Bankinter Sa Reg Shs

Good morning. This is Lori Shepard. On behalf of Investor Relations of Bankingta, it is our pleasure to welcome you all to the Bankingta's earnings call for the first half of 2024. Please note that our related financial statements were posted with market authorities earlier this morning. This presentation is also available on our corporate website. On today's call, we are joined again by Bankingta's Chief Executive Officer, Gloria Ortiz, and Chief Financial Officer, Jacobo Diaz. At the end of the presentation, they will be available to respond to questions in a live Q&A. As a reminder, you will need to press star 5 on your phone to be able to submit a question. Please refer to the disclaimer in the presentation and note that this call is being recorded. I will now turn over to Gloria Ortiz to review highlights.

Thank you, Laurie, and good morning to everyone in the call. Before starting, I would like to emphasize that the results on this first half of 2024 are very satisfactory and show very significant growth in activity in all business and geographies in which we operate. A first half of the year of intense commercial activity that translates into a result after tax of 473 million euros, 13% above that reported in the first half of 2023. In addition, these results are supported by solid management ratios from return on capital through efficiency as well as all the ratios related to the bank risk profile. Well, having made this preamble, I will start the presentation with a review of the highlights of the first half of 2024 and share with you some important trends in our commercial activity that drive growth in business volumes and revenues. Then I will hand over to Jacobo to review in depth the financial results and the performance of our businesses across Spain, Portugal, and Ireland. Let's start with some key highlights on page five, where I would like to emphasize four key pillars that underpin our strategy. Firstly, we continue to differentiate ourselves through diversified business volume growth with our customers across the different segments as well as geographies. In this first half of the year, we have grown our loan book by 5.5%, our retail deposit base by 4%, and we report a robust 20% increase in off-balance sheet volumes as a result of a successful strategy of saving relocation from deposit to value-added products. Secondly, backed by the strong commercial activity, all the revenues in the income statement continue to grow. Net interest income grows by 9% compared to June 2023, despite the decline in Euribor in the period. Euribor was at 3.68% compared to 3.88% in the second quarter of 2023. This is 20 bps less. The growth of net interest income is supported by volume growth, the management of customer margins that remains stable, and an active asset and liability management that has reduced the sensitivity of the balance sheet to rate movements. On the other hand, fee income grew by double digit, a solid 13% due to the good performance of balance sheet funds and customer transactional activity. Third, all this growth has been achieved while keeping our risk appetite intact. which is reflected in the improvement in the MPL ratio, which stands at 2.17%, and increase in the coverage ratio by two percentage points that stands at the end of June at 68%. Lastly, we preserve best-in-class efficiency levels at 37%, a robust return on equity ratio, which in the last 12 months stands at 17.7%, improving the ratio reported in the first half of this year. I fully believe that we have achieved these solid results by adhering and consistently delivering on our long-term strategy. The reported volume growth is particularly commendable because we have managed to continue growing in shrinking markets, gaining market share year after year in a diversified and profitable manner. On the top of the page, you can see two graphs that show the evolution of growth rates both for the sector and Bank Inter in Spain. We have clearly outperformed the system in our core market, where we have grown 26 percentage points above the industry, both in loans and retail deposits. This growth differential with the industry also happens in Portugal, where we have grown 62% since 2019, while the sector reports 10% growth in that same period. In the case of Ireland, where we have started our mortgage business in 2021, we have reached a market share of 2.2% in the back book that stands now at 2.6 billion euros. In slide seven, we can see the solid growth in business volumes across the group. If we add lending, retail funds, and of balance sheet funds, the total business volume amounts to 212 billion at the end of June 2024, an 8% or 16 billion euro increase year on year. Going into detail, lending stood at 79 billion at the end of the quarter, which is 4 billion more than in June 2023, and represents 5% growth. On the other hand, retail funds amount to 81 billion euros, 3 billion more than in the first half of 2023. And we have added 9 billion to the off-balance sheet business, which stands at 53 billion, an impressive 20% growth rate in the last 12 months. This intense commercial activity translates into strong increases in fee income. On slide eight, you can see a chart that shows the evolution of business volumes since 2019. This is the sum of lending on and off balance sheet funds from clients, as well as the evolution of fee income. Business volumes have grown by 43% in the period, and fees have presented a solid annual compounded growth rate of 7.4%. Well, there is a clear correlation between business volumes and fee income, as you can see. Moreover, fee income is well diversified and based on value-added products like wealth management, advice brokerage, and custody that represents circa 60% of net fees, but also is based on transactional activities from clients that account for 40% of net fee income. Sustained and diversified growth is what allows us to report net results in the first half of the year of 473 million euros, 13% above last year and 75% more than in the first half of 2022. We continue to increase the return on equity that reached a robust 17.7% in the last 12 months, improving the figure reported in 2023 as well as above 2022. We therefore continue to generate shareholder value, both in terms of dividend yield, which stands at 6.4%, and in retained value in the business, since the tangible book value stands at 5.94 euros per share, which is 11% more than last year. In summary, a solid and increasing second quarter earnings resulting from a consistent delivery of a unique business model. I trust that we will continue to deliver successful growth in the future and remain confident that we will continue to create value for our shareholders by adhering to our strategy. Well, I cannot end this chapter of highlights of the period without mentioning several strategic decisions that we have taken this quarter. These are long-term investment decisions that aim to maintain the pace of diversified business growth in the future. The first decision has to do with the absorption of EvoBanco into Bank Inter. This decision is part of a firm commitment to digital business and customer growth. Evo has done an extraordinary job in the last five years since its acquisition, proving that it is possible to grow profitably with 100% digital model and a simple value proposition. However, the fact is that it is a completely separate legal entity, and it presented two problems. First, that Bank Inter's customers did not benefit from the innovations in digitalization that were taking place in Evo, and second, that Evo lacks the benefits of scale needed in a digital business. At this stage, we want to make a winning and decisive leap forward in digital banking by combining the best of both worlds, Evo's talents and digital experience, with banking their greater investment muscle and scale. The absorption of Evo is accompanied by the creation of a digital organization that joins the 11 already existing organizations in Spain and that has set ambitions growth goals. The second relevant decision has to do with Ireland. In Ireland, as you know, we acquired Avant Money in 2019, which was a consumer finance operation to which we have added quite successfully residential mortgage business in recent years. We believe that there is a great opportunity for growth in Ireland and this is why we have decided to turn the consumer operation into a bank. To this end, we have already registered with the Central Bank of Ireland the file to open a Bank Inter branch in Ireland and absorb Avant Money operations into it. This will allow us to expand the offer of our products and services to our customers and therefore continue to grow and diversify the business in Ireland. Finally, we have launched an ambitious digitalization project in Portugal, where in the coming years we will prioritize in the group a sizable investment with the aim of improving the digital experience of our customers, gaining efficiency and productivity to continue growing profitably. Well, this was all from my part. Jacobo, now over to you, please.

