Earnings Call Transcript
BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (BBVA)
Earnings Call Transcript - BBVA Q4 2023
Operator, Operator
Good morning. Welcome, and thank you for joining BBVA's Fourth Quarter Earnings Conference Call. With us today are Onur Genc, our CEO; and Luisa Gomez Bravo, the Group CFO. After the speaker's remarks on the Group's results and our expectations for 2024, we will open a live Q&A session. Now, I turn the call over to Onur.
Onur Genc, CEO
Thank you, Patricia. Good morning to everyone. I will start, I'll jump into it right away, starting with page number three, by highlighting the acceleration of our profitable growth strategy in the year, as the title says. First, I want to highlight that the best way that we can contribute to our stakeholders and society in general is through our activity of lending, our banking business, and through growing our business. In that sense, we have increased our loan portfolio by 7.6% this year, and we have acquired more than 11 million new customers. Second, from the top, the financial results that we see today are the outcome of the significant progress in the execution of our strategy. In 2023, 79% obviously, a record of our unit sales were done digitally, and we also continue at the frontline of the industry in sustainability. In 2023, we channeled EUR70 billion in sustainable business, again, an all-time high. Third, we have achieved the highest annual net attributable profit ever, over EUR8 billion, an increase of 22% versus 2022, which translates into a 27% increase in earnings per share. Fourth, we continue delivering on our commitment to value creation for our shareholders with return on tangible equity at 17% and an exceptional 20.2% increase of tangible book value per share plus dividends. All of this is allowing us to significantly increase distributions to our shareholders for a total amount of EUR4 billion, which is equivalent to EUR0.68 per share, increasing payout, while at the same time our CET1 ratio remains comfortably above our target. These highlights are what I would be expanding upon in the coming pages. But just to reiterate, the common theme in my view of all the numbers on this page is that we continue growing, and we are growing profitably. Moving to slide number four, our positive impact on society, we continue to help our customers achieve their life and financial goals. We have increased our loan book, as I mentioned, by 7.6% in the last year. It's a very high-level number at the top, but this implies, for example, that during 2023 we have helped more than 140,000 families buy their homes. We have supported more than 550,000 SMEs, self-employed individuals, and around 70,000 larger corporates in financing their growth and their business. And in terms of transactionality, we have more than 20 million payrolls collected by our clients on a monthly basis. As we grow our activity, we promote employment, we promote investment, and we promote welfare in society. Moving to page number five, new customer acquisition, one of our important pages. And as we keep reiterating, expanding our customer base will allow us to continue growing our business in a healthy and profitable way. With 11 million gross new active clients in 2023, we have grown to more than 71 million active clients in 2023. Even more impressive is the share of those customers acquired through digital channels, which increased to a new record of 65% in 2023. I think this is our key differentiator, the way that we acquire customers through digital channels sets us apart from most of our competitors out there. On slide number six, our leadership in digital has proven to be essential and differential in serving our customer base as well. On the left-hand side of the slide, we have surpassed 52 million mobile customers, a figure more than twice that in 2018 and a record high 74% penetration rate. At the same time, our digital sales have reached 79% in terms of units and 63% in terms of value, again, one of the best, if not the best in our industry. This leadership in digital has also translated into higher client satisfaction. As you can see on the right-hand side of the slide, the net promoter score continues improving in the group with clear leadership positions across the main countries of our footprint. Slide number seven, a message that again defines 2023. We continue growing, outperforming our peers. Our competitive advantages, like our digital strategy and our globality, have supported our loan growth as you see on this page, and in the bubbled numbers, in every single country, we have gained market share in total loans. If you observe the trends over the last few years, because we have five years in this chart, we are gaining market share, especially in those highly profitable segments that we wanted to grow, namely consumer credit cards and private businesses across our footprint. Turning to slide number eight. Sustainability, as I have said many times in the past, is an incredible business opportunity, and we are trendsetters in this area. As you can see on this page, we accelerated in mobilizing sustainable business volumes across segments, and we set a new record with more than EUR70 billion channeled in 2023, totaling EUR206 billion since 2018. We maintain our top-ranked European bank position in the Dow Jones Sustainability Index for the fourth year in a row now. Moving to slide number nine, as you can see on the left-hand side of the page, we have established clear portfolio alignment targets in key CO2-intensive industries for 2030 to achieve Net Zero by 2050. This last quarter, we