Earnings Call Transcript - BBVA Q3 2022

Operator, Operator

Good morning, and welcome everyone to the BBVA Third Quarter 2022 Results Presentation. Thank you very much for your interest. I'm joined today by Onur Genc, BBVA CEO, and Rafael Salinas, Group CFO. As in previous quarters, Onur will start reviewing the group figures, followed by Rafa who will go through the business units results. Then we will move straight to the Q&A session. And now I will turn it over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning, everyone. Welcome and thank you for joining our third quarter audio webcast. Let's get started with slide number three. On the left side of the slide, you can see our net attributable profit, with recurrent net attributable profit at €1.841 billion. We consider this a very strong result, achieving the highest quarterly results ever, which is 31% higher than the same quarter last year. Additionally, this figure is significantly higher compared to the last five years' average, which is around €1.2 billion. As a result, our earnings per share have risen to €0.29, reflecting a 45% year-over-year growth, exceeding the growth rate of net attributable profit due to our share buyback program. The graph on the right side of the slide shows our capital ratio at 12.45%, above our target range and well above regulatory requirements. Moving to slide number four, I want to emphasize that this quarter marks the highest operating income ever for BBVA. We've achieved, for the first time, a quarterly record exceeding €4 billion, with a 16.6% increase from the previous quarter and outstanding year-over-year growth. On page five, our tangible book value per share, including dividends, shows notable growth, closing at €7.66 per share, a 20% increase year-over-year and a 3.2% increase in the quarter. This 20% year-over-year growth is one of the most impressive statistics in this presentation. Regarding profitability, our metrics continue to improve, reaching 15% in ROE and 15.7% in ROTE this quarter. With these figures, we remain one of the most profitable banks in Europe. Now, on slide six, what are the key highlights for the third quarter? First, we have seen outstanding core revenues growth of 38.4% year-over-year, driven by a strong 15% loan growth at the group level and improved customer spreads. Second, our leading efficiency ratio is improving, currently at 42.9% for the first nine months, consistently showing positive jaws. Third, we are reporting the highest quarterly operating income ever. Fourth, the cost of risk stands at 86 basis points year-to-date, below both 2021 and pre-pandemic levels, indicating strong asset quality trends. Fifth, our capital position is comfortably above our target range. Finally, there has been significant progress in key areas of our strategy, achieving record figures with 8.6 million customer acquisitions in the last nine months of 2022, of which 3.3 million were in the last quarter, and €124 billion in sustainable financing since 2018. Given this, we are on track to meet our ambitious long-term targets shared during our Investor Day in November 2021. Slide seven shows a very positive evolution in the P&L for the quarter across all lines, both in current and constant terms. The strength in our core revenues is evident, with net interest income growth of 45% year-over-year and fee growth of 17% in constant terms, contributing to our impressive operating income. Reported net attributable profit growth rates were 45% and 34%, respectively, both demonstrating positive trends. On slide eight, in the nine-month results, I again emphasize the strong core revenues evolution. This year and quarter have shown significant growth in core revenues, with a gross income increase of 21%, in conjunction with positive jaws and solid risk metrics, leading to a recurrent net attributable profit exceeding €5 billion in the first nine months of 2022, a figure we usually achieve in a full year. Slide nine provides insights into the quarterly revenue breakdown, which is a clear highlight of the quarter. Our net interest income increased significantly by 45% compared to last year and by 15.3% from the last quarter, driven by strong activity and improved customer spreads. Net fees and commissions also showed robust performance with a 17% year-on-year increase, maintaining high figures from the previous quarter despite market challenges impacting the asset management business. Additionally, we recorded very strong net trading income, with another quarter exceeding €500 million, reflecting favorable global market conditions. Overall, our gross income performance showcases a 34% year-over-year growth and a 13.9% increase from the last quarter. Observing this page, I appreciate the positive trend curves shown. Many figures exhibit quarter-over-quarter improvement, and we anticipate this trend to continue in the coming quarters. Moving to slide ten, we highlight our positive outlook, particularly concerning net interest income