Thank you, Gloria. Good morning. I'll talk through the financial results of this quarter. On page 11, you can see that revenue lines continue to perform particularly well and support our increased optimism for the year with higher for longer rates, resilient margins, and excellent fee growth. With a 9% increase in NII and 13% increase in net fees, we reach total gross operating income of 1.4 billion euros, an increase of 10%. Operating expenses remain at plus 6% year-on-year as we look to support business growth and projects, but also intend to move to more equally smooth total year expenses volumes over each quarter while maintaining our positive operating jobs this year. Cost of risk has increased 7% year-on-year, reflecting provisions for additional growth this quarter. Our profit before taxes reaches €715 million and net profit €473 million, an important increase of 13% year-on-year. On slide 13, you can find an additional table with a comparison between quarters. Here, I would like to highlight that we have been able to deliver an increase of NAI quarter-on-quarter, resulting from our ability to continue to grow volumes as well as manage customer margins that I will comment on the next page. Again, delivering strong net fee results, both on a quarter-on-quarter basis of plus 6%, but also a seasonally strong Q2 this year versus the second quarter of 2023 with a 17% increase. Other income and expenses line has reduced this quarter due to the payment of the bank charge last quarter, as well as the benefit of not having to fund the single resolution fund this year in Q2. Now, I would like to provide some additional detail into each of the results categories. net interest income reached another record level of 583 million euros. We have continued to grow versus last quarter by 1% and up 7% versus second quarter of 2023. Our customer margin remains resilient at 301 basis points, up 3 basis points, versus last quarter and at similar levels to 2023. On the asset side, customer credit yields performing well at 441 basis points, as we see that recent interest rate reduction may impact us more gradually than initially expected. Containment in deposit costs has been achieved with a similar mix of deposits between site and term deposit versus prior quarter. Here, we will continue to manage these costs closely in following quarters. In terms of our net interest margin, we have also been able to maintain stability above the 2% level, consistently one of the highest in the Spanish market when considering our peers over time. Our NIM in the first half of the year was an average 208 basis points. In terms of our outlook for the future, we are committed to maintaining resiliency at current levels in both customer margin as well as NIM. Next page, next slide, we continue to strengthen, diversify, and increase gross and net fee revenue sources. As Gloria mentioned at the beginning of this presentation, our business model and volume growth are the drivers for not only fee growth in our asset management and brokerage business, where we see increases of 20% and 8% respectively, but across the board in our transactional feed lines, where we are performing strongly across the board in payments, risk, and insurance category. Even our FX feed line are now increasing after a slower first quarter. All these factors contribute to our capacity to deliver a substantial accumulated increase of 13% in net fees year on year. contributing 24% to gross income. We continue to exceed last quarter results, reaching 176 million euros in this quarter, a record quarter in recurring net fees and a clear tendency of our expectations for coming quarters. Fees in an area of the bank where we have increased optimism for the following year, given our unique business model that leads to this exceptional feature generation results in a consistent and diversified manner. Moving on to the other income and expenses lines, I would only highlight that we have reported lower trading income and dividends versus last year, mainly due to seasonality and variances due to our regulatory charges that I have already mentioned. Moving to the next slide, the total operating income up 10% year on year, a 133 million euro increase versus the first half of 2023, and a 14% or 93 million euros increase versus the first quarter. Moving on to operating expenses, considering we ended 2023 with an already best in class cost to income ratio of 37.3%, significant improvement has been achieved to reach current levels of 36.6 on a last 12 months basis. This is a direct result and proof of our continued focus on efficiency and productivity in the group. As I previously mentioned, we are looking to smooth our expenses across quarters while still delivering positive operating jobs quarter on quarter with operating expenses growth at 6% currently this year. This can be compared to our gross operating income growth at 10%, allowing us quarter on quarter to improve our cost to income ratio despite our current projects at hand. We maintain leadership across the industry with exceptional levels of 34.1% on a year to date. This figure for the year even includes the bank charge paid in the first quarter. On page 19, we share the key asset quality metrics. Loan loss provisions total 176 million euros with cost of risk at the high end of our annual guidance at 40 basis points. However, we do feel this is a result of some additional seasonality of the quarter due to our asset growth levels. In other provisions, we continue to see a downward trend year and year with some stabilization of volumes on a quarterly basis this year. We currently have no evidence of any negative impact to consider modifying our annual guidance in cost of risk. So in summary, on page 20, another strong financial quarter, reaching 750 million euros in profit before taxes, this is plus 14%, and total group net income of 473 million euros, growing quarter on quarter by 13% on a year-on-year basis. Now, moving on to the pages on credit risk and solvency. On page 21, the group's NPL ratio stands at the comfortable levels at 2.17%, and in Spain at 2.5%. Both data points at the group and Spain level have decreased versus last quarter. Our NPL ratios continue to be considerably lower from the sector average in Spain at 3.6%, where we see an improvement in households and stability incorporates. I also would like to highlight our prudent coverage ratio at 68% currently, increasing from 64 last quarter. And this is a new record high in our case. These figures clearly outline the excellent asset quality of our book and reflect upon our prudent risk management policies, not only in Spain, but also in Portugal and in Ireland. In page 22, with the growing loan book, accompanied by increases in deposit base in the quarter, our commercial gap regained levels similar to the end of June 23. As a result, loan to deposit ratio in the quarter ended at 95.6%, similar levels to a year ago. Since in the first quarter of this year, we repaid our last outstanding TELTRA program, we have no further maturities this year. On the following page, Last slide in this section's details are fully loaded set one ratio, finishing the quarter at 12.44%, an increase of 14 basis points from the end of the year, given the strong retained earnings generation of 66 basis points. We remain well ahead of the 7.85% set one minimum requirement set for the group, the fifth lowest across Europe and lowest in Spain. With strong capital buffers, as well as adequate MREL and leverage ratio, we continue to meet our regulatory requirements by far. Moving into