included targets in two more sectors, Aviation and Shipping, as you can see. During 2023, we have started tracking our performance against these targets and included the degree of portfolio alignment as part of the compensation of those employees who have long-term variable remuneration. On the right-hand side of the chart, starting from 2022, the baseline, we have already managed to reduce emissions in the top six sectors by 19%. Slide number 10. From this slide on, I'm going to walk you through the financials. First, net attributable profit set a new record. In the bars at the center of the slide, you can see the upward evolution of our annual results, a wonderful trend in my view. 2023 has been an outstanding year with profits at EUR8,019 million, 22% higher than the EUR6.6 billion recurring net profit of 2022, which was already an exceptional figure. These results bring our earnings per share up to EUR1.32, an increase of 27% year-over-year, higher than the growth of the net attributable profit, thanks to the share buyback programs that we have been executing. Moving to slide 11, our tangible book value per share plus dividends shows outstanding evolution. Beyond the excellent figure of 20.2% year-over-year growth in tangible book value per share plus dividends, we wanted to remark that over the last five years, our tangible book value per share plus dividends has increased by 68%, despite COVID. This growth, in my view, is one of the most impressive figures in this presentation. Regarding profitability, we continue to improve our excellent profitability metrics, reaching 17% in ROTE and 16.2% in Return On Equity. Moving to slide number 12, the best measure of our performance is the comparison with competitors. This is how we live with it in the bank. We breathe this competitive success. In all key financial metrics, we have done better than our competitors. Once again, we remain clearly one of the most value-creating, most profitable, and most efficient European banks out there. Moving to slide number 13, this is a summary of the pages to follow where I will give you insights into the P&L, revenue growth, costs, asset quality, and capital. So, let me jump right into page number 14, focusing on P&L. I'd like to highlight the excellent evolution of gross and operating income, growing by 19% and 20% in current euros respectively. Slide number 15 presents the P&L for the fourth quarter. I will not spend too long here as the strong depreciation of the Argentinian peso in December has affected the comparisons for the quarter in both current and constant euros. However, all in all, in the fourth quarter, we reported net attributable profit above the EUR2 billion mark in current euros. Slide number 16 lets us focus more on the revenue growth in our two core markets of Spain and Mexico. On the left-hand side of the slide, you can see the strong loan growth in the most profitable segments in both countries. In the center of the slide, you can see the evolution of customer spreads. In Spain, the improvement continued in the last quarter of the year with spreads reaching 3.42%, and for Mexico, customer spread at 11.67%, showing a solid year-over-year increase, although reducing versus the last quarter, explained by two straightforward reasons. First, lower yields on loans due to seasonality with the impact of the holiday period campaigns at the end of the year, especially in credit cards. Second, switching from expensive wholesale funding to grow volumes in deposits from customers. This is financially neutral on NIM but obviously affects the customer spread. The results show on the right-hand side of the slide the core revenue growth year-over-year in both countries, 32% growth in Spain and 12% growth in Mexico in constant terms, and also shows quarterly growth in both countries. Regarding core revenues, some of you have been asking about the peak, when we might reach it. As we have commented in the past and as this page also shows, due to the continued spread improvement in Spain and strong volume growth in Mexico, we believe we will continue to post healthy core revenue growth in 2024. Slide number 17 emphasizes costs; I highlight that once again we ended the year with positive jaws, with gross income growing above 30%, clearly more than costs at 19.7%, which is mainly affected by the high inflation rate in some countries of our footprint. The efficiency ratio is one of the best among our European peers and has further improved to 41.7%. Slide number 18 demonstrates that the evolution of our asset quality metrics remains in line with our expectations amidst activity growth in the most profitable segments as we have noted, and with higher interest rates. First, on the left-hand side of the page at the bottom, the standalone cost of risk in the fourth quarter remained at the same level as the ratio in the third quarter, resulting in an accumulated cost of risk of 115 basis points year-to-date. So, there is stability quarter-over-quarter; the yearly number is 115 basis points, aligned with our expectations. There were two trends anticipated last quarter. Once again, the mix effect as activity growth is biased towards highly profitable but higher cost of risk retail segments and emerging market geographies. The NPL ratio on the right remains stable in the year-over-year comparison at 3.4%, while our coverage ratio slightly reduces to 77%. Slide number 19 outlines capital, indicating that our CET1 fully loaded ratio as of December '23 remains very strong at 12.67%. This level is well above our target range of 11.5% to 12%. Following the waterfall, the