Earnings Call Transcript - BBVA Q4 2021

Operator, Operator

Good morning, everyone. Here with me today are Onur Genc, Chief Executive Officer of the group; and Rafael Salinas, BBVA CFO. As in previous quarters, Onur will start with the presentation of group results and then Rafa will review the business areas. Then we will move straight to the live Q&A session. And now I will turn it over to Onur to begin with his presentation.

Onur Genc, CEO

Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining our 2021 results audio webcast. I will start directly with the pages. On page 3, I want to highlight some key achievements of 2021. First, we believe we have made significant progress in executing our strategy focused on profitable growth while also leading in the digital and sustainability areas. We ended the year with nearly 9 million gross new clients, an all-time record. Additionally, 73% of our unit sales were completed digitally, another record high, and we remain industry leaders in sustainability. In 2021, we channeled more than €35 billion in sustainable finance. Second, we are reporting our highest recurrent results in the past decade. Our net attributable profit, excluding some nonrecurring items, is over €5 billion. We also saw excellent operating results, with operating income growing 10.8% in constant euros compared to 2020. Third, we remain committed to profitable growth and value creation for our shareholders, reporting a return on tangible equity of 12% and a strong 10.1% increase in tangible book value per share plus dividends. This has enabled us to significantly enhance distributions to our shareholders, including a proposed cash dividend of €0.31 per share, marking the highest cash dividend in the last decade. We are also executing one of the largest share buyback programs in Europe. Lastly, we are on track to achieve the ambitious long-term targets announced during our Investor Day in November. I will provide further details on these highlights in the coming pages. On page 4, regarding new customer acquisition, our relentless focus on growing our franchise has allowed us to acquire 8.7 million gross new clients in 2021, marking another all-time record. The share of new clients acquired through digital channels has increased significantly, rising from 4% in 2016 to an impressive 40% in 2021. We welcomed more than 3.5 million new clients through digital channels in the past year, a 47% increase compared to 2020. Moving to Slide 5, our leadership in digital has been essential for our growth. To illustrate, we now have nearly 40 million mobile customers, a figure that is 50 times higher than in 2016, with a penetration rate of 66%. Our digital sales reached 73% in terms of units and 56% in terms of value. We have also designed various digital journeys and financial tools within our app to enhance our clients' financial well-being, which positively impacts our business. Users of financial health advisory tools in our Spain app report a customer satisfaction score 90 percentage points higher than non-users. These tools also contribute to digital sales, making up 27% of new mortgages and 27% of new investment funds sold in Spain. Additionally, we are investing in innovation as a driver for growth by entering attractive new markets through selective investments in digital banks and venture capital vehicles targeting fintechs. For example, Propel has invested in 40 companies, six of which are currently valued as unicorns, and contributed €328 million in pre-tax income to BBVA in 2021. Moving to Slide 6, we are leaders in sustainability, making significant commitments in sustainable finance. This year, we have doubled our sustainable finance target from €100 billion to €200 billion for the 2018-2025 period and are exceeding this new pledge, having channeled €35 billion in 2021, up 72% from 2020. We were among the first banks to announce decarbonization targets in specific CO2-intensive industries, and we are proud to now rank first worldwide in the Dow Jones Sustainability Index. On Slide 7, I'll provide an overview of our financial performance. In 2021, we achieved the highest recurrent profits in ten years. Our quarterly net attributable profit reached €1.341 billion, equating to earnings per share of €0.19. This result is double that of the same quarter last year and significantly above pre-COVID levels, reflecting a 30% increase compared to the fourth quarter of 2019. For the annual results, our profit surpassed €5 billion, which is nearly double the amount from 2020 and represents an 18.7% increase compared to 2019, bringing our earnings per share to €0.71, one of the highest figures ever recorded. Please note that these numbers exclude nonrecurring impacts, particularly from discontinued operations in the U.S. and restructuring costs in Spain, with the final reported profit for 2021 amounting to €4.653 billion. On Slide 8, our tangible book value per share, including dividends, closed at €6.66, reflecting a strong year-over-year increase. We are also seeing continuous improvement in profitability metrics, with a return on tangible equity of 12% and return on equity of 11.4%. Slide 9 highlights key points from 2021, including strong activity growth that gained momentum throughout the year, particularly in the fourth quarter. We achieved strong core revenue growth in net interest income and fees, and our efficiency ratio continues to improve. Consequently, we recorded excellent operating income growth. Finally, our cost of risk performed better than expected and we maintain a strong capital position. On Slide 10, summarizing the year, we see excellent growth in both gross income and operating income, with gross income rising by 9.7% and operating income by 10.8%, driven by strong core revenues in net interest income and fees. Our net trading income also performed well. The positive evolution of impairments and provisions is primarily attributed to the improved risk performance of our portfolio, resulting in an attributable profit of €5.1 billion, excluding nonrecurring impacts, and a total of €4.7 billion including all items. On Slide 11, focusing on the fourth quarter, there was an impressive 31.1% increase in operating income, with lower impairments contributing to an excellent net attributable profit, reflecting an 84% year-over-year growth. Moving to Slide 12, we anticipate continued growth in loan production, which has positively translated into loan balance growth across both retail and wholesale segments. We achieved a 6.3% year-over-year increase in loans, indicating strong prospects for net interest income and fee income in the upcoming quarters. Slide 13 offers insights into quarterly revenue breakdown and evolution. Our net interest income increased significantly compared to both last year and the previous quarter, driven by strong activity growth and some improvements in spreads and CPI linker contributions in Turkey. We also saw an extraordinary growth of 22.2% in net fees and commissions, marking the highest quarterly figures over the past years. On Slide 14, despite costs growing at 8.5%, which is slightly above blended inflation, we ended the year with positive jaws thanks to our strong gross income. The increase in expenses was largely due to the normalization of variable compensation, which had been notably low in 2020 due to COVID. When we exclude this effect, expenses grew only 3.6%, much less than inflation. Our efficiency ratio improved to 45.2%, outperforming our European peers. Slide 15 reflects solid performance in risk indicators, with total impairments in the quarter aligning closely and even exceeding pre-COVID levels in absolute terms. This is mainly due to positive underlying risk performance across our portfolios. As for asset quality indicators, the NPL ratio slightly increased to 4.1%, while our coverage ratio decreased to 75%, impacted by the new definition of default guidelines. However, without this adjustment, the NPL and coverage ratios would show improvement. On Slide 16, we have reaffirmed our commitment to value creation for shareholders by raising our payout policy to a ratio of 40% to 50% of our profit. We are pleased to propose a cash dividend of €0.31 per share, the highest in a decade, alongside one of Europe’s largest share buyback programs valued at €3.5 billion. On Slide 17, our fully loaded CET1 as of December 2021 stands at 12.75%, significantly above the SREP requirement. The impact of our share buyback program has been deducted, and the results have positively contributed to our capital ratio. Lastly, on Slide 18, I will not go into detail, but I assure you that we are well-positioned to achieve the long-term targets we announced during our Investor Day. Now, I will hand it over to Rafa for an update on business areas.

