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Banco Bilbao Vizcaya Argentaria [BBVA] Conference call transcript for 2022 q4

2023-02-01 09:43:03

Fiscal: 2022 q4

Patricia Bueno: Good morning. Thank you very much for your interest. I'm joined today by Onur Genc, our CEO, and Rafael Salinas, BBVA CFO. As in previous quarters, Onur will start reviewing the group figures and then Rafael will go through the business units. Then we will move to the live Q&A session. And now, I will turn it over to Onur.

Onur Genc: Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining our 2022 results audio webcast. I hope you have had a great start to the year. So let me just jump into it. Slide number three. So I'll start with that page by highlighting the outstanding results of the year. First, in going through the lines on the page, we have made significant progress in the execution of our strategy, focused on profitable growth. We are accelerating our profitable growth. At the same time, we are leading the digital and the sustainability space. We have ended the year having acquired more than 11 million gross new active clients, a new all-time record; 78% of our unit sales have been done digitally another all-time high. And we are also at the frontline of the industry in terms of sustainability. In 2022, we be channelled €50 billion in sustainable business; again, another record. Second line, we have achieved the highest annual net attributable profit ever €6.6 billion, an increase or 31% versus 2021, which represents also a 48% increase in our earnings per share. Third, we continue delivering on our commitment to profitable growth and value creation for our shareholders with ROTE, return on tangible equity of 15.3% and then exceptional -- exceptional 19.5% increase of tangible book value per share plus dividends. All of this obviously is allowing us to significantly increase the distributions to our shareholders for a total amount of €3 billion, which is equivalent to €0.50 per share. While at the same time our CET1 ratio continues comfortably -- very comfortably above our target of 11.5% to 12%, as you know, our target. These highlights are what I would be expanding upon in the coming pages, but just to reiterate, the common theme of all the numbers in this page is that we are growing and we are growing in a profitable way. Moving to Slide number four; new customer acquisition, so our relentless focus on this, growing our franchise, the healthiest way to grow our business. Our focus on this has allowed us to acquire 11.2 million gross new active clients in 2022, more than doubling the client acquisition that we had five years ago and this has also allowed us to reach at the bottom of the page to reach more than 67 million active clients in stock in 2022. Additionally, the share of those acquired through digital channels has also increased from 7%, as you see on the page in 2017 to 55% in 2022. This 55% we do think it's a clear differentiator versus most of our competitors out there. Moving to Slide number five, our leadership in digital, it has also proven to be essential and differential again in serving our customer base. Let me again put some figures to this on the page. On the left hand side of the page, you see that we have almost 50 million mobile customers, a figure almost three times higher than 2017 and the record 70% penetration rate on mobile. And at the same time, our digital sales as I mentioned, it has reached 78% in terms of units and 61% in terms of value. This leadership in digital obviously translates into higher client satisfaction. As you can see on the right hand side of the slide, the Net Promoter Score is continuously improving in the group, it clear leadership positions across the main countries or the footprint as you can again see on the page and in the last year we have improved our customer satisfaction by five percentage points, which is very strong. Slide number six; the other piece of our strategy that we put a lot of energy, a lot of efforts on sustainability. We are also in our view trendsetters in sustainability. We maintain the top ranked European bank position in Dow Jones Sustainability Index. This is the third year in a row. And as you can see on the left hand side of the page, we have set clear targets in our goal of achieving net zero by setting decarbonisation targets in the key CO2 intensive industries. And we are very serious about this, how to achieve these goals, how they achieve these alignment goals, obviously by accompanying our clients in the process and supporting them with investments for decarbonisation. As such, we do think sustainability is also a great business opportunity. And again, as you see on the on the page, in 2022, we channelled more than €50 billion in sustainable business, totaling €136 billion cumulative since 2018 and we remain aligned with our increased target of channelling cumulative €300 billion to sustainability by 2025. Then page number seven, I'm going to walk you through starting from this page through the financials. 2022, obviously, it has been a great year. We delivered the highest annual recurrent and reported in both of them profits ever of our history. So we're very happy with that result. In the bars at the centre of the slide, you can see the upward evolution of our annual results. So beyond the fact that it's the highest; the trend that you see in this page, in my view is impressive. 2020, €6.6 billion of recurrent profits, 31% higher than the €5.1 billion that you recorded in 2021, which was already in again an exceptional level and these results, it brings our earn -- it bring our earnings per share up to €1.05 with an increase of 48% year-over-year, obviously significantly higher than the growth or the profit. Thanks for the share buyback that we have been executing in 2022. And lastly, let me note that for comparison purposes, all these figures they exclude the non-recurring impacts reported on those respective years, but in any case, if you want to see them, we put those reported figures at the bottom of the page as well. And again, even on those numbers, we are posting our best ever reported profit. Slide number eight, our tangible book value per share plus dividends, it continue the outstanding evolution closing at 7.79%, a 19.5% increase year-over-year. I believe in this presentation, we have a lot of impressive figures, but this growth, 19.5% growth in tangible book value per share plus dividends, it is one of the most impressive figures in my view in the presentation. And regarding profitability on the right hand side of the page, we continue to improve our excellent profitability metrics, reaching 14.6% return on equity and 15.3% in ROTE. With these numbers, we believe, at the end of those nine months, we have also compared it, but we believe we are still one of the most profitable European banks out there. In fact, again, the highest ROE bank in Europe among the 15 largest European banks at the end of the third quarter and we keep advancing, we keep advancing on these metrics. Slide number nine, I do think it's an important one, in managing our business, we always compare ourselves in every single geography, in every single business to competition. Competitive success is what we're after. So how do our numbers at the group level? How do they compare with competition? So on Slide number nine, we wanted to highlight again, the exceptional comparative performance of our profitability and efficiency metrics. So on the left hand side of the slide, our tangible book value per share plus dividends growth of 19.5% that I just explained, it compares with the 3.8% for the average of the peer group, and then the peer group, you have it in the footnote, it's the largest 15 European banks. In the centre of the slide, our mid-teens ROTE of 15.3%, again, compares very favourably with the 7.4% for the peer group. And lastly, on the right hand side, one of the key elements of our success in our view, our strong efficiency levels, it stands out at 43.2% versus the 62.8% of our peers. So comparatively also, we are creating a very good picture as you can see on this page. Slide number 10 In terms of the details of the financials, I'm going to go very quickly from these and maybe just the headlines. As we are going to be looking into them in the next few pages, but in the summary of the P&L and the financials, and the results is first, outstanding core revenues and activity growth number one. Second, in the page, our improving and industry-leading efficiency ratio as we just discussed; third, highest annual operating income ever also; fourth, very solid asset quality metrics with cost of risk clearly aligned with our guidance and lastly, our strong capital position, comfortably, very comfortably above our target range. So let's just jump into them. Slide number 11. Looking at the summarised P&L of the year. Again, there are many numbers in this page, but I would like to highlight the excellent evolution of gross and operating income improving 22.9% and 29.2% respectively, driven by strong core revenues evolution and positive jaws in the case of operating income. So beta positive growth figures. Also in this page, it's important to note the evolution of impairments, very good evolution of impairments with asset quality remaining solid in this profitable growth context. Slide number 12, you have the quarterly P&L, year-over-year comparisons. The second column from the left is the year over. What stands out is the impressive 47.5% increase in operating income, again driven by the strong core revenues and positive jaws, which then leads to an excellent net attributable profit growth of 29.8%. In terms of the quarterly evolution, which is the second to last column in the table on the right, gross income and operating income, they increased 6.6% and 4.2% respectively, versus the third quarter, despite, obviously, as you know, being negatively affected by the once in a year deposit guarantee fund contribution in Spain. We do it at the fourth quarter, as you know, and given that the quarterly comparisons at revenue numbers is a bit misleading, but even with that, we have grown our revenues. All in all, fourth quarters, 2022 reported an up net attributable profit is €1.578 million as you see on the page. Slide number 13; there are too many -- there are too many numbers on this one, but as I said, one of the clear highlights of the year and of the quarter has been revenues. I don't want to dwell too much on the page on the details, but please, please do register the excellent trend in the revenues, the trend curve, for example, net interest income, quarter after quarter, quarter after quarter, we are increasing our revenues and we are breaking new revenue records, which I think is again very positive. Page number 14; let me do a quick deep dive on the net interest income growth, especially Spain and Mexico, so that you can also see why we continue to be quite optimistic for the quarters to come in 2023. So there are some signals of the future in this space for you. On the left hand side of the slide, you can see the strong loan growth for the group, which has accelerated obviously since last year; so, 13.3% versus the 5.6% of 2021, so, very good growth in activity. And in the center of the slide, you can see the improvement in the customer spreads for Spain and for Mexico, our two core geographies. In the case of Spain, it has strongly picked up during fourth quarter to 221, following obviously the recent increase in the interest rates. We have been telling you that it takes a bit time in Spain to get -- to reflect the higher rates into the spreads and that's clearly happening in Spain and again there is more to come. And for Mexico, again in the center of the slide, interest rates have been increasing for several quarters. Lending yields and customer spreads, they have a longer track record of an increase in a very consistent manner. So you also see a very positive curve, trend wise, quarter after quarter, there is an improvement in that number for Mexico. As a result of all of this, obviously, on the right hand side of the slide, you can see the strong NII growth, both quarter-over-quarter and also year-over-year in both countries; 26% in Spain, 35% in Mexico in constant Euros and quarter-over-quarter numbers, 17% in Spain and 8.5% in Mexico, very positive, very positive figures. Slide number 15, is around costs and the jaws. On this page, I would highlight the fact that once again we end the year with positive jaws, with gross income growing obviously more than the costs. Costs are growing 15.5%. That also remains well below the blended inflation rate in our footprint. So as a result of all of this, you can see our efficiency ratio, the best among our European peers, further improving to 43.2% from the 46% levels of last year. Slide number 16, asset quality. It remains solid in this growing context. First of all, NPL ratio on the right at the bottom of the page, it continues to improve NPL, including the effect of a debt sale that we did in Spain in the fourth quarter and also due to very good underlying performance of the portfolios. In this context, impairments increased in the quarter due to higher requirements from the macro models updates. As you do every quarter, we do the macro updates and also as a consequence of cautiously setting additional provisions in certain portfolios, sectors more vulnerable to the macro situation, leading to this quarterly increase, but still resulting in a cost of risk of 91 basis points, which is within guidance and obviously below pre-COVID levels. Our coverage ratio, the other key number on the page, decreases slightly to 81%. This is again partially due to the aforementioned debt sale that we did in Spain in the fourth quarter. It was a highly provisioned sale and highly provisioned book that we sold. As a result it had this impact obviously in the number, a part of it, a part of the decrease is explained by this. Slide number 17, as we have repeatedly stated, we have a clear focus on value creation for our shareholders, which guides all of our decisions. In this regard and in line with our payout policy, I'm quite happy to announce that the proposal to be sent to the next Annual General Meeting contemplates the distribution of total amount of €3 billion for 2022. This payout is equivalent to a total shareholder remuneration of €0.50 per share, and it's split among a total cash dividend of €0.43, which is 39% higher than last year in terms of the cash dividend, which again also implies that €0.31 to be paid in April, 2023, subject to the approval of the Annual General Meeting, obviously, and complimenting the €0.12 per share cash dividend that we have already distributed back in October. In addition to this cash dividend of €0.43 per share, we will be proposing a new share buyback program of €422 million, equivalent to 1.1% of BBVA's market cap. We have been growing -- we have been growing profitably -- we have been generating capital organically, and as we have been saying consistently in the past few years, we are determined and clearly dedicated to share that profitable growth with our shareholders in terms of higher remuneration, as you can see here, you are seeing clear growth in the numeration to our shareholders. Slide number 18, our capital, our CET1 fully loaded as of December 22, remains at a very strong level of €12.61. Needless to say, again, much above, comfortably above our target range of 11.5% to 12%. In terms of the change in the quarter following the waterfall, main impacts; first, obviously our strong results generation, that contributes 47 basis points with the ratio. Second, the dividend and the 81 , it detracts 20 basis points, and then the third, 25 basis points due to a relatively contained RWAs growth. And last the bucket of others of 14 basis points it's positive, positively impacted in the quarter by the market related impacts, and especially by the credit in the OCs due to hyperinflation. And these positives are more than absorbing around 20 basis points, negative impact due to the final batch of so-called regulatory impacts, model updates and others for the year. So we have compensated for the 20 basis points impact and as you -- if you remember, we have done a 10 basis points throughout the year in 2022. So the 30 basis points impact of regulation and model updates is basically already incorporated into our capital figures. In January, 2023, the second box, second bar from the right, we have a relevant positive one-off due to a release generated by the reversal of the NPL backstop deduction for 19 basis points, which would increase our CET1 ratio to 12.80% pro forma. So you see that pro forma number also on the page. At this point and in a full year view, let me stress that once again, our ability to generate organic capital is impressive in my view. It has allowed us to keep financing the desired profitable growth. We have grown a lot in the year. It has allowed us to remunerate our shareholders with an increasing momentum, and we still ended up the year with a yearend CET1 ratio well above the upper part of our target range. It all goes back to the profitable growth mandate that we had and that we have been sharing with you. And Page number 19, I'm not going to go into it, but it basically is telling us that all the long-term targets that we announced in the Investor Day in November, 2021, we are clearly in line to meet those goals. And now for the business update for the countries also Rafa, I turn it to you.

