Banco Santander - Q2 2023
July 26, 2023
Transcript
Begoña Morenés. (Global Head of Investor Relations)
Good morning, every body, to Banco Santander's conference call to discuss our financial results for the first half of 2023. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I am joined here today by our CEO, Mr. Héctor Grisi, and our CFO, Mr. José Garcia-Cantera. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. If you would like to ask a question, please press Star five on your phone. With this, I will hand over to Mr. Grisi. Héctor, the floor is yours.
Héctor Grisi (CEO)
Thank you, Begoña. Good morning, everyone, and thank you for joining us. Let me share what we will focus on today. First, I'll talk about our half one results on the context of how we are progressing with the strategy we outlined our Investor Day. José will review our financial performance in greater detail. I'll conclude with a few closing remarks. Despite the challenges the financial system experienced at the beginning of the year, Q2 was another strong quarter for Santander, demonstrating the strength and resilience of our strategy and unique business model, even in times of market volatility. We delivered a record profit of EUR 2.7 billion, an increase of 14% compared with Q2 in 2022. That's +17% in constant euros.
In the first half of 2023, profit was EUR 5.2 billion, up 7%, supported by robust customer revenue growth. Revenue increased double-digits year-on-year, supported by all regions and Global businesses. Global and Network businesses are contributing around 40% of total group revenue. Our numbers of customers grew by 9 million year-on-year, taking the total to 164 million, and loans increased by 1% and deposits by 5%. The group continues progressing towards a simpler and more integrated model through One Transformation, the program that is accelerating our structural model change to drive efficiency improvement and growth in profitability. As a result, our efficiency ratio improved 1.3% points year-on-year to 44.2%, and our net operating income grew double-digits.
Our return on tangible equity, RoTE, rose 80 basis points year-on-year to 14.5%, while our earnings per shares improved 13% year-on-year, supported by greater profit and share buybacks. At the same time, our strong balance sheet, with solid and sound capital ratio, liquidity at comfortable levels, and robust credit quality, contributed to solid, profitable growth, value creation, and shareholder remuneration. These results allow us to deliver value creation in terms of TNAVps plus EPS year-on-year of 11%, of which represents an increase of more than EUR 6 billion in the first six months of the year. Moving on to the income statement, firstly, remember that as we usually do, we are presenting growth rates both in current euros and constant euros. This quarter, there was no material difference between them.
As I have just mentioned, profit increased in the first half, supported by, first of all, a strong line performance with all the regions and global businesses growing; costs in line with our expectations, growing 1% point below the rate of inflation; double-digit growth in net operating income to approximately EUR 16 billion, which demonstrates the strength of our results; and low loss provisions normalizing in line with our expectations. These trends resulted in our highest quarterly profit on record, 4% higher than on Q1, even after the following impacts net of taxes recorded in Q2. The SRF contribution of more than EUR 200 million, an additional Swiss mortgage provisions in Poland of EUR 140 million, and one-offs in Brazil of EUR 137 million. José will go into more detail on all of these points later on.
This was a great first half that makes us confident that we will deliver our 2023 targets. Good business dynamics are translating into double-digit revenue growth. Our efficiency ratio improved as a result of good cost control and revenue trends. Our cost of risk remains contained in line with our target of keeping it below 1.2% at year-end. CET1 was 12.2 after profitably growing our businesses organically and at a comfortable level, allowing us to accrue funds to meet our shareholders' remuneration targets of a 50% payout. Our RoTE also grew year-over-year to 14.5%, on track to reach our target, and would already be close to 15% if we don't annualize extraordinary banking tax on revenue earned in Spain.
As we announced at our Investor Day, we have entered into a new phase of value creation that will help us grow TNAVps per share plus DPS at a double digits or through the cycle. I'd like to spend a couple of minutes updating you on the progress of our transformation plan now that we are 6 months down the road from our Investor Day. We are transforming the bank in the right way because we are structurally changing our model to improve both cost and revenue. We are making great progress in the implementation of One Transformation, creating a common operating model and technology for our retail business across our entire footprint, to better serve our customers and to improve efficiency, and increase the size and profitability of our customer base. We are delivering across the three pillars of One Transformation.
In simplification, we already have reduced 5% our number of products, nearly 400 fewer products in 2023. We are progressing in our digital self-service model, increasing the availability of products and services in our digital channels, and reducing the use of our contact center by 17% just alone in the first quarter of 2023, compared with the same period last year. We are digitalizing the onboarding process end-to-end in Mexico. This initial pilot has resulted in a 36% growth in digital accounts per month compared to those in 2022. We have already captured around $70 million in savings so far in the U.S. from transformation and simplification initiatives.
As you can see on the slide, the initial efficiencies for One Transformation and the impact of our good sprint management in a context of higher interest rates, which our CFO will cover later in depth, have already contributed 85 basis points in efficiency improvements. Our global and network business keep continuing contributing to the group's profitability and have already delivered another 43 basis points. Multi-Latinas and Multi-Europeans, our initiatives to better serve our multinational corporates and SMEs through regional coverage model, are growing at a very high rates, with revenue increasing by more than 70% year-to-date. In asset management, we have progressed to enter the alternative business, starting to serve upper market and institutional segment, and has reached more than EUR 2 billion commitments already.