Rafael Salinas, CFO

Thank you very much, Onur, and good morning, everyone. Let me begin with Spain, Slide 20. Positive loan growth close to 2% year-on-year in 2021, driven by a continued growth in the most profitable segments, consumer lending and SMEs and improvement in mortgage portfolio deleverage rate and a progressive recovery in the commercial segments, accelerating in the last quarter of the year. For 2022, we expect a slight growth in performing loans in Spain with consumer loans to continue growing at high single digits. Going to the profit and loss account. In 2021, pre-provisioning income grew 14.5%, thanks to core revenue growth and higher contribution from the net trading income. Core revenue growth was delivered by the strong performance of fees growing above 20% in the year with growth in more headings, mainly in those coming from asset management, banking services, and insurance after the joint venture with Allianz. Expenses decreased slightly in 2021, reflecting our continued cost control effort that have offset the increase in the variable compensation as activity and results continue to recover. In any case, we should keep in mind that expenses compared with an abnormally low 2020. And when compared to 2019, they have declined by 7%. All in, we can see a very positive jaws in Spain this year that led to an improvement in the efficiency ratio of 3.4% to 51.1% ratio in 2021. Sound asset quality ratios with the cost of risk down to 30 basis points in '21 in line with expectations. All in all, very good results with net attributable profit in Spain above pre-COVID levels. For '22, in terms of the P&L guidance, we expect in Spain NII, excluding TLTRO, flat to slight growth. Net fees and commission flat consolidating 2021 outstanding levels. Expenses to decrease in mid-single digits and efficiency improving and cost of risk around 30 basis points.

Onur Genc, CEO

Slide 21, moving to Mexico. In the loan portfolio growth accelerated gradually, ending the year at 6.5%, in line with expectations. The retail segment drove loan growth with an outstanding performance in mortgages, credit cards, and SMEs while the commercial segment performance improved in the last quarter, reaching a 3% growth quarter-on-quarter. For 2022, we expect the loan portfolio in Mexico to grow at mid-single digits. In terms of the P&L, net attributable profit increased 43% compared with 2020, thanks to the good performance of core revenues. Net interest income evolution was favored by the loan growth mentioned by the improvement of the customer spreads, thanks to our effort to review deposit costs and the improvement in deposit mix. For '22, we could see NII growing at high single digits. Also on core revenues, a strong fee growth driven by the recovery of activity and higher transactionality. On the other hand, expenses grew 10.9%, mainly explained by variable compensation normalization linked to the recovery of activity and result. In fact, excluding the increase in the variable compensation, expenses in Mexico will have increased by 5.9% year-on-year, in line with the aggregate inflation of 5.7%. All in, the efficiency remains at very strong levels at 35% in 2021. For '22, we expect expenses to grow at mid-single digits with positive jaws, resulting in an improvement of the efficiency ratio aligned with our long-term target for 2024. In terms of asset quality, we see a slight increase in the NPL ratio and a reduction of the coverage ratio, explained by the fact that we have already implemented EBA's new destination of default for accounting purposes with no significant impact in terms of the cost of risk. In fact, there is a continued improvement of the cost of risk along the year supported by good underlying trends on the loan portfolios ending at 267 basis points in 2021. For 2022, we expect the cost of risk at the end of the year below 300 basis points, in line with our long-term target.

