CaixaBank, S.A. (CAIXY) Q4 2022 Earnings Call Transcript
CaixaBank, S.A. (OTCPK:CAIXY) Q4 2022 Earnings Conference Call February 3, 2023 3:00 AM ET
Company Participants
Edward O'Loghlen - Investor Relations
Gonzalo Gortazar - Chief Executive Officer
Javier Pano - Chief Financial Officer
Matthias Bulach - Head of Accounting, Management Control and Capital
Conference Call Participants
Maks Mishyn - JB Capital
Francisco Riquel - Alantra
Sofie Peterzens - J.P. Morgan
Alvaro Serrano - Morgan Stanley
Ignacio Ulargui - BNP Paribas Exane
Carlos Cobo - Societe Generale
Andrea Filtri - Mediobanca
Ignacio Cerezo - UBS
Britta Schmidt - Autonomous Research
Daragh Quinn - KBW
Borja Ramirez - Citi
Fernando Gil de Santivanes - Bestinver Securities
Edward O'Loghlen
Good morning, and welcome to CaixaBank's Results Presentation for the Fourth Quarter of 2022.
Joining us today are the CEO, Gonzalo Gortazar; and the CFO, Javier Pano.
For first-time viewers, just a reminder of the logistics, we plan to spend around half an hour with the presentation and up to an hour with a Q&A. And of course, if any questions remain unanswered, the IR team is at your disposal after the event.
And with that, let me hand it over to the CEO, Mr. Gortazar.
Gonzalo Gortazar
Good morning. Thank you, Eddie. Thank you, everybody. Let's get into the presentation immediately.
It's been certainly for us a very solid year, and I think we finished it with a very strong operating momentum, not just because of the activity, you see given the relatively low growth in the Eurozone for us to see performing loans up 3.3% and having had also positive net inflows in our long-term savings despite the market volatility is a pretty good achievement. That's how we see it.
But beyond that, I think, particularly on the P&L front, momentum is very strong. NII, in particular, this quarter has helped us to post a 5.5% growth in revenues, and that's combined with a 5.6% decrease in costs associated to the bank integration, means that our pre-impairment profit is growing close to 20% this year.
Together with that operating momentum and profitability momentum, we made good advances in terms of asset quality. For a year like this, we have reduced our non-performing loan ratio from 3.6% to 2.7%, and we have done that in combination with a very prudent provisioning policy so that coverage for non-performing loans is now at 74%, up 11 percentage points during the year and keeping our cost of risk in line with our guidance at 25 basis points.
Capital-wise, a very strong year. We obviously completed the share buyback during 2022, and we end up the year with 12.5% Core Equity Tier 1, excluding IFRS 9 transitional adjustments. It's a buildup of 40 basis points of capital this fourth quarter, very strong one, obviously. Beyond that, MREL ratios with ample margin and liquidity at 194% liquidity coverage ratio, having paid back 80% of our TLTRO speak by itself.
That's why we have obviously set up a payout at €0.2306 per share for this year at the middle of our 50% to 60% payout range and announced that we will repeat that 50% to 60% range for 2023. I'd like to advance at this point that we feel comfortable with our €9 billion target for capital generation or excess capital generation in our plan of 2022 to 2024. And net income, as you know, has grown by close to 30% to [€3.145 million] (ph).
In terms of our activity, I will go quickly through a number of points. First of all, clients. This is the first year after our integration, the first full year after our integration. It means that in this year, and we tend to forget it very quickly, but this year has been very intense, very busy year for us, where retail branches have come down by 17%, number of employees down by 10%. We've restructured our insurance business, which is so important for us. We have achieved our cost savings target. In fact, bringing it forward again in terms of the synergies -- cost savings that we have achieved already in 2022.
And all this is now a chapter, I would say, closed, but it's obviously kept us busy during the year. And at the same time, we have made good progress. You see some of our client-related activity in terms of relational clients, percentage is now above 70%. Digital clients, imagin clients, transformation of our also customer attention model branches through InTouch, growing all very strong.
And yet, as you see, we have plenty of potential to continue or to increase the penetration of various products among our client base. We have done so since the merger. You can see that on the right-hand side, but obviously, there's many more -- much more progress than we can do.
Our NPS that we measure internally at branch level is up 10 percentage points over the year, indicating a very strong advance after the integration, which is obviously very satisfying for us.
Moving on to loan production. New loan production up 23% on the business front, 16% on the consumer front, and doubling on the mortgage front, speak by themselves. I think you have some statistics there. And I think it's very relevant to see that our loan expansion is being done with very prudent levels in terms of the target clients, both in business lending, consumer lending, with 90% of our consumer clients have the source of income paid into CaixaBank, which obviously historically has proved to be very attractive from a risk-reward point of view.
And on the mortgage front, keeping mostly the fixed rate mortgage, hence protecting as we have done over the last seven years, protecting our clients and our own asset quality from increases in interest rates. I would say most notably on the mortgage front after the MyHome sort of full year effort, we have now put back our market share of new mortgage lending at 24%, in line with the market share we have on stock, which was the objective even exceeding the objective we have put in our three-year plan.
In terms of the stock of loans, as I mentioned earlier, 3.3% of the performing loan book, up, business at 7.6%, consumer 4.1% and even mortgages at 0.7%. The total loan book is going slightly lower. We have had some very, I think, timely and good non-performing loan disposals through the year, which have -- which mostly explained these differences.
We'll look at the customer funds. Obviously, the year has been marked by market volatility. So, when we look at performance, we want to look at it ex markets, where we have seen 1.1% growth year-to-date, particularly 1.6% in long-term savings. Obviously, when we include the market impact, which is the reality, then we have a fall of 1.7%. You have all that on the right-hand side here.
And I would again highlight the fact that every quarter of this year, we have had positive inflows in our long-term savings, as you know, including long-term life insurance plus mutual and pension funds. And basically, for the whole year, we have that €3.7 billion. By the way, January, we have had significant inflows, figures were published yesterday in terms of mutual funds.
So, a very good performance for us, which vindicates our strategy on basically advising our clients in terms of their investment horizon, investment needs and asset allocation. No, it's not been an easy year for anyone, and certainly not for our clients, but the fact that we've maintained positive inflows speak by itself.
Protection insurance, up 8% with a stronger growth from MyBox, which is now over 77% of total protection sales and yet, I would say, another year of very good activity and success on protection insurance in line with our targets.
BPI fantastic year. You can see in terms of activity, up 6% on the asset side; 5% on the liability side. Market share-wise, gaining share across the board, be it total loans, mortgage, business loan, mutual funds, a very good year. And obviously, this is showing, in terms of operating just -- strong growth in core operating income. As you can see, efficiency is now at 50% when you see the graph there from 2017. In fact, the previous year before we acquired the control, it was at 70%. So, we're talking about 20 percentage points of cost income improvement over a six-year period, a structural improvement, which makes us obviously very happy with the performance. Asset quality and capital continue to be pristine, as you can see also on the slide.
And with that, the net income for the year is a pretty simple story, a story of 5.5% gross income growth and reduction of cost of 5.6% due to synergies, hence, that pre-impairment income growing at around 20%. And then below that line, while our loan loss provisions have been in line with last year, 25 basis points, we have managed to reduce all the provisions in a significant manner, so that net income actually grows by 29.7% on a comparable basis, so a very good performance coming from integrations in 2021, I would say, and with return on tangible equity just below the double-digit level, which we certainly expect to achieve very soon.
In terms of the environment, macro environment, we have slightly improved our expectations for the economy following the positive indicators that we have seen over the last couple of months. We still see a GDP for Spain growing by 1.3% in 2023, slightly more than the 1% we had before. Obviously, 2022 has been stronger with that 5.5%, yet it is a significant slowdown from 5.5% to 1.3%, but certainly staying in positive territory. One of the great news is that employment is behaving very well during this period. And hence, we're not seeing a deterioration on unemployment, which would have obviously an impact on asset quality. Equally on the house prices, we're seeing basically a flat market, slightly below what we were expecting a couple of months ago, but still in nominal terms, flat; obviously, in real terms with -- that means single-digit reduction. But all in all, an environment is consistent with a fairly good asset quality behavior.