the next section. Let's move and see and review the geographies and business. I will give an overview of the commercial activity and performance of each. Bank Inter Spain, our core business. We continue to grow our loan book year-on-year, reaching now 62 billion euros, supported by a strong growth rate in corporate SME loans of plus 6%, and a recovering and now stable retail banking book. The outlook for growth is also quite positive, with improving growth forecast at 2.4% by the International Monetary Fund announced a couple days ago, with Spain leading growth across Europe. Deposits grew a solid 5% year-on-year, even with a strong savings reallocation to off-balance sheet funds, where we see growth rates of 20% year-on-year. As for the income statement, we maintain growth for both NII and fees to reach 1.2 billion euros in gross operating income, an increase of 10% year-on-year. In this year, we have been able to maintain cost to incorporation at an impressive level below 30%, reinforcing the efficiency as well as the scalability of our business model. Profit before tax up 14%, up to 686 million euro, a very solid contribution from our core business in Spain. Moving into Portugal, this is our quite admirable and growing franchise in Portugal. We continue to deliver exceptional double-digit business volume growth and robust financial results across the board. Our loan book increasing at 12%, now at 10 billion euros. Retail banking increased by 6%. Corporate SME banking also continued to grow by an impressive 25% year-on-year. Deposits up to 8 billion euros, an increase of 13% from a year ago, in an increasingly competitive environment. Just as with Spain, the business model to reallocate savings to off balance sheet products continues to be successful, reaching 5 billion euros, up 24% year on year. As for the income statement, gross operating income grew by 17%, supported by double-digit growth, both in AI and fees. We continue to improve efficiency with costs growing below revenues to maintain exceptional levels of cost to income below 30% in a year. All the above made possible for Portugal to deliver profit before taxes of €102 million, a 20% increase year-on-year. So now moving into the Irish operation. We continue to see remarkable loan growth across mortgages, up 51%, and consumer credit, mainly consumer loans, up 19% both year and year. Total new loan origination this year in Ireland almost doubled versus last year to reach 600 million euros in June. In terms of the income statement, we are delivering growth in NII and fees, have positive operating jobs, and contain loan loss levels, contributing in profit before taxes 20 million euros, up 20% versus last year. In summary, a franchise in Ireland that has all the levers to grow and where we will continue to invest. Now moving into the corporate SME business. The corporate SME loan book in the group continues to grow year-on-year by 7%, fueled by double-digit growth in Portugal of 25% and our international banking segment, noting that in both countries we are well above the market growth rates for the industry. In terms of additional drivers for commercial activity and growth, we have the international business segment loan book up by 17%, closing in to reach 10 billion euros. And supply chain finance multiplying volumes by four year-on-year, expanding to and attracting new international customers to the bank with a unique product and servicing model. This international activity together with Portugal and the increased financing and pipeline from the next generation EU funds will continue to provide relevant sources of growth in our corporate and SME banking business line in the future. Moving to the next page, let's have a look at the wealth management retail business line. We can see the total customer wealth under management increased by 14 billion this past year to reach record levels of 122 billion euros in June when combining the wealth management with the retail banking segments together. This is an increase of 12% year on year. If we look only at the increase in 2024, customer wealth under management increased by 9 billion euros, where almost half of it is net new money inflows into the bank. The other half of increase is or come from the market effect. In total, we have increased with the net new money a total of 4.3 billion this year so far. In the past? On average, we have increased between 5 to 7 billion in a year, which means we are well on the way to reach new record levels in the net new money inflows this year. Continuing with the wealth management and retail banking business line on slide 30, we can see the highly diversified mix of products that comprise of balance sheet funds. In total, a considerable increase of 8.9 billion euros, a 20% increase year on year. As a reminder, within our Orff Balance Sheet Fund offering to customers, we offer an open architecture with a diversified product offering. All product classes are growing double digit. We are currently especially strong not only in third party funds, but also in our proprietary Bank Inter funds and advisory management services, where we have higher average fees from asset management, custody, and distribution. Turning into the next page, salary accounts in the group continue to grow at a steady pace of plus 4% year-on-year, with good levels of new customers both acquired and in the pipeline. New mortgage production, initially impacted by weaker demand in the first quarter, is now seeing a recovery in this second quarter. We are proud of our strong market positions in Portugal, Spain, Ireland, and we have achieved new residential market share from 9% plus 10% this year. Also, still performing well above industry growth rates across each geography. Our total group mortgage-backed book continues to grow quarterly, reaching over 35.6 billion euros in June, showing an increase of 4% year-on-year and above December 23 figures, as well as above March 24 levels. So, before I hand back to Gloria for closing remarks, I would like to review our expectations for the year in light of the review of our first half results. Related to loan volumes, we expect continued growth in all geographies and businesses. Portugal, in all three businesses, mortgage, corporate, and consumer loan books. Ireland continue focus on mortgages and growth in consumer credit. And for Spain, we are seeing a pickup in mortgage lending and short term financing in the corporate book. That means that we are optimistic with our ability to keep growing our loan book at the same levels. We do believe there is an upside risk with NII in a higher for longer rate environment supported by long growth and with resilience in client margins, albeit with the need to continue to manage deposit cost. For these reasons, we upgrade our guidance from stable to close to meet single digit for the year. Fee income results are going well and we remain very optimistic with our very high single digit guidance. Groups cost will grow to support our new projects but should end lower than the rate of growth of incomes and provide positive operating jobs this year. We may be closer to the upper range of our guidance of low to mid single digit by the end of the year. And finally, for cost of risk, we still expect to finish the year 24 within our annual guidance of 35 to 40 basis points. In summary, we believe NII will provide better than expected results, fees will reach better than expected income, and costs will stay at mid-single digit due to the new growth initiatives. So, Gloria, I will hand it back to you for closing remarks.