growth in Spain and Mexico. On the left side of the slide, strong loan growth is evident, having accelerated since last year to reach 4.6% for Spain and 15.1% for Mexico. In the middle, you can note the increase in customer spreads, especially in Spain, which saw significant growth during the third quarter. The trend in Spain for this quarter reached 1.85%, following recent interest rate hikes. We expect this to persist in coming quarters. In Mexico, lending yields have shown a consistent pattern of catching up with rising interest rates. On the right side of the slide, both countries demonstrate strong year-over-year NII growth, with Spain at 6.8% and Mexico at 29% in constant euros. Continuing to slide eleven, we observe positive jaws at the group level, thanks to solid gross income performance, which grew by 21.2% in the first nine months of the year compared to the same period in 2021. Meanwhile, costs have risen by 14.5%, remaining below the blended inflation rate in our footprint, consistent with our guidance. On the right, you see our efficiency ratio, the best among our European peers, now at 42.9%, down from 45.4% last year. Slide twelve highlights our solid asset quality trends, with impairments rising to €929 million this quarter, mainly due to growth activity in Mexico and a cautious approach in Turkey. Consequently, the cost of risk is at 86 basis points, a favorable comparison to the 93 basis points in 2021, especially in today's uncertain environment. This aligns with our prior expectations and guidance. To remind you, we aim to match the 2021 figure of 93 basis points, which is positively viewed against historical standards. Additionally, the remaining asset quality indicators show excellent trends, with NPL flow displaying strong improvement, particularly in the wholesale portfolio. Both recoveries and repayments are on a positive trajectory. The NPL balance has reduced to €15.2 billion, and the NPL ratio has decreased to 3.5%. This represents one of the most noteworthy achievements of the quarter, not only at the consolidated level but across all our key regions, showing a decline in NPL ratios. Amidst this favorable decrease in NPLs, we've raised our impairments, leading to an improved coverage ratio of 83%. Slide thirteen discusses capital, where our CET1 as of September is a robust 12.45%, well exceeding our SREP requirements. Following the waterfall, let's quickly highlight the progression. First, our results generation adds 56 basis points to the ratio. Second, dividend accrual at 50% payout according to ECB regulations deducts 30 basis points along with AT1 coupons. Third, we've seen a reduction of 16 basis points due to RWAs attributed to strong credit growth. Lastly, a bucket categorized as 'others' reduces the ratio by minus 10 basis points, primarily due to market impacts such as mark-to-market adjustments in FX and contributions from our share buyback program, alongside a positive adjustment in other comprehensive income due to net monetary losses in hyperinflationary economies like Turkey and Argentina. Page fourteen is one of my favorite slides, illustrating our continual focus on new customer acquisition. The healthiest growth for our balance sheet emanates from expanding our client franchise. We continuously set new records week after week. In the first nine months of 2022, we acquired 8.6 million new clients, up from 6.5 million in the same period last year, more than doubling our client acquisition over the past five years. Digital acquisition has grown from representing only 7% of total customer acquisitions to accounting for 54%, which drives these impressive numbers. Slide fifteen highlights our new customer engagement development in Spain, where over 70% of new clients have become primary clients within six months. New clients typically start with an account and debit card, but after six months, the number of products they acquire increases by 15% and diversifies with additional offerings such as payroll, direct debit, and lending products, which enhances both engagement and profitability. Slide sixteen signals another strategic priority, raising our sustainable business target to €300 billion by 2025, up from previously set goals of €100 billion and subsequently €200 billion. This positions us among global banking leaders in this commitment to sustainability. Since 2018, we have mobilized €124 billion, including over €13 billion in this quarter alone, sustaining our positive trajectory. On the right side of the page, we have recently published our commitment to portfolio alignment, now expanded to include the oil and gas sector as part of our sustainability goals, collaborating closely with clients on this initiative. Finally, slide seventeen summarizes our long-term targets outlined during the Investor Day. I won't go into detail for each one, but I can confidently state we are on the right track to achieve them all, as demonstrated on this slide. And now, for the business areas, Rafa?