Inflation coming down, but as you can see, still average inflation for 2023 at 4.2%, which suggests to us that rates are possibly going to outstay at higher levels for a bit longer than the latest that we have seen from market movements. But anyhow, time will tell. What is undoubtedly a big news is the major movement on the right-hand side of rates. And obviously, the very different environment we are facing now than we were facing a year ago and obviously, a much more positive one, no doubt.
On that note, just a couple of comments on our financial resilience. The major news is obviously pre-impairment income. And obviously, the gap between pre-impairment income and cost of risk is increasing, widening. And that gives us, obviously, a lot of comfort for absorbing any bad news and also for keeping good remuneration for our shareholders.
NPLs, at historical levels. Coverage, at historical highs. Liquidity, as you say, post TLTRO, you can see it would come down to 162%, if at year-end, we had paid all TLTRO. We had paid, in fact, 80%, as Javier will explain in more detail. But it means we have basically liquidity position is already adjusted to a world post TLTRO, which I think is going to be a significant competitive advantage for us vis-a-vis some other players in Europe.
And capital-wise, I mentioned at the beginning, a fairly positive development, ample MDA buffer and hence, fairly good prospects on this front. And precisely on that note, again, just reemphasizing our payout and dividend policy, which I mentioned at the beginning. We're very pleased to have seen a year that has been positive for shareholders when we add the dividends and the share buyback. It's basically €3.5 billion that we have returned to shareholders this year. We are comfortably on track to achieve our €9 billion target, which means, obviously, that there's further good news for shareholders on this front to come.
And with that, Javier, it's your turn. Thank you.
Javier Pano
Okay. Thank you, Gonzalo, and good morning, everybody.
Let me now focus on further details for the fourth quarter, starting with the consolidated income statement. The most remarkable is net income is €688 million, that's 2x net income of last quarter of last year. So -- well, this is supported basically by a strong contribution from core revenues, up by 16% year-on-year and with costs negative with cost synergies, obviously, having a contribution on that front. Core operating income up by more than 40%.
On revenues, clearly, NII is the main driver, 33% year-on-year, also 23% quarter-on-quarter. Clearly, loan index resets already having a very positive impact. On fees, we are affected by the end of corporate deposit fees and also during this last quarter compared to the last quarter of last year, also market impacts on AUM, obviously, clearly, a much lower average AUM balances.
On life insurance, I would say that we continue to have a very positive trajectory with -- you may see on a quarter-on-quarter basis, up by 7%. So, this is as is quarter-on-quarter figure, not being impacted by the consolidation of Bankia Vida. And then, on non-core revenues, just to keep in mind that we have this fourth quarter, the impact from the Deposit Guarantee
Fund.
We have, on costs, nothing much to remark, flat quarter-on-quarter. And as you know, we have reached our targets on that front for the year. And then below the line, loan loss charges, reflecting a broader year-end approach with cost of risk at the end of the day has met also our guidance. All in all, as I say, that net income at €688 million.
Let's continue with NII, which is a key part of our results today. It's on upper left, you may see the evolution of NII, but also disclosing the impact we have had every single quarter from TLTRO. We have quite a significant contribution from TLTRO this fourth quarter as ECB changed the terms last November. But as you may see, excluding TLTRO also, we have quite a positive organic evolution, up on a quarter-on-quarter basis by close to 18%.
Upper right, you may see the NII bridge with this extraordinary contribution of €161 million from TLTRO, but then you may see that this client NII, the main driver, €325 million and still having some negative impacts from ALCO, basically from the wholesale funding impact, remember, it's at floating rates, and also other foreign exchange money market funding.
Bottom left, you may see the evolution of yields. Very remarkable improvement on the back book yield, 50 basis points to 234 basis points. At the same time, the front book loan yield at 315 basis points, up by more than 1 percentage point in one single quarter, basically reflecting the new environment -- the new yield environment in the new yield production.
Then, on customer deposits, you may see that the cost is at 16 basis points. But here, let me remark that excluding some structural hedges and also foreign exchange funding that cost is 6 basis points. As a result of all that, margins expanded significantly, up by 36 basis points this fourth quarter and also the net interest margin also increasing by 26 basis points.
On the ALCO, we have been on a standby this fourth quarter with relentless increase in yields, but we have ample margin to add to the portfolio. You have the maturity profile, €7 billion, this year, but also remember that we have a long-term target for that portfolio to reach up to €90 billion. And in due time, I'm sure we will expand the portfolio taking market opportunities -- taking advantage of market opportunities.
You may see the average yield of the portfolio 0.8% by the end of December with an average life and duration pretty much unchanged this fourth quarter around five years. Also, we continue with the diversification of the portfolio. Now the weight of Spain in the Spanish government bonds is 67%, down by 11 percentage points year-to-date.
In terms of wholesale funding costs, I would remark here that we have a slight increase to 83 basis points. This is the result of, well, the new issuances clearly with a cost spread that is above the historical average.
A few words on our balance sheet sensitivity. You know that we are geared towards higher rates. You know well about the percentage of our assets that are at floating. Remember, approximately two-thirds of our loan book at floating. But the main difference in our case probably compared to some of our peers is on the liability side. Here, you may see that on our deposit base that this is a very stable and highly granular one. We have 79% of those deposits from retail deposits. So, those are basically customers with a strong relationship with us, with plenty of operational accounts. So, this is a figure that is well above the figures compared to our peers and also in Spain, but also in the Eurozone.
And we have been working on our models for our deposit base. And now we assess that we have approximately 40% of our core deposits that are considered -- core deposits -- our deposits that are considered core deposits, deposits that are actually not -- excuse me, that are not sensitive to interest rates. This is the result of basically €10 million payroll and pension deposits that are actually -- sorry, deposit beta is expected to be by the end of the year circa 20% and the terminal deposit beta is expected to be in the high 30%-s by the end of -- by 2025. The sensitivity to NII is expected to be between 5% and 10% for a move of up or down 100 basis points.
On fees, we show clear resilience this quarter. You may see here that we are in a situation where -- sorry, but I'm not feeling well.
Gonzalo Gortazar
Okay. Well, sorry for this, as Javier is not feeling well now. So, I'm going to try and take on from him. I'm sure he'll be back with us soon. Okay, this is going back to my old job.
In terms of fees, as you can see, we have had a quarter where we're slightly up from the third quarter with a difference between this year and last year, which was an exceptionally good year in terms of fee performance, but all in all, when we look at the yearly evolution, very satisfying performance, particularly taking into account that in the fourth quarter, we have obviously removed the cash custody fees which is a significant part of that impact.
In terms of AUM, markets have been weaker, and hence, we have had an impact this quarter from the lower value of our AUMs, and this is likely to be reflected, as you can see, into 2023 figures. But it all will depend on market evolution. Obviously, we have had a good -- very good market in January, which provides us some hope, but time will say.
Credit cards, very good performance in terms of payments, growing up. So, we expect some positive news on that front within the overall sort of fee environment. And I would say, in the quarter, very good performance both in the quarter and the year from wholesale banking in terms of recurring fees -- non-recurring fees, I apologize, as you can see as well on the slide.
Some pressure on recurring banking fees. This is mostly associated to our loyalty program. So, clients had become relational or they exit, and hence, the pool of clients that are non-relational and are hence being subject to these fees are reduced. And this explains why the recurring banking fees mostly are slightly down, as you can see, together with cash custody I mentioned before.
Good performance on insurance. This is obviously nothing new to anybody, very solid and consistent. I would say life-risk, in particular this year, also associated to the increase on mortgage production, but a lot due to our MyBox policy, which continues to be very successful.