Rafael Salinas: Thank you, Onur. Good morning, everyone. As Onur said, we are very happy to present outstanding result for the year '22. I would like to highlight asset management and very positive contribution for all the franchises, focus on delivering on our commitments and to exceed the objectives set at the beginning of the year. We will now comment on the performance of our main franchises. In the last quarter, I will provide our guidance for 2023. Let me begin with Spain. Slide number 21. Some business trends and strong result evolution, continuing the fourth quarter, closing up an excellent year. A positive loan growth with significant market share gain in the year, both in consumer lending 140 basis points, and in commercial 76 basis point, continue shaping up a more profitable lending mix. That translate into very solid dynamics in terms of P&L. Pre-prohibition, profit hits double digit growth in '22 above 13%. The main driver here is the NII, which clearly accelerated in the fourth quarter reaching high single digit growth year-on-year above expectation. Interest rate increases are positively supporting the NII are more expected to come in the following quarters as you will see in our guidance. Despite the positive growth in banking services and insurance fees, total commissions are affected by lower asset management fees due to market evolution. Expenses decreased by 4.1% year-on-year, a figure that shows our cost control commitment in a contest of higher inflation and growth in activity. All-in, significant improvement in our efficiency ratio to 47.5% in '22 from this 51.7% last year. On the asset quality side, the cost of risk improved to 28 basis points in '22, driven by solid underlying asset quality trends throughout the year, while higher impairments in the last quarter as Onur mentioned are mainly related to the macro scenario update and additional adjustment in certain portfolios after updating our level of conservatism in the models. To sum up, very strong result, reaching close to €1.9 billion on our recurrent basis. For '23, we expect similar positive dynamics. NII trend should accelerate further as a higher percentage of the portfolio resets as rates, in this context, we are updating our 2023 NII guidance to grow at low 20s, and fees will slightly grow subject to market volatility. After years in a row of continued cost cutting in Spain, we are expecting expenses to increase around mid-single digit in '23, while efficiency will continue to improve. Our expectation for the cost of risk in Spain is to stand around 35 basis points in 2023, slightly higher in the new economic scenario, but a manageable increase taking to consideration the strong provision effort than during the pandemic, the degree of leverage of the economy and our product new loan origination policies. Slide 22, turning now to Mexico. Once again, we are happy to share with you on a standing set of results, a strong loan growth in the year, balance among retail and wholesale segments, benefiting from positive economic momentum in the retail segment and hybrid working capital needs in the commercial segments in an inflationary environment. In terms of P&L, fantastic year in Mexico, the net profit reaches a record figure sitting €4 billion due to an impressive revenue growth close to 26% year-on-year, driven by a strong NII growth supported by long growth and higher customer experience, that has increased 71 basis points during the year, benefiting from an effective repricing of the asset sites, while the cost of the deposit remains well contained. Some performance in fees, growing at high thins based on our higher volumes in credit cards and transaction ID and payment services, and a very positive year on improving efficiency to outstanding 31.7% efficiency ratio. And finally, very solid risk metrics with the cost of risks improving to 247 basis point to the full year, while the NPL ratio continues to decline, and the coverage level increases to almost 130%. For 2023, we expect activity dynamism to continue and the loan book to grow at double digit. We see clear opportunity to continue growing in the country, and we are well prepared to take advantage of them. Based on those solid dynamics and an effective prime management in the context of higher rates, WE are expecting the NII to grow mid teams in 2023 above loan growth. Expenses, we'll be growing at double digit in '23, and we will continue investing in the country to reinforce our leadership in all states, products and segment, but maintaining positive jaws. On asset quality, although we expect some quota potential deterioration in the risk metrics, our solid starting point make us to estimate the cost risk to stand below 300 basis points in '23. Slide 23, regarding Turkey, in terms of activity, I would like to point out the significant de-dollarization of the balance sheet during the year. The leverage of foreign currency loan continuum where targets lead deposit grew strongly favored by the conversion of foreign currency deposits about the growth of the TL loans book. On the P&L, the net profit in the full year '22 stand at €509 million driven by good underlying business trends at a better than expected FX evolution. On the quarterly basis, the net profit continue to improve in constant terms in the fourth quarter, driven by the increase in trends in growth income; thanks to higher core revenues, NII supported by activity growth in Turkey and free growth mainly for payment service and brokerage, and a lower quarterly high proliferation adjustment, impacted by the depreciation of the Turkish lira during the last month of the quarter. Finally, asset quality trends improved throughout '22. Progressive decline in the MPA ratio, thanks to the strong recoveries and limited provisions and a higher recovery level over the year. Financial impairments increased in the quarter due to the macro update, while underlying trend remains sound. The cost of risk stands at 94 based point for the full year will contain. Finally, for '23, what can we -- what can we expect going forward? The first is that we will continue to manage the bank following a present and anticipatory approach of how we have done since we took control in 2015. Our priority will continue be to preserve the value of the franchise and his fundamentals, both from the capital and liquid perspective. Having said this and highly uncertain environment, we expect BBVA to contribute to the P&L in '22 in line with his contributions in 2022. And finally in South America, Slide 24, the regions maintain a solid performance in terms of revenues. NII growth is the main driver of the P&L in '22, with a strong growth throughout the year, supported by sound loan growth and higher rates. A strong performance fees supported by activity developments across the board and despite inflationary pressure and the increase in cost, efficiency continues to improving to 46.4% ratio at the end of the year. As in the rest of the year, Greece indicator remains sound with NPL on coverage improving in the year and cost of risk remain broadly flat at 170 basis point in '22. All in, net profits in the regions exceeded €700 million in the year, more than 80% as compared with the last year results. And for 2023, our guidance, we expect the cost of risk to be below 200 basis points in the region, and we expect the efficiency to improve, aligned with our long-term targets. And now back to your Onur, for the highlights and takeaways.