main impacts of the quarter are: first, our strong results generation contributed 57 basis points. Second, dividend accrual and AT1 coupon payments detracted 32 basis points. Third, RWA growth accounted for 36 basis points, a figure that embeds some annual catch-up this quarter for operational risk as capital for operational risk is a function of gross income, which showed better-than-expected performance. Lastly, the bucket labeled others positively impacted by 5 basis points due to credit in OCIs from hyperinflationary countries, and strong performance in the hold-to-collect and sell bond portfolios. The combined effect more than offset negative postings, particularly highlighting the Argentinian peso devaluation this quarter, and some higher-than-usual model update impact. At this point and in a full-year view, I stress that our ability to generate organic capital has allowed us to keep financing desirable profitable growth to significantly remunerate our shareholders with increasing momentum and an extraordinary share buyback of EUR1 billion, which is equal to 32 basis points, resulting in a year-end CET1 ratio well above the upper part of our target range. Regarding shareholder compensation, as we have stated repeatedly, we have a clear focus on value creation for our shareholders, which guides all our decisions in the bank. In this regard, I am happy to announce that the proposal to be sent to the next annual general meeting contemplates the distribution of a total amount of EUR4 billion for 2023, equivalent to a 50% payout at the maximum end of our distribution policy, obviously above the 47% payout of last year. This payout is equivalent to total shareholder remuneration of EUR0.68 per share. It's split into two, a total cash dividend of EUR0.55, which is 28% higher than last year in cash dividends, implying EUR0.39 per share to be paid in April '24, complementing the EUR0.16 per share interim cash dividend that we already distributed last October. In addition to the cash dividend, we will be proposing a new share buyback program of EUR781 million, equivalent to 1.6% of BBVA's market cap. Including this new payout, the total shareholder distribution would be EUR13.2 billion since 2021, EUR5 billion of that from the results of 2023, including the EUR1 billion extraordinary share buyback we executed in 2023. With this new payout, the total outstanding shares have been reduced by 14%. Lastly, on slide 21, regarding our long-term targets announced on Investor Day, I will not go into each one of them for time purposes, but on all the metrics, we are well on track to realize our upgraded expectations, clearly exceeding all our original goals. Now for the business areas update, I turn it over to Luisa. Luisa?
Luisa Gomez Bravo, CFO
Thank you very much, Onur, and good morning, everyone. Starting on slide 23, with Spain. In 2023, we truly believe we have delivered an outstanding year in Spain. In a context of strong competition, we have demonstrated our commercial strength and digital lead with loan origination growing by 10% year-on-year, achieving important market share gains in all portfolios. As such, despite lower demand for credit in the system, our loan book deleverage remained contained, stable over the last two quarters. In terms of P&L, NII stands as the main engine for revenue growth. NII accelerated throughout the year, achieving a 48.9% growth fueled by high rates, effective price management, and ultimately ongoing customer spread improvement, increasing by 128 basis points year-on-year. In a context of higher rates, we have successfully managed to limit the rate pass-through on deposit costs, thanks to effective customer funds management, primarily by offering our customers seeking higher returns mutual funds, which as you see grew by 12% year-on-year while benefitting from a highly transactional deposit mix supported by the acquisition of new customers, close to 900,000 throughout the year. In the last quarter of 2023, these trends remained. We continued benefiting from loan book repricing and from our sound deposit mix with deposit costs remaining well-contained. In terms of fees, there were very sound dynamics in the fourth quarter across the board, but I would like to highlight the contribution from asset management supported by strong net inflows over the year. In this particular quarter, this heading also includes success fees coming from the portfolio's performance for the year. Turning to operating expenses, the increase in the quarter is explained by the final adjustment in annual variable compensation accrual as earnings have exceeded expectations. Strong revenues in the year led to an outstanding efficiency ratio below 40%, more than 7 percentage points below 2022. On the asset quality side, impairments and cost of risk evolution are aligned with our guidance. In short, another very positive quarter for BBVA Spain leading to a record net profit close to EUR2.8 billion, the highest figure in the last 15 years. Looking forward, we remain very positive on Spain's performance for 2024. We expect NII to grow at mid-single-digit in 2024 as there is still some repricing on the loan book to come and we expect a contained deterioration in deposit costs. Expenses growth will slow down to close to 5%, maintaining efficiency below 40% in the year. Finally, our expectations for cost of risk in Spain is around 40 basis points, a quite contained level in a context of a still high-interest rate environment. The start of the easing cycle will be supportive as the year progresses in terms of NPL entries. Moving on to Mexico in slide 