Thank you, Jacobo. Well, to close the presentation, I would like to highlight that we are once again presenting a solid set of results that are the consequence of a successful execution of a consistent long-term growth strategy. We are growing steadily in all businesses and geographies in which we operate, keeping our risk appetite intact and improving the risk profile of the loan portfolio. We continue to invest in projects and initiatives that allow us to keep up with the pace of business growth, and despite this, will maintain positive jobs and improve efficiency. Volume growth, interest rate margin management, a consistent and prudent approach to risk management, and continued focus on operational efficiency and productivity is what allows us to report our robust return on equity on a consistent basis. On page 34, we have included our key KPIs for the first half of the year. To summarize, consistent and diversified business volume growth across the board with extremely positive growth of balance sheet products, solid recurring income and financial results as shown in the upper right hand corner, strong and improved set of management ratios with comfortable solvency levels and improving MPLs underpinned by our best in class cost to income ratio. A 17.7% return on equity and an increase of 11% in book value year-on-year, delivering to our shareholders a 6.4% dividend yield in the past 12 months. Well, this is all from my part, and now it is on to you, Lori.

Thank you, Gloria and Jacobo. We'll now move into the live Q&A. And as per the instructions previously sent, please remember to press star five on your phone to submit a question. And we kindly ask that you limit your questions to two, please. The first caller on the line is Max Mission from JB Capital. Max, please go ahead.

Thank you. Hi, good morning. Thank you for the presentation and taking our questions. Two questions for me. The first one is on customer spreads. Last quarter you mentioned you saw deposit costs declining in March versus December. Could you please update us on how you have seen monthly evolution in the second quarter and what do you expect for the rest of the year? And the second is on fees. Could you kindly share more color in the quarterly evolution? Were there any one-offs? Is growth in AUM fees driven by mixed effects or you also increase prices? And what prevents you from improving guidance for 2024? Thank you.

Hi, thank you. I might start with a second question regarding your fees. Basically, there is no one-off fees in this quarter. Just basically, this is a result of our strong commercial activity. As you have seen across the presentation, our commercial activity in bringing net new money to the bank and having the capacity or capability to transform it into value-added products has a proper result in the strong fee generation. We have increased strongly our assets under management fees. Our brokerage fee, we had, again, an excellent quarter in intermediation with securities or fixed income securities or any other type of product that we have in our online broker. And that's it. I mean, nothing extraordinary. Yes, very strong position. You ask us what is preventing us of increasing our guidance, so we will review it in the next quarter, and we will see. And regarding, I think the first question is regarding the cost of the deposits. I think as you know that, as I did mention, capturing deposits is an important part of our business model. So capturing new funds and convert them into off balance sheet value added products for our customers. This is quite important for us, so we continue to compete and price our deposits to capture new funds, as you have seen in this presentation. So the mix between site and term deposit has changed, so we will still feel that we have the ability to manage customer margins and deposit costs going forward as the terms of the time deposits come up to renewal. We keep managing the cost of deposits, thinking in terms of reducing the duration of these term deposits. In the corporate banking, duration is below 90 days, and in the commercial banking activity is around an average six months. So that keep us the ability to keep competing, attracting new funds, and making sure that we'll convert into other value-added products that will bring us more income for the future.

Thank you, Jacobo. Our next question comes from Antonio Reale from Bank of America. Antonio, please go ahead.

Good morning, it's Antonio from Bank of America. I have two questions, please. My first one is on NII guidance. You've got it to meet single-digit growth this year. It would be great if you could share a little bit more color on your key assumptions, your IBOR volumes, deposit cost, and your strategy on the ALCO book, please. Any more color would be great. My second question is really linked to the first one. From your comment on volumes, it seems like we're reaching an infection point on new loan origination. and that deposits have finally stabilized, even growing this quarter. Can you share what you're seeing from competition, especially since the BVA bid for Sabadell, and your expectation both on loans and deposit dynamic in Spain in particular? Please, thank you.