Onur Genc: Thank you, Rafa. We're a very performance-oriented organization based on numbers and metrics. We always promise that we'll be done in half an hour. So I have two more minutes. So I will skip Page 26. The only summary that I have for you is that as on behalf of the really wonderful teammates that we have at BBVA on behalf of the whole team, we feel very, very happy with what we have delivered in 2022. And we have -- we have had our best year ever on multiple dimensions, not only on profits, and the team is very motivated and energetic to do even more and that's page number 27, the guidance. Looking also, what excites me more is because 2022 is already gone, is that as we look into the coming year and as we have seen the first numbers coming along at the beginning of the year, we are quite positive on what we are seeing and you see that in the guidance. On the right hand side of the slide, Rafa all went through them. So I'm not going to go through those, but by country, all the key fundamentals of our business, they have been performing quite well. Obviously, we have to be cautious. We do see still some uncertainty in the macro environment and that will obviously affect our business, but overall, quite positive as you have listened to from Rafa and as you see on this page. At the group level, all of this, it translates into a few things. For the group, we expect core revenues to grow at mid-20s in constant euro. We don't have it in the guidance here, but depending on obviously the FX evolution based on our own estimates of the FX evolution in terms of the current Euro revenue growth, we expect it to be in the mid-teens, which again, is a very, very positive figure, and again, reflects our optimism going forward. It goes back to our strategic focus of profitable growth. It goes back to serving the most profitable segments, but we are quite positive on core revenues. Then on costs, we expect to grow around average footprint inflation, focus on the jaws as always. In some countries we are investing, but in general still below the average inflation is what we are aiming to do. And lastly, cost of risk, we are expecting it to be around a 100 basis points based on the readings that we have at the moment. Again, we have to be cautious, but based on what we see, we are quite confident that we can guide you around a 100 basis points. With this, I conclude the presentation; 10:00, we are right on time. So let's go to Q&A.

Patricia Bueno: Thank you, Onur. We are ready with the Q&A session. So the first question please.

Operator: Thank you. The first question today is from Benjamin Toms from RBC. Benjamin, please go ahead. Your line is open.

Benjamin Toms: Good morning, and thank you for taking my questions. Firstly, on your group cost guidance, which is to grow around average inflation based on the footprint weighted by operation expenses, can I just confirm that the number you expect this to be then is around 16% your weighted average inflation across your geographies. And then on ROTE, the print this year was 15.3%. Your target for 2024 is 14%. That's looking a little bit redundant to this stage. I think that the net of all your new guidance implies that ROTE in 2023 will be higher than in 2022. Can you confirm that's the case and can I push you to give any guidance that's firmer than that? And if not, can you guide when you're next we're next likely to hear an update on your 2024 ambitions. Thank you.

Onur Genc: Thank you, Benjamin. On the -- maybe on the costs, you can lay a view Rafa on the ROTE, on the return on tangible equity. You are very well, right? Our original goal was 14%, as we have said, November, 2021. When we set it up, we heard many comments saying that, isn't it too aggressive? Are you going to be really able to do it? And so on. And we are already above that. So it's set three year plan that we have had, and that three year plan we are already on in the first years, we are not even half of the planning period yet. The only thing I can tell you is we are not revising those figures. But as you can also see from those pages, in multiple of those metrics, not only in return on tangible equity, but the target customers, the customer growth, definitely the tangible book -- tangible book value per share plus dividends, we have a clear positive upside potential and hopefully we will clearly beat the goals that we have. So, in short, let me not mumble with the words, but the goals, we are not going to revise them because it's a three-year plan. We are only in the first year, but we have a clear positive upside on all of those metrics. Regarding the costs, the 16% inflation, we are guiding around debt inflation. But Rafa, do you want to comment?

Rafael Salinas: No. It's just, that, I mean, you are right Benjamin on the numbers. The weighted average inflation that we are projecting, our research department is projecting for next year just slightly above 15%. So it's just that between the 15% what in the high, in the heightened levels. So around the 16% that you mentioned,

Onur Genc: Benjamin, maybe one addition to this cost number, when you would see it in the coming months and quarters, as you have seen also this year in 2022, in Mexico, we are slightly or we are above inflation in terms of costs. We do see an opportunity still in Mexico of growing further our position. That's what we have been doing. We have been gaining market share consistently year after year and also in 2022. There's a discontinue in the market. One of our competitors is being sold and so on. In this context, we do think that an investment, a further investment into Mexico, which might lead into remaining in costs above inflation, is very well justified. So that's one of the drivers of this around inflation. But overall for the group, then we will make it in such a way that we will be around inflation. But in Mexico, you might see a bit higher figures than the average inflation.

Patricia Bueno: Thank you, Ben. Next question please.