24, I'd like to emphasize that we feel extremely positive about this franchise. The economy continues to outperform expectations with a strong labor market, resilient consumer demand, and positive news coming from nearshoring. Thus, the loan portfolio is benefiting from this momentum, growing close to 11% year-on-year. In the quarter, positive dynamics have unfolded with retail portfolios remaining strong while the wholesale segment is also gaining some pace, balancing a bit the growth in the book. All in all, one more year we have outpaced the market, further strengthening our leadership position as we are the number one franchise in the country across different loan segments. On the income statement, we continue to deliver on the top line with core revenues growing by 20% year-on-year, bringing net profit to EUR5.3 billion in the full year 2023. Positive NII dynamics remained in the fourth quarter supported by solid activity close to 3% growth, geared towards retail. Looking forward, as we have been anticipating, loan growth will be the main driver for NII growth with high fees increasing by 24% year-on-year. As in previous quarters, this growth includes credit cards and payment fees, alongside higher contributions from asset management and increased fees from CIB. On the expense side, our main focus is to maintain an efficient operation while continuing to invest to establish the basis for future growth. As in Spain, expenses quarterly evolution is also affected by the final adjustment in the annual variable compensation accrual. All in all, operating jaws remain positive leading to further improvement of the cost-to-income ratio to an extraordinary level of 30.7%. Finally, asset quality has performed within expectations, consistent both with our strategy in the most profitable segments and the tightening monetary cycle. All in all, the cumulative cost of risk stands below 300 basis points, in alignment with our guidance. To sum up, Mexico continues delivering outstanding results quarter-on-quarter on the back of its indisputable leadership and structural strengths. These will allow us to maintain growing earnings moving forward and continue outperforming our peers. More specifically for 2024, we expect the loan momentum to continue, growing the loan book at a double-digit pace. Based on this sound loan growth and our proven capacity to preserve spreads, we expect NII to grow at a high single-digit pace in 2024 slightly below activity growth. With regards to expenses, growth will slow down to high single-digit while preserving positive jaws. On the asset quality side, we expect a moderate increase in cost of risk to around 325 basis points, consistent with our growth strategy in a context of still high rates, especially in the first part of the year. Moving on now to Turkey on slide 25. Turkey, with the gradual transition towards DOCs policies, has started to surprise us positively, particularly regarding monetary policy, signaling the country's commitment to tackling inflation. Last week, we saw the policy rate reach 45%, still relatively low given the high inflation but already favoring capital inflows and international reserves for the Turkish lira. Looking at the performance of our franchise in the full year 2023, the net profit reached EUR528 million in line with 2022, despite the very challenging environment we have been facing. The magnitude of the rate hikes during the year and the regulatory measures in place have put pressure on deposit costs and ultimately on spreads and NII. However, our franchise managed to offset these headwinds through higher fees, mainly coming from payment services, brokerage, asset management, and higher net trading income, thanks to a strong performance from global markets. Very low cost of risk is at just 25 basis points due to low net NPL entries in a negative real rate environment, along with strong recoveries and repayments in the commercial segments. In 2024, Turkey's earnings contribution to the group could be similar to that of 2023 in a still challenging environment. This guidance includes an expected increase in the cost of risk to around 110 basis points in 2024 after the abnormally low level in 2023. Overall, we expect 2024 to be a transition year in which the basis for more healthy and sustainable growth model is implemented in Turkey. Without a doubt, Garanti is the best bank in the country with proven capacity to overcome short-term challenges and take advantage of opportunities going forward. Moving on to South America, on page 26. Finally, net profit amounts to more than EUR600 million in 2023. The region maintains strong performance in total revenues. NII growth remains the main driver for P&L in 2023 amidst loan growth in the most profitable segments and improving spreads. Higher fees and strong NTI supported the gross income growth of the year. Despite expenses being pressured by inflation, pre-provisioned profit growth more than offsets the increase in impairments due to higher provisioning in a challenging macro environment. All in, cost of risk stands at around 250 basis points, in line with guidance. For 2024, in an improving macro scenario in the region, we expect loan growth to be somewhat higher than in 2023 and cost of risk to be around 280 basis points. Although we expect some inertia in the NPL inflows in the retail segment, especially in the first half of the year, easing monetary cycles across the geographies will be an important supportive factor for asset quality trends. Now, back to Onur who will highlight the main takeaways of the quarter and the outlook for 2024. Onur?