Rafael Salinas, CFO

Thank you, Onur, and good morning everyone. As anticipated by Onur, we are very happy to share with you another excellent quarterly result across all geographies, supported by very sound operating trends. During the third quarter, we continued to deploy our strategy based on customer acquisition, strengthening our business relationships with them and gaining market share in the most profitable segments. Let's begin with Spain on Page 20. In Spain, we continue to see very robust business trends. As Onur mentioned, the loan book growth is accelerating to almost 5% year-on-year. Within our risk appetite, we continue to focus on the more profitable segments. Consumer loans are increasing by 8%, while lending to mid-sized companies is growing at close to 14%. In addition to activity trends, I want to highlight a strong trade provision profit evolution reaching double-digit growth of 10.2% year-on-year, primarily driven by solid dynamics in NII. Despite a lower contribution from TLTRO of minus €30 million in the quarter, NII still grows by 3% quarter-on-quarter thanks to activity improvement and an improved customer spread of 1.85%, which is a 14 basis point increase compared to previous quarters. As anticipated, we have started to see positive support from rates on NII, and we can reaffirm our guidance for NII growth around mid-single digits in 2022. This trend should accelerate into Q4 and further into 2023, as the loan portfolio continues to reprice, leading us to expect high-teens growth in NII next year. Second, our sound fee income is explained by positive activity trends, mainly in credit cards, payment services, and the insurance business. Lastly, thanks to our cost control efforts, expenses declined by 4.3% year-on-year, leading to an outstanding 46.4% cost-to-income ratio, improving by 350 basis points year-on-year. Finally, regarding asset quality, sound underlying trends remain, with lower NPL entries and higher recoveries leading to further improvements in both NPL and coverage ratios in the quarter. Slide 21 covers our performance in Mexico. There, we are delivering another outstanding set of results. We continue to see strong activity dynamics mainly driven by increased transactionality and heightened working capital needs, with balanced growth in both retail and wholesale segments throughout the year. In retail, loan growth is skewed towards the most profitable segments, namely consumer loans and credit cards, which grew by about 14% year-on-year, while the wholesale loan portfolio experienced growth above 15%. In terms of P&L, net profit reached a new all-time record, exceeding €1 billion once again, driven by strong core revenue growth above 20% year-on-year. NII increased close to 24% compared to the previous year, surpassing loan growth due to increased customer spreads, which rose by 57 basis points year-on-year, benefiting from higher yields on loans while maintaining well-contained deposit costs below 2%. This positive trend is due to our advantageous deposit mix, which is a clear competitive advantage borne from our payroll strategies and high market shares in transactionality. Based on these solid dynamics, we expect NII in 2022 to grow in the low 20s, clearly above the loan growth rate. Strong fee performance of 17% year-on-year stems from increased volumes in credit cards, fees from mutual funds, and investment banking activity. Overall, gross income growth continues to significantly outpace expense increases, leading to improved efficiency and a cost-to-income ratio of 31.9%. The increase in costs aligns with inflation levels but is also connected to our ongoing investments in the country. Lastly, we see robust asset quality trends, with low NPL entries and strong recovery rates supporting favorable evolution of the NPL ratio. The cost of risk remained stable around 260 basis points, with the coverage ratio increasing above 130%. Moving to slide 22, discussing Turkey. Net profit improved to €318 million in the quarter, mainly driven by an upswing in gross income. In terms of activity, TL loan growth remains relatively contained, growing below the annual inflation rate, while foreign currency loans decreased by 12.8% in line with our strategy to reduce exposure in that segment. In the P&L, NII growth is underpinned by activity in TL and higher customer spreads due to disciplined pricing policies. Fee evolution is primarily supported by positive trends in payment services and brokerage activities, while net trading income remained at a high level in the quarter, benefitting from derivatives trading and FX activity. The loss from the net monetary position has lessened as quarterly inflation trends have declined. On asset quality, the reduction in the NPL ratio is bolstered by strong underlying trends, with robust recoveries, especially in wholesale segments, and low NPL entries. The cost of risk has remained contained at around 90 basis points year-to-date, and we will continue to provision for the most FX-sensitive exposures to enhance our coverage levels to 86%. Overall, the contribution from our Turkish operations as of September has exceeded expectations, driven by strong underlying business trends and better-than-expected FX evolution. On slide 22, South America maintained solid revenue performance. NII is robust given the higher rates and growth in activity, favoring the most profitable segments like consumer loans and credit cards, alongside some fee growth instigated by activity dynamism across the board. Despite inflationary pressures, positive jaws persist while efficiency continues to improve. Risk indicators in the region, including NPL and coverage, remained stable in the quarter, with the cost of risk sustaining low levels around 140 basis points. Overall, net profit in the region surpasses €600 million in the first nine months of the year, effectively doubling results from last year. Now back to Onur to highlight the main takeaways.