Okay, I'll answer the first one in terms of the NII guidance. So basically we are assuming that there will be probably an additional official rate cut probably in September and probably another one by the end of the year. We don't know exactly, somewhere probably in December or probably in January. So these assumptions are made based on what we think the market is expecting. So URIBOR, as you know, has been behaving better than expected, and we do expect that at the end of the year, the URIBOR might finish somewhere around, I don't know, 3.30 probably. So this gives us a good average URIBOR for this year. As I did mention, we think there is a strong client margin resilience and strong NIEM resilience, and I think that will provide us a very good outlook compared to the, or accompanied with the increase of volumes. As I did mention, volume growth in this first half of the year has been strong. We are quite confident that we can keep those same levels of growth for the end of the year. NII sensitivity has reduced a little bit. So today, our NII sensitivity for a decline of 100 basis points parallel shift is below 3% in 12 months. So that means that the NII sensitivity, I mean, the impact of reduction in rates it's quite a minimum. This combined with growth, as I did mention, and with the expectations that we have of your arrival, give us some more optimism in NII in order to improve our guidance. And additionally, you mentioned the ALCO portfolio. The ALCO portfolio size has increased. The yield is now at 2.5. So all these items combined will provide us that increase in our guidance.

Well, I will take the question regarding volumes. Well, basically what we have seen is, well, we are nicely growing in enterprises in general, particularly in corporates and the bigger midsize enterprises. This growth is very much focused and linked to to working capital financing as well as, as you have seen also, international trade. We are also seeing some pick up in everything that has to do with European European funds. So we are growing there nicely, as you have seen. We have seen also a recovery of the mortgage financing in Spain, where we had dropped in the first quarter. And we think that with the reduction in interest rates there will be more activity in that market. And with regard to competition, well, the competition is steady. As you know, Spain is a very competitive market. We also see competition recovering in Portugal. And, well, we are a new entrant in Ireland, so we have impressive growth rates there, but I think it's normal for a new entrant. With regard to deposits, competition is stable. I think that Jacobo has already gone through it. It's part of our strategy. What we do is, obviously, we fund our balance sheet, but we also gather funds in order to convert them into higher value products of balance sheet. which is actually what drives our growth in fee income together with obviously the transactional activity that is linked to these working capital financing of our corporates. So in general, I think that volumes are behaving well. We are very optimistic looking forward and a competition obviously is there and is hard, but we are accustomed to that.

Thank you. Our next question comes from Sophie Pettersons from J.P. Morgan. Sophie, please go ahead.

Yeah. Hi, this is Sophie from J.P. Morgan. So my first question would be around Ireland and the kind of banking license that you're applying for in Ireland. How should we think about your plans there? When are you going to start with your deposit offering? How much are you planning to potentially pay for deposits? Are you going to target more savings deposits or transaction accounts in Ireland? And also, the growth levels you're seeing in Ireland look quite impressive, over 50% mortgage loan growth. But how do you ensure that the asset quality is solid and you don't end up having problems with asset quality later on. And then my second question would be that you mentioned in the previous question that the year one impact from a 100 basis point decline in rates is 3%. But does this mean that we should also expect a minus 3% lever in interest income in year two or will the year two impact be larger? If you could just comment on this. Thank you.

Good morning, Sophie. I'll try to answer your question on Ireland. I think you've touched many points. I'll probably start with the last one. I think you were mentioning something regarding the asset quality, how we are ensuring the asset quality. I think the way we do business in Ireland, as you know, the NPL ratio in Ireland is almost close to 0% because we normally do recurrent sales of portfolio of NPL positions that allow us the capability to keep those NPL levels always very, very low. Secondly, in the mortgage business, as you know, the credit policy is a similar policy, credit policy that we have here in Spain. Everything is centralized. Therefore, we target the same similar risk profiles in Ireland that we target in Spain. And we apply the same, let's put it that way, risk scoring processes than in Spain. That means that the quality of our book, of our mortgage book in Ireland, is exactly or quite similar to the one in Spain. That means that it is very safe. So we are continuing to grow in Ireland. We have very good expectations. We just have barely 2% of market share. We do think there is good opportunities in new production. We are reaching above 9% of market share in new production. That means there is space and room for us. So we are competing always, making sure that we meet our minimum return levels. So by the probably mid of the year, mid of 2025, we will set up the branch, and therefore we will start offering products regarding savings. That was another of your questions. So we are ambitious in that process. We think there is a very good opportunity to start offering those savings products, to start capturing deposits from the Irish economy, and also to have the capability to fund all our growth in mortgages that we have in Ireland with those deposits in Ireland. So we will slowly but, you know, we will increase our product offering in Ireland once we get all the approvals that we expect to receive them somewhere in the first half of 2025.

Hi, Sophie. Could you help us and repeat the end of your second question, please? We heard that you were asking about the NAI sensitivity. We just didn't get the last phrase you said. Could you repeat it, please?

Yeah, of course. Sorry. So just what the year two impact in the net interest income sensitivity is. So if it's minus 3% from 100 basis points cut in year one, what is the year two impact?

Yes, it is below 3% with a parallel shift or 100 basis points in the first 12 months. That's it.

And after the first 12 months, like 15 months, like 24 months later, is it still the same or is it larger?

No, no, it would be the same. Basically, it would be the same. I mean, we are managing the structure of the balance sheet in the asset side and the liability side just to make sure that sensitivity to rate reduction of 100 basis points is limited below 3% in the following 12 months. And today's picture is similar if you apply that for the following 12 months.

