Earnings Call Transcript - BBVA Q1 2022

Operator, Operator

Good morning and welcome everyone to BBVA First Quarter 2022 Results Presentation. Thank you very much for your interest. I am joined today by Onur Genc, BBVA’s Chief Executive Officer, and Rafael Salinas, Group’s Chief Financial Officer. As in previous quarters, Onur will start reviewing the group figures followed by Rafa, who will go through the business results. Then, we will move straight to the live Q&A session. Now, I will turn it over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining BBVA’s first quarter ‘22 results audio webcast. Let’s jump into it. Starting with Slide #3, outstanding evolution in our view of our results this quarter, on the left hand side of the slide, you can see our net attributable profit evolution, the highest quarterly recurrent profits ever, reaching €1.651 billion. This is 60% above the results of the same quarter last year and 23% higher than the results of the fourth quarter of 2021. And as you can see, one of the highlights of this quarter is the fact that this is across the board, so we are seeing a positive evolution in all business units. And our earnings per share at the bottom of the page on the right hand side, these excellent results, bring our earnings per share up to €0.24. Let me also note on this page that on the right hand side of the slide, our strong capital ratio at 12.70%, well above our target range, as you all know, and well above our regulatory requirements. It has decreased by 5 basis points in the quarter, absorbing 10 basis points from the stake increase in Neon in Brazil and also considering the very strong quarterly loan growth of 4%, as we will be discussing in the next slides. Just one quick note on this, for comparison purposes, the figures for the 2021 first half, in terms of comparison, excludes non-recurring impacts, more specifically, the U.S. business sold to PNC and also the restructuring program in Spain. Moving now to Page #4, our tangible book value per share plus dividends closed at €6.93, a 12.6% increase year-over-year and 4.1% in the quarter. Regarding profitability, we have strongly improved on our profitability metrics, reaching an excellent 15.1% in ROE and 15.9% in return on tangible equity, ranking first in both metrics among our European peers. If you move to Slide #5, what stands out in terms of the key messages for the first quarter, very quickly. First, I want to highlight excellent core revenue evolution, 23.3% versus the first quarter of last year, supported by very strong loan growth in all countries and in all segments, 10.6% activity growth, loan balance growth at the group level versus the same period last year. Second, our leading efficiency metric, significantly improving to 40.7%, with positive jaws again, at the group level and across the board in all the countries. Third, we are also reporting the highest operating income in our history, growing an impressive 31.9% versus the first quarter of last year. Fourth, the cost of risk evolving better than expectations at 82 basis points. Fifth, as mentioned, our strong capital position. Finally, the outstanding progress in key areas of our strategy, reaching new record figures with 2.4 million customers acquired in just one quarter and €11 billion channeled into sustainable finance. Given all this, we are on the right path, in our view, to achieve the ambitious long-term targets that we set for ourselves and announced back in November at our Investor Day. Moving to Slide #6, I am not going to dwell too much on this page, but you see the summarized P&L here. Focusing on the year-over-year comparison with the first quarter of last year, the second column from the left, you can clearly identify the very positive evolution in all the P&L lines. I would highlight again the outstanding 31.9% increase in operating income, leading to an excellent net attributable profit in constant euros, a 68% growth in profits. In terms of the quarterly evolution versus the fourth quarter of 2021, the second column from the right is an excellent performance with operating income growing 25%. Moving to the next page, Slide #7, some insight into the quarterly revenues breakdown, once again, one of the clear highlights of the quarter. Our net interest income increased strongly, 26.3% versus last year and 6.9% compared to last quarter, especially boosted by strong activity growth, which we will discuss in a second. Next, the positive evolution of net fees and commissions, there is some seasonality here, but still a very positive evolution across the board, increasing 14.1% year-on-year and almost aligned with last quarter’s record figure. It was the record figure last quarter. Also, excellent performance of the net trading income in the quarter growing 46.3%, a figure even higher than the exceptional quarter that we had a year ago. All in all, again, very strong performance in gross income, 21.3% growth versus the same period last year and double-digit growth, 11% versus last quarter. In Slide #8, I mentioned this very briefly verbally before, but this page illustrates how the continued new loan production recovery is translating into strong loan balance growth across all the countries of our footprint and also, in all segments, both retail and wholesale. In total, activity growth has been accelerating quarter-over-quarter, reaching a 10.6% growth versus the same period last year, with very positive implications for NII and fee income. With very positive implications also going forward, we will be benefiting from this in the coming quarters. On the country pages, one of the key highlights also is that you will see that this growth is concentrated in the most profitable, highest return segments. Again, we will talk about them when we talk about the countries. Slide #9 presents a forward-looking perspective on margins, with very positive news here as well. As you can see on the left hand side of the page, we have witnessed a sizable increase in our main reference rates, with the EURIBOR reaching positive levels and the TIIE 28 in Mexico, very important for us as well, increasing by more than 100 basis points year-to-date. The right-hand side illustrates the very positive implications of this new environment on NII. Slide #10. We continue showing positive jaws this quarter, again, not only at the group level, but also across the board in all geographies, thanks to our strong gross income growth and with costs growing below the blended inflation of our footprint. In the middle of the page, you can see how our efficiency ratio is evolving, already the best compared with our European peers at the end of 2021, and it has now improved even further to 40.7%, the best figures over the past 10 years for us as well, independent of the benchmarking. In Slide #11, risk indicators are evolving better than expectations, which is supported by good performance of total impairments in the quarter, mainly explained by the underlying very positive evolution of the risk performance, lower NPL entries, and higher recoveries. Cost of risk closes at 82 basis points, comparing positively with the 93 basis points recorded in 2021. Under this heading, I should also highlight that regarding the Russia-Ukraine war, our direct exposure to Russia and Ukraine is very limited and immaterial. However, we will be monitoring closely all the indirect impacts, especially through commodity prices through the confidence chain and everything. In this uncertain environment, we still maintain our 2022 cost of risk guidance of around 100 basis points. In terms of the rest of the asset quality indicators, there is a very positive picture there as well. NPL decreased to 3.9% and our coverage ratio improved to 76%. On capital, our CET1 fully loaded as of March 12, ‘22 stands at 12.70%, on Slide 12. On a quarterly basis, the ratio has slightly decreased by 5 basis points, but we have absorbed the capital consumption associated with our investment in the Brazilian Neon, which was 10 basis points. In the waterfall breakdown of the change, first, our results generation contributed 52 basis points to the ratio. Second, the dividend accrual at 50% payout. This is a change from last year, partly due to our improved payout ratio. According to the ECB mechanism, we must take the upper part of our internal policy to be adjusted with the final payout at the end of the year, and we are taking a 50% payout in this calculation. Coupled with the AT1 coupon payments, these are detracting 29 basis points. Third, in the waterfall, 17 basis points from RWAs due to the strong credit dynamism, as we discussed before. Let me note here that approximately, 25 basis points are coming from activity increase. This has been partially offset by the release of the impact from the market risk-related RWA increase we experienced in the fourth quarter ‘21 due to the volatility increase in Turkey, which we have already anticipated and discussed in the last quarterly presentation. So, 17 basis points from RWAs. Lastly, the bucket of others accounted for 1 basis point, which includes 7 basis points market-related impacts mainly due to the mark-to-market of health to collect and sale portfolios, almost compensated by minority interests. Slide #13 is about new customer acquisition. I always love this page. The healthiest way in our view of growing our balance sheet is through growing our franchise. I’m very happy to see that we continue to beat new records each quarter. Our relentless focus on franchise growth has allowed us to acquire 2.4 million new clients in the first quarter. The share of those acquired through digital channels, which we believe is a competitive advantage for BBVA, is also consistently increasing. From 6% in the first quarter ‘17, we have increased digital acquisition percentage to 57% in the first quarter of 2022. Slide #14. As we have mentioned in multiple locations, we have discussed this in our Investor Day as part of our strategy; we are investing in innovation and disruption as enablers for our growth. On one hand, entering new and attractive markets through digital is important to us. Our investments in the UK, in Europe, and our latest investment in Brazil, as we just discussed together with our organic initiatives, like in Italy, forms a component of this strategy. We are also investing in disruption through venture capital. We have been very successful in this with Propel and Sinovation. Now, we are extending our scope beyond fintech to other strategic verticals such as decarbonization and high-growth companies in our footprint as well as DeFi digital assets. We believe that these investments bring better capabilities to the group and create strategic value beyond pure financial investment. Moving on to Slide #15, we continue to surpass our sustainable financing pledge. We have already mobilized €97 billion in sustainable financing as part of our revised pledge of €200 billion to be achieved by 2025. In this first quarter alone, we achieved €11 billion, setting an all-time record here as well. On the right-hand side of the slide, you can also see how sustainability is a key growth business lever that we are already pulling, for example, through sustainability-linked products. In just one year, we have increased mobility financing by 2.5x and energy efficiency financing by 4x. Finally, Slide #16 discusses our long-term targets announced at Investor Day. To save time, I’m not going to go into each one of them, but I can say that we are very well positioned to achieve them all, as you can see on this slide. Now, for the business area update, Rafa.