Onur Genc, CEO

Thank you, Rafa. To summarize, the group's results continue to exhibit a positive trend over recent quarters. For another quarter, we have reported, in our view, exceptionally strong results. Second, we see excellent evolution in core revenues, mainly driven by strong activity and improved customer spreads. We consistently maintain one of the highest profitability metrics among our European peers, with RoTE at 15.7%. Third, we have made significant strides in executing our strategy, achieving record figures in digitalization, customer acquisition, and sustainability. Lastly, we are on track to achieve our ambitious long-term goals, as indicated in one of the pages we shared with you. Now back to Patricia for the Q&A. We are committed to metrics and KPI orientation; we had aimed to finish our presentation in 25 minutes and have saved four minutes, achieving that this quarter. So, Patricia, could you please proceed with the questions?

Operator, Operator

Okay. Thank you, Onur. We are now ready to start with the Q&A. So first question, please.

Operator, Operator

Thank you. Our first question comes from Ignacio Ulargui from BNP Paribas. Your line is open.

Ignacio Ulargui, Analyst

Thanks very much. Thanks for taking my questions. I have two questions. One on Mexico and the outlook for lending growth and the strategy of the bank. I mean, we are – I'm personally surprised quarter after quarter by the performance of the bank. I just wanted to get a sense of what will be the ceiling of the bank in terms of profitability and NII growth. The second question is regarding the TLTRO I. Following the announcement from the ECB yesterday, what would be the strategy that you have for the TLTRO, and what could be the implications for that on NII? And whether the high-teens guidance already assumes a full repayment of the TLTRO? Thank you.

Onur Genc, CEO

Very good. Thank you, Ignacio, for the two questions. Regarding Mexico, we have maintained a strong franchise there, and given the low bankarization in the country, our growth prospects remain robust. I will repeat this quarter after quarter, but the banking sector loans divided by GDP is only 38% in Mexico. In comparison, it's 55% in Colombia, 70% in Brazil, and 120% in Chile. Over the last 15 years, the growth in the Mexican economy has averaged lower than 2%, while we have comfortably achieved an average growth of 8.5% year-over-year CAGR. Given the low bankarization level in the country, there is substantial potential for healthy growth. Our new loan production in the third quarter was actually higher than in the second quarter, and our NPL numbers show positive trends, as they are declining while the cost of risk remains stable. To cut a long story short, I believe that the trends we see in loan growth will continue, although we are watching the environment closely as this is a cycle. Now regarding TLTRO, the implication year-over-year for 2022 and 2023 is projected at around €70 million. With new changes announced recently, starting November 23, there will be an additional impact of €170 million in 2023 versus 2022. The total combined change resulting from the alterations in TLTRO and previous tiering measures is going to be €240 million. Despite this, we stand by our high-teens guidance for next year as it was expected and already incorporated into the numbers. Regarding our strategy for TLTRO, it became economically neutral after the recent changes. While it helps with liquidity ratios, we don't have a pressing need for it; thus, we might keep it until mandatory payment periods as a liquidity buffer. Anything else you want to add about TLTRO, Rafa?