Rafael Salinas, CFO

In Turkey, TL loans have seen significant growth in 2021 with double-digit increases in both retail and commercial sectors, while foreign currency loans have decreased year-on-year, aligning with our strategy to minimize foreign currency loan exposure. For 2022, we anticipate TL loan growth exceeding 25% and a continued decline in foreign currency loans. Gross income grew by 25% in 2021, showing strong performance across the board. We expect net interest income (NII) to grow at a rate above that of the TL loan portfolio, driven by the increase in TL loans and improvements in the TL customer spread, as well as a higher contribution from CPI linkers. Fees performed excellently, particularly from payment systems and increased activity compared to 2020, alongside strong net trading income for the year, attributed to positive contributions from global markets and favorable foreign currency results due to market volatility. However, expense growth has been affected by high inflation and the depreciation of the Turkish lira. Overall, efficiency remains strong at 29.5%, and we forecast an improvement in the efficiency ratio for 2022. Impairment decreased significantly in 2021, influenced by front-loaded provisions from the first quarter of 2020 and favorable performance trends in various portfolios. In the fourth quarter, we recorded higher impairment compared to the previous quarter, mainly due to our cautious risk assessment regarding foreign currency sensitivity among wholesale clients increasing their coverage. The cost of risk was 133 basis points in 2021, and for 2022, we project it to be around 150 basis points, despite ongoing macroeconomic uncertainty. Slide 23, moving to South America. We provided some color on the main countries. In Colombia, the loan portfolio grew, thanks to a good performance of both retail and commercial segments. On the profit and loss account, the net attributable profit increased 45.4% compared with 2020, driven by core revenues growth and lower impairment figures. In Peru, the loan portfolio benefited from improving economic conditions. It was reflected mainly in the retail portfolio that grew above 8% in '21. The strong core revenue growth, the positive jaws, and the lower impairments explained the increase of 28% in net attributable profits. Lastly, Argentina shows a positive net attributable profit contribution to the group of €63 million despite a higher inflation adjustment, thanks to the net interest income growth favored by the higher securities portfolio contribution and fees growth favored by higher transactionality. For 2022 and for the region, we expect loan growth in line with 2021, an improvement in efficiency aligned with our long-term goal, and cost of risk below 200 basis points. All in, very good solid results in all our franchises, levered on core revenues growth and higher activity levels together with very positive trends on the asset quality side leading to a significant reduction of the cost of risk across the board. And now back to Onur to highlight the main takeaways on '21 and the outlook for '22 results.

Onur Genc, CEO

Perfect. Thank you, Rafa. We have this goal of finishing our presentation by 10:00, so I will skip Page 25 and jump into 26, which is the outlook for 2022. At the group level, very simple. Core revenues, we are expecting them to grow around double digits, maintaining our strategic focus towards the most profitable segments, as you would also see in the growth that we have been driving in this year in different portfolios. On costs, we expect the growth to be less than inflation and efficiency to improve across the board in all the countries. Cost of risk is expected to be around 100 basis points, slightly better than pre-COVID levels. And lastly, sizable distributions to our shareholders will continue in 2022, with the full execution of the €3.5 billion maximum share buyback before October. But again, we expect it to last 4 months, and we expect to start the second wave in March. And with this, I conclude the presentation. I go back to Patricia for the Q&A.

Operator, Operator

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

Operator, Operator

The first question comes from Maksym Mishyn at JB Capital.

Maksym Mishyn, Analyst

I have two, if I may. The first one is on Turkey. I was wondering if you could update us on the approval process for the Garanti bid? And what acceptance rates from minorities would you consider as a success? And then on Mexico, I was just wondering to hear your view on sector consolidation. Would you favor domestic consolidation or a new entrant in the case of potential acquisition of Banamex? And do you think that it is possible BBVA could become one of the bidders? And what time line for the process do you expect?

Onur Genc, CEO

Perfect. Thank you, Maksym. Very quickly, Turkey approval process, it's in its path. It continues. We guided when we announced it back in November that it will be in the first quarter of 2022. That's still the expectation. So the regular approval processes continue. You asked about the acceptance success, what do we expect, and so on. As again, we mentioned back in November, we are happy with any outcome on that one. We would be happy to get it all. Or as you know, we own 49.85% of shares guaranteed today, and then we pass the 50%. So if we get another 0.15% of the shares, we pass this important threshold of 50%, which gives us flexibility and a big optionality for the future of getting shares without the full tender. So with respect to the market, we do think that our offer is an attractive one. Whatever the outcome, we will be fine. We will be happy with any of the outcomes that might be coming out. You asked about the consolidation process in Mexico. Obviously, we don't comment on potential transactions and who might buy, who might not buy and so on. The only thing I can tell you is when you look into our results in the last few years and even today, for sure, today, Mexico is so important for BBVA as a country, as a business, as a franchise. We will continue whatever happens. Whoever buys, whatever happens, we will continue to invest and we will continue to grow in the country. We do have the best franchise in the country, in my view. By far, I'm a very quantitative numbers-focused person and I look into ROEs and I look into NPS, customer satisfaction, I mean efficiency, whatever number that I look into, I see an amazing franchise of BBVA in Mexico. Our goal would be whatever the outcome of this process is, we will continue on that path.