On the fourth quarter versus the third quarter, obviously, there's an impact on the equity accounted part of revenues. This is associated to the seasonality at SegurCaixa Adeslas where the third quarter is always very low in terms of claims. You can see that performance as well last year and some other non-organic impact.
On the cost side, nothing new. Basically, we have had, I would say, a very good execution on our integration and cost savings, and that has allowed to offset, obviously, inflation pressure, which is widespread and which explains also our guidance for next year. But we have managed to keep that €6 billion round terms, finishing at €6.020 billion with this 5.6%. And obviously, we're going to keep making sure that our cost base is under control despite the inflationary pressure. The costing has made a substantial improvement with, as I mentioned, from 58% to 52% cost savings have -- vast majority, 84% of the cost savings have already been booked by year-end 2022.
Cost of risk, flat at 25 basis points. Again, a very prudent provisioning exercise at year-end. As you can see, even more prudent than we did at the end of 2021. I think that's the only way to read it. We have seen actually no deterioration on asset quality in the fourth quarter. Quite the opposite, as you see, we have reduced non-performing loans substantially and built-up coverage. So, we feel we enter 2023 extremely well prepared from this point of view.
In terms of NPLs, as I mentioned, this very strong reduction. It includes the impact of some portfolio sales, but it also includes basically a non-organic reduction trend. For the whole year, more than half of the improvement in non-performing loans came from actually organic and approximately 40% from asset sales.
The ICO portfolio is doing very well. 98% of the portfolio is repaying principal, only 4.2% of the portfolio is as Stage 3, and over one-third, 34% of the ICO portfolio has already been amortized. So, basically, this is another sort of question mark that we had at some point and market had at some point, this is actually behaving extremely well.
In terms of the mortgage portfolio, we provided some detailed statistics last quarter in terms of the loan-to-value at 54% on average and the fact that actually, most of the portfolio that is being granted in the last seven years over 70% has been granted at fixed rates, and hence, it's fairly well protected from increases in interest rates and the impact on our clients' ability to pay. Obviously, there is going to be some impact. We still expect some deterioration in terms of non-performing loan during 2023. But given the quality of the portfolio and obviously, the substantial provisioning exercise that we have already made, we actually feel comfortable in meeting our targets that we explained in the Investor Day.
Liquidity and capital, not much more to elaborate. You have all the numbers here. They indicate a very strong cash and ample margin. In terms of capital, total capital, MREL and liquidity indicators, it's really, for us, a very good starting position into 2023.
I think I would highlight Javier and his team have made a very successful issuances during the year with a significant part of that in sustainable bonds, either green or social bonds, as you can see on the right-hand side. And already in 2023, we have accessed the U.S. market with $125 billion senior non-preferred and the sterling market with a Tier 2 also confirming our ample ability to fund ourselves globally and diversifying sources of funding, which is obviously always good.
You have some details here on our ESG issuances. This is the statistics for the last three, four years, where we actually have issued €9.6 billion, both in green and social bonds, topping the league table out of Europe consistently, I would say, certainly on a cumulative basis. And on this slide, I also wanted to highlight that we -- even though there are many agencies following different -- slightly different criteria and results are not always too consistent, we are actually ranked very highly by all participants in the sustainability rankings, and obviously, very happy to have stayed in the Dow Jones Sustainability Indices as one of the top players and FTSE4Good at a very high level as well.
Capital generation during the quarter, up 40 basis points. You have three components here: the organic generation, 26 bps; dividend and coupons from AT1 of 15 bps, I would say that's the normal; and then markets and other, we include the impact of BPI are moving on to IRB models, which is slightly above 10, 11 basis points positive impact that has already been booked in this year 2022. We still have an extra 30 basis points from the transitional adjustment to 12.8%, but obviously, very comfortable, certainly better -- even better performance than we were expecting some quarters ago in terms of how quickly we are rebuilding capital or how quickly we're generating capital, again post the share buyback, which certainly is something that all of you would be very interested. Good increase in tangible book value per share associated with our profitability and also positive impact from the share buyback.
And with that, I'll finish with our guidance for 2023. NII, we expect to finish the year at around €9 billion, circa €9 billion NII, that is close to 30% growth from the figure in 2022 and obviously even higher if you exclude the TLTRO in 2022, which we should. But you have seen our very strong growth in this fourth quarter. And I think -- and I hope that gives you comfort to see how we can move from the €6.9 billion to almost at that 30% and reaching the €9 billion number during 2023.
In terms of fees and insurance, we're grouping there the two categories together with NII [indiscernible] core revenues. We're expecting to have a flattish-to-slight growth, as you can see, from €5.1 billion this year to €5.1 billion to €5.2 billion in 2023. You have to remind the cash custody fees, which are approximately €100 million, which, obviously, we lose in the year-on-year comparison. It's a bit less because already in the fourth quarter, obviously, there's been very limited contribution from custody fees closer to €75 million contribution in 2022.
And then, it's obviously AUMs that are -- given the market developments that are going to moderate growth in AUM-related fees. And then, as I mentioned before, what's our loyalty program and the fact that our clients are becoming more and more relational or if they are just marginal clients then leaving.
Costs, here's where inflation is hitting us, €6.3 billion to €6.4 billion. That gives you obviously a range of 5% to slightly over 6% growth. And here, we have a number of factors, but I think this is a very exceptional sort of cost growth for 2023 that we certainly should not project going forward. And combination of the inflation pressures that built in 2021 to 2022, together with the fact that 2023 is still a relatively high inflation year in all expectations means that altogether, we have this impact.
And there are some others that are worth mentioning, including the effect of our sort of loans to employees that are made at sort of subsidized rates, the subsidy release capture in this cost of statistic, and that is obviously then adding to NII, but it's -- it means that costs are somewhat artificially higher this year because of the increase in interest rates, which is something that we do not expect. And we expect possibly that these levels are maintained, but we certainly don't expect another 300 basis points of increase in rates into 2023.
And then finally, cost of risk. We expect to be below 40 basis points. And that's based on a very conservative sort of assumption of how the economy and clients may behave in this environment. And on the other hand, the reality that we have a very good level of provisions, cumulative provisions with €1.5 billion of unassigned provision. In our financial statements, if you had the bank PPA and the post-model adjustments, the macro sort of provisions that are not yet reflected in our typical IFRS 9 provisioning system, that gives us a lot of confidence that 74% coverage ratio eventually is another way to look at it, that even if the environment deteriorates strongly, our cost of risk is not going to be above 40 basis points. And certainly, I think any of us can think that if the economic situation is better, we could have some upside on this slide.
That's all. Apologies for not being as good as Javier is, but I've been told he is feeling much better now. So, don't worry about Javier. And I think we can now go into Q&A.
Edward O'Loghlen
Yes. We can go straight into Q&A. Just to reassure everyone, Javier is fine. He felt dizzy. So, he's getting a checkup, that's all.
So, let's move now, operator, into Q&A. Please ask the name and company of the person that's asking the question. And I believe we have a big queue around 12 people lining up for questions, so please keep the questions brief. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is from Maks Mishyn with JB Capital. Please go ahead.
Maks Mishyn
Hi. Good morning. Thanks for the presentation and taking my questions. I have one question that has a couple of them inside. It's on the NII. I was wondering if you could give more color on your guidance, how much of your loan book has repriced so far? And how much of it do you factor in for 2023 in the guidance? And do you think that following 2023, after the loan book is repriced to current rates and the beta is increasing, there could be a stall or a decrease in NII in the following years? I just wanted to hear your thoughts on this. And then what kind of loan book growth expectations do you have by segment? That would be very helpful. Thanks.
Gonzalo Gortazar
Okay. Shape of NII and loan book growth. Thank you, Maks. In the meantime, while Javier recovers, we have been joined by Matthias Bulach who is responsible for -- as a member of the management committee and he's responsible for capital accounting and business planning, and he will help me in some of the questions, so it doesn't become a monologue. Alternatively, you, Eddie, can pick it, [can join up] (ph), because you know the stuff very well.