Rafael Salinas, CFO

No.

Operator, Operator

Thank you, Onur. Next question, please.

Operator, Operator

We now turn to Alvaro Serrano from Morgan Stanley. Your line is open.

Alvaro Serrano, Analyst

Hi. Thanks. It's really two follow-ups on the previous questions. In terms of the high-teens NII guidance for next year, considering your sensitivity was I think it was 15% to 20% for 100 basis points. We've now seen 200 basis points rate hikes, and while it looks like a good number, it could potentially be higher. Can you walk us through some of the assumptions in that number? The second question is on Mexico. Again, similarly I think you've said low-20s growth. But if I just take your Q3 number and assume flat in Q4, I get to 24% year-on-year growth. But Onur, I think you just said there’s more to go in Mexico. So, I’m trying to assess how conservative you’re being in both Spain and Mexico. Thanks.

Onur Genc, CEO

What you said at the end is certainly a fair observation, and thank you for that feedback. We aim to deliver what we promise, and I fully acknowledge we may be a bit conservative with our guidance. The high-teens number incorporates some conservative assumptions, including that 35% of demand deposits will transition to time deposits, with a deposit beta of 75%. We prefer to deliver on realistic expectations rather than mislead you. That noted, there is potential upside from the performance metrics we've discussed. With reference to Mexico, I want to reiterate that we maintain a robust outlook regarding loan growth; yet, we must remain vigilant about the economic cycle. Although we aren’t currently providing specific guidance for 2023, we will clarify this in the next quarter.

Operator, Operator

Thank you, Onur. Next question, please.

Operator, Operator

Our next question comes from Sofie Peterzens from JPMorgan. Your line is open.

Sofie Peterzens, Analyst

Yes. Hi. This is Sofie from JPMorgan. Sorry for going back to the NII question in Spain. But you've now guided for around 15% net interest income growth in Spain versus the previous guidance of 15% to 20%. Can you discuss a bit why you have slightly lowered the net interest income growth guidance, given the higher rates? The second question would be if you could remind us of your capital headwinds and when you expect these headwinds to come? And clearly, if you have any tailwinds that we should be aware of? Thank you.

Onur Genc, CEO

On the first question regarding interest rate guidance, we actually stick to our earlier assertions. However, some shifts have occurred; for instance, we used to state that our NII growth would increase by 15% to 20% for a 100 basis point interest rate hike. The first 200 basis point increase has occurred, and moving forward, the next 100 may yield slightly lower sensitivity. This is the only reason for the adjustment—nothing else. We are not currently observing significant pressure on deposits, reflecting ample liquidity in the system. Regarding capital headwinds, we have previously updated you during past quarters. The original estimate was around 35 basis points, then slightly above 35. We maintain the stance that the supervisory impact on capital will be lower than 35 basis points, although we expect that impact in the fourth quarter of this year, having communicated it previously.

Operator, Operator

Thank you, Onur. Next question, please.

Operator, Operator

We turn to Maks Mishyn from JB Capital. Your line is open.

Maks Mishyn, Analyst

Hi. Good morning. Thanks for the presentation and for taking my questions. I have two on loan book growth in Spain. The first is that you continue to grow strongly in corporate loans, so I was wondering what's the key driver—is it working capital or investment loans? The second is concerning mortgages. Your loan book is shrinking, while the sector is growing. Can you explain why you're deleveraging in mortgages? Thank you.

Onur Genc, CEO

Great questions, Maks. To tackle the first one, the primary driver is working capital loans needed due to inflation. Our corporate lending clients are requesting increased working capital, and we are here to support them. We are also gaining market share in this area. Now regarding mortgages, yes, we are intentionally shrinking our mortgage portfolio. We lost market share in new mortgage production because it was planned. We have seen a drop in our new production market share, which is publicly available data in Spain. At that time, the industry was extending long-term, fixed-rate loans at much lower rates than we considered appropriate, reflecting our risk appetite for our active portfolio. Therefore, we decided to withdraw from that market segment.