Operator, Operator

The next question comes from Benjamin Toms at RBC.

Benjamin Toms, Analyst

The first one is on Turkey. Inflation data is out today and the official estimates inflation is running around 49%. People keep track of this number due to potential implications for hyperinflation accounting, which will be unhelpful for the valuation of the Turkish franchise. When you talk to accountants, and just interested, when you talk to them about Turkish inflation, do they focus on the official estimates? Or do they also take into account unofficial estimates, which tend to be higher? And then secondly, can you just give us an update on your digital push into Italy?

Onur Genc, CEO

Thank you, Benjamin, for your questions. Regarding hyperinflation in Turkey, the accounting board makes the decision based on various metrics. It's not solely our choice. They assess whether the 3-year cumulative inflation exceeds 100%, and this leads to discussions, but it’s not an automatic ruling. Other factors, such as the inflation trend and how the population manages their wealth in nonmonetary assets, also play a role. A recent update is that the accounting board decided not to apply hyperinflationary accounting for 2022, so that year is settled. For 2023, it depends on the accounting board's review. The 49% inflation announced today was anticipated, and our BBVA research team expects this trend to persist for the next few months. However, they predict inflation may ease in the third and fourth quarters. In summary, 2022 is secure while 2023 requires consideration of trends, particularly if we observe declining monthly and quarterly inflation, which could mean hyperinflationary accounting will not be necessary. As for our venture in Italy, we initially anticipated reaching 25,000 customers in the first two months, and I can confirm we have reached that number. However, our primary focus is not just on the number of customers but on ensuring they perceive us as a quality bank, reflected in higher customer satisfaction scores. We’ve seen a positive trend in customer acquisition, better than expected, which has continued into January. Nevertheless, our emphasis for the first couple of years will be on the quality of service and customer satisfaction.

Operator, Operator

The next question comes from Alvaro Serrano at Morgan Stanley.

Alvaro Serrano, Analyst

I've got one on capital and another one in costs in Spain. On capital, I'm just trying to get my head around because I remember in Q1 2020, capital also dipped and then it bounced back. Obviously, the market element, those 11 basis points that you've called out, presumably, we can hope and that's kind of a question, we can hope that comes back. But I wanted to focus on the 29 basis points. Onur, you mentioned that it was strong activity in credit growth, kind of a good problem to have. But the reality or at least my perception is a lot of it is a very strong growth in Turkey, obviously, related to the inflationary situation. And ultimately, that's despite the returns are high, they're high for a reason. And the PE multiple, the market is being very, very low. So can you sort of confirm if that's the case? And if you are deploying more capital de facto in Turkey organically, wouldn't it be more sensible to cut back on lending at this point? So that was on capital, sorry. And very quickly on costs. In Spain, I think Rafa said mid-single-digit growth in costs in Spain. And that's despite the €250 million cost savings that you achieved with the restructuring. I just want to understand what's going on because salary inflation is not that high in Spain. And my understanding is the collective bargaining agreement reached until 2023. I get your point about variable pay, but just a bit more explanation around that figure, if I got it correct.

Onur Genc, CEO

Thank you, Alvaro. Rafa, perhaps you can address the second question. Regarding the first question on capital, Alvaro, that's a great question. However, your assumption that a significant portion of this is attributed to Turkey is incorrect, as the Turkish loan book has actually increased. This is observable in the presentation. When you examine different countries, you'll notice that the figures are in Turkish lira. On Page 12 of the presentation, you'll find that the number for Turkey has actually decreased in the fourth quarter. The capital evolution of 29 basis points refers to the numbers from the fourth quarter, which we are currently analyzing. This is not due to the depreciation of Turkish lira in current euros. The capital consumption isn't coming from Turkey; it's coming from other areas. If you check the country pages in the presentation that Rafa mentioned, in Spain, we've grown our mid-sized companies segment by 10%. This stock growth of 10% in Spain is impressive in my opinion. Additionally, the consumer business in Spain has expanded by 9% in consumer lending. Our average lending yield is approximately 6%, indicating these are high-return portfolios. Another important portfolio that has seen growth this quarter is in Mexico, where credit cards have grown by 13.4% year-over-year. You can quickly compare this with the previous quarter to analyze the figures effectively. SMEs have also grown by 15%. Our growth is focused on areas where we aim to allocate capital. I want to be very clear on this: Our growth strategy is built around a micro capital planning process. Business units, including relationship managers, must demonstrate that the lending they engage in, whether at the client or portfolio level, yields a specific return. We adjust that return based on the local conditions of each country or location. This micro capital planning process is integral to our bank's strategy. Growth cannot occur in areas where the capital return does not exceed the cost of equity associated with that capital. Consequently, this is reflected in the figures; the 29 basis points growth is something I am very pleased with because it is derived from regions that provide substantial capital returns. Regarding the question about Spain, Rafa?