Operator: Thank you. Our next question is from Francisco Riquel from Alantra. Francisco. Please go ahead, your line is open.

Francisco Riquel: Yes. Thank you for taking my questions and congratulations for the results. First I want to ask first about the deposit beta. In Mexico, 25% in the fourth quarters local peers are closer to 35%, 40%. I wonder if you think that you will be able to maintain the gap and what beta do you expect in '23. In Spain, you can comment on what terminal deposit beta you pay for '23, '24, if you will believe that BBVA will be above or below the sector average. Any color you can give on the deposit mix would be great. And second on capital, if you can update on the regulatory headwinds left for '23 please. Thank you.

Onur Genc: Very good. On the Mexican situation, you already mentioned that Francisco, but as you can see on the page, the policy rate at the moment, as you know, is 10.5%. Our blended cost of deposits is 2%, 2.07%, as you see on the page for the country for the fourth quarter average. And how is that possible? That's possible because again, a big part of the deposits that you can see is demand deposits, and these are all transactional deposits. I did mention to you in the previous calls that we do have a really wonderful franchise in Mexico. 40% of the salaries in the country go through BBVA in terms of amount 40%. That helps us in transactionality. We have a wonderful acquiring franchise for the SMEs and so on. We are a cash flow oriented business. We are a technology digital oriented business, and we are really in the transactional business of our clients. In that sense, the demand deposits for us is the key number here. And as a result of that, we have 100 basis points difference, positive difference in cost of funding versus our competitors already. So given the transaction nature of those deposits, the deposit details that you see here, obviously there will be some further maybe increases and so on, but the deposit betas would not change much. Regarding Spain, the assumption that we have at the moment is obviously there are three, three parameters here. What percent of demand deposits, again, a big part of our deposit base will move to time. So the percentage of, or the amount that would be subject to interest rates, number one amount, number two, what would you pay to those -- to that piece? And number three, the timing. When are you going to start doing that? Given the really high liquidity in the system and you might have seen it, but even if you take into account the full payment of TLTRO, there will still be a lot of liquidity in the system. In that context, our estimated beta is a combined beta of what percent will go to time deposits and how much you will pay to it is around 20% to 25%, the combined beta. And we are expecting that the pressure is not there at the moment and it'll be later in the year if there is any. And we are going to be, as we are going to be watching competition very closely, but we don't see that competitive pressure yet. To cut the long story short, the dynamics are quite positive because of the very high liquidity in the system, even after you take out the full TLTRO from the balance sheets of the banks and the combined beta estimate that you see in our guidance is 20% to 25%. Regarding the regulatory impacts, I did guide you on the regulatory impacts for 2022 to be less than 35%. I'm not sure -- I'm not sure whether it was very clear in the speech around the presentation. This year, we have done 30 basis points. In the capital figures that you see, we have a 30 basis points impact from regulation, model updates and everything else. So we delivered or we -- the thing that we were telling you that we would do by the end of the year, we have done that. And that's 30 basis points already in the numbers. Now regarding 2023, the model updates and so on, it's done, but there are other things, as always. Our expectation is that you see in the presentation that we have a pro forma 19 basis points positive impact due to MPL backstop. That 19 basis points positive impact from MPL backstop will be consumed by other impacts coming from further regulatory topics in 2023. Again, in simple terms, and in short, the expectation is that the 19 bps of positivity coming from MPL backstop will be consumed by some other topics in 2023, but we don't expect anything more than that because we have already done all the model update related impact in our figures.

Patricia Bueno: Thank you, Francisca. Next question please.

Operator: Thank you. Our next question is from Benjie Creelan-Sandford from Jefferies. Benji, please go ahead. Your line is open,

Benjie Creelan-Sandford: I'm back on Mexico and perhaps a little bit more around the fee momentum which is still very strong this quarter. If you could just maybe talk a little bit more detail about the dynamics there on the card side and your expectations in the 2023, should we expect that to remain as strong as it has been in recent quarters? Equally on net interest income, obviously the guidance is to grow NII above loan growth. I know you've already touched on the beta, but I guess in terms of the -- on the margin side, is that being driven by a change in mix on the loan book side towards higher margin products? And equally, what are your rate expectations for Mexico going forward, embedded in that guidance? Thank you.

Onur Genc: The first question was on the fees. There's a problem with the line today. So on the NII, let me start with the NII, which I think is the second one. If the first question was on the fees, let's talk about that as well, and maybe Rafa, you can talk about it. If it's something else, please let us know. Benji, there's a problem with the line today. On the NII, as we said, it's coming from two things. When you look into the Mexican loan evolution in the year, you see a higher growth in areas of better margins. So consumer has increased by 16% year-over-year. Stock, credit cards has increased by 20.7%, 21% SMEs has increased by 20% and so on. So the mix to higher spread products is helping obviously number one. And number two, 40%, 40% zero, around 40%, let's say that way around 40% of our loans, especially on the corporate commercial side is linked to interest rates and interest rates going up. It used to be, as, you know, 5.5% at the beginning of the year. It ended 10.5% at the end of the year. That has led obviously to some of this impact as well. Some of that repricing continues because, some of the latest increases were done very recently. We do expect another 25, 50 basis points to come. Our BBVA research estimate is that there might be another 25 basis points in the next meeting of Mexico. So that that will continue. And depending on whether that stays at that level or so on, the impact from the rates will come along as well. But the mix effect is also very important and the mix effect is what we also intend to maintain for the coming year. We will be growing more in the commercial SME credit card consumer portfolio. As you can see in 2022, the pieces that grew the least is mortgages and public sector, which typically comes with lower margins. So the mix effect is under our control, and we will continue on that path and the interest rate impact will also be there because the curve is still very, very high. On the fee income, Rafa?

Rafael Salinas: On the fee income in Mexico next year, at the end of the day, we are still believe we are going to have a good performance. We don't -- we don't have a guidance in terms of a growth rate, but clearly it is not going to be -- it is not as affected as the market component because of the weight of the asset management component in Mexico. In fact, the big portion of the fees related with payment services and brokerage. We, given the level of transactionality that Onur mentioned, I think we still believe that we are going to have a double-digit growth on that. Clearly there is a little bit less than 20% weight on the asset management fees that clearly is going to be depending on market evolution, but still some growth in face in Mexico is here.

Patricia Bueno: Thank you, Benjamin. Next question please.

Operator: Thank you. Our next question is from Max Mishyn from JB Capital. Please go ahead. Your line is open.

Maksym Mishyn: Hi. Good morning. Thanks for the presentation and taking our questions. I have two. The first one is an outlook for loan growth in Spain. You seem to have increased new production in mortgages from the third quarter. Do you see the market better? And how do you see growth in new production evolving in the beginning of 2023? And then the second question is on the shareholder remuneration. Can we assume that buybacks will now be part of shareholder remuneration in the coming years? What was the reason to put part of remuneration as buybacks this time? And also with the strong capital generation and excess we currently have, could you consider an increasing payouts in the coming years?