In payments, we have deployed Getnet in Portugal and Argentina in the first half, we expect to launch in latest in Chile in the second half. In auto, we're increasing managing OEMs and retail relationships globally, expanding our partnerships in Europe to LATAM and the U.S. We have recently onboarded new partners in the U.S., leveraged the existing agreements in Europe, which are expected to materialize in around EUR 4 billion of new business per year. We have also deployed a new pan-regional leasing platform in two markets, more countries will be added throughout 2023 and 2024. Finally, our global technology capabilities have already resulted in 36 basis points improvement in the efficiency ratio.
Our global approach to technology has allowed us to capture EUR 80 million in savings this year, mainly driven by, one, efficiencies from the recent development and deployment of Gravity in two countries, which has contributed with EUR 31 million in savings in the first half, and new global agreements with vendors, which represent around EUR 40 million in cost reduction year to date. The actions that we are beginning to carry out as a part of One Transformation, which we are expanding across the group, are starting to be reflected on cost and on operational efficiencies. As you can see on the slide, simplification has already driven significant improvements in our cost and revenue per active customer ratios.
The solid progress we are making with the process digitalization and automation to capture efficiencies enables us to spend less time on operations in branches and turn the branch network into a powerful sales and advisory channel. Portugal has already taken out most of the operational activities from the branches, freeing up branch employees so that they can spend more time supporting customers and commercial activities. We're extrapolating this to other of our banks. In only six months, through One Transformation, we have already reduced the number of operational FTEs per million customers by 3%. We are already deploying global tech platforms to improve customer experience, leverage economies of scale, and extend best practices. Open Digital Services, as we call it, ODS, our cutting-edge front-end platform, allows to deliver a best-in-class omnichannel experience to our customers.
At the same time, that Gravity, our award-winning core back-end platform, drives significant efficiencies versus mainframe technology. We have integrated both in the U.S., so we will operate it on an end-to-end cloud-based retail technology stack, core and omnichannel, which is already tested and will result in significant improvements in service quality and customer experience. Our Global and Network businesses continue to contribute to this new phase of value creation. In CIB, we continue growing strongly after record performance in 2022, beating the market. Our global presence has allowed us to grow at 24% year-over-year, well above the average of annual growth target of 10% for the period 2022-2025.
First of all, we can provide a one-stop shop service to our clients across all geographies, thereby capturing cross-border flows, and because we bring CIB products and services to our wealth, retail, and commercial clients across the group, and vice versa. Revenue related to these two concepts, which we call network revenue, grew 27% year on year to EUR 2 billion. Wealth management and insurance grew 25% year-on-year, well above our target, and this has been boosted by the benefits obtained from the Santander network effect. A fundamental part of our value proposition in private banking is our unique combination of local presence and local reach, a global reach.
Our customers can move and transact easily from one country to another. That's the reason why customers have EUR 50 billion in assets under management booked abroad, 10% higher than 1 year ago. Our payments business is also growing very strongly. Two years ago, we began to move our payments business onto scale global platforms. As of today, our payments hub platform already manages a significant part of all payments in the Eurozone. We are progressing in another key countries such as Brazil, Mexico, and the U.K. We are in the process of expanding our cards platform across the group, delivering real-time digital processing capabilities to our banks, accelerating our business growth, as well as generating operational synergies of around EUR 100 million per year during the next two years alone.
First delivery of the platform will be live in Brazil by the second half of 2023. In Auto, we continue to prioritize profitability over market share growth in a context of rising interest rates. Our Transformation plan, which is making us more, much more efficient and increasing contribution of our Global and Network businesses, is helping us reach our 2025 profitability targets across all regions and businesses. As I mentioned earlier, the group's ROTE rose 80 basis points year-over-year to 14.5%, and will be around 50% if we didn't annualize the extraordinary banking tax in Spain, which is in line with the group's targets for 2022, 2023 and 2025. José will now go in more detail to the group's first half performance.
Please, José.
José García-Cantera (CFO)
Thank you, Héctor, good morning, everyone. Tailwinds in Latin America, driven by growth in volumes and fees. Digital Consumer Bank benefited from asset repricing actions and gains on financial transactions due to FX hedges. We also saw a strong performance across businesses. The only exception was Auto, the result of lower leasing income in the U.S., which, as in previous quarters, was affected by an increase in the share of end of leased vehicles repurchased at the dealership. Revenue at the corporate center also improved, up nearly EUR 400 million due to higher liquidity buffer remuneration and a lower impact from FX hedging, which negatively affected revenue last year. Most of our revenue growth came from NII, which continued its upward trend, increasing 6% in the quarter alone, driven in particular by Europe.