Rafael Salinas, CFO

In Spain, Alvaro, I think the guidance for '22 is just a decrease in expenses at mid-single digits. The fact is that, as you mentioned, clearly, the restructuring program is going to provide savings of €225 million on a 12-month basis in Spain and an additional €25 million at the corporate centers. So at the end of the day, this €250 million are going to allow us just to decrease the expenses in Spain in 2022. Regarding the '21 number, in fact, I think some savings were already included. I think it was €66 million in '21 and around €16 million in the corporate center. That compensates for the increase on the variable remuneration given the good results. But for '22, as I said, the guidance is a reduction of mid-single digits.

Onur Genc, CEO

And maybe it's also important to confirm that when we did the collective saving and the restructuring program in Spain, we committed to €250 million savings a year for that program. We can confirm to you that the €250 million still holds.

Operator, Operator

The next question comes from Sofie Peterzens at JPMorgan.

Sofie Peterzens, Analyst

Could you provide an update on your hedging policy, particularly for Turkey? Specifically, I'm interested in how much of the profit on capital in Turkey has been hedged and the costs associated with those hedges. Additionally, could you share details about the hedging policy for Mexico? My second question pertains to Turkey as well. Net interest income is quite strong in the fourth quarter. You mentioned that NII will grow significantly due to high yields on loans in 2022. What are your underlying assumptions for Turkey, and how do you anticipate developments in that region?

Onur Genc, CEO

Perfect. Rafa, could you provide guidance for 2022 regarding Turkey? Regarding the hedging policy for Turkey and Mexico, we hedge 30% to 50% of our profits at the P&L level each year. Additionally, we hedge 60% to 70% of our capital annually, focusing on excess capital from our subsidiaries. This P&L hedging is a flow hedging within the 30% to 50% range. In previous years, we have hedged more than this to be cautious, influenced by favorable market conditions. We typically commence hedging for the upcoming year in the fourth quarter of the previous year and aim to complete it in the first quarter, depending on market circumstances. Currently, 65% of the results in Mexico are hedged, and 20% of the results in Turkey are hedged. For Peru and Colombia, we have hedged 100%. The current hedging levels in Mexico and Turkey may change as we continuously assess and adjust based on market conditions, particularly focusing on the costs of the hedges. This reflects our policy as of today. Now, could you update us on Turkey's net interest income, Rafa?

Rafael Salinas, CFO

Regarding Turkey, the guidance indicates that loan growth is projected to be around 25%. The growth is primarily focused on the TL book, which is expected to rise approximately 39% in Retail and 16% in Commercial. Meanwhile, we are committed to reducing our foreign currency loan portfolio, and we anticipate that the U.S. dollar loan book will decrease by about 13%.

Operator, Operator

The next question comes from Ignacio Ulargui at BNP Paribas.

Ignacio Ulargui, Analyst

I have two questions. One is on capital. I think, Onur, during the Investor Day, you flagged that you would expect in the bank to generate around €1.2 billion, €1.5 billion of capital every year. I wanted just to see whether that is pre or after RWA growth? And what kind of RWA growth should we expect into 2022? Just to get a bit of sense of the organic capital generation of the bank. And the second question is on Mexico. We have seen a strong growth in SMEs and cards in '21. I was wondering in the mid-single-digit growth guidance which segments that you are just sort of like expecting to grow faster and also whether you are taking into consideration current market expectations of rate hikes in Mexico.

Onur Genc, CEO

Thank you, Ignacio. Regarding capital, we achieved organic capital generation of €1 billion to €1.5 billion. This figure accounts for the growth in risk-weighted assets as it is driven by earnings before interest and taxes, and we have a clearer sense of how the markets will change. It does not include the effects of regulatory changes or mergers and acquisitions, as these are one-time occurrences that can be unpredictable. Our capital planning incorporates everything else. With our updated risk-weighted asset estimates, we expect to generate an average of €1 billion to €1.5 billion, depending on future payouts. As for Mexico, growth will continue to be primarily in retail. Retail has been a key growth driver for many years, posting a 9% increase in retail balances last year, with high returns. We have significant competitive advantages in this area. We assess the strength of our franchise through our cash management and daily banking relationships with clients. In retail, we have nearly 40% market share in salary payments in Mexico, which we believe is a strong advantage that will help us capture more market share in retail credit cards. This year, we have gained substantial credit card market share and plan to maintain our focus on retail growth. While we will monitor investment demand from enterprises, our current plan emphasizes the retail sector.

Operator, Operator

The next question comes from Marta Romero of Bank of America.