Operator, Operator

Thank you, Maks. Next question, please.

Operator, Operator

Our next question comes from Carlos Cobo from Societe General. Your line is open.

Carlos Cobo, Analyst

Hi. Good morning, and thank you for taking my questions. I have a couple and then just a quick clarification if you could. NII in Mexico, it's reminiscent of when rates were falling, and I remember that the bank was discussing a more resilient customer spread to falling interest rates. Now we are seeing somewhat the opposite. So, I'm wondering whether you expect the net interest margin to be sustainable, or do you foresee some catch-up in the cost of funding going forward? The second question relates to TLTRO III. Can you confirm what would have been the net interest income had you applied the same accounting method as your peers? Lastly, in terms of capital, you seem to have tightened control. Are the market volatility quarters affecting the capital ratio significantly? I'm curious if there’s a change in risk management or exposures to consider moving forward. Thank you.

Onur Genc, CEO

Thank you, Carlos. To clarify, regarding NII in Mexico, we have been clear from early on that our NII sensitivity to a 100 basis point hike is at 3.8%. If the interest rates were to decrease by 100 basis points, this would result in a small decrease in sensitivity of -3.1%. We do manage and adjust those sensitivities depending on market conditions. Regarding TLTRO, Rafa, perhaps you could take that question.

Rafael Salinas, CFO

Yes. On TLTRO, the expected impact for 2022 is around €170 million compared to 2021, which accounts for the changes announced. The overall impact due to changes in TLTRO and other measures amounts to about €240 million. As for the accounting, we have taken a more prudent approach by accruing expected contributions at lower rates, which assures greater consistency with our financial strategies.

Onur Genc, CEO

Perfect. Now regarding capital strategies, we haven’t altered our approaches. We have been able to generate organic capital while managing market volatility impacts. Given our strong historical performance, we consistently generate significant results, which translates positively into capital figures. These influences interplay and help buffer against market volatility. To sum it up, market impacts have been significant, but we also achieve great results, which is crucial for future planning.

Operator, Operator

Thank you, Carlos. Next question, please.

Operator, Operator

We turn to Pamela Zuluaga from Credit Suisse. Your line is open.

Pamela Zuluaga, Analyst

Hello, good morning. Thank you for taking my questions. I have two, and if I may one follow-up. The first one is on your profitability goals. You have achieved an ROTE of 15.7% this quarter, and as you mentioned, you still have the bulk of the rate hike benefit in Spain, which could be a strong catalyst for further topline growth. Are you considering reviewing your profitability targets, or are there specific headwinds you are concerned about, which is why you maintain your 15% ROTE goal? The second question is can you provide some insight on your overlays? Other peers have indicated they plan to continue building further overlay provisions in Q4; should we expect a similar increase? Finally, on Mexico, given the liability side of your balance sheet, we see time deposits growing close to demand deposits. Are you worried that higher rates may prompt further demand for expensive deposit funding? Could we possibly see a deceleration in NII growth for that country? Thank you.

Onur Genc, CEO

Rafa, do you want to address the profitability goal question?

Rafael Salinas, CFO

I will take that internally and see how it reflects publicly.

Onur Genc, CEO

Pamela, regarding our profitability targets, yes, we have stated our target at 14%, and now with an overachievement at 15.7%, we are indeed delivering good performance, but we will not continuously adjust goals as a reflection of strong performance. We will reassess after the year-end and communicate any changes at that time. Regarding provisions, we are anticipating normal model adjustments; however, we do not foresee large one-off changes unless macro parameters drastically shift. On NII in Mexico, we are very optimistic. We have an excellent franchise with substantial demand deposits. Our cost of funding advantage over others is approximately 100 basis points. Despite a surge in rates, our growth remains strong because of our competitive standing. Thus, NII growth should remain robust moving forward.

Operator, Operator

Thank you, Pamela. Next question, please.

Operator, Operator

We turn to Andrea Filtri from Mediobanca.