But in any case, I will leave the first question in terms of how much of the loan book has repriced for Matthias to give any clarification. But I would say we do not expect 2024 to be a year where NII falls, because it obviously will depend on the rate environment, which you're seeing that almost every day, changes in the interest rate curve are very significant. So, we need to be prudent on that front. But we still feel that in 2024, pricing of -- asset pricing and activity are going to be more beneficial than further repricing of deposits because beta continues to go up. So, I do not think of 2024 as a year of falls in NII, at least with information we have today.
In terms of loan book expectations for 2023, I would say, generally, we expect a slowdown in mortgage in new production and hence fall in the mortgage book, obviously, single digits -- low single digits fall. But clearly, there's going to be an impact from the current interest rate and real estate market. Again, not so much in terms of pricing, but in terms of activity, I would say, it's logical to think that the loan book for the market and for us will shrink during 2023. We're going to try and keep our share of the market in line with what we did this year. So, I would look maybe at slightly a larger decrease for us because we have a slightly sort of more aged book, and hence, higher share of principal repayment.
On the consumer side, we have actually seen growth every single quarter of this year. But when you look at the macro slowdown, you'll think that that's likely to mean a small fall in the loan book in 2023, that's how we are at least -- well, that's what we are incorporating into our numbers. I have to say consumer has surprised us positively consistently for the last 12 months. So, I do not discard that the environment eventually is better, but we're having, again, a small decrease in consumer lending books. And we're expecting to still grow, I would say, slightly, maybe it's flattish to slightly positive growth what we see on the business front, continue to be fairly liquid.
I think it's also a market that is going to be different and where asset spreads should be more attractive and the asset side should reprice as liquidity is a bit more scarce. And hence, we're not going to be too aggressive in terms of volumes because prices are quite relevant to the business; well, everywhere, but on the business side, certainly are very, very critical. And we expect to actually gain both in terms of asset spreads and slightly increase in volumes. So that's the 2023 outlook.
And with that, maybe, Matthias, you can complete some of the other aspects of the question. Thank you.
Matthias Bulach
Sure. Thank you very much, Gonzalo, and good morning to everybody.
On the question on the repricing of deposits. Recall that around two-third of our mortgage -- sorry, repricing of our mortgage book, recall that about two-third of our mortgage book are referenced to Euribor 12 months and repricing every 12 months and around one-third of the mortgage book is repricing every six months. We've -- that pretty much evenly spread across the year. So, there's even repricing each in any months of the year of these two books. That means, the repricing and positive rates started around April-May this year. So, two-third of the deposit -- of the mortgage book has already started repricing.
It's sure obviously that this repricing has been going up. So, it's not up and until now November-December that we see significant repricing. And obviously, a significant repricing will be going on throughout the entire year of 2023, most definitely. And hence, we'll have also a carryover effect on NII in 2024, as repricing that is happening in the later next year, obviously, then we'll have a carry-on effect on NII year-on-year evolution 2024 with respect to 2023.
Remember that the repricing typically happens with a lag of two to three months. So, we are typically repricing using Euribor reference of two to three months before. And hence, there's a certain lag when they started to reprice in a positive manner and means that repricing will be going on as well for a little bit longer than Euribor implicit rates would actually suggest.
Edward O'Loghlen
Okay. Thank you, Matthias. Thank you, Gonzalo. Just to add to Matthias' point, remember, TLTRO is an extraordinary in Q4, we will not have that in Q1 of 2023. Next question operator, please.
Operator
The next question is from Francisco Riquel with Alantra. Please go ahead.
Francisco Riquel
Yes. Thank you for taking my questions. And I'm glad to hear that Javier is recovering. My first question is about the deposit beta. You can share with us your thinking process behind the assumptions for the deposit beta, you expect 20% by the end of '23. Previously, you guided to 30% in '24. You are now pushing out the terminal beta to '25 in the high 30%s. So, what interest rate scenario and what customer behavior do you expect? How big a shift from site to time deposits? What pass-through of the interest rates? So, you can please elaborate on the deposit beta assumptions?
And second question is on the cost target for '23. You are projecting 5%, 6% growth is above -- is in line with headline inflation. Would you still be benefiting from some major synergies left because the restructuring was made during the '22. So, you mentioned some costs related to the subsidies for the loans to employees. If you can quantify, just to assess the underlying inflation in the costs? And for that, if you can also detail of how much is investment in business initiatives or wage inflation or catching up in spending? You can please elaborate on the guidance of the growth? Thank you.
Gonzalo Gortazar
Thank you, Paco. And yes, we're all pleased Javier is feeling well. Indeed, I would say, let me make a few comments and Matthias can elaborate.
On beta, obviously, it's something we've looked at it in a lot of detail. Obviously, beta depends on what's your view of the deposit facility rate, so beta would be different depending on whether we're talking about 3%, 4%, 3.5%, 2.5%. And at this point and based on the rate curve at the end of the year, which was fairly similar to the one just before yesterday's movement, what we see is based on obviously having looked at very different scenarios in different countries, our history of what has been the evolution of rates and then what has been the evolution of deposits, what we see is that the likelihood is that we will get to these high 30%s, but that the repricing or the timing in terms of the number of quarters that are needed to get to that level is slightly larger. That's why we're saying high 30%s by 2025.
We obviously have no certainty on this. It does depend a lot on competition. I think then competition is going to depend on overall picture of liquidity in Europe and obviously, particularly on loan to deposits. So, there's a very different behavior of betas -- deposit betas depending on the loan to deposit in the overall system. It's our base case that certainly the loan to deposits remains and the liquidity position of banks remains -- even if obviously not as comfortable as in the past, remains, I would say, balanced rather than comfortable. And hence, we think this is the reasonable assumption to make.
Obviously, then one thing is the system and then is our particular case, we're different from the system. And we are convinced we will have a lower beta than the system will have, no question, because we're -- 80% of our deposits are retail. And we have a very large proportion of transactional deposits. When we look at our payrolls market share above 35% or pension market share or even on the business side, what's our market share in point of sale, clearly, the sort of merchant acquiring, we are above 35%. And as Javier mentioned, before he left, actually core deposits that are going to be transactional and not remunerated under earning circumstances are estimated to be 40%. So, this is also a very significant factor.
And when we look at what we have already published vis-a-vis our competitors at year-end, we're actually having a 5 basis points. Once you exclude 5 basis points payment of deposits, once you exclude hedges and foreign currency basically, which is certainly below some of our peers, and this is because the mix of our deposits is actually very different. So actually, current beta, if you look at the fourth quarter for us is 4%. And you should expect that this grows during the year to that 20%.
In terms of costs, and again, Matthias, if there's anything you want to add, I'll answer the cost question, and then please elaborate as you seem fit. In terms of costs, there's a good combination of factors here, but almost half of the increase comes from, let's say, external and non-organic factors. The one I mentioned is the costs from employee credit facilities. And these are mostly mortgages that we have been -- this is part of the collective agreement -- not the collective agreement, actually we agreements that date back to decades, where they have a significant subsidy versus Euribor on the mortgages. And then, as Euribor goes up, this custody, which -- because it was floored at 0%, it tended to be not very significant. When Euribor increases, this becomes a significant subsidy and it's an accounting reclassification from costs to NII, this is approximately €100 million. So, you have that in mind.
Another important part is the social security contributions, so [indiscernible] has been revised. This is, again, what we call the stop -- removing the ceiling on social security contributions. And the rest, I think -- well, I'll let Matthias, because he knows this stuff also inside out as Javier does. So please, Matthias, go ahead.
Matthias Bulach
Thank you very much, Gonzalo. On the second issue on the social security contribution, as Gonzalo said, this is another €40 million or €50 million approximately. So actually 45% of what we've been guiding for the increase from the level of €6 billion by the end of this year into €6.3 billion, €6.4 billion as the guidance says next year, 45% actually stemming just from these two factors. So very important as they are, to some extent, inorganic factors or difficult to manage, obviously.