Okay, that's very clear. That was my question.

Thank you.

Thank you, Sophie. Our next question comes from Francisco Riquel from Alantra. Francisco, please go ahead.

Yes, thank you. So my first question is on fees. The fees paid to agents are down 3.5% year-on-year, even if third-party AONs are up almost 20%, and business is growing on all fronts. I wonder if you can explain what is driving this. if we should expect any catch-up here in the fees paid to agents in the second half of the year, and if that would be consistent with the fee income guidance for the year. My second question is about Ireland. NII is growing by just 8% in the first half of the year, against a 40% jump in the long book. So you can comment on the margin dynamics in this market. And then if you allow me just a follow-up on the cost of deposits, because the shift to time deposits has stabilized, but I wonder how sticky do you see this stock of time deposits in a higher for longer interest rate environment? And for the resilient guidance for the customer spread, what are you embedding in terms of time deposit mix and deposit beta in your assumptions? Thank you.

OK. Hi, Paco. Regarding the agent fees, exactly, I mean, the business with agents is not just based on assets under management, but it's also based on loans. So that means that some of the fees that we pay to agents are not just recorded on that line, but they are recorded in different lines across the P&L and as the income can change across quarters versus last year in terms of how do we make business with these agents, that means that you might have some reduction in the payments of agents in this quarter, but it could be more payments in another lines of the P&L. So basically this is nothing which is different. It's just the way the business is performed with these agents and the way these fees that we pay to them are recorded in the P&L.

I will take the question regarding Ireland. Well, in Ireland, as you know, we don't have retail deposits, so basically what we are doing is funding Ireland with a transfer cost of funds, which is much higher, obviously, because it takes into account our external financing than it is for Spain. So with regard to the margins on the products, which is what really matters, because at the end of the day, this is an internal transfer cost. The margins in the mortgages there are much higher than they are in Spain. I mean, just to give you a little bit of color, The public price of a 30-year fixed in Spain is $2.99 at present. And the price of a mortgage in Ireland that normally reprices in the 7th or 10th year is around 3.8. So it is almost 100 basis points better margin than in Spain. And this is obviously what we take into account, difference in the margin, because at the end of the day, the financing is at corporate level.

And I will take the other one. I think it was related to the time deposits and this higher for longer rate, how we will manage the resilient client margin. I think we have demonstrated over the past quarters that we are able to manage this client margin. I think we, again, we have shortened our durations in either both the commercial, the retail banking business and the corporate banking business. So we are closely monitoring and managing these cost of deposits. I'd like to remind that We link the way we see the cost of deposits with the fees. For us, both concepts need to be together. There is plenty of cross-selling alternatives, plenty of opportunities for bringing new clients on board, and there is a strong ability or capability to transform into assets under management or assets under custody whatever deposits we bring into the bank so we don't mind if from a commercial perspective we need to tailor some prices to some specific clients and bear in mind again that our level of cost of deposits compared to others is a little bit higher and that means that we have much better opportunity to reduce this cost of deposits in the coming quarters to make sure that we keep resilient our client margin So we have much more room for reduction than others, although, again, we link this activity to the business that can be transformed into more value-added products in the long term. And as a result, that's why we are presenting such strong figures in terms of fees.

Thank you, Jacobo and Gloria. Our next question comes from Avro Serrano from Morgan Stanley. Avro, please go ahead.

Good morning. I guess these are two follow-up questions, one on deposit and another one on island. The deposit yield in the quarter was flat despite your IBO that's been down and your mix has actually improved because I can see the growth has been in current accounts in the quarter. Have you increased any offers during the quarter? Is it competition or is it just a lag? We'll see the deposit yield fall later on. And the second question follow up on Ireland is basically on what could we expect? Do you think you're going to build uh the deposits sort of um balances as as fast as you've built the the the mortgage balances which has been remarkably um uh remarkably fast because i guess if we're heading towards uh two and a half percent rate environment according to the forward curve or slightly lower um it's going to be difficult to do profit profit profitably and quickly and and i guess more longer term um does the model in Spain work in Ireland? Because Gloria, you mentioned some of the differential in spreads, but clearly in Spain, you can do a lot more cross-selling than typically you've been able to do in Ireland. So some thoughts around the business model. Thank you.

Okay, I'll take the first one. Again, I think the cost of deposit has been flat because we think there are opportunities. As you've seen, we've grown in our deposit base. We've grown in our loan book. Again, we've had a very strong first second quarter so we have the capability to bring money to the bank to bring wealth of assets of our clients and when there is opportunity we try to capture it because there are plenty of commercial activity around it so for us we again we don't see the cost of deposit by itself we just link it to plenty of other commercial activities we have the ability to manage this level And we have the ability to transform it. So when we see opportunities, we try to focus on specific and tailored value propositions to our clients. And even if the arrival, you mentioned, that has gone down lately in the last probably month or two months, Again, we have very short durations and we will have the capability to adapt this cost of deposits to the reality of the market and to make sure that we keep our client margin resilient across time.

Well, if you want, I can take the Ireland question. Well, I think we have to be clear. I mean, we are not doing what we are doing just for gathering deposits. I mean, this is a long-term investment decision that has to do with a strategy of diversified growth. and this and we really think there is an opportunity in ireland to do what we've done in portugal we are starting by deposits and current accounts and we obviously have the intention to cross sell starting from consumer finance to the new clients uh of course credit cards and also everything that has to do with insurance i mean once you are a bank you're allowed to sell basically to do all the cross-selling that we already do in Portugal or in Spain. Obviously, it's a question of developing the products. No, we don't have any, you know, I don't think it's going to be as quickly as mortgages, but I think that we have a great opportunity that we will show nice growth rates in Ireland when we start with the operations there.