Rafael Salinas, CFO

Thank you, Onur, and good morning, everyone. This quarter, we are glad to share with you very good results in all geographies, strong growth in activity, accelerating customer acquisition, and growing results, all thanks to the efforts of our teams across the board. Very positive returns above our expectations, reaching record results in Spain and Mexico, have led us to a positive guidance review in both countries, which we will see in the following slides. Let me begin with Spain. In Spain, we have experienced a quarter with very positive business dynamics combined with efficient management of the customer spread. The loan book is growing at 3.4% year-on-year, an encouraging signal after a long period of deleverage in this country. We continue focusing on the most profitable segments. The consumer lending portfolio is delivering almost double-digit growth at 9.6% year-on-year. We are also seeing very good performance in commercial segments, despite the typical seasonality of the first quarter. In those two segments, consumer and commercial, we continue gaining market share, with digital capabilities improving the SME business model, likely contributing to this good performance. In mortgages, new production remained very dynamic, almost offsetting the runoff of the portfolio. This gives us confidence with our guidance for 2022 of slight loan growth in Spain, with consumer lending expected to continue growing at high single digits. In line with activity, the profit and loss account has evolved positively. NII is almost flat compared to the previous year, affected by the downward repricing from the arrival of 2021. However, regarding the heading, I’d like to highlight the improvement in forward-looking expectations. The increase in rates will be a tailwind for NII, something we expect to see starting in the third quarter. In this sense, we have updated our NII guidance for 2022 to expect slight growth, more than compensating for the negative impact from the TLTRO. For 2023, the perspectives are even better. We also see very sound fee income, despite asset management fees being impacted in the first quarter from the negative market evolution. In addition to revenues, expenses are also progressing very positively, down 5.6% year-on-year, fully in line with our expectations, benefiting from savings arising from last year’s restructuring process. Therefore, we can see widening jaws and a significant improvement in the efficiency ratio this quarter, reaching 42.9%, a very sound figure. We maintain our guidance for ‘22, expecting expenses to decrease at mid-single-digit rates, with efficiency improving aligned with our long-term targets. Lastly, when we review the impairments line, positive underlying trends in asset quality are enabling us to show a cost of risk of 17 basis points this quarter. For 2022, we maintain our guidance of a cost of risk around 30 basis points, while awaiting more visibility in an uncertain economic environment. All in all, record profits in Spain reached €600 million, a level we haven’t seen since 2010 and representing 32% of the group’s total earnings. Moving to Mexico, we again report very strong results this quarter. We are seeing dynamism in activity and some loan growth across all segments. The loan book is growing at 8.9% year-on-year. I’d like to remark on the outstanding performance in the consumer lending quarter, supported by our strong position in payroll runs. Additionally, our growth strategy in SMEs is clearly paying off with a 20% year-on-year growth in this portfolio, thanks to specialized sales force teams and an upgraded app. Lastly, wholesale portfolios are also recovering, showing a 0.42% growth on a quarterly basis. These trends have led us to improve our guidance for 2022; we now expect the loan portfolio in Mexico to grow at high single digits. Moving to the P&L, net profit has reached a record level of €777 million, supported by strong core revenue growth close to 20%. Net interest income has grown at 20% year-on-year, driven by activity growth and improvement in customer spreads. Based on these dynamics, we have updated our guidance for 2022, expecting NII to grow at double digits. We also see a strong performance in fee income, growing at 14% year-on-year and 6% on a quarterly basis, mainly driven by recovery of activity, especially in the credit cards and payments business, where we maintain a high market share above 30%. Expenses grew at 12.9% year-on-year, below gross income growth, partly due to base effects, given activity was subdued in the first part of 2021, and also due to inflationary pressures. However, jaws in Mexico are looking very positive, and we are currently operating at an outstanding 33.7% cost-to-income ratio. Looking ahead, we maintain our guidance for expenses to grow at mid-single digits, expecting positive jaws. Regarding asset quality, the NPL ratio has dropped below 3% this quarter, supported by good underlying trends, low entrance rates, and very sound levels of recoveries. The cost of risk stands at 284 basis points, in line with our guidance that remains in place. For ‘22, we expect the cost of risk to stand below 300 basis points. Moving to Turkey, as you all know, we are currently involved in the voluntary takeover bid process of a guaranteed minority interest. We recently announced an increase in the bid price to 15 Turkish lira per share. As of today, we have reached 60% ownership, breaching the 50% threshold, providing us with further options for managing our stake. Looking at the P&L, quarterly results are very strong in Turkey. The main highlights include NII evolution supported by Turkish lira loan growth across all segments, a customer spread improvement, and a higher contribution from the CPI linkers portfolio. Excellent performance is also represented by our leadership in payments and credit cards, along with very positive net trading income in the quarter, led by strong results from our Global Markets unit. Expenses were affected by salary revisions and inflationary pressures; however, efficiency remains at solid levels, improving almost 10 percentage points to 22.4% in the first quarter of 2022, thanks to our strong revenues. Finally, sound credit risk metrics, with a cost of risk at 100 basis points in the quarter, supported by limited underlying provisioning needs. In terms of South America business, this region is showing very positive trends in terms of activity and results contribution. The main highlights include healthy loan growth across segments and countries, averaging 11% year-on-year in the region; very strong core revenues supported by activity dynamics, strict pricing policies, and efficient excess liquidity management in a higher rate environment; expenses are growing in an inflationary context; however, efficiency is improving in the region, supported by gross income growth, which is showing positive jaws year-on-year. Contained impairments also support the P&L, reflecting healthy underlying trends in asset quality, with the cost of risk standing at 117 basis points. Overall, we achieved net income of €158 million in the region. In short, we report outstanding results across all our franchises driven by higher activity, increased customer numbers, core revenue growth, and very positive asset quality trends. Now, back to Onur who will highlight the main takeaways.