Onur Genç: It's actually three questions, Max, but they are all very good questions. So yes, so the after for 2023 for the loan growth in Spain, we guided you in the page as the flat growth. You asked about mortgage specifically. We actually expect mortgage to deleverage a bit. So there will be negative growth in mortgages in our expectations, in our base case expectations. As you said, the production has increased for us in the fourth quarter. but it is mostly because of the baseline impact. Because in the third quarter -- in the second and the third quarter, we didn't like the pricing dynamics in the market, and we were basically out. And we came back in once the rates are up, we came back in, in the fourth quarter. It was specific to more to BBVA. We do expect the new production to be relatively soft in the coming year for mortgages, but more importantly, given the rates and given the fact that the stock is very much variable rate mortgages in Spain, 75% of the stock is variable rate mortgages. We do see early payments and so on a bit. Given all that, it's not going to be a major negative but slightly negative balances in growth in mortgages. But when you sum them all up, we still do expect a positive growth in consumer. We expect clearly a positive growth in -- although there is some prepayment dynamic there as well. But for companies, mid companies, especially, we do see a clear dynamic of growth there because there is inflation. We see a clear working capital need related lending activity, quite strong lending activity in that segment in Spain. Overall, when you sum them all up, our guidance to you is flat. Regarding the buyback, will it be a part of the shareholder payout going forward. If you remember last year, when we -- 2021, in the Investor Day, when we announced our new payout policy, we said we are increasing our payout policy. At the time, it was 35 to 40. We took it to 40 to 50, and we said, as compared to before, we are also adding this sentence into our payout policy, saying that going forward we do have the flexibility of doing a piece of the payout in terms of share buyback. So will it be a part of the payout policy going forward. It already is. We already injected it into a payout policy. But what is our intention? Our intention is to do a piece of the payout in buybacks going forward as well because we do think looking into the dynamics of our business. I mean if we do our own, and we do think we are quite objective in that valuation, all the cash flows going forward and so on are fair value. Our fair value is much higher in our view than the share price that we have. As such, and also given the fact that we are, at the moment, currently traded below book value, it's accretive in terms of tangible book value, it's accretive for our shareholders. So for those reasons, we would like to have a piece of our payout in share buyback. But we do also have a large amount of retail shareholders. So we will always also prioritize the dividend as the cash dividend as the core part of our payout. Again, as you know, 40% to 50%, this is not a policy. This is not -- but maybe a guidance and intention that can help you in thinking through this. The 40 to 50, the 40%, as we have done this year, will always come in terms of cash dividends because we do have, again, this retail customers, retail shareholder base who depend on that cash dividend. We do have the clear, clear intention to continue on an increasing path of cash dividend increases year after year, a consistent pattern of strong and hopefully increasing cash dividends, 40%. And then the remainder we intend to do some share buybacks. So that's kind of the mix that we have in our mind at the moment. Was there -- the third question?

Patricia Bueno: Increase in payment.

Onur Genç: Increase in payout. We just increased it, Max, a year ago. So it's obviously on the table. But we -- let me be very clear on this topic because it's important to us. We told you very clearly when we sold the U.S. business, that number one, we have a capital target of 11.5% to 12%. We confirm and stick to that target very clearly, 11.5% to 12%. That is our target. Number two, we told you that we don't like to operate with excess capital, and given our target, if you do have excess capital, we do have two -- a few things to do with that excess capital. Number one, grow our business profitably, number two, remunerate our shareholders in a very positive and a very favorable way. What we said, these phrases that I'm just repeating to you, is what we are committed to, very clearly, which means if we continue to operate with this excess capital, our intention, 1,261, pro forma 1,280 versus the upper end of our range of 12%. We are very committed to, as we have said before, to grow our business profitably organically in such a way that we create even more organic capital for our shareholders and/or to remunerate our shareholders, which implies that given again where we are, given the expectations that we have given the guidance that there might be other programs of extraordinary payments to our shareholders going forward. But this 40% to 50%, again, we just changed it. But whatever the excess capital is not through maybe 40% to 50%, the annual payment program that we have, but through other extraordinary measures, we are committed to give it back to our shareholders.

Operator: Our next question is from Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is open.

Alvaro Serrano: Can I have two very quick follow-ups and then a question. So you said the 20%, 25% deposit beta in Spain, is that the average for this year or the end of the year? And in Mexico, I missed it if you gave your rate assumption, I apologize for that. And then hopefully, that's very short. And then the question is around Turkey because the trends in Spain and Mexico are very strong. In Turkey, you said flat profits for this year, which is reassuring. But considering at the beginning of this year, admittedly, we're going to hyperinflation, you were saying breakeven. Now you feel confident the €500 million is the profit. We've got elections mid-May and that creates uncertainties. Can you maybe reassure us why you're confident that you can be that profitable? And what's behind that confidence? And what happens if there's an adjustment in currency? What are you baking in? Just a general reassurance behind that assumption.

Onur Genc: Okay. So the 20% to 25%, it's not full year. It's not average for the year. We are assuming that in the second half of the year, to be specific, as of May, as of June, in that period, this dynamic will kick in. And then the dynamic kicks in, 20% to 25% will kick in. That's the guidance. So maybe starting with the second quarter, take it in that way. But our -- given again the competitive dynamics and the liquidity in the market, I do think that we have an upside on that assumption. What we are telling you is not our expectation. What we are telling you is what we have baked into the assumptions for the guidance. If it's worse than that, it will affect. If it's better than that, which is actually my base case, then we will see that it will be a better figure than the guidance. Mexico rate assumption, we are not giving it that -- you didn't miss it. I didn't give it. The guidance that we have for Mexico NII is grow at mid-teens. Very clear, mid-teens growth in NII. All of that is baked into it. Regarding Turkey, you are asking for reassurance. You are saying that how can you be that confident and so on. overall, in the guidance, I'm going to read it to you literally, Turkey. In a highly uncertain environment, contribution could be similar. I mean -- this is as much flexibility as we can bake into the sentence. It's very uncertain in Turkey. And our expectation, looking into the again, how we started the year, looking into our bank there, which is a very strong bank, we do feel that the system has to come up into a new balance at some point. But given the strength of our franchise, some profitability has to be there. Otherwise, the banking system will be hurt and so on, and we are one of the strongest in the whole banking system in terms of capital, in terms of the customer franchise and so on. Given what we are seeing at the beginning of the year, we do have this clear expectation that we do have this expectation. Let me take out the clear expectation that we will repeat 2022. But there are a lot of uncertainties. We have to see the elections, we have to see the evolution of the monetary policy. At the moment, as you can see, the policy rate is 9% in a country where inflation is 65%. We do think that this will change at some point. When it changes at that point, which is our base case, then the interest rates will go up, deposit rates will go up, and you might be left with a loan book, which might not be priced as quickly as deposits, and you might be seeing some losses even in those periods. This is what we have all baked into our guidance and into our planning. And despite all that, we still see a profit output coming from Turkey. But we have to see the elections and we have to see how the monetary policy evolve. After that, the only thing that we know is that we are managing the bank in a very prudent, and as Rafa said, in a very anticipatory manner. The duration, the maturity of our loan book has been coming down. We are going for short term, short term, short term, but there will be a repricing of deposits at some point when the policy rate normalizes or changes. We are managing it in such a prudent way, and we have such a great bank that we do think that we can give you that guidance. But in terms of language, you can add as much flexibility into that language that you like because the uncertainty level in Turkey is obviously very high at these days. And we are clearly aware of those, and we have injected some of that assumptions into our planning. It was a long answer, but basically saying that Turkey is very uncertain. This is our best guess, an informed best guess, but it's our best guess at the moment.

Operator: Our next question is from Sopfie Peterzens from JPMorgan. Your line is open. Please go ahead.

Sofie Peterzens: Yes, here is Sofie from JPMorgan. So I also had 1 follow-up clarification question and then two questions. So my first clarification would be that when you said that gross revenues adjusting for FX to be mid-teens growth or imply roughly mid-teen growth, what FX are you using? Your estimated FX rate in 2023, or the current kind of end of 2022 FX rate? So that would be the clarification question. Then my first question would be that if we look at the free float of guarantee and where the share price of guarantee is currently trading and the fact that it's not part of the benchmark anymore and my understanding is that, that's hurting guarantee a little bit in Turkey, did you kind of consider a free float optimization for guarantee in Turkey, I reduce your stake in guarantee from the current 86% level. And then my final question would be that after the elections in Turkey, there are some expectations that interest rates in the current -- in Turkey could increase quite substantially from the 9% current levels. you have around €8.5 billion of bonds in Turkey. What capital impact would you expect from every 10% increase in interest rates in Turkey?