Onur Genc, CEO
Thank you, Luisa. We always aim to finish in half an hour, so let me not go into every single bullet point you see here on the page. The only thing I would say is that we are very happy; very happy with BBVA's performance in 2023. As a team, we are very focused on creating value for our stakeholders, including our customers, shareholders, employees, and society in general. As I mentioned to you multiple times in the past, it all starts with delivery. You have to deliver on your commitments and deliver the numbers. We do believe that's what we accomplished in 2023. But 2023 is already behind us, so we have to look forward to 2024. So, let me jump into slide 29 and the guidance. Luisa has just explained the countries. The guidance for every country, seen on the right-hand side of the slide, translates into the following group guidance on the left-hand side of the page. We expect our net attributable profit (NAP) to continue growing in 2024, ROTE to remain in the high-teens, above 2023 levels of about 17%. We expect to beat our long-term goal on efficiency, which is set at 42%. With this, I conclude the presentation. I give the floor to Patricia to govern the Q&A. Patricia?
Operator, Operator
Yes. Thank you, Onur. We are now ready to start with the Q&A session. So the first question, please.
Operator, Operator
The first question today comes from Maks Mishyn from JB Capital. Please go ahead.
Maks Mishyn, Analyst
Hi, good morning. Thank you for the presentation and for taking our questions. I have three on Spain. The first one is on your NII guidance. Any chance you could update us on your NII sensitivity to interest rates, but also shed some light on what kind of evolution of interest rates do you bake into your mid-single-digit growth guidance? Then, the second question is on loan growth outlook. I was wondering if you could just share more visibility on what you expect for loan book growth in Spain per segment? And then finally, on deposit costs, you mentioned you expect contained deterioration in deposit costs. I've noticed that the share of time deposits increased notably in the fourth quarter, and I was wondering if this was related to some particular campaigns or sector pressure, and what kind of beta evolution you expect throughout 2024? Thank you.
Onur Genc, CEO
Thank you, Maks for all the questions. On the NII change, the NII sensitivity you mentioned, we have been putting this into the appendix of our presentation for clarity because I believe it's the right question and very important. If you remember, this sensitivity to 100 basis points is a symmetric number: plus/minus 100 is the same. A 100 basis points step function decline in the curves would have implied more than a 20% NII impact; so a minus 100, minus 20% NII, not long ago, a year and a half ago. We have managed that number for the last two years every single quarter. The latest number we are putting into the appendix now is plus/minus 5%, meaning every 100 basis points step function change in the curve would imply a much lower sensitivity due to the ALCO strategies we have been implementing. You asked about the guidance and the rate implications. We have multiple scenarios, with the base case now working with, that sees the Euribor 12 months as an important reference rate. It's a range, and we have multiple scenarios. In all scenarios, we foresee an increase in NII, but our latest scenario expects the average for the Euribor 12 months to be around 300 basis points for 2024, and with that assumption, we guide mid-single-digit NII growth. You asked about loan growth in Spain per segment. Overall, we expect flattish growth compared to 2023, but we foresee growth in the consumer portfolio and the medium-sized enterprises segment, which is very important to us. Our average market share in Spain is 14%, which is lower than our average for retail banking and corporate loans. We see the potential to grow business lending there and also in private enterprises. Regarding deposits in the fourth quarter, the trend was expected, and market movements will continue. We still guide mid-single-digit NII growth in summary. In my presentation, I mistakenly mentioned customer spread improvements; it’s more accurate to say NIM margin will continue improving in 2024 due to our ALCO strategies. Anything to add, Luisa?
Luisa Gomez Bravo, CFO
No, I would just add on the beta side we’re expecting a slightly higher beta this year, around 25% to 30%. But we achieved to be within our guidance this year, with beta below 20%. The ALCO strategy will have a positive contribution, as you mentioned.
Operator, Operator
Thank you, Maks. Next question, please.
Maks Mishyn, Analyst
Thank you.
Operator, Operator
Our next question comes from Antonio Reale from Bank of America. Please go ahead.