Onur Genc, CEO

You already summarized it very well, Rafa. But very quickly, on the last page, we have reported the highest quarterly results ever, driven by strong operating income and solid underlying risk performance. It’s also noteworthy to highlight the strong acceleration of profitable activity growth. Secondly, we have improved our guidance for 2022 in Spain and Mexico, as Rafa mentioned, given the better-than-expected operating trends in the revenue lines, which is very positive in my view. Thirdly, we continue with our commitment to accelerate profitable growth and value creation for our stakeholders. Our tangible book value per share plus dividends is growing at double digits, and we are achieving the highest profitability metrics among our European peers. Fourth, we have made significant progress in executing our strategy, reaching record figures in sustainable finance and customer acquisition while investing in disruption as part of our growth strategy. Lastly, we are on track to achieve our ambitious mid-term goals. I had to finish our speech in less than half an hour, so back to Patricia for the Q&A.

Operator, Operator

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

Operator, Operator

Of course. I will take our first question from Andrea Filtri of Mediobanca. Andrea, over to you.

Andrea Filtri, Analyst

While you are posting very strong results, we are experiencing a potential change in the macro scenario with high inflation and high energy prices at steady levels. What would you need to see on this front in your view to be forced to revise your growth prospects in a meaningful way? Additionally, could you elaborate on the positive one-offs in Spanish provisions and how you plan to use the remaining COVID overlay provisions? How does that work? Finally, just a quick update on the Turkish CPI linkers; where do they stand and do you expect Turkey to be a hyperinflation accounting country by this year? Thank you.