Onur Genc: Very good. The first one is very quick. We use the forward curve always. But as you can see, the NII of the group is very much composed of mainly Spain and Mexico. -- if you put the forward curve of those, you would immediately get to those guidance that we are giving to you in current euros. But we don't have our own estimate. It's the market forward curves that we use in our planning exercise in our guidance. Second question is, would you refloat guarantee. Sofie, we just bought it, and regarding that deal, we have had multiple discussions in the past, whether it was a good deal and this and that. And now there are some of -- it was very negatively perceived by the market, let's be very honest about it. But then given the share price now, we bought the shares at 15%. Today, it's around 25%, and the currency is more or less the same. People are saying to us that, oh, you do have an opportunity here. So it's actually a very good deal now. Some of the people are telling us the other way around. And none of them, in my view, is right. We don't know whether it was a great deal or not in this very short term. And we are not very short-term investors. We are not trading on floating, refloating, taking it back now that we have 25, we sell it, we are not that player. We are a strategic long-term oriented value focused bank. And we have done the deal because in the long term, we do think that there is value in that franchise. We do think that there are big risks, but we do think that those risks were already factored into the price. And we do think that it was a great value for our shareholders, and it was better return to our shareholders versus other alternatives like share buyback. That's why we did the deal. And we are consistent with that. We are long-term shareholders. We would not be refloating in the short term and trading, that's not who we are in this type of strategic assets. Then elections, what is the -- Rafa, do you want to take it, but we have €1.7 billion of fixed bond portfolio. It depends on how much the fixed bond portfolio moves. Obviously, there might be some capital impact, but it's very absorbable, very removable. It's already in the planning.

Operator: Next question is from Marta Sanchez Romero from Citi. Please go ahead.

Marta Sanchez Romero: First question is Spain and deposits. You've seen inflows of roughly 7 billion in the quarter. Can you explain a bit what's that? Is that corporate deposits? Is it a volatile number? And if you can explain what your strategy on deposits is going to be, do you have a target for loan-to-deposit ratio in Spain. The second question is in Mexico NII. Two small here. The first one is the -- when do you see the peak on customer spread and how -- if you can elaborate a bit on the competitive side on your loan book, just by categories, whether you are being able to pass through higher rates particularly on the corporate side and on mortgages where you're being quite competitive, I believe. Also in NII Mexico, the book, it looks like you've been adding bonds. Do you have a target in terms of the size for your bond portfolio in Mexico given where rates are and where rate expectations are moving? And finally, capital. You got 11.5%, 12% target. Do you think that is an adequate capital position or target given that a lot of the capital that you're building is in Turkey and is effectively trapped. And if I remember correctly, writing it off would cost you around 40 basis points. So is that a buffer that we should be effectively adding to your target?

Onur Genc: Rafa, do you want to take the first one?

Rafael Salinas: Martha, in relation with the growth in the customer deposits in Spain that we have in the last quarter is mainly, mainly related with demand deposits. And it's also quite related to the new customer acquisitions. So at the end of the day, it's just more than €10 billion that we have increased coming from new customers in the format of demand deposits. We have seen also an increase of around €3 billion in time deposits, as I said, it's just a lower and mainly coming from commercial banking.

Onur Genc: Regarding the Mexican NII, have you seen the peak yet, we don't think so. Our planning, that's why we are guiding you in the guidance that we are going to grow at mid-teens. Why is that? Because the mix change is still happening because -- the repricing is still happening even for the last batches of rate increases that were done in Mexico, we still have some time to reflect all of that to our clients. And there might be some more rate rises to come, as we said. Given that the peak is not reached yet in our view. Adding bonds to our ALCO book, it's €12.4 billion of an ALCO book we have in Mexico as you might know. The latest increases in the last quarter, we only increased it by around €200 million. So that's going to be more or less the range. I mean we would be a bit opportunistic or a bit tactical on this one. We don't expect large increases into our ALCO book yet. We are a client-oriented customer-centric business. We do have so much very attractive customer franchise business in Mexico that we would rather grow in our Mexican customer franchise. And if you do have some opportunities, which we do, we believe we do have some, but we would rather use that liquidity and capital growing with our customers. So ALCO portfolio book increase would be limited and opportunistic going forward in Mexico as well. Then 11.5% to 12%, is that good enough, the 40 basis point walk-away scenario in Turkey, should we added back to the goal -- the walkaway scenario is 39 basis points as you say, 40 basis points, but we don't think you should be adding it to our capital target whatsoever. Martha, I really encourage you, I'm sure you looked into it in the past. But if you take 10 years, 20 years, or earnings profile of BBVA, or more importantly, organic capital generation of BBVA. Again, 10 years, 15 years, long enough period. Even five years, you can do it because it gives more or less the same messages. What you see is that BBVA always faces a problem here and there. We're a diversified global retail bank, 1 year it's the elections in Mexico and the fluctuation that comes with it. The other year, it's Argentina. The other year, the Spain, there's a problem with mortgage floor closures and so on. Now these days, it's Turkey. And we have seen a lot of innovation on how to manage macro economy, given our presence in these different countries. We have seen a lot. I mean some of the things that we see in some of the countries that you mentioned, we really have seen them because BBVA, we do have the experience. We had a 164-year-old bank and so on. But to cut the long story short, given the fact that we are used to this, even in that context of different crisis here and there, our organic capital generation capacity has been proven to be resilient and more importantly, the fluctuation, the standard deviation of our earnings of our capital generation has been very limited compared to pure European banks, for example. In that context, when you look into our, again, goal of 11.5% to 12%, let's take the upper end, 12% as a reference year. as compared to our requirement of 8.60, 340 basis points is the gap. That gap is also one of the highest. It's higher than the average of the large European banks. Given the fact that our requirement is that low, and it goes back to that fluctuation or the organic capital generation variation from one year to another, in my view, we do think that 11.5% to 12% is already a very comfortable target. So I wouldn't be adding this and to that number because we have, in our modeling and our planning, when we look into different countries and figures, we do think that 11.5% to 12% is the right capital target to have. And in that sense, in my view, you should not be adding the 40 basis points, but obviously, it's your call.

Operator: Our next question is from Andrea Filtri from Mediobanca. Please go ahead. Your line is open.

Andrea Filtri: Just a very small follow-up, really. On capital, if you could also update your Basel IV impact and give us a bit more color on the plus 14 basis points from other items in Slide 18. If you could break it down, please, because it looks like there is very large swings within that. On NII, again, a follow-up, if you could please provide us when which forward curve have you used abate to set your interest rate expectations in each geography. And if you could provide us by geography, the betas, deposit betas today and where you expect them to be in '23 and '24 on average so that we can make our own assumptions rather than taking just the guidance as reference. And finally, what do you expect in terms of inflation in Turkey for '23.

Onur Genc: You did ask all the parameters of your model, but it's very fair and they are all the right parameters to look into. The forward curve, what forward curve do we use, we use it basically at the end of the year planning period. So it's the December forward curve that you see. But the forward curve of today, again, what matters there is the Mexican peso. At the end of year number versus today, a month from the planning, it didn't change too much as far as I know, the currency curve. Then the Basel impact, Rafa, do you want to comment on the Basel impact?

Rafael Salinas: Basel IV, I think we haven't provided any guidance, but I think what is clear in our case is that our -- the impact of Basel IV is going to be much lower than the industry average. If you analyze the EBA estimates the Basel IV impact that is just on average of around 260 basis points for the European banks. In our case, it's going to be well, well below a completely different scale. Maybe because in our case, we have a high-density risk-weighted assets. A big portion of those are already calculated with the standard models. And in fact, some of the low default portfolios are going to release some capital on the new framework. So at the end of the day, we are only going to be slightly affected on the financial review of the trading book, FRTB and in operational risk. So but at the end of the day, the impact is going to be very, very limited.