Antonio Reale, Analyst
Hi, good morning everyone. It's Antonio from Bank of America. I have two questions for me, please. One on NII trends in Mexico, and secondly on fees, please. The first one is on NII in Mexico. Your outlook for high single-digit growth in '24 is very clear. You've talked about seasonality in Q4. Could you elaborate on how much of the quarter was affected by negative carry trades? And the key moving parts for 2024, perhaps across spreads, volumes, and hedges? The second question is on fees. Fees have been strong for a few quarters now outperforming peers both in Spain and in Mexico. Can you talk about what you're doing differently here? What products you're placing? What are the main drivers? And how sustainable this is going forward? Thank you.
Onur Genc, CEO
Thank you, Antonio, for both questions. A similar strategy is being employed in Mexico. You can also see it in the NII sensitivity in Mexico. A year ago, the sensitivity of our Mexican franchise was around 3.7% to a 100 basis points. We have been reducing that. The latest number now is 2.3%. Why? Because we have been increasing the ALCO book, increasing the fixed part of the ALCO book, and so on. You asked what proportion is negative carry? A significant part is negative carry, but it’s important to manage that NII sensitivity. We currently have an EUR18.2 billion securities in Mexico with a yield of 8.5%. The ALCO book increased EUR5.8 billion last year, yielding 9% to 10%. The central bank is currently paying us 11.25% for liquidity. We are taking negative carry to manage NII sensitivity. Overall, we are guiding a double-digit loan growth in Mexico with a health NII growth close to 10%. Regarding fees, the business is doing exceptionally well, especially in payment systems. A significant portion, 59%, of our fee income is from payment services and 50% of that derives from cards and POS, with 20% growth year-over-year. We are gaining market share in credit cards. Asset management has grown 17% as well. Overall, I see robust growth, and we remain quite positive on fee income evolution in Mexico.
Antonio Reale, Analyst
Thank you.
Operator, Operator
Thank you, Antonio. Next question, please.
Operator, Operator
The next question is from Benjamin Toms at RBC Capital Markets. Please go ahead.
Benjamin Toms, Analyst
Good morning, both, and thank you for taking my questions. As a management team, you've historically spoken about your excess capital but less about the timing and cadence of buybacks. I was hoping you could remind us how you define your excess capital? And when do you expect to have returned the majority of that to shareholders? Secondly, on cost of risk in Mexico, that's up 25 basis points year-on-year; presumably that’s partially driven by mix. Your consumer and credit cards are about 25% of your Mexican loan book. Where do you envision that number ultimately going? Will that come along with a cost of risk that’s higher than 325 basis points? Thank you.
Onur Genc, CEO
Thank you, Benjamin. On the cost of risk in Mexico, Luisa can assist with the reply. We have stated that we don’t like to operate with excess capital. We have a clear commitment to return the excess capital, as we have been doing over the years. The upper end of our target range is 12%; we will time it properly but will continue on the path we have been taking. Regarding organic capital generation, we have guided you that around 60 basis points will be generated organically beyond the regular payouts. Our guidance remains, and in terms of buybacks, I see more to come along the way.
Luisa Gomez Bravo, CFO
Yes. The increase to 325 basis points cost of risk is driven partially by the continued growth in the retail portfolios yielding more. There is definitely a mix effect at play. The underlying trends this year have been supported by positive impacts on recalibrated models. As we grow in retail portfolios, this will remain aligned with the cost of risk while also maintaining profitable growth in those portfolios. We expect the cost of risk to moderate, and we think the start of the easing cycle expected in Q1 will help to progressively improve these trends going forward.
Onur Genc, CEO
In Mexico, the banking debt-to-GDP is 36%, considerably low compared to emerging market landscapes. It’s about half of Brazil and one-third of Chile. There is a sound opportunity for loan growth, maintaining a healthy lending environment. We anticipate consumer loans will also increase within this context as the lending book continues to grow.
Operator, Operator
Thank you, Benjamin. Next question?
Benjamin Toms, Analyst
Thank you.
Operator, Operator
Our next question is from Sofie Peterzens from J.P. Morgan. Please go ahead.
Sofie Peterzens, Analyst
Yes. Hi. This is Sofie from J.P. Morgan. My first question would be how you view inorganic growth opportunities, especially in South America and Spain? My second question would be in Mexico; Nubank is becoming quite aggressive. They've had a huge success story in Brazil. But how do you see the competition in the Mexican banking market? Does it make any impact on BBVA? Lastly, how should we think about regulatory capital headwinds in '24? I assume you will see the share buyback deducted, but could you comment on that? Thank you.