Marta Romero, Analyst

I've got a couple of follow-ups in Mexico. Can you be more explicit on what you are expecting for interest rates this year, CPI and GDP growth? And then if you can give us more color following Matt's question. How do you see the year starting for SMEs and corporate demand? Do you expect growth, any growth this year in that book? And just quickly, sorry, on fees in Spain, if I understand correctly, you're guiding for just flat, which seems a bit weak relative to the guidance given by other banks in Spain. What is driving that? Could you split banking fees versus asset management fees?

Onur Genc, CEO

Sure. On Mexico, interest rates at the end of the year are expected to rise from 5.50% to 7%, an increase of 150 basis points according to BBVA Research, driven by inflation. Our net interest income is positively correlated with rising rates, so we anticipate benefiting from this situation. For GDP growth in Mexico, BBVA Research predicts it to be 2.2% for the upcoming year, which is lower than this year's growth and below potential. This projection is influenced by supply chain issues. In terms of inflation for 2022, we expect an average of 4.1%, with this year's final number around 7.4% and next year returning to 4.1%. Regarding loan growth in SMEs and commercial sectors, we expect it to be positive. This year, our SME portfolio has grown by 15%, attributed to gaining market share and not just market conditions. We have a global program for SMEs, including a strategic initiative in Mexico called Banco de Barrio, which is contributing to positive growth in lending balances for both SMEs and mid-sized companies. Rafa, what about Spain?

Rafael Salinas, CFO

On the fees in Spain, I think this conservative guidance that we are providing for '22 is based first one on the outstanding performance of the fees in 2021, clearly, with very high levels. Second, we want to be conservative on the contribution of the asset management related fees given the very good performance of the markets in 2021 and the uncertainties clearly in '22 in terms of market. But underlying, I think we continue seeing very solid dynamics in terms of activity, especially on those related with rationality and activity.

Operator, Operator

Next question comes from Andrea Filtri at Mediobanca.

Andrea Filtri, Analyst

First question on fees. If you could give us the contribution of upfront and performance fees in fee income in 2021 and in Q4? And the second question is on the NII and cost of risk guidance. Could you disclose what absolute contribution from the ALCO portfolio you are assuming in 2022 versus 2021? And in the cost of risk guidance, if you could detail if you have any assumptions of write-backs from COVID overlay provisions? So finally, if you can just remind us of the TLTRO maturities.

Onur Genc, CEO

On the fees question, if you have it, please share, otherwise we can come back to you. Regarding the contribution to net interest income from the ALCO portfolio, we have not increased ALCO's contribution yet as we wanted to assess the market first. We have essentially maintained our ALCO book during the planning cycle, though it may change in the coming months depending on yield developments. The size of the ALCO portfolio has remained stable with replacements for expiring assets, but not much more than that. Our HQLA portfolio has decreased, as we maintained a short-term HQLA portfolio to manage liquidity, but we have held off on expanding our ALCO book until we see some yield increases. We're starting to see some improvement, but in our planning cycle and guidance, we have not accounted for any significant new contribution from ALCO books. Regarding the cost of risk guidance, we will monitor its evolution. We have accumulated some buffers related to COVID, particularly for Spain, and we want to observe the behavior of ICO loans, which were issued three years ago and will start coming due in the second quarter, with a notable €2 billion expiration in April. We are observing positive signals from that portfolio, bolstered by the overall conditions in Spain, which may contribute positively in the next fiscal year. However, we have made some post-model adjustments for the Teco portfolio, and we won’t release those until we are confident about the behavior of the loans after their nonpayment period ends. The guidance we provided does not include any positive outcomes from that discussion yet, and we will need to wait until the second quarter to provide further commentary. The guidance reflects our usual business expectations. Lastly, we have €38 billion in TLTRO, but I don't have specific details on its maturities.

Rafael Salinas, CFO

On the TLTRO, I mean the relevant maturities in June '23 with €21 billion, but before that, we have €7 billion by the end of the year and another €1 billion at the end of the first quarter of '23. And in terms of the composition of fees in Spain, I mean, Andrea can provide you with more detail. But just what I have in mind is just the fees for asset management are around €900 million in 2021, around 70 or 73 out of those 900 are performance fees related to the behavior of the markets below the funds.

Operator, Operator

The next question comes from Carlos Peixoto from Caixa Bank.

Carlos Peixoto, Analyst

The first question was a follow-up on an earlier topic regarding dynamics. I'm curious to know if you consider yourselves as a potential bidder for this unit or whether your size in the country makes an acquisition sensible. If you do see yourselves as a bidder, how might this deal be structured? Specifically, would you need to finance it through a capital increase? Additionally, regarding the outlook, fees in Mexico showed exciting performance in the fourth quarter. How do you see trends developing going forward? What restrictions or challenges do you anticipate for fee income growth in Mexico?

Onur Genc, CEO

Very good. Carlos, regarding Banamex, we do not comment on potential transactions. We aren't sure how the transaction will be structured. As for the outlook on fee income in Mexico, the fee income for the fourth quarter was somewhat impacted by the CIB situation, which can be quite volatile from quarter to quarter. However, we remain optimistic about the fee income growth in the upcoming quarter. The majority of fee income in Mexico is driven by payment systems, including credit cards and POS. We are seeing very positive trends in those areas, which should lead to strong numbers, potentially even better in 2022.