Onur Genc: And Andrea, regarding the 14 basis points impact or other, you were asking on this one, I will give you the details so that I can avoid your detailed question on beta. But on 14 basis points, the market impact is around 10 basis points, FX, 2; and then fixed income and equity was zero actually, but eight plus two, the market impact was 10 basis points positive. Then hyperinflation accounting around 20 basis points because as you know, in Argentina, in Turkey, we add back the hyperinflation losses that we registered in P&L into OCs. That's why we always say that from a capital perspective, it's neutral. That's around 20. And then the regulatory impacts, as I did mention to you, in the quarter, on top of the 10 that we did in the first nine months, we did a 20 basis points negative impact from regulation, bringing some -- and there is some other minor impacts when you sum them up, it gives you the 14. Then the betas, the key beta really Andrea, that matters at the moment is Spain, and I gave you all the numbers around it, the combined beta that we estimate when we see the pressure is going to be around 20%, 25%. It's for the rest of this year that we have put into planning, again, starting with the second quarter. That's the key one. And regarding Mexico, again, I already gave you the guidance number. The beta number there is a bit different. But what I can tell you is that the 2% that you see in the cost of funding at the moment, we do expect some slight increase on that one, but not much. If you go to 2018 in Mexico, another time period, a recent period where you have seen higher rates, at that time, the policy rate, if I'm not mistaken, was 8.5, 8 or 8.5, in that range. In that period, our cost of funding peaked around 2% again. So this is not like, oh, my god, there is something unusual here. No. I mean it goes back to the franchise that we have. to the transactional deposits that we have in Mexico. The fact that most of our deposits is demand deposits and transactional deposits is basically telling us that the beta is a relatively small figure in Mexico. And then what is the inflation expectation for Turkey, the BUA research number, we always stick to our independent research entity on this one is around 45%.

Operator: Our next question is from Ignacio Ulargui from BNP Paribas Ignacio. Please go ahead. Your line is open.

Ignacio Ulargui: I just have one question on the competitive landscape on the loan book in the same. I mean, we have seen a bit of a slowdown in the pressure in mortgages, at least as the perception I have. Just wanted to see how do you see the market competing into 2023. And if there is any kind of in spreads? And second, a more financial question. I just wanted to understand, and I am sure that you understand the benefit of IRB models, but I mean the fact that we have doesn't lead you to believe at some stage to move to standardized models and stop dealing with all these kind of regulatory headwinds single year and quarter.

Onur Genc: Ignacio, regarding the loan growth in Spain, again, we are guiding for flat for next year. The reason is, again, mortgage will be, in our view, negative next year. But again, the working capital needs of companies especially is leading us to believe that there might be some growth there. There might be some growth in consumer book and so on. Just to be -- maybe to be helpful to you, in terms of the new production that we have for different books in Spain, the fourth quarter production was 3% higher than the third quarter of the year, it was 8% higher versus the fourth quarter of last year. So quarter-over-quarter or year-over-year on the flow of new production has been relatively positive. And when I look into the positivity, for example, let's focus on quarter-over-quarter. Very small businesses, PMS, 5% up the production. Midsized companies, 6% up. So in those segments, given the need for working capital, we do see some positive dynamics. As a result, all of that, we are guiding you towards the flat growth that we set in the guidance document. Then the standardized models versus advanced models, you pressed our button on this one. This is something that we are working on. This is something also -- it's a discussion with our supervisors saying that simplifying the model landscape might be helpful. And that's something that we would be working on in this coming year, to be fair.

Operator: Our next question is from Carlos Peixoto from CaixaBank. Please go ahead. Your line is open.

Carlos Peixoto: Carlos from CaixaBank here. A couple of questions from my side as well. The first one is actually just a bit of a follow-up in terms of your guidance. You're guiding towards core revenues of mid growth of mid-20s, which basically above the guidance to better in for NII and fees in both Spain and Mexico. So might hear is this explained by a very strong performance expected in Turkey and in South America? Then second question on capital, which would be -- we believe more detailed one or a small detail, is the share buyback announced already from the capital ratio, or is that an impact that will come through next year?

Onur Genc: That's a very good question. And the second one, Rafa, do we deduct the share buyback already from capital?

Rafael Salinas: Already included on the 12.61.

Onur Genc: Already deducted. We deduct when -- we announce things, we deducted. On the first one regarding the guidance, it's not Turkey and so on. Carlos, you see it also in the country-by-country guidance. In Spain, we are also -- for NII, we are guiding in current euros. Obviously, it's a euro country. growth at low 20s. Growth at low 20s is obviously, given the NII weight in the total group NII, it feeds in. For Mexico, we are putting in growth at mid-teens, again, which then feeds in. And those two countries are the key. Then for the others, we do have growth in constant terms, but we do also bake in the forward curve of the currency. In that sense, it's already factored in. So mid-20s is gross, is constant euros. But in current euros, as I'm telling -- as I told you at the beginning of this call, is that we are expecting mid-teens. It's mainly because of the fact that both Mexico and Spain continue to be very strong.

Operator: Our next question is from Daragh Quinn from KBW.

Daragh Quinn: The first 1 would just be on Spain and looking at the current level of your for those with variable rate mortgages 2023 will obviously be quite a dramatic change in in mortgage payments. What level do you think would imply stress levels or have a material impact on cost of risk or require further write-downs of real estate assets? And then a second question just on capital and potential capital return, you very clearly indicated your targets and also very clearly indicated your policy or approach to that with the pro forma January first level being 12.8 and presumably with the outlook for additional organic capital generation in the early part of the year. At what stage do you think you'll be revisiting this potential incremental capital return? Will you be waiting for the second half of the year? Is it something you want to wait and see where the numbers finish at the end of the year. Maybe if you could just give us some idea of what you're thinking is around timing.

Onur Genc: Daragh, thank you for the questions. On the first one, you should know that the key -- the mortgage portfolio in Spain, we are relatively positive despite all the rate rises that we are seeing. So we're asking for a threshold that the NPLs will then go up significantly and so on. We don't think it will matter too much today of 3.5, 3.36 versus the 4% Euribor and so on. The reason being when you look into obviously the cash flow for the client, the load on the client, what matters is if you have a variable rate loan that was originated with recently, those are the loans that is most exposed, because the loans that you have given 10 years ago, 15 years ago in variable rate loans, the principal in the quarter in the installment is now much lower. As a result, the increase in the monthly installment will not be that high if the loan that you have gotten is relatively old. When we look into that portfolio, in the last five years, 80% of the mortgages that we granted in Spain, 80% were fixed already. So our loan portfolio, variable rate mortgage portfolio, dates back to many years ago. In that sense, the increase in the installment will not be that high. In that sense, 3.36 of today, or it can go up to more 4%, it will not make a huge difference in our view in terms of sensitivity. The second question, at what stage would you return the excess capital back. This is a question that we cannot answer apologies. It's basically any time. And whenever we feel the need, we'll do that. But I'm repeating once again that our commitment, our target is 11.5% to 12%, repeating it for the third time. And the excess capital, as we have said before, we are committed to either grow very profitably organically in our business or return it to the shareholders. And the timing obviously, depends on the conditions and so on. So I would not be giving a specific data on this one.

Operator: Our next question is from Britta Schmidt from Autonomous Research.

Britta Schmidt: I've got two questions. So first one is just picking up on the last point. You're funding your growth organically. You're adamant that 12% is enough, but you are still at 12.6%. So why did you not -- why did you decide not to distribute more this year? And the second one is on the guidance. If you could just give us the equivalent FX assumption for the cost growth if it grows from 15% to 16% inflation? How much do we need to take off for devaluations?

Onur Genc: On the forward curves in the planning period forward curves, maybe, Rafa, you can help. Regarding the first question, why not higher than now, Britta, I mean we have a payout policy of 40% to 50%. We are delivering the upper end of that range, already €3 billion, €0.50 per share. Very representative, but straight to the point number. And I'm going to repeat it for the fourth time because the question comes again, is we are committed to our 11.5 to 12, and we will return it back to our shareholders through other extraordinary measures and so on in the coming periods. You should not get anything from this in the sense that why not more? We are already doing a lot. I mean we are growing our cash dividends by 39%, 39% increase in the cash dividend. We are doing a piece in share buyback and so on. So it's already at the upper end of the range. We are already committed, and we have repeated it many times that we will give it back to our shareholders through other extraordinary measures on the guidance and the forward curves.

Rafael Salinas: I don't have with me. I mean the forward curves, but at the end of the day they are just the differential rates on the different geographies for the year. So we will provide you with the exact data, but at the end of the day, it's just equivalent to the differentiator of rates that we are seeing on the different economies with the euro.