Onur Genc, CEO

Perfect, Andrea. Perhaps on the CPI linkers, I have the numbers in front of me, but maybe you could comment on their contribution, Rafa. But very quickly, regarding growth prospects in this high-inflation environment, the prospects are quite positive. As you can see in the country pages, if you refer to the breakdown of the year-over-year growth, we are seeing growth and we have not observed timidity in the markets yet regarding caution in terms of loans. I would highlight a few numbers: for example, in Mexico, one of our crucial portfolios, our credit card business is growing at 17.6% year-over-year. Another geography, in Spain, consumer lending is growing at 9.6%. So, we are expanding. In this new environment, we must be cautious, obviously, and closely monitor the situation. However, if we continue to acquire new customers and grow the franchise, it’s healthy growth, in our view. We continue to monitor risk parameters closely, and we do not see any deterioration in the risk parameters at present. To summarize, I believe that in the portfolio where we aim to grow, we are growing very robustly, and we expect that growth to continue in the coming months. That’s why we upgraded our loan growth guidance in Mexico and NII guidance in both countries. Regarding the Spanish provisions, were there any one-offs, and how do we evaluate this? In the figures this quarter, there is no one-off. The 17 basis points you are observing results from underlying risk parameters performing much better than we guided you. In the quarter, we experienced lower NPL entries and improved recoveries, which we appreciate. However, we will wait for more clarity in subsequent quarters. As you noted, there is significant uncertainty out there, and we prefer a cautious approach; that’s why we are not revising our cost of risk guidance yet. There are eco loans as you know; state-guaranteed loans in Spain. We must analyze their evolution in the upcoming quarters. We are a very conservative bank in these regards. Thus, we maintain our guidance for now, but we see very positive dynamics with respect to underlying risk parameters. After the Russia-Ukraine war, we anticipated some releases from our models; conversely, we added more to our macro adjustment. So, we didn’t release anything but rather fortified our buffer for prudential reasons. Hence, those numbers come out quite positively in my opinion. Regarding the CPI linkers and hyperinflation, maybe Rafa could take over.

Rafael Salinas, CFO

CPI linkers, the portfolio size in Turkey is roughly TRY40 billion, around €2.5 billion. The contribution this quarter has been €218 million, which is significantly higher than in the last quarter ‘21, by approximately €60 million. We are currently accruing those bonds at a 40% inflation rate.

Onur Genc, CEO

Regarding hyperinflation in Turkey, as you know, inflation has surged recently. The latest figure, as of March, is 61% inflation. As you can expect, the war in Ukraine adds to the uncertainty, driving up pressures in food and energy, particularly relevant for Turkey. Consequently, inflation has increased, and the expectation is that it will remain high for some time. In this scenario, we may apply hyperinflation accounting as early as the second quarter of 2022. It’s early to determine the potential initial impact because the number is dynamic; it depends on the evolution of different balance sheet items. We will spend the second quarter to analyze the moving parts, and hopefully, come up with a clearer number to guide you in our next quarterly call. Analogous to other countries where BBVA already applies hyperinflationary accounting, we typically observe a positive impact on capital and tangible book value from the reevaluation of non-monetary assets, along with only a limited contribution to P&L in the first year of implementation. Once again, we will monitor the situation closely, and I will update you in the upcoming quarters. Additionally, I will mention that we have added around €200 million for the group in macro overlays.

Andrea Filtri, Analyst

Thank you.

Rafael Salinas, CFO

To be precise, €190 million.

Onur Genc, CEO

€190 million, to be precise, as Rafa mentioned.

Operator, Operator

Thank you. Next question, please.

Operator, Operator

We will take our next question from Maksym Mishyn of JB Capital. Maksym, over to you.

Maksym Mishyn, Analyst

Good morning. Thank you for the presentation and for taking my questions. I have two questions. My first is on Spain, and I was wondering if you could explain the growth in the corporate loan segment. You’ve done better than the sector, and I was wondering what the reason for this is. A small follow-up on eco loans: do you know if any of the grace period eco loans are maturing? What trends do you see there? My second question is on capital. If we assume a full pickup of guarantee minorities in the tender offer, you will still have close to 35 basis points of excess over the higher end of the range. How could we think of potential deployment? Could you please update us on any headwinds for 2022 that you expect for capital? Thank you.