Operator, Operator

The next question comes from Carlos Cobo from Societe Generale.

Carlos Cobo, Analyst

Can I please ask you to clarify the TLTRO III impact on NII in Spain? We have the total TLTRO III number, but if you could just clarify how much of that is Spain and what is the step down? Just to follow up on that previous question, which I think it was a focus for me, one on tangible book value per share. If you don't mind explaining their performance, in the quarter. I was expecting some drops driven by the Turkish lira depreciation, but it actually went the other way around. So I was wondering if the capital was held in excess of the capital surplus or how do you manage to offset that currency impact in tiering? And also, if you could guide us to what is the total expected hedging costs, to be booked against capital in 2022. What's going to decide and how that compares with 2021 due to the high cost in Turkey?

Onur Genc, CEO

Very good. Perhaps the last one you can get, Rafa. Regarding TLTRO, the expected impact from the expiration, adjusted for a 100 basis points effect, will be €97 million on net interest income. As you know, there's ongoing discussion about increasing the tiering multiplier, and we hope to have clarity on that in the March meeting. That change could potentially have a positive impact. Regardless of that decision, the expiration of the program in June 2022 will result in a €97 million effect on net interest income. As for tangible book value per share, we increased it by 1.6% in the quarter. It’s important to note that 0.3% of this increase was due to the positive effect of our share buyback program. By the end of December, we had purchased shares starting from November, and we were buying them below tangible book value, which contributed to the increase, albeit only by 0.3%. The remaining 1.3% of the 1.6% increase came primarily from profits, with over €1.3 billion in profit for the quarter being the main driver behind the positive figures. For your third question, Rafa?

Rafael Salinas, CFO

In terms of planning, we consider the differences in interest rates across various currencies. Ultimately, we incorporate all our planning processes that account for hedges and profit and loss against the capital base.

Operator, Operator

The next question comes from Ignacio Cerezo at UBS.

Ignacio Cerezo, Analyst

I've got 2. If you can give us your best approximation of how much RWAs are going to grow in the year is a mid-single-digit number is a reasonable ballpark for you? And then the second one is on the capital return. Do we need to work with a 50% payout ratio? Or do you think there's space for extra dividends or another buyback in the back of '22 earnings?

Onur Genc, CEO

Let me address your second question first. The decision to sell in the U.S. was significant and prompted several actions aimed at creating value for our shareholders. We emphasized our commitment to investing in profitable growth in our existing markets, which is reflected in our current figures. Additionally, we have announced a €3.5 billion share buyback program, one of the largest in Europe. We have also raised our payout ratio from 35% to 40%, and now aiming for 40% to 50% based on upcoming opportunities. All initiatives will focus on shareholder value, and we will pursue whichever option yields the highest returns. While I cannot specify our next steps until we see how things develop, we are in the midst of executing one of the largest buyback initiatives and increasing distributions. We are currently offering the largest cash dividend BBVA has provided in the last decade, and we will remain on this trajectory while adapting to the opportunities that arise. It is crucial to understand that our primary goal driving every decision is value creation. If we are unable to identify significant value creation opportunities, we will continue to return funds to our shareholders as we have been doing. As for the growth of risk-weighted assets, you mentioned a mid-single-digit increase. This will vary based on our portfolio, but I suggest revisiting the figures provided in previous discussions. Over the next three to four years, we anticipate generating €1 billion to €1.5 billion in organic capital on average. For the 29 basis points of RWA growth we discussed today, we expect some reversal in the first quarter due to end-of-year conditions. Many institutions were uninterested in certain high-return factoring deals we engaged in with reliable clients, which have since expired, and we anticipate seeing some return to previous levels. Additionally, as noted in our presentation, a portion of market risk-related RWAs was affected by high CDS levels in Turkey at year-end, which have since reverted. Thus, in the first quarter of 2022, we expect to see up to 15 basis points return from the RWA inflation observed at the end of 2021.

Operator, Operator

The final question comes from Fernando Gil at Barclays.

Fernando Gil, Analyst

Two questions, please, from my side. First one is if you can refresh the capital impact on Turkey acquisition? If we are assuming 100% take-up and today's currency levels. This is one. The other one is on CPI linkers in Turkey, and the link to this hyperinflation that we are seeing. What should we expect for this line in 2022?

Onur Genc, CEO

Very good. On the first question, Fernando, the December 31 impact that we have from the OPA, if 100% is taken is 32 basis points. And as we mentioned, we don't know. We don't know the take up. It can be much less than that. It can be in the middle, 100%, but the total impact we are talking about, the latest number is 32 basis points. Then the CPI linkers, what do we expect? We will see. We did our budget with a much lower figure, but after also today's figure, this morning's figure of 49%, we will see. You should know that our CPI book in Turkey is €2.3 billion, €2.3 billion. So every 1 percentage point in inflation has an impact, as you can see, in 2023. So there is the sensitivity that you can look into.