Then on the back of this, obviously, and you know we've reached an agreement with the trade unions on remuneration on this 4.5% increase, which obviously is taken into consideration into the cost evolution into next years, as well as we do see, obviously, some inflationary impact on general and on depreciation expenses. And depreciation expenses, this always takes a little bit longer to flow into our cost line as investments around now has been done this year 2022 or will be done throughout 2023, capturing some of the inflationary consequences and hence, we generated a certain upward pressure on depreciation and also on general expenses. So -- and investment in business obviously is continuing. We continue to invest in business. We continue to invest in our digitalization strategy, as we pointed out in the strategic plan, and hence, investments done this year, obviously, generate also more depreciation expense over the next year.
On the positive side, obviously, next year, with respect to this year's levels, there is still the tail end of cost synergies and on phasing of cost synergies. We actually had a better year this year 2022 than we expected in terms of realization of those. We realized approximately €800 million this year of cumulative synergies in 2022 versus what we had previously estimated and guided, which was €755 million of our overall target of €940 million. And that means there are pending synergies into 2023 of around €140 million, which are the positive side, obviously, of this evolution.
Edward O'Loghlen
Okay. Thanks, Matthias. Paco, I hope that answers all your questions. We need to move on to the next one, operator, please.
Operator
The next question is from Sofie Peterzens with J.P. Morgan. Please go ahead.
Sofie Peterzens
Yes. Hi. Here's Sofie from J.P. Morgan. And I hope Javier feels fine. Just if you could remind us of your capital tailwinds and headwinds in 2023, and kind of in which quarters those headwinds will come? Is it still 60 basis points or has that changed?
And then, my second question would be if you could also remind us of the IFRS 17 impact on P&L? And also, what does the IFRS 17 mean for your guidance, should we just assume about of IFRS 17 adjusted lever NII and fees and costs? Thank you.
Gonzalo Gortazar
Thank you, Sofie. In terms of capital, no change, i.e., we still expect impacts -- negative impacts of circa 60 basis points. That includes IFRS 17. We expect the bulk of this impact to be in the first quarter. In any case, we expect to keep Core Equity Tier 1 at or above 12% during the year.
And second question on IFRS 17, we've decided to not provide at this stage the guidance or the detailed impact of IFRS 17. We will do so in due course. Obviously, we have to report at least in the first half this semi-annual accounts under IFRS 17. We will see if we have numbers and all clear enough for that to be communicated properly when we present the first quarter results and certainly, it will be by the first half.
But in order to make our message simple, not to break trends and not to play with too much complexity, all the guidance we've given to you is pre-IFRS 17. As you know, our expectation is that IFRS 17 is not going to impact the bottom line, but it's going to be a reclassification where we will have some revenue lines, both in NII and in fees, moving into other insurance results, basically and also some of the costs associated to insurance also moving to that line. So, we will have an impact that is neutral in the bottom line, at least non-material in the bottom line, but where both revenues and costs will decrease and that will have a positive impact on cost income.
Now that is the direction of the trend that we -- obviously, Javier and the team presented in December in that investor meeting you had, nothing has changed, I would say. But we thought that trying to provide all that detail at this point would be sort of too early and a bit more confusing. So, we've rather today speak about no accounting change. And obviously, at the time when we move from the current system to IFRS 17, we will provide you the full detail, so you can see the impact.
But the most important thing are the trends, the trends are as per our guidance and the results today. And having said that, I don't know if there's anything you should know. But those are the big messages, Sofie.
Edward O'Loghlen
Just, Sofie, to be clear, remember that the 60 basis points is as a result of 10 basis points being applied positively this quarter related to the BPI adoption of advanced models. So, net it's 50 basis points, as we said in the last quarter, okay?
Sofie Peterzens
Great. Thank you.
Edward O'Loghlen
Let's move on to the next one, please.
Operator
The next question is from Alvaro Serrano with Morgan Stanley. Please go ahead.
Alvaro Serrano
Hi, good morning. Two questions, one on deposit flows and another one on capital returns. On deposit flows, term deposits were down in the quarter. Maybe you can comment on -- and the total deposits down the last couple of quarters. If you can comment on what the dynamics are there? And also, as we think about next year, what do you think of the -- for example, in the U.S., we've seen the QT has driven shrinkage and deposit balances are actually coming down, Javier mentioned in the past that that's a possibility with QT, I don't know if there's any sort of estimate you can give us of what part of your deposits could be sort of related to QT and you might lose at some point or some color on the general flows?
And the second question is on my numbers, your guidance points around 12% ROTE for this year post AT1, it's about €3.5 billion. If you're not growing loans or very limited growth in loans and you're already at 12.5%, can we assume the bulk of that 3.5% can be distributed? I'm just conscious you've been quoted in Bloomberg that there could be capital -- sort of further capital returns -- extraordinary capital returns considered. I don't know if that's an interim decision that could be made or we've got to wait until next year, but this €3.5 billion, the total distribution we can look forward to on '23? Thank you.
Gonzalo Gortazar
Thank you, Alvaro. In terms of term deposits, I would say, nothing out of the ordinary in the quarter. Obviously, within that, you have sort of wholesale deposits that are more volatile and where there's some large movements that are not really generating any trend. They come and go, and we're going to be very disciplined there. So, when they come and go because of rate decisions, they may go more than come. But anyhow, that's something that's part of the business. Quarter-on-quarter, you will see swings on that front.
Then, we're going to continue to see, as you know, many of the banks we've been launching funds that are sort of short-term treasury-based funds or sort of treasury bill backed funds, and that is just a shift from deposits to AUMs that has had some impact and may have some impact. Overall, for 2023, we do not see significant movements in deposits, I have to say. I would say we'd probably be stable, slightly up on our deposit base for 2023.
In terms of Core Equity Tier 1, obviously, we have €9 billion target. We have had a very good year in 2022 from that point of view. We now have this impact of circa 60 basis points, most likely being front-loaded to the first quarter all or the majority of it. So, the 12.5% is going to come down very soon. So, when we look at our capital distribution plans rather than thinking that the starting point is the 12.5% this year or this last year, December '22, I think we need to look at sort of two, three quarters from now to see that excess capital being built back again.
And then, yes, we have, obviously, taken no decision. But in order to get to €9 billion, clearly, our 50% to 60% dividend payout is not enough. So, you should expect, and that's what I expect that we will undertake another capital distribution that is going to be more likely in the end of this 2023 or even more likely in 2024. So that's the overall environment.
We haven't made any decision yet because even if we have 12.5% in a quarter, this is going to be back at close to 12%. But as we see capital generation very strong, I have to say, because we are going to be fairly profitable, and we are not expecting high growth in RWA. You correctly said so. Obviously, there's going to be capital generated. And again, our commitment is absolutely clear, crystal clear, we want that capital to go back to our shareholders. But anyhow, it gives us a few quarters until that sort of plan for the future is actual capital, excess capital on balance sheet.
And if I may take the time to say Javier is 100% recovered. He's in pretty good shape. He's maybe come back and kick off Matthias, I don't know. And he said thank you to everybody for taking an interest in how his health was evolving. Thank you.
Edward O'Loghlen
Okay. Thanks, Alvaro. And with that good news, let's move to next question, please.
Operator
The next question is from Ignacio Ulargui with BNP Paribas Exane. Please go ahead.
Ignacio Ulargui
Thanks very much. Glad to hear Javier has recovered. I guess, I have two questions focused on credit quality and the guidance of 40 basis points. If I just look to the fourth quarter gross inflows into NPLs, has been a decline of 17% year-on-year. And in the year, you have reduced around €3 billion of NPLs. Why you are guiding for such an increase in cost of risk? I mean, is there any kind of tangible deterioration in credit quality and early indicators that you see? Or is just an effect from the good practice code approved by the government in December? Just trying to get a bit of a color on that. And linked to it, where do you see the coverage going forward? I mean you have a 74% coverage, which looks too high for the credit portfolio that you have? So just to try to square the 40 basis points cost of -- below 40 basis points cost of risk guidance. Thank you.