Thank you. Our next question comes from Ignacio Ulargui from BNP Paribas Exane. Please go ahead. Hi.

Hi. Good morning. Thanks for taking my questions. I have two questions. The first one is on the savings from EboBanko and there will be potential cost implication from the integration of EboBanko over the coming three years once you get the regulatory approvals. And a follow-up on costs. I mean, how do you see the cost evolving into 24, 25? I mean, would you expect, in a context of lower rates, to deliver positive operating jobs, as the bank has been doing historically? Or it would be more challenging in an environment of 150 basis points rate cuts? That is probably what the market is embedding here. And then a second one on deposit costs. I mean, you provided in one queue... At the end of the quarter, March cost of deposits was below the year end. Could you give us some sense of the evolution of the cost of deposits throughout the quarter? Thank you.

Hi, good morning, Ignacio. I'll start with the last one. Yes, I mean, basically it was stable. I mean, the March figure and the June figure is probably exactly the same. Again, I'd like to remind that we are managing the cost of deposits. Just bear in mind that, for example, this quarter we have a little bit less proportion of term deposits in the overall. So we have reduced the overall volume of third deposit in this quarter. As I mentioned, the duration is short or is shortening. That means that the short-term prices incentive is always probably higher than a long-term deposit or a long-term price that, as I did mention, we are not offering. And, of course, we are managing the payroll accounts and any other stable funds that are improving. So basically these are items that will allow us or is allowing us to manage the cost of deposit at the level where we have a good clearing between the strong opportunity in commercial activity versus the resilience of the margin. regarding the the operating the operating jobs 2024 you will have some operating jobs as we mentioned before we haven't provided yet guidance for 2025 as you can imagine this is our aim and we will we feel we have excellent levels of cost to income ratio which we ambition to maintain around the levels. As I mentioned, we are not in a place to set guidance for 2025. I will have to ensure we size our expenses, budgets to source projects to grow our revenues. But in any case, our ambition is to continue to be a market leader in efficiency levels in coming years. And we will ensure that when we provide our guidance in 2025, we will ensure you have a better view on the positive jobs for 2025.

Thank you. Our next question comes.

So, sorry, he made a question of EvoBanco as well. Sorry.

I'll take that one if you want. I mean, I think what we're doing, the absorption of EvoBanco is a decision that doesn't have to do with cost synergies first. It is more has to do with growth. with growth and decisive investment in digital. Anyway, obviously Evo is a separate legal entity and once it is absorbed and there will be savings mainly in technology where, I mean, they will be in the order of what, 15 to 20 million euros. But we are talking more about the end of 2025 and 2026.

Our next question comes from Borja Ramirez from Citi. Borja, please go ahead.

Hello. Good morning. Can you hear me?

Yes, we can.

Perfect. Thank you very much. I have two questions. Firstly, there has been a strong increase in the ALCO portfolio during the quarter. The average volume is up 10% quarter over quarter. I would like to ask if you could give details on the yield and the duration of the net purchases during the quarter, and also if this could continue to grow. And then my second question would be a follow-up on the 2025. If I remember well in your previous conference call, in the previous quarter, You mentioned that the margin should remain stable in 2025, so gross margin. Currently, consensus has a 1% drop in margin and a 4% drop in pre-provision profit in 2025, which seems to be more conservative than your guidance, if I understood well. I would like to ask if you could give more details. Thank you.

Hi, good morning. Regarding the ALCO portfolio, as you know, we have risk appetite framework that sets our limits to the size of the ALCO portfolio. These limits have been there for many, many years, which are somewhere between 2 to 2.5 times our equity. So that means that the size should be somewhere between around 10 to 15 billion. So even if we have increased some amount during this quarter, everything is under our risk appetite framework and very, I would say, limited in terms of size. Even if the size has grown during this quarter, there is no major expectations about expecting additional increases in the volume of the ARCO portfolio, because we will still are within our risk appetite framework. The yield is around 2.5%. It has been increasing across the past quarters, and the average duration hasn't really changed so much. We have a total of five years average duration, which is pretty similar to the figure that we have in the past. And regarding the 2025, I did mention that we are not providing guidance for 2025, although, as you can imagine, we do expect growth in terms of overall income. We will provide you more more insight probably as we come closer to the end of the year. But as you can imagine, fees are behaving quite strongly, and NII, as I did mention, is behaving with very strong resilience in terms of client margins. So we provide you more guidance, but as you can imagine, we do expect growth in income lines for 2025.

Thank you. Our next question comes from Britta Schmidt from Autonomous Research. Britta, please go ahead.

Yeah, hello. Good morning. Thank you for taking my questions. Two fairly quick ones. Just coming back to the fee growth again, there was a very strong increase in payment and collection services. And you were mentioning the linkages of transactionality to volume growth. Maybe you can perhaps break down the growth a little bit and talk about whether there is any seasonality here or whether... you can grow on these sort of numbers. And then secondly, I think you also talked about smoothing costs, your cost base. I was just wondering whether you're referring to the quarterly cost base and what you're planning there. Thank you.

Good morning, Britta. Regarding the payment and collections, I mean, there is no special seasonality. I mean, this type of what we call transactional fees are related to commercial activity, and payments and collection is something which is obviously quite linked to the economic behavior of the country and of our clients. So when we have a good level of GDP growth in Spain and a strong level of activity that has some sort of good correlations in these payments and collections. So there are no one-offs in there, just basically the level of economic transactions that our corporate clients and our retail clients perform, and there is nothing special. In this concept, of course, we have also things related to endorsements of other things, of activity related to granting new loans. So this is the type of fees that we call as transactional, where payment and collection is a very good example.