Onur Genc, CEO

Regarding corporate loans in Spain, growing better than the sector, I heard some issues on the line, but if that's the question. We are gaining market share and growing nicely. As you may have seen in the presentation, our commercial loans grew 13.9%. That's an impressive figure; 14% growth in Spain is excellent. The reasoning behind this growth is that we've been focusing on certain clients where we previously had low wallet share. About a year ago, we launched a targeted program to identify clients we aimed to grow with and revised our risk appetite accordingly. I believe we are now seeing results reflected in our numbers. For eco loans, we forecast that, including lines that may not be used, our total eco extension of credit is around €21 billion. About €13 billion was utilized since those lines were granted. Currently, roughly €4 billion to €5 billion is part of the non-payment period category. We are closely monitoring this portfolio, and we are observing very positive dynamics, including clients recovering strongly post-COVID, which provides reassurance. Regarding any grace period requests, we did not receive significant demand for additional extensions, demonstrating the resilience of that portfolio. On the matters of excess capital, I reiterate that we view capital as a scarce resource; many initiatives compete for it, including M&A or growth within existing markets. Every loan we extend consumes capital. If we can introduce initiatives that deliver excellent returns, we will do so. If not, our alternatives are either share buybacks or dividends to return capital to shareholders. We evaluate all initiatives based on their potential returns and make decisions accordingly. I would emphasize that we will compare all potential initiatives to determine which creates the most value for shareholders.

Operator, Operator

Thank you, Maksym. Next question please.

Operator, Operator

Our next question comes from Alvaro Serrano of Morgan Stanley. Alvaro, over to you.

Alvaro Serrano, Analyst

Thanks. Good morning. Thanks for taking my questions. I’ve got two questions based on some of the comments on the call. The first one in Mexico; obviously, a very strong performance. With that performance, I wondered about the updated guidance for double-digit NII growth, which you basically achieved in Q1 already. If I annualize Q1, I believe, I am calculating around plus 15%. So I just want to clarify what you mean by double-digit growth or if there might be one-offs? What about sequential performance in Mexico? The second point is on Turkey. Onur, you mentioned in the outer years that the hyperinflation impact would be lower; is that because inflation typically decreases, or is there a mechanical reason? This uncertainty could generate added volatility in the P&L, so understanding this context is important. Thank you.

Onur Genc, CEO

Very good. Alvaro, thanks for the questions. Regarding the double-digit growth, I encourage your interpretation of what double-digit means. We take this guidance document seriously. As you mentioned, I am seeing very positive dynamics in Mexico; the numbers on the pages highlight the growth of 17.6% in credit cards, 8.5% in consumer lending, and 19.7% in SMEs. These are impressive, high-return portfolio figures, and I expect to see continued benefits in the upcoming quarters. Although we have seen positive outcomes in Q1, I anticipate even better news ahead; that’s why we are upgrading our guidance. Double-digit growth means what it states, but I will leave it up to your interpretation. On the second question regarding Turkey, your comments are astute. In terms of P&L dynamics, we are generally positive about the outlook in Turkey. In short, if we apply hyperinflationary accounting, this may occur as early as the second quarter. However, this move can significantly change the accounts. We are already applying hyperinflation accounting in two other countries. Typically, the first year of implementation may yield limited contributions to P&L while showing a positive impact on capital and tangible book value. The P&L still reflects a different overall picture during that time. I would mention again, the underlying fundamentals in Turkey are strong, creating a positive sentiment for value generation. We are committed to progress and will inform you of expectations in the months to come. We will update you regularly on the relevant insights.

Operator, Operator

Thank you, Alvaro. Next question, please.

Operator, Operator

We will take our next question from Ignacio Ulargui of BNP Paribas. Ignacio, over to you.

Ignacio Ulargui, Analyst

Thank you. Good morning. Thanks for taking my questions and for the presentation. I just have two questions. One on Mexico: I am interested in the success of the bank in high-earning portfolios like credit cards, SMEs, and consumer. Is there a limit for you to gain market share in this space? The second question is: Do you foresee any potential restrictions for growth outside of Mexico? Specifically, could capital become a constraint for growth in Mexico, South America, or Turkey at some point? Thank you.