Onur Genc, CEO
Thank you, Sofie, for all three questions. Regarding inorganic growth, we are focused on organic growth. It doesn’t mean we don’t look into opportunities, but our focus is on organic growth, with little to say on that one. Regarding Mexico, our data shows the share of neobanks in new cards issued in Mexico has been decreasing. Over the last seven quarters, the peak market share for neobanks occurred in Q1 2022; since then, it has declined each time. We respect our competitors, who are very successful and agile, but we also see the positive trend in our own operations to defend our market share effectively. Finally, on regulatory headwinds, Luisa?
Luisa Gomez Bravo, CFO
Currently, we do not foresee specific regulatory headwinds in 2024. The most relevant impact pertains to the entry of Basel IV, effective January 1, 2025. We expect limited impact of less than 40 basis points on a fully loaded basis, with less than 30 basis points coming into effect. This should be easily absorbed by our capital organic generation. For 2024, we anticipate maintaining our CET1 ratio somewhat above 12% to avoid potential cliff effects from this near-term impact.
Operator, Operator
Thank you, Sofie. Next question, please.
Operator, Operator
Next question is from Ignacio Ulargui from BNP Paribas Exane. Please go ahead.
Ignacio Ulargui, Analyst
Hi, thanks for taking my questions. I have two questions. The first one is about the healthy core revenue growth that Onur mentioned for 2024. Can you provide some indications of what growth levels you are aiming for? Alongside this, I have seen high single-digit growth in Mexico on the cost side and 5% cost growth in Spain. Is there room to adjust on the core side? Since you've made many efficiency improvements in recent years, do you think it's necessary to manage costs if revenue dips a bit? The second question is about the buyback; has the EUR781 million already been deducted?
Onur Genc, CEO
Thank you, Ignacio. Starting with the last question, of course, all the buyback numbers are already deducted from capital. So the number of 12.67% already incorporates the impact of the buyback. The core revenue growth you asked about must be examined at the country level, where dynamics differ. In Spain, NII is expected to grow mid-single-digits, which is reasonable. NIM strengthening, coupled with flattish volume growth but changes in mix towards higher return segments, will help reach this mid-single-digit NII target. For Mexico, we anticipate double-digit loan growth. The GDP growth rate of Mexico stood at 3.2% in 2023, which is substantial. We expect this momentum to persist in 2024 with positive loan growth. We are guiding expense growth in Spain at close to 5% and in Mexico at high single-digit rates for the upcoming year as we still see significant growth opportunities.
Luisa Gomez Bravo, CFO
Efficiency is always part of the bank's DNA, and all countries have ongoing efficiency plans in place to support continued growth. We believe that growth will be compatible with the plans in each country to ensure continued efficiency.
Operator, Operator
Thank you, Ignacio. Next question, please.
Ignacio Ulargui, Analyst
Thank you.
Operator, Operator
Next question is from Francisco Riquel from Alantra. Please go ahead.
Francisco Riquel, Analyst
Yes, thank you. Luisa, I have two follow-ups. First, in Mexico, your NII guidance of two percentage points below loan growth is consistent with your NII sensitivity to lower rates. But you also mentioned that the mix should continue to improve. You are capturing that in the cost of risk guidance, which has also been increased. But I would have thought the NII would grow faster, so I wonder if you can comment and help reconcile both the increase in cost of risk with the NII guidance for '24, particularly the deposit beta in Mexico. You mentioned you are paying higher for corporate deposits. Is that expected to offset the positive impact from the loan mix? The second question is about the capital target that you have of 11.5%-12.0%. Specifically, regarding the 12% threshold to return excess capital, you said that in '21, and since then, your SREP has gone up by 50 bps, which is now at 9.1%. We've heard of Basel IV, which you mentioned could add close to 40 bps. And there's also noise about a potential countercyclical buffer in Spain. Given this context, do you think that the 12% threshold on a 300 to 350 basis points MDA buffer is still valid going forward, pro forma for Basel IV, or will you update that during the year? Thank you.
Onur Genc, CEO
Thank you, Francisco. On the first question, we already accounted for the mix change in the guidance. Quarter only, not year-to-date, the cost of risk in Mexico in Q3 saw an uptick to 308 basis points. In Q4, that number is around 297 basis points. The mix change influenced by retail growth is included in the guidance. Customer spread will continue to slightly decline, and increased NIM will moderate overall NII growth to high single-digit as we look forward. On capital, as you stated, since January 2024, the requirement is now at 9.1%, leaving a gap of 291 basis points for CET1 buffer, which is substantial compared to our peers. We have the highest leverage among larger banks in terms of risk density. Hence, we find ourselves in a secure position regarding capital management. We address this requirement every year, but we are confident that we are financially stable enough to operate smoothly during these changes.