Onur Genc: We can share that number because it's the market information. So maybe, Britta, if you can touch base with our IR team, they will give you the specific figures.

Operator: Our next question is from Carlos Cobo from Societe Generale.

Carlos Cobo: A couple of questions for me. One, if you could update us on your currency hedging policy, both on P&L and what's the percentage of a subsidiary where you're hedging this year. And on capital, what's the cost of the hedging of the capital supply hedging that we have against book value this year? Second, on Mexico, again on NII, you've touched on the customer that you still see upside in the customer spread, but what about the wholesale funding cost? When you look at the comparative versus peers, the system in Mexico has seen a big increase in wholesale funding costs along with interest rates, where BBVA Mexico seems to be lagging behind that process. So could you explain why that happened? How you kept that funding cost so low and whether you expect that to catch up with interest rate levels at what time? And quickly sorry, lastly on M&A. Turkey, you said that you want to grow profitably if the opportunity emerged in Turkey in the context of post collection, some restructuring of the banking system in the country, a good use of your capital be to gain some market share in Turkey.

Onur Genc: Okay, on hedging, Rafa, do you want to comment a little bit on where we are in these countries?

Rafael Salinas: As you know, I mean, in terms of hedging, we haven't changed our policy. I think we are hedging the sensitivity to the capital ratios. In average we tend to be 70% hedged in terms of the capital that we have in the different currencies. At this moment, I think we are around a little bit above 75% in Mexico 78% and 50% on capital on the sensitivity to capital to the currency, 50% in Turkey. So and in terms of the hedging policy for the variability of our P&L to FX evolution, we maintain our policy to hedge on average between 40% and 50% of the aggregate results that we have in the different currencies. So we haven't changed that. Clearly, probably the main -- the only change that we have done during the year, as you can imagine, is in Turkey, given the fact that there's a significant deduction that we are doing on the P&L because of the hyperinflation accounting. At the end of the day, we are combining the capital hedging policy with the P&L hedging policy in the case of Turkey. Also increasing the amount of hedging that we do through options in order just to combine volatility hedging with also with the current traditional hedging of the carry with the forwards.

Onur Genc: Regarding the wholesale funding, you asked about Mexico. First of all, in our funding -- maybe on the hedging for Mexico, you should know that the key -- from a P&L perspective, the key risk that we have is obviously Mexican peso, and even the very strong levels of Mexican peso, you have already hedged once again. Maybe to repeat the message, we have once again hedged a good part of the P&L to come along from Mexico already in our books this year. Regarding the wholesale funding in our funding plan, Rafa, we have 1 to 2 billion to issue maybe possibly in Mexico, depending on the market conditions, obviously. But the liquidity of Mexico is such that we have deposit funding, and it's so strong and the wholesale funding impact within the balance sheet that we have in Mexico, it's going to be marginal. So I wouldn't be too much worried about it or so on. It's a small figure in the context of the balance sheet that we have in Mexico. Profitable growth, market share, should we be planning or thinking about after elections in Turkey to do so? Let's see how the elections come out, and we have to be in this mood of cautiousness and prudence in Turkey, in our view. So it's too early to comment on those types of things. We have to see what comes out basically.

Operator: Our next question will be from Fernando Gil de Santivanes from Bestinver Securities.

Fernando Gil de Santivanes: Two questions, please, quick ones. First, can you please provide the amount of excess deposits that you hold at ECB right now? What's the balance on and your maturity profile? This is one. And the second one, can you please provide some metrics on the budget you have allocated for these different new operations in European countries?

Onur Genc: The second question, did you get Rafa?

Rafael Salinas: No, no, no.

Patricia Bueno: Can you repeat the second question.

Fernando Gil de Santivanes: Yes, how much capital you have committed for this investment in new European operations like Italy or new ones that you might decide to open?

Onur Genc: TLTRO, your expertise, and liquidity, do you want to comment on that one?

Rafael Salinas: I mean on TLTRO, as you know, we have already amortized 30%, 1/3 of the portion. We still have 7 billion maturity in March, 16 billion maturity in June, and a 3.5 billion maturity in March 2024. In terms of our liquidity, we have plenty of equity, so this is already included in our liquidity and funding plan. And probably the only point that we will need to think a little bit in the coming weeks is whether we smooth a little bit more the profile of the maturities as we did in December when we early amortized €5 billion, probably we will try to also to do something similar in this first quarter of the year in order just to -- probably to reduce the peak that we have in June, but only as a way to shape the profile of the maturities so that we don't have any kind of job on our liquidity ratios.

Onur Genc: Perfect. And then how much capital have you in different initiatives, it depends on the initiative. But as a bucket, I don't know what you mean. But Italy, let's be very specific on Italy, you asked about Italy. Again, it's an investment that we are doing through our Spanish franchise, meaning we are using the infrastructure systems, people and so on of Spain to take what we have in Spain because in terms of the mobile application, we do think that we have something really unique. We took that to Italy. As such, given the fact that we are leveraging what we already have, the investments are really, really limited. I can tell you let me give this -- to build that bank, it was basically less than €20 million, which is in the context of what we have is very limited.

Operator: Thank you. Our next question is from Pamela Zuluaga from Credit Suisse.

Pamela Zuluaga: One of them was already addressed on capital distribution, but my second one is on asset quality. Is there any upside to your cost of risk guidance of 100 basis points? If asset quality remains as resilient as you've been flagging so far, could we see some release in provisions as tailwinds to earnings? Or alternatively, do you have some downside risk? I've seen that you have a rather unchanged proportion of exposures classified under Stage 2 versus what you had last quarter, around 8% of gross exposures are already under special vigilance. But is there any downside risk to your guidance from future procyclicality headwinds, or is this already embedded in your numbers?

Onur Genc: Pamela, very quickly, it's already embedded into our numbers. That's the guidance. Obviously, we are looking into an uncertain environment. What will happen to inflation, whether the central banks will keep increasing the rates, if that's the case, whether that will have a secondary effect on the NPLs. And obviously, there are a lot of uncertainties, but everything is included in our planning. I should reiterate once again that since the COVID times, we have put in beyond the business as usual, the loans go bad, we take provisions. There are clear rules, and those rules are never compromised. Beyond the business as usual, we have put close to €1.2 billion of provisioning into what we call the macro modelling and also what we call post model adjustments and so on. Some of this is clearly allocated to certain portfolios. Some of it is unallocated, but that €1.2 billion and €300 million of that is actually non-allocated, which is pure buffer. That's another safeguard that we have regarding the guidance that we have.

Operator: Our last question today is from Chris Hallam from Goldman Sachs. Chris?

Chris Hallam: It's a quick one to finish off. It's just another question on efficiency improvements and it's sort of a follow-up to Britta's question earlier, but for 2023 costs, should we really just focus on the positive jaws comment within the guidance; i.e., a sort of stable to slightly improved to income ratio rather than solving for the cost growth in current euros? Because I think if we use the same FX adjustments on costs is on core revenue guidance and you'd get to around a 300 basis points improvement in the cost-to-income ratio, which seems like a lot, and obviously, there's a difference in geography at FX mix on costs and on revenues.

Onur Genc: I will reiterate, Chris, very clearly what we have in the guidance still in constant euro level, costs to grow around average inflation again, I mentioned it very briefly, but maybe in Mexico, this is not going to be the case. But at the group level, in blended number, it will be around this. Yes, focus on the positive jaws, which is a very important management discipline at BBVA. But I would also keep the costs in constant terms to grow around average inflation. We stick to that one. So if it means an improvement in the efficiency ratio, it means an improvement in efficiency ratio, because the income profile of Spain and Mexico, in our view, is going to improve further in 2023.

Patricia Bueno: So thank you very much, Chris. Thank you, Onur, Rafa, and thank you, everyone, for all your questions and your interest. We finish it here. Let me remind you that the entire IR team are available to answer any further questions you might have. Thank you very much.