Onur Genc, CEO

I will address your second query first. Is there a capital constraint on growth in Mexico? No, absolutely not. We maintain a micro-capital planning approach; every loan we extend, regardless of segment or sector, is evaluated on a client-by-client basis. For the rest of our approach, we look at portfolios and enforce a minimum threshold for pricing that creates organic capital. If we are growing in these portfolios, we will consistently generate more organic capital, which is justified. In this context, I do not foresee any issues. Regarding limits to growth in Mexico, I don’t see constraints. I’ve expressed before that our franchise in Mexico is outstanding. When visiting, I frequently return impressed by the level of talent and the robustness of our brand. Therefore, for us, the issue is not merely market share growth; it’s how banks can contribute to the country’s growth and facilitate bbankarization efforts. Banking debt over GDP in Mexico is only 29%, the lowest in Latin America, compared to 70% in Brazil and even higher in Colombia and Guatemala. We should all strive to expand our books to support this process. There should not be any limitations on growth within this context, and we are doing an excellent job. Customer satisfaction is another focus; we are tracking an NPS of around 60 in Mexico with the second-best competitor at approximately 30. If customers are satisfied, if our franchise is healthy, and if the bankarization process is necessary, I foresee ample growth opportunities.

Operator, Operator

Thank you, Ignacio. Next question, please.

Operator, Operator

Our next question comes from Benjamin Toms of RBC. Benjamin, over to you.

Benjamin Toms, Analyst

Good morning, guys. Thank you for taking my questions. Firstly, regarding Spain, you announced earlier this month the buyback of your Spanish branches. Can you talk through the immediate benefits of this transaction once completed? Additionally, what longer-term strategic advantages do you anticipate from it? Secondly, on Mexico, to follow up on loan growth, did the Citibanamex situation contribute to gaining market share in the region? Can you provide more details regarding interest in that asset?

Onur Genc, CEO

The transaction concerns the share buyback; Rafa, let’s let you comment on the details.

Rafael Salinas, CFO

The branch buyback transaction pertains principally to a positive NPV project. As I mentioned previously, we evaluate value creation; if it is a project with a positive NPV, we execute. The financial motivation is clear. Strategically, owning those branches will provide us with operational flexibility; we can sell or lease if we choose not to use a location. This ownership gives us options, unlike merely subletting a leased property. In terms of market competition, I believe our competitive environment benefits from having fewer competitors overall.

Operator, Operator

Thank you, Benjamin. Next question, please.

Operator, Operator

Our next question comes from Sofie Peterzens of JPMorgan. Sofie, please go ahead.

Sofie Peterzens, Analyst

Hi, it’s Sofie from JPMorgan. I was just wondering if you could talk about the NII or the assumptions in your new rate sensitivity guidance for Spain, 15% to 20%. What do you assume in terms of deposit data and pass-through regarding this? Also, for your revised guidance for slight NII growth in 2022, could you remind us of your TLTRO assumptions? Do you still expect TLTRO to fall off in the third quarter? That’s my first question. My second question concerns growth opportunities; last year, you launched your digital bank in Italy and now the Neon bank in Brazil. Can you discuss the performance and potential opportunities for these ventures?

Onur Genc, CEO

On rate sensitivity, I will address your point on TLTRO and NII dynamics. We directed this to you, but Rafa will provide further insight on NII in relation to TLTRO. As for our expectations on rate sensitivity, the deposit betas are reflected until rate increases are recorded, primarily driven by our significant volume of demand deposits. We hold approximately €190 billion in our euro balance sheet consisting of demand deposits and only €16 billion in time deposits. Given these dynamics, we have modeled our projections, which you can observe in the 15% to 20% NII increase segment. Rafa, perhaps you can discuss NII and TLTRO.

Rafael Salinas, CFO

Regarding NII, our projections are influenced by the evolution of rates that the market indicates. For TLTRO, we basically project that it will not be renewed, leading to maturities. We have €7 billion maturing in December of this year, another €7 billion in March next year, and €21 billion in June of ‘23. We are working on all these assumptions to ensure they reflect the reality we anticipate.