Gonzalo Gortazar
Thank you, Ignacio. And let me be very clear, on the credit quality, we feel extremely pleased where we are. It's been a major achievement to reduce non-performing loans to 2.7% this year. It means we have really the organization, everywhere, very ready and prepared to deal with asset quality issues in the right way and very decisively. So, we feel pretty good. Now we are extremely conservative. And if you look at our guidance, historically, we've always been very prudent in asset quality because something that we do not really control, we look at the year and obviously, there are some reasons to be concerned.
I would say three quarters ago, nine months ago, there were even more reasons to be concerned, but actually, non-performing loans have come down and done very well in terms of cost of risk. And hence, if you look at the asset -- sorry, at the glass half full, you can be very upbeat. There is nothing we see today in our numbers that indicate that the problem has already surfaced. Early in non-payments, early defaults, look at the -- between one and 90 days are at historical lows. Even the month of January, which is always a tough month, has gone very well on that front, very well.
So, no indication whatsoever today in anything that we see that we have a problem. But you look at the environment, you know that rates have increased, but this is certainly going to mean an extra effort for some clients. Obviously, that inflation is an issue for some companies. They cannot pass on in full sort of cost increases and you have to conclude logically that things are going to deteriorate, and hence, our guidance is prudent.
It's prudent, not just because we're not running today at 40 basis points, but because we have €1.5 billion of unassigned provisions. And that is why we have a 74% coverage rate. If we didn't have this €1.5 billion, obviously, you would have a very significant decrease in that non-performing coverage. Even despite that, they will still be in the 60% area. So, very, very high considering the high proportion of collateral that we have on the real estate portfolio.
So, time will tell. I think it's reasonable to be prudent at this point because there will be some deterioration. I think we have no doubt. That's not been prudent, that's been reasonable that there is going to be some deterioration. But because deterioration may not be that tough and particularly because we have all these provisions, I think that less than 40 basis points is safe for us, but we will see. Thank you.
Edward O'Loghlen
Okay. Thanks, Ignacio. Let's move on to the next one please.
Operator
The next question is from Carlos Cobo with Societe Generale. Please go ahead.
Carlos Cobo
Thank you very much, and I hope Javier has a good long rest as he can fully recover. Questions for me. One is if you could give us a quick update on the low-income mortgage renegotiations? How many requests are you getting? And if you still think that it could consume a big part of the COVID overlays in terms of cost of risk, because it seems that it's not going to be that high? So, if you could update on your base case?
It'll be good if you could share your front book term deposit yield. So, how much are you paying to the new deposits, terms deposit in Spain?
And lastly, about your outlook for mortgages, is this related to the fact that didn't want to pay for deposits that you see some contraction. So, when customers face the decision between getting a yield on the deposits, they didn't get it, they're going to decide to amortize their more expensive mortgages. Is that a trade-off that is included in your forecast? It'll be interesting to know your thoughts. Thank you.
Gonzalo Gortazar
Thank you, Carlos. Let me just respond to part and let me pass it on to Matthias.
In terms of the new code of good practices, it's early days. But as of the end of January, we had approximately 800 requests of approximately €100 million from clients. This is the first month where we would have expected significant demand. So, the numbers are, I think, consistent with our view that this is code of good practices. Again, we have 800 requests and round numbers are €100 million of principal affected by these requests.
It's consistent with what the purpose of this code is. It's a tool for those people that cannot pay their mortgages. And these people, obviously, we want to help them. And certainly, we will do. And it's not a tool for people that do not want to pay their mortgages, but they have the ability to do so. And hence, it's going to be limited because the reality in Spain is that the resilience of our -- of the economy, of businesses, and in this case, of families is very strong, and they are actually being able to muddle through this economic environment. And the first thing they want to do is to pay their house, their home and the mortgage, because obviously, the alternative is not to live in the house and not pay it, but have to pay it at the end of, I don't know, adding an extra three, four, whatever number of years to the mortgage sort of payment period, and that doesn't make sense.
So, the take-up is likely to be moderate, but it's likely to be hitting exactly the target audience of people that we want to help. And hence, we feel very good both from the point of view of our -- the impact on our financials and of our ability to help the people that really need it in this moment.
In any case, we have had significant increases in rates in -- from November, but particularly December and now January. We're going to still have months where these increases in rates are going to be impacting our clients. And hence, we are expecting certainly some deterioration on -- or some increase in the number of requests and some deterioration on asset quality. Mostly -- this would be mostly unlikely to pay sort of a Stage 3 that in due course, we're helping someone that cannot pay for a year or two or three, it is our expectation that these mortgages in most cases will eventually be repaid.
But we should have an impact. I think it's moderate. But it's part of the explanation, which we were giving for, yes, we expect some deterioration, cost of risk below 40 basis points. And this is one of the factors we are obviously expecting to have an impact. The numbers from January are obviously modest at this stage, but we need to be prudent and wait.
On mortgages, I want to say, we expect a lower mortgage production because rates have moved. And it's not because we may remunerate on our deposits, but I think the main factor is new production is going to come down because prices are stable, but clearly, the number of transaction is going to be much lower or much lower significantly lower because of, obviously, interest rates reducing the purchasing capacity of people that want to buy a house.
Now, there is some impact from, obviously, people that had excess cash that take the opportunity to repay their mortgage. I think that is unlikely to be impacted by the beta on deposits that's natural and we had some impact. And in fact, sure Matthias can also elaborate on that beyond the topic of the term deposits on the front book. Matthias?
Matthias Bulach
Thank you very much. In terms of -- to finish up with that question in terms of the impact of increasing rates or not passing on deposit costs on early repayments, we do see a very limited impact as of Q4. Remember that Q4 always is a seasonal quarter in which the early repayments for tax reasons and people are canceling in the last quarter, typically over the year to make sure they reach the maximum amount or the total amount that they can deduct from the tax bill, there's always a seasonable effect on the fourth quarter, and that's why this quarter, actually the mortgage book has been slightly down. But we don't see any significant impact or increase of that of the early repayments in this quarter. There's a little bit of an increase, but it's not to any point significant.
On the front book term deposits, on euro deposits, we are not paying. The front book is zero. Recall, actually, we are down €2.3 billion Q-on-Q on term deposits, 8% reduction. We are down €7.5 billion year-on-year on term deposits. This is 23% reduction. So, what is euro-denominated term deposits, we're not playing at that moment. Obviously, there are some term deposits in foreign currency, which then generates some impact, but this is obviously then against different rate levels and with a very positive margin, including those and if we compare with the sector -- and sectoral data has just been out this week, we compare very, very favorably with the overall deposit rates clearly below those that the sector has seen over the last three months.
Edward O'Loghlen
Okay. Thank you, Carlos, for your question. Let's move on to the next one, please.
Operator
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Andrea Filtri
Yes. Good morning. One question on insurance and one on capital, if I may. On insurance, could you please remind us the level of life traditional reserves at VidaCaixa and the amount of the unrealized capital gains it has today, possibly before and after policyholders' interest? And linked to that, what is the lapse rate in Q4 '22 versus Q4 '21? And on capital, if you could just update your expected impact from Basel IV? Thank you.
Gonzalo Gortazar
Thank you, Andrea. I think there's nothing new on Basel IV, but Matthias, do you want to take that and the question on life insurance?
Matthias Bulach
Sure. On Basel IV, there's no update to the guidance that we gave. So, there is a very limited -- we expect a very limited impact overall on the different elements of Basel IV once it reaches impact. So, no update on that front.
And on the life insurance reserves, we are holding approximately €66 billion of life insurance reserves currently on balance sheet. This includes unit-linked reserves, obviously, so part of that being mark-to-market and the part which is not mark-to-market, it's somewhere below €50 billion. That currently holds €1.8 billion of unrealized losses before policyholders.