Luisa Gomez Bravo, CFO
I would only add that regarding the Basel IV impact, we stated that it would be around less than 40 basis points on a fully loaded basis. But among the group one entities, it's projected to be around 150 basis points when considering European Commission specifics. Our impact on Basel IV will be among the lowest in the sector.
Onur Genc, CEO
Universally, the impact is expected to differ among banks. However, for BBVA, we are well positioned profiting from our solid capital base. The competitive advantage that we hold should keep us shielded from severe impacts, and we will remain dedicated to returning excess capital.
Operator, Operator
Thank you, Francisco. Next question?
Francisco Riquel, Analyst
Thank you.
Operator, Operator
The next question is from Alvaro Serrano from Morgan Stanley. Please go ahead.
Alvaro Serrano, Analyst
Good morning. I have a couple of follow-up questions. Onur, you mentioned the rate sensitivity in Spain that was symmetric plus/minus 5%. I would like to double-click on that. Can you share the deposit beta assumptions behind the minus 5%? Given that it's symmetric, I'm unsure if you're using the same deposit beta assumptions for both the upward and downward movements. Given my calculations, it looks like you've had a beta of 21% to 22% in Q4 standalone. So it seems that the standard EUR0.50 beta on the way down could be optimistic; I'd appreciate clarification. The second question, if you've mentioned this already, could you share the rate assumption you're using in Mexico? Thank you.
Onur Genc, CEO
Definitely. I mentioned symmetric, but it’s marginal, there's little difference. The calculation of the deposit beta is important; it's based on our deposit cost compared to the ECB rates, and right now, the beta in Q4 was approximately 19%. Using this in rates coming down, we expect a beta between 25%-30%. The deposit costs dipped in response to the decrease in rates. Regarding the Mexico rate assumption, we forecast the official interest rate to be 9% at the end of December 2024, down from the current 11.25%. We expect this trend to start from Q1.
Operator, Operator
Thank you, Alvaro. Next question, please.
Alvaro Serrano, Analyst
Thank you.
Operator, Operator
The next question is from Carlos Cobo from Societe Generale. Please go ahead.
Carlos Cobo, Analyst
Thank you very much. A couple of questions, one being related to Turkey. You mentioned that the cost of risk is flexed to around 110 basis points, but you expect the net profit contribution to remain broadly stable. I was wondering if you could shed some light on the main drivers for that and if there's a relationship with the higher cost of risk. The second question is a follow-up on Argentina. I think you mentioned the contribution to net profit should be 30% lower than this year in constant euros. Considering I believe you've said that the Argentine peso may rate to 15.42, this indicates around a 42% devaluation if I am correct. So should we factor this on top of the 40% drop you mentioned before? Or how do you envision this?
Onur Genc, CEO
Certainly. Let’s clarify regarding Argentina's profits: the numbers we've discussed are in current euros. So overall, we do expect a contribution to be around 20% to 30% below the previous year's figures considering the ongoing high inflation and devaluation. As for Turkey, the expected cost of risk arising from expected improvements in customer spread will offset the slight cost increase, leading us to deem this projection stable.
Operator, Operator
Thank you, Carlos. Next question.
Carlos Cobo, Analyst
Thank you.
Operator, Operator
Our last question comes from Hugo Cruz from KBW. Please go ahead.
Hugo Cruz, Analyst
Thank you very much. I just wanted to ask about the long-term potential for loan growth in Mexico. Is there a point where we could start to see the loan growth decline? Is there a cap in terms of nominal GDP or bank loans to GDP where you could see that loan growth coming down? Or how do you consider that?
Onur Genc, CEO
Hugo, you are partially correct that the banking debt over GDP is only 36% in Mexico, which is much lower than many emerging markets. The dependency on a large neighbor such as the U.S. further accelerates this growth outlook amid the ongoing nearshoring trends. We expect to see sustained loan growth in this environment for at least the next two to five years, given the favorable macroeconomic conditions, especially since there is plenty of room to grow profitably.
Operator, Operator
Thank you, everyone, for participating. This concludes our earnings call, and the entire IR team will be available to answer any further questions you may have. Thank you.
Onur Genc, CEO
Thank you to all. Bye-bye.
Luisa Gomez Bravo, CFO
Thank you.