Andrea Filtri, Analyst

I'm trying to better understand your NII guidance assumptions. Can you elaborate on the deposit beta evolution in your guidance? I understood you're setting it at 75%. What’s the transition to 75%? What is the assumed ALCO size and contribution within your guidance? The second question is about fees. Could I have your outlook for Q4 Spanish fees? What performance fees did you book in Q4 of 2021? Lastly, could you repeat your guidance on Mexican NII? Thank you.

Onur Genc, CEO

Thank you for your questions. Rafa, could you help with the NII guidance assumptions regarding deposit beta?

Rafael Salinas, CFO

Certainly. Our underlying assumption in Spain is that around 30% to 40% of demand deposits will transition to time deposits, with a corresponding 75% pass-through of interest rate increases. As previously mentioned, we observe that rising rates usually have a diminishing sensitivity in our overall guidance, mainly due to base effects and the resulting convexity on the portfolios. Our sensitivity overall is expected to stabilize around 15%. For ALCO, we have an ALCO book in euro balance sheets around €30 billion, and an additional HQLA of €10 billion with a maturity of 0.6 years, which we plan to leverage in the next year. We haven’t dramatically increased our ALCO book; rather, we are waiting for market developments since there might be room for upside later.

Onur Genc, CEO

As introduced, the additional HQLA will likely be incorporated into the ALCO book as we approach market development. On Spanish fee income, success fees this year are marginal, as the market dynamics have subdued the revenue potential. Regarding guidance on Mexican NII, we typically refrain from issuing precise future guidance until our next quarterly call.

Operator, Operator

Thank you, Andrea. Next question, please.

Operator, Operator

Our next question comes from Ignacio Cerezo from UBS. Your line is open.

Ignacio Cerezo, Analyst

Yes. Hi, good morning, and thanks for the presentation. I have two questions. One on funding. Again, in Spain, looking at your loan-to-deposit ratio of 85%, it seems quite comfortable. How are you approaching deposit volumes in the coming quarters? Are you prepared to lose part of the deposits in a more competitive pricing environment, or do you prioritize liquidity over NII? How do you reconcile both? The second question relates to capital and dividends. You are currently accruing at 50%, which is higher than suggested. How should we consider dividends this year, given your improving capital levels and reduced regulatory headwinds? Is there any possibility of an increase in the coming years?

Onur Genc, CEO

Ignacio, thank you for those questions. We are actively optimizing our position and don't wish to face a trade-off between liquidity and NII. Our liquid assets exhibit approximately €110 billion collateral base, which we can use to fund ourselves if necessary—leading us to a comfortable liquidity position. This flexibility allows us to manage our deposit beta and avoid pressure to raise deposit pricing. Regarding dividends, we did increase our payout previously, raising it to 40% to 50%. The final decision will rest with the Board after year-end results are disclosed and planned accordingly. Our goal is maintaining a capital ratio of 11.5% to 12%. Should we exceed that threshold, especially substantially, we will take steps to generate value for shareholders, as we did with previous share buyback programs.

Operator, Operator

Thank you, Ignacio. Next question, please.

Operator, Operator

We turn to Britta Schmidt from Autonomous Research. Your line is open.

Britta Schmidt, Analyst

Yes, hi! Thank you. I've got a question on your LCR ratio. Post-TLTRO, what sort of buffer of 100% are you managing towards? Also, could you provide an update on the overlays connected to IFRS 9? Lastly, could you clarify the impact of the removal of the excess liquidity fee in Spain for this quarter?

Rafael Salinas, CFO

Currently, our LCR at the group level is 166%, while in the euro balance sheet, it's close to 200%, which is well above our maximum risk appetite. We aim for that to stabilize around 150%. With the new TLTRO conditions now being economically neutral, we'll adjust to that target. Presently, our liquidity levels remain very high. On the topic of IFRS 9 overlays that might arise, there's no predefined figure, but we've provided about €953 million in overlays, particularly focusing on segments we believe will see future risks, and I hope that answers your concern.