Sofie Peterzens, Analyst

Perfect. Thank you.

Operator, Operator

Thank you, Sofie. Next question, please.

Operator, Operator

We will take our next question from Carlos Peixoto of CaixaBank. Carlos, over to you.

Carlos Peixoto, Analyst

Hi, good morning. Thank you for taking my call. My first question will be on capital, specifically, on the capital bridge. In the previous quarter, I believe you mentioned that there were roughly 10 basis points to 15 basis points of market positions that you expected to revert or impact this quarter. Was this reflected in the current market-related impacts? Secondly, on Turkey, do you maintain your guidance on cost of risk considering the local currency situation, inflation, and the war in Ukraine?

Onur Genc, CEO

The impact we previously anticipated has occurred this quarter; the 15 basis points of recovery in the last quarter represented a reversal of previous impacts. We are witnessing an increase in RWAs due to our 4% growth in activity. If I remember correctly from last quarter, we addressed about 10-15 basis points of market risks; this quarter, we observed an 8 basis points recovery. We anticipated further RWAs due to credit, but we managed to counteract on that front. On Turkey and cost of risk, we are sticking to our guidance. We are not seeing pressures on our numbers.

Operator, Operator

Thank you, Carlos. Next question, please.

Operator, Operator

We will now move over to Stefan Nedialkov of Citigroup. Stefan, over to you.

Stefan Nedialkov, Analyst

Hi guys. Good morning. I have two types of questions. The first one is on Turkey, and the second one is on costs. On Turkey, Onur, trying to understand your NPV calculations concerning your acquisitions and divestments. Given the favorable FX, inflation remains around 60%, so if your profits grow with inflation, how do you integrate FX and inflation into your NPV calculations? Supporting this question: do you hedge any guaranteed book value interests apart from excess capital? Now turning to costs, do you keep the same guidance regarding costs growing below the footprint inflation you pointed out around 11%?

Onur Genc, CEO

Very good questions. Rafa, you handle the details around costs; I'll address what I can about Turkey. We take FX fluctuations and inflation volatility into account within our valuation metrics. We are one of few banks that target tangible book value per share plus dividends as our strategic goal, reflecting various dynamics, including FX impacts. Our commitment during the Investor Day was impressive; we strive for a 9% return that holds merit amidst numerous challenges like FX, interest rates, and capital fluctuations. In this context, we are achieving favorable dynamics; if the economy allows, we will generate value for shareholders. Now, regarding your query about hedging, we do hedge 60% to 80% of our excess capital, which provides us with a level of protection against currency volatility.

Rafael Salinas, CFO

On the cost front, our guidance remains for costs to grow below inflation. From last quarter, the average inflation rate in our footprint has been approximately 10.3% year-on-year, and the cost increase has been held at 8.5% year-on-year. Adjusting for variable compensation for 2021, we observed a growth rate of about 6%.

Operator, Operator

Thank you, Stefan. Next question, please.

Operator, Operator

We will take our last question from Britta Schmidt of Autonomous Research. Britta, over to you.

Britta Schmidt, Analyst

Yes. Hi there. Two quick questions. On the Mexican net interest income, could you break down the Q-on-Q movement between volumes, mix, and rates? Then, regarding the trading income this quarter, could you provide insight into what’s driven that performance and offer color on the outlook, specifically regarding market impacts versus customer business?

Onur Genc, CEO

Thank you, Britta. Regarding Mexican NII growth, although we mentioned the upgrade of our guidance, we note that we expect higher loan growth as NII increases. We anticipate high-single digit growth now instead of previous mid-single digit expectations. The margin growth exceeds loan growth reflective of improvements in both. The detailed breakdown will involve your assumptions and projections based on those figures. As for trading income, Rafa will provide insights.

Rafael Salinas, CFO

On the trading income side, the strong performance is driven by robust results from our global markets activities related to client trading. At the corporate level, we experienced counterbalancing market impacts impacting our FX exposure; this incurred a negative impact of €49 million this quarter.

Operator, Operator

Thank you, Britta. We will conclude our question session. Thank you all for your participation. We appreciate the insightful questions. If you have further inquiries, our IR team is available for follow-up. Thank you.