Edward O'Loghlen
Okay. Andrea, I hope that asks your -- replies to your technical question. Moving on to the next one, operator, please go ahead.
Operator
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Ignacio Cerezo
Yes. Hi. Good morning. Thank you for taking my questions. I've got one on overlays. If you can tell us to what extent the release of those overlays is included within the cost of risk guidance for the year? And what happens if you don't use those overlays, how quickly do you have to release them?
And the second one is in the banking fee discussion. I mean if you can break down the €2 billion ex CIB by segment and give us some color basically about how you expect each of those segments to evolve in '23? Thank you.
Gonzalo Gortazar
Thank you. Let me start with the first question. Yes, in the -- in our cost of risk, implicitly, we have use -- we would be using the overlays, that's what they are there for. So, that's why I was mentioning that even if there's a significant deterioration, we still have a €1.5 billion of unassigned provisions. This is including over €1.1 million of macro provision funds and over €300 million from the Bankia PPA. So, this is the €1.5 billion, which we expect -- part of which we expect to use.
Depending on how the year goes, the expectation of how much of that provision is used or not, obviously, will depend, but it is our view currently, assuming our conservative and prudent scenario that we will be using a large part of this unassigned provision during 2023, even if it's only because we need to update our provisioning models under IFRS 9, which we run twice a year, and we still need to incorporate the current projections versus the last update that we did. So, we will be certainly releasing these overlays. To what extent, at this stage we expect to a large extent. But time will tell depending on how tough the environment becomes.
On fees and any other comment you want to make on this point, Matthias, please go ahead.
Matthias Bulach
Sure. On fees of the €2 billion fees approximately that we have on banking fees ex CIB, you asked for the breakup, half of that approximately is a transaction -- on what we call transactional fees, i.e., including maintenance fees of deposit accounts, including also the corporate custodian fee that we charged last year and which obviously will be reduced and eliminated by -- or has been limited already and hence, we generate a negative impact next year. And including also exchange difference -- exchange rate differences fees deriving from those as well as, obviously, bank transfers.
This is most probably the part of banking fees, which is on the most pressure going forward into 2023. As we said, the fees that we charged from -- on corporate deposits obviously, we have abolished them when rates moved into the positive territory and hence, there will have an impact of approximately €75 million year-on-year next year with respect to this year.
On the other hand, obviously, our loyalty program, as we sometimes commented here, our loyalty program, in the way that people start as they are charged fees if they are not loyal or not customers with a significant amount of products, they might move into being more loyal or having more products and that means that we move and shift away fees from those loyalty program fees into asset under management fees or other fees of other services. So, as a capture, the transactional fees are the ones definitely on the most pressure into 2023.
The other half of recurring fees is evenly split up again between fees derived from assets, from credits, whereas there might be from the risk business basically on contingent assets and liabilities and fees charge thereof, where we actually expect into an economic environment that might be getting some more complex into next year, we should be getting some tailwind from that side.
And the other quarter of this €2 billion then is electronic banking fees, credit card fees, where we expect as there are still year-on-year some positive impact from increases and transactional levels and the levels of credit card payments, we do expect year-on-year still to have some tailwind from that side, even though if you're looking into Q-on-Q evolution, if the economy really gets into lower growth rates and getting into some slowdown, there obviously might be looking -- starting from Q4, some slowdown on that part.
So, €2 billion split into half of it being transactional fees and the quarter each related to risk are related to credit card business.
Edward O'Loghlen
Okay. Thanks, Matthias. We'll move on to the next one. I realize we have around five people on the queue.
Operator
The next question is from Britta Schmidt with Autonomous Research. Please go ahead.
Britta Schmidt
Yes. Hi, there. Thanks for taking my questions. I was wondering if you could provide a little bit more color on the asset quality outlook with regards to NPL balances and what you expect? What share of unlikely to pay versus NPLs should we be counting on? And how are you forecasting recoveries next year? Are you seeing any changes in, for example, the NPL sales markets, either with regards to demand for volumes or pricing?
And then, I've got two clarification questions. Could you tell us what the share of your deposits in FX is? And on the market and other moving capital in this quarter, I know there was the 11 basis points from BPI in there, but could you give us a breakdown of the rest, please? Thank you.
Gonzalo Gortazar
I think Matthias, I'm going to leave you -- let you just a comment on asset quality. Obviously, we expect the deterioration of non-performing loan ratio in 2023, a limited deterioration, but rather than having something that is 2.7%, we expect non-performing loans to start with a 3%, maybe around 3.5%, we will see, obviously, again, based on a fairly conservative view of the future.
Part of this is our assumption that 2023 is going to be a year where executing portfolio sales will be probably not economical or not attractive enough. And for that reason, we precisely brought down NPL to a very low level to be able to make sure that we have no pressure of having to do portfolio sales when the market is not there. The market for portfolio sales is still open, particularly for non-collateralized non-performing loans. For mortgage loans, collateralized loans, people used to require funding to do these purchases and funding has become much more expensive and hence, prices are likely to be lower.
So, part of the reason why we expect some deterioration in NPLs is precisely that even though the market, I think, is going to still be open, we are likely rather than be aggressively pursuing that market to be a bit more selective to make sure that we get appropriate pricing on that front. If the market is even better, then obviously I think we will do even better.
Certainly, this is one line where I am being very conservative, and I think that's what we should use for planning purposes. But at the same time, deep in my heart, I think there's quite significant upside, but then, time will tell.
Having said that, Matthias, if you want to complete the answers, please go ahead.
Matthias Bulach
Sure. On the capital side, we have this 29 basis points of increase in what we call markets and markets and other, as we said, approximately 11 basis points to 12 basis points stem from the IRB implementation in BPI. There's a small positive impact from the cancellation of the equity swap that we had on the Telefonica shares. As you know, in the beginning of this quarter, this generated a slight positive impact through the RWA reduction of approximately 2 basis points. And the remainder are the sum of little bits and pieces. There's one that by the end of the year, as we had a very positive evolution of profits and of recurring profitability, we are updating in a much finer, in a much more detailed manner, our DTA and DTL and estimations, obviously, into a final year close. And out of that update, actually, we were able to also register a small positive from that side. So, about half of this capture, as I said, IRB from BPI; a small positive on Telefonica; other bits and pieces and a positive also from DTA, DTL update by the end of the year.
And then on your question on foreign exchange, it's a very little share in our overall time deposits. It's around 6% and in side deposits around 2% share over the of the portfolio. So, a very small share.
Edward O'Loghlen
Okay. Thank you, Britta. Let's move on to the next one please.
Operator
The next question is from Daragh Quinn with KBW. Please go ahead.
Daragh Quinn
Hi, good morning. Thank you for taking my question. One would be on the outlook for Euribor. And the current level of 3.3%, 3.4%, you're seeing that as provoking a slowdown in loan growth, lower house prices, but not necessarily asset quality issues. What level of Euribor would make you more concerned about the outlook for asset quality? Is it 4%, 4.5%, maybe just if you could give some commentary on that?
And then, a second question on the outlook for deposits. How much are you expecting a shift within the existing deposit base, i.e., from site to term versus outflows from AUM into term, maybe if you could just make a comment on that as well? Thank you very much.
Gonzalo Gortazar
Thank you. On -- well, on the first point, I think it's important not just to look at rates, but why are rates? If the rates are rather than being at 3.5%, are at 5%, this obviously means that it's a very different inflationary environment. And this also means that probably our clients are having a different degree of inflation in their salaries and other income they have. I think it would not be realistic to think of very high rates and all other things being equal.
So, to be honest, we are not looking for higher rates than the current ones. I think the current ones are adequate in a zone where obviously they benefit our NII, but they do not severely affect the economy, and they are conducive to some, I think, soft landing. And in the case of Spain, that soft landing, as you have seen, is with growth rate above 1%. So, there's, I think, not much more upside from beyond 4%, because I think increases in rates would obviously be beneficial to NII, but hurts cost of risk, I would say.