I will take the one regarding costs. I mean, as you know, we have a very strong seasonality in cost in the fourth quarter, traditionally. And what we're trying to do is to actually smooth cost along the different quarters of the year. So you can expect a little bit less of cost than normally in the fourth quarter.

Thank you. Our next question comes from Carlos Peixoto from CaixaBank BPI. Go ahead, Carlos.

Yes. Hi, good morning. Well, most of my questions have already been answered, but just a couple of quick ones, which should be on capital. One of the details, basically, if my answers are correct, in the quarter, you have nine basis points negative impact in CT1 from intangibles. and others. I was just wondering if you could give us some color on what happened there, given that the evolution of intangibles was relatively small in the quarter, at least as far as I can tell. And then the second question would be basically on looking at it toward early growth. Basically, you have RWAs up 9% year on year, where volume growth is around 5%. year on year, is this higher pace of growth in RWA the reflection of risk here, loan growth, or are there other factors weighing in here with RWA growth, and basically how should we think about it for the second half of the year? Thank you.

Hi, good morning. I'll answer the first one. Basically, these intangibles are related to the level of investments that we have in IT and also the level of what we call some technicalities regarding the IRB shortfall. So these are, I would say, seasonality effects, and that's it. That's the detail. More or less, half of it is each of them, so basically acceleration of IT investments IRB shortfalls that, as you know, is just expectations of the difference of expected loss versus current loss. But this is something that always happens in some quarters. Some quarters have positive behaviors. Some quarters have negative behaviors.

Okay, I'll take the one about risk-weighted assets. Effectively, we are growing 5.5% in the loan book and 9% in risk-weighted assets. This growth in risk-weighted assets that is higher to the loan book has to do also with a change in the mix of the loan book. We are growing faster. in corporates than we are doing in mortgages. And we are growing faster in Portugal and in Ireland than we are doing in Spain. And these are investments that have higher risk weighted asset density. It is also the explanation of why going down the arrival in the quarter, we have managed to even increase by three basis points the margins in the credit side.

Thank you. Our next question comes from Alberto Nigro from Mediobanca. Alberto, please go ahead.

Yes, thanks for taking my questions. The first one is on Portugal. If you can give us more color on the quarter-on-quarter evolution of the loan book. From the presentation, I can see a reduction of both retail and corporate. Sorry to come back again on the cost of deposits. I would like to hear your thoughts on the evolution of cost of deposit next year. How fast can you transfer to clients in deposits? If you refer in other words, what on cost of deposit under your NII sensitivity?

Yes. Yes, good morning. Yes, in Portugal, as you see, the first half of the year has delivered quite strong growth of $1 billion. There are some positions which are linked to the corporate banking activity and to working capital facilities, so there is more volatility in that side. So this is normally things that happens at the end of every quarter. So in this case, there is... a reduction on the level of growth of this quarter, but this is basically to some large positions that come and go, and depending on the moment, can happen right in the middle of a closing of a quarter. So at the end of the day, nothing to worry about. We see Portugal growing the loan book at double-digit levels above one billion in year versus year, and quarter, and since December, it's growing almost half a billion. So things are running well in Portugal, and this is just basically short-term positions that can go and live. And regarding the cost of deposits, I mean, it's, again, it's difficult to provide you some guidance for the next year. We are, as I indeed mentioned, we are with a very stable, even reducing the level of term deposits versus the overall resources. This is something that should give some comfort about how are we managing cost of deposits. Again, shortening duration means that probably the pricing is higher for a short-term position versus a long-term position, and this is exactly what we're doing. And again, we... hope that you understand that when there are commercial activities or commercial opportunities to bring wealth to the bank, we will take it and we will capture it. We have new great clients on board and we will do plenty of new businesses. So we try to look and we look both the NII and the fees line all together. And this is how we manage our long-term view on long-term relationship with our clients and long-term profitability of the bank.

Thank you, Jacobo. Our last question comes from Hugo Cruz from KBW. Hugo, please go ahead.

Hi. Thank you for the time. Yeah, I just want to focus on the loan rates that you mentioned that actually went up Q1Q. If you could give a bit more color. I know you said that he was driven by a change in mix, but I wonder if there's any repricing in there effect as well. and also what you expect for the coming quarters. Thank you.

Yeah, I think your questions were related to the level of loan growth and the level of loan yields. If I'm wrong, just let me know. But basically, I mean, as you've seen, the loan yields have been quite resilient, some of the different quarters. So we are today at good levels of loan yields. There is still the Uriber curve, which is one of the, the one that we will, that we follow in June, the The rolling 12-month URIBOR curve, it stays at 386%. That means that in June, the average URIBOR 12 months for the last 12 months is at 386, which is just three basis points below the figure in March. But it's exactly the same that the figure that we have in December 23. And when we compare to the figure of June 23, the rolling URIBOR 12 months is at 293. so that means that there is very similar levels of your eyeball moving average for figures for june and we do expect very limited reduction over the following uh the following the following months since June, we end up with an average arrival of 365, and probably we end up July in a figure around 360. So the moving average of the arrival 12 months will probably slightly go down, but will definitely stay much higher levels than one year ago.

Thank you. Thank you to everyone who has participated. And on behalf of the entire Bankingda team, we thank you for your interest and your participation. As a reminder, Investor Relations will be available after the webcast to answer any questions you may have. Thank you all and have a wonderful day.