Onur Genc, CEO

To clarify regarding the liquidity fee removal, previously it was a quarterly charge of €26 million, which will now reduce to €10 million and will no longer be an issue moving forward.

Operator, Operator

Thank you, Britta. Next question, please.

Operator, Operator

We turn to Marta Sanchez Romero from Citi. Your line is open.

Marta Sanchez Romero, Analyst

Good morning. Thank you very much. I've got three follow-ups please. The first one is on the theoretical size of the ALCO portfolio in Spain, given your equity position there and your current accounts and deposits generally. Could you provide some indication of what this theoretical size might be? The second question is that since you've broken your tradition of not providing guidance for 2023 regarding NII in Spain, can we expect some soft indication on loan growth in Mexico? Is the 15% growth sustainable? Lastly, regarding your U.S. dollar position, given its increase—now at 19 basis points—have you considered changing your hedging strategy to isolate the dollar impact?

Onur Genc, CEO

Marta, regarding the ALCO portfolio, we prefer to maintain our conservative and cautious approach when detailing figures. However, we do have potential to expand our ALCO portfolio significantly. Usually, this depends heavily on upcoming market conditions. Notably, our HQLA book of €10 billion will soon begin maturing, providing a liquidity influx that will likely lead to an increase in the ALCO book size. As for Mexico, we are optimistic about loan growth, but prefer to wait until our next call before issuing specific figures. For the U.S. dollar position, I will turn it to Rafa for more detail.

Rafael Salinas, CFO

To address the U.S. dollar position, our short position has a natural hedge since our asset returns in hard currencies relate to dollars. This helps mitigate the negative sensitivity to the currency. As with other FX hedges, we can execute those through P&L, ensuring we actively manage that positioning and have indeed reduced sensitivities by over 25% throughout this year.

Operator, Operator

Thank you, Marta. Next question, please.

Operator, Operator

We turn to Carlos Peixoto from CaixaBank. Your line is open.

Carlos Peixoto, Analyst

Hi. Good morning. Carlos from CaixaBank. I have a couple of questions: regarding loan book growth, could you provide feedback on how you expect it to develop through Q4 and into next year? Additionally, do you foresee any possibility for provision overlays in some geographies in Q4? The second question concerns Turkey and the currency swaps with the central bank. What is the current exposure amount there? Thank you.

Onur Genc, CEO

To summarize how we foresee P&L progression, the upcoming quarters appear favorable, with positive trends in net interest income and customer spread improvements. In Q4, typically, we record contributions to a deposit insurance fund, but beyond this seasonality, we expect positive dynamics. As for provision adjustments, we plan incremental model adjustments based on macro developments, yet we do not foresee any major or extraordinary provisions unless there’s a significant shift in economic circumstances. Regarding Turkey's currency swaps, our current exposure is inline around $5.5 billion, which has decreased slightly from previous figures.

Operator, Operator

Okay. Thank you, Carlos. Next question, please?

Operator, Operator

Our final question comes from Fernando Gil de Santivañes from Bestinver. Your line is open.

Fernando Gil de Santivañes, Analyst

Hi. Thank you for taking my question. Just a quick follow-up on Mexico regarding the current competition trends and expectations. With Citibanamex nearing conclusion and competitors like Banorte and Santander indicating they will not continue, how do you foresee these developments impacting market share, given that you have also gained significant market share this year? I would appreciate your insights.

Onur Genc, CEO

Thank you, Fernando. As you noted, we gained approximately 52 basis points market share year-to-date in this quarter alone. We are growing steadily across various segments, such as SMEs and personal loans. Though competition will inevitably adjust, I believe our strategic positioning and our unique franchise present a considerable competitive edge. Our customer satisfaction levels and the brand power we possess contribute further to our stability. Our strategy focuses on maintaining and enhancing this franchise strength, regardless of competitive shifts, which we believe will help us continue to capture market share consistently.

Operator, Operator

So thank you, Fernando. This concludes the Q&A. We appreciate all your questions and interest. The entire IR team will be available to address any further inquiries you may have. Have a nice weekend. Thank you very much.