But I don't see that it becomes sort of a big problem, because when rates are higher than that level, it means that actually we will have inflation, much more serious trends in inflation, and our clients will be obviously being paid at nominal salaries that will be increasing, and the actual increase in nominal salaries and the nominal growth of the economy is going to be higher than the increase in rates. So, for good or bad, our clients paid in nominal euros. And hence, we think we have some protection. But again, beyond the level of 4%, I don't think that's a net benefit from -- for us at all.
Matthias Bulach
Yes. On the question on deposit and the shift or some more color on the shift from site to term, we've been guiding for beta, and we are looking at remuneration now on the deposit side actually on a whole picture. It's very difficult to pin that down into concrete levels of movement from site to term deposits. Recalling that when we're looking into corporate clients or into business clients, we are mostly thinking more of a remuneration via site deposits, which is what is typically happening first and which is typically already starting to happen and competition is around some remuneration on that front.
And on the households and household clients, there are very many different ways of reaching, obviously, this expectation of getting some more remuneration on the savings. On the one hand, as we said, asset under management as well as fixed income funds might be one way. So, we would be on the strong position of liquidity that we are holding. We are very flexible in the way that we are offering the additional remuneration to our clients. So, it's very difficult to really pin down an exact number. But what we always expect is that we're clearly below historical levels and historical trends.
I mean, if you're looking into the last 10 years of history, if you wish, first of all, none of the years over the last 10 years has been an ordinary run. We're looking into, obviously, a liquidity crisis in the last financial crisis at similar rate levels as we have today, and hence, nothing of what we have seen, we do expect to be repeated, especially if we're sitting on a 90% loan-to-deposit currently and back at those times, the sector was around 150% or 160% even. So definitely a very different scenario.
So, I need to leave a little bit with the global message, with the global message of overall deposit remuneration that we are seeing based on the models that we commented before and not pin that down to exact numbers of movement between subparts of those deposits, I'm afraid.
Edward O'Loghlen
Okay. Thanks for the question, Daragh. Let's move on to the next one, please.
Operator
The next question is from Borja Ramirez with Citi. Please go ahead.
Borja Ramirez
Good morning. Thank you very much for taking my questions. I have two quick questions. Firstly, is on capital. The EBA published the forecast for the 2023 stress test this week and the GDP assumptions seem to be somewhat more pessimistic. I would like to ask if you could kindly comment on this? And related to capital distribution, I would like to ask regarding your latest discussions with the regulator, if there's any change in the stance with -- regarding bank's capital return?
And then my second question, very quickly, on NPL ratio forecast, thank you for giving that guidance. Could you kind of comment in which areas you expect an increase? Is it more in the SMEs or consumer? Thank you.
Gonzalo Gortazar
Thank you. On ECB's attitude on capital distribution, I've seen absolutely no change. On EBA stress test, I will ask Matthias to give this simple summary because he's the one who runs the stress test for us, so he's actually very knowledgeable.
And NPL, I think you -- well, Matthias, will answer better, but it's going to be across the board. Consumer mortgage and SME, self-employed we'll have -- we expect to have sort of the weakest part of these portfolios being more likely to suffer. Matthias?
Matthias Bulach
Thank you very much, Gonzalo. A few to add on the NPL question. I mean SMEs, probably small enterprises being most hit by inflationary pressures and potential difficulties of the cost base. On the other hand, obviously, in the mortgage portfolio, this is where the pass-through of the increase of Euribor is then impacting and consumer loans, obviously, probably been earlier non-repay their mortgages. So, these are the three segments. But across the board, I think this is the message.
And on stress test, I do think there are scenarios which are very much in line with what we expected from looking into a history of stress test scenarios. And reminding sometimes now we have the headline that is very, very big dives in GDP, if you compare it to the stress test -- last stress test of the EBA. But you need to recall that the last stress test was doing -- was just coming out of COVID crisis and hence, the central scenario was one of the clear recovery. And the stress with respect to that central scenario is actually higher than the last stress test than is expected to be in this stress test in terms of macroeconomic scenario.
So even though the accumulated reduction is clearly higher of GDP, is clearly higher than the one in the last test, the shock with respect with the central scenario actually is not as high. So, we do not see this as a very significant and very relevant downturn scenario, but rather than one that we would expect -- we would have expected in that range. And for internal capital stress test purposes, as you know, that we are running yearly, we are using similar types of scenarios. So, in that sense, I think no concern from that front.
Gonzalo Gortazar
[There is some] (ph) weakness. Sorry, let me be clear. We do think it's a tough scenario. The only thing is we do these scenarios internally on very tough and conservative prudent basis. So, I think we are prepared, but it is certainly a tough scenario. Not -- let's not...
Edward O'Loghlen
So, tough, but not surprising.
Gonzalo Gortazar
Exactly.
Edward O'Loghlen
Okay. Borja, thanks for your question. Let's move on to the last question for the day.
Operator
The last question is from Fernando Gil de Santivanes with Bestinver Securities. Please go ahead.
Fernando Gil de Santivanes
Hi, there. Thank you for taking my questions, and glad to hear that Javier is okay. Two questions, please. One is on ALCO size on the repricing. I see there are maturities this year coming about €7 billion in 2023. What is that you're forecasting for this portfolio including the guidance for this year?
And the second question is a question on the -- if you can please provide some comments on the exit of the executive member, Mr. Alcaraz? And if there is any change in any kind of policy -- commercial policy considered behind this? Thank you very much.
Gonzalo Gortazar
Thank you, Fernando. On ALCO, this is one that is Javier very much at core. But let me say what we see, and obviously, Javier is leading the thinking on this front together with his team. We are in a bit of a wait-and-see mode in ALCO. And obviously, it's going to be market dependent. What may be very attractive and sort of terming out maturities at some point, maybe less attractive, certainly, at least with today, we do not have a carry when you go long term now versus 12-month Euribor, that's pretty obvious. And hence, I think even though our plan is to reach that €9 billion target for the ALCO book and -- the medium term, that is a medium-term target, and it's going to be market-dependent.
That's clearly -- we'll continue to diversify the ALCO portfolio. And again, I think if we do more ALCO, it should be upside to our expectations, to be honest, because again, it would mean that sort of longer-term figures are -- for rates are more attractive. That doesn't seem to be the most likely case after how the market has taken the ECB's actions and the fed actions this week. But obviously, the year is very, very long.
With respect to the change in the management committee, it represents no change in strategy. What we have done is replace someone who is Juan Alcaraz, who's done a great job for us for the last 15 years. Starting this new cycle, where certainly rates look very different from what we have seen in the last seven years and taking the opportunity to specialize -- or not specialized, I would say, reinforce the strategy in the direction of two parts of the business: advanced analytics with digital transformation; on the other hand, payments and consumer, naming responsible for those areas. Putting them in the management committee, together with obviously replacing Juan in the management of a commercial portfolio with Jaume Masana. The idea is to keep going in the same direction we're going, but hopefully accelerate because we want to be ambitious and certainly try to be better year after year and adapt to the new environment.
So, no change, and I have to say, almost a month into the changes, I feel very good about sort of the progress that we have already made by these new responsibilities with their respective responsibilities. They are sort of all-timers, 10 to 20 years in the group, well known by the whole organization and well received, and everybody understands that from time to time, we have to move on to new cycles and management changes are part of sort of the life of every organization. What's important is the strategy actually keeps being exactly the one that we have had for a pretty long time. And obviously, we will adapt it to the different circumstances that we see now in the market and the many opportunities we see associated with higher rates or at least structurally positive rates, which is obviously critical for our liability side of the business. Thank you.
Edward O'Loghlen
Okay. That's all we have time for today. Thank you for watching one more quarter. We will reconvene next quarter. Again, thank you, and goodbye.
Gonzalo Gortazar
Thank you very much.
Matthias Bulach
Thank you.
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