Operator, Operator

The next question comes from Britta Schmidt at Autonomous Research.

Britta Schmidt, Analyst

I've got three questions, please. Firstly, could you just update us on regulatory impacts on capital that are still outstanding? What do you expect in 2022? The second one would be on the cost outlook. What is the blended inflation rate that you assume in your guidance? And could you perhaps quantify a little bit the basis, the COVID-related basis at what sort of euro million numbers are we talking here? And then lastly, on Mexico, there is obviously a macro worsening, but loan growth is still strong and the cost of risk guidance still looks okay. How do you explain that the sort of disconnect?

Onur Genc, CEO

Britta, can you repeat the second question? I couldn't get the second question.

Britta Schmidt, Analyst

The second question was on the cost outlook. Could you tell us what the blended inflation rate is that you assume for the group when you say you want to grow below inflation? And can you also give us some help quantifying in euro million terms what the COVID-related base effect is? Obviously, there were some COVID-related savings, T&E expenses, et cetera. What sort of million number are we talking about?

Onur Genc, CEO

Rafa, could you address the cost question? Regarding the ongoing regulatory impacts, as we mentioned previously, the main remaining regulatory aspect is the EBA guidelines. We have discussed the EBA guidelines concerning various models, including probability of default, loss given default, and margin of conservatism. The impact of the probability of default on the EBA guidelines was already included in 2021. In our last quarterly calls, we mentioned that we expect the EBA guidelines on loss given default to be implemented in 2022, with an anticipated impact of 15 to 20 basis points. This needs to be considered for 2022. Additionally, the EBA guidelines regarding the margin of conservatism may also come into play and affect us, as they have introduced stricter rules. Therefore, the total expectation for this year, including the loss given default, is around 35 basis points. Now, let me pass it back to you, Rafa, to discuss the cost question further while I revisit the situation in Mexico.

Rafael Salinas, CFO

The blended inflation for our footprint that we are assuming for 2022 is 11.3%.

Onur Genc, CEO

Regarding the Mexican cost of risk, this year has also been challenging. As noted in our documentation, we recorded a cost of risk of 267 basis points. Typically, before COVID, our cost of risk was around 300 basis points, with a 10-year average of about 340 basis points. When analyzing the reasons for this improvement and considering the mix effect of different portfolios, we see positive results, particularly in credit cards and consumer segments in Mexico. Our performance is also improving due to enhanced information, data, modeling, and processes. We have invested significantly in collection infrastructure and processes in Mexico over the past three years, even during COVID. Consequently, the improvement from 340 over the last decade to 300 just before COVID and now to 267 this year reflects structural enhancements within our bank that are likely to persist. Therefore, we are guiding for a cost of risk of less than 300. Independently of market conditions and macroeconomic factors, we are confident in achieving these numbers, and the start of the year is reaffirming this outlook.

Operator, Operator

The final question comes from Pamela Zuluaga at Credit Suisse.

Pamela Zuluaga, Analyst

I have 1 regarding the next-gen EU funds that you were mentioning before, possibly translating into higher loan growth in Spain. Do you have a clear idea of the role banks are playing in the deployment of these funds? And if so, can you give some details on the evolution of the loan mix into support? Would there be some margin compression if there is a collaboration between the banks and the government? Or if alternatively, most of the activity we expect in Spain will come continuing growth in the consumer segment, do you see some margin pressures from high competition there? And then as a follow-up on something that you were saying before in the ICO loans, other peers have granted extensions to the grace period on these loans? Do you anticipate granting further extensions and potentially delaying even further any write-backs related to that COVID overlay?

Onur Genc, CEO

Thank you, Pamela. We are open to collaborating with the government in managing and distributing next-generation EU funds to stimulate the economy. We have launched various products, including advanced loan factoring to support the subsidized aspects of this initiative. We are actively working with the government on this. Regarding the impact, our BBVA Research team is forecasting a 1 percentage point contribution to GDP growth from the next-generation EU in 2022, and a 1.5 percentage point boost in GDP growth specifically for Spain due to these funds. Overall, this will positively affect the economic landscape. We have also analyzed which sectors will benefit, the types of companies involved, the subsidy levels, and the additional financing needs of these clients. We anticipate an annual increase of 8% in what we term new loan production in the Commercial and SME segments arising from these programs. This will translate to an increase of 1% to 1.5% in loan balances in the Commercial and SME sectors. This is favorable for us. Concerning potential extensions on ICO loans, there may be an additional six months because the current nonpayment periods are set to expire in the second and third quarters of this year. While there could be a minor extension, I don't see it as a necessity and expect things to return to normal as scheduled. However, if there is a slight extension of three to six months, I wouldn’t completely dismiss that possibility. Beyond that, I don’t foresee any further extensions or new nonpayment periods being required, as the portfolio is performing well.

Operator, Operator

Thank you. So thank you for all your questions. And let me remind you that the entire IR team will be available to answer any questions you might have. Thank you very much for attending this call.

Onur Genc, CEO

Bye, bye, everyone. Bye, bye.