We see upside potential for further growth in the coming quarters. First half, 2023 was 15% higher year-on-year in constant EUR, with positive sensitivity to raising rates, mainly in Europe and Mexico, and volume growth in Auto, North America, and South America, which more than offset negative interest rate sensitivity in Brazil, Chile, and Auto. In terms of profitability, we have improved our margins every quarter since the first quarter of 2021. We continue to actively manage our credit spreads to make the most of the higher interest rate environment. Gains on credit yields outweighed higher funding costs, thanks to our disciplined deposit remuneration strategy, adapted to each country's specific needs. In Europe, we are strictly managing deposit costs, especially in Spain and Portugal, where there is excess liquidity in the system and much lower credit demand.
The U.K. has a more competitive environment in line with our expectations. In LATAM, deposit rates are more directly linked to market interest rates, which implies negative sensitivity and will benefit margins when rates start to decline over the next few months. In the U.S., deposit betas are higher due to the heightened competition following the collapse of Silicon Valley Bank. All in all, net interest income sensitivity to interest rates has resulted on EUR 500 million above the assumptions that we shared during our Investor Day. We are well on track to meet our double-digit NII growth guidance for 2023.
Turning now to fees, in an environment of low fee growth in general, as a result of subpar loan demand, weaker activity, consumer activity, and higher margins, our net fee income grew at 4% in the quarter, compared with the same quarter last year, and 5% in the first half, year-on-year. CIB and PagoNxt are leading the way in terms of growth. CIB is increasing its share of leading roles and mandates, and PagoNxt continued to expand total payment volumes, which rose 25% year-on-year, and transactions, 32%. We also had a very good performance for cards, with turnover increasing 9% year-on-year, with fees growing 20%. Retail banking also continued to grow well, primarily driven by an increase in customers and transactionality.
Wealth management and insurance grew less as customers moved to lower risk, fixed-income products with lower fees and margins. We saw volume improvement in both private banking, net new money of EUR 6 and a half billion, and Santander Asset Management, over EUR 3 billion net sales. Auto performance year-on-year was affected by the new insurance regulation in Germany in the first quarter, but recovered significantly in the second quarter. In terms of cost, our transformation efforts that Héctor took you through earlier are paying off. Despite initial investments, costs in real terms are growing below the rate of inflation across most of our footprint, reflecting the savings we are beginning to generate and our strict cost control.
This, in turn, is reflected in efficiency improvements led by Europe, which improved 7% points, thanks to strong revenue gains, together with a 2% fall in costs in real terms. Group efficiency is already at the bottom end of our target range, where we expect it to remain for the rest of the year. Credit quality remains robust across our footprint. The non-performing loan ratio remains stable in the context of unexpected soft landing and strong labor markets, as unemployment is a key driver of credit quality. Of note, were the positive trends in Brazil, driven by the more selective lending policies that we introduced a year and a half ago.
We said in the fourth quarter of last year that we believe the Brazil NPL ratio had already peaked. Trends so far this year support that view, having improved almost 60 basis points year-to-date. In terms of cost of risk, we remain comfortably on track to meet our 2023 target to remain below 1.2%. Spain continues to perform well, with a 12-month cost of risk down 16 basis points year-on-year, supported by the quality of the loan book and improving macro conditions. Normalization in the U.S. continues, but is more resilient than anticipated. Brazil remains elevated due to the unsecured individual borrowers portfolio, but we are seeing signs that cost of risk has stabilized.
Brazil's 12-month cost of risk at the end of June was 4.74%, but if we annualize the first 6 months, that improves to 4.5%. Mexico is increasing from low levels, mainly due to a changing mix towards unsecured loans, which require more provisions upfront and obviously is more profitable. Other units, such as the U.K., Portugal, and the Digital Consumer Bank, are rising, but from a very low base, and should remain below or in line with through-the-cycle averages. Moving on to our balance sheet structure. As we have discussed in previous presentations, our credit portfolio is well-diversified by segment, product, and country. Moreover, our balance sheet is low risk, the portfolio is highly secured with quality collateral, and has low average loan to values.
Loan growth year-on-year was flat in constant euros, as growth in auto and consumer was offset by falls in CIB, mainly in Spain, from very high levels in 2022. Mortgages, driven by early repayments in Europe and slowing demand from corporates, also in Europe. We saw positive dynamics in North America, South America, and DCB. On the other hand, deposits continued to grow well, up 4% year-on-year, following a EUR 3 billion increase in the 2Q in constant euros, reflecting new customer capture with more than offset mortgage prepayments. We saw gross growth across the bank, concentrated mainly in time deposits as customers seek higher rates. Our deposit base is diversified and highly stable.
Using LCR criteria, 75% of our deposits are transactional, which are stickier, and a high proportion of our deposits from individuals are covered by deposit guarantee schemes. We have not seen any unusual movements in deposits in the year to date following market turmoil, particularly in the U.S. In fact, deposits in the U.S. grew in the quarter and remained flat this year to date, which implies that we are gaining market share in deposits, and with an average cost, which was well below our main competitors. Mutual funds have begun to recover, up 4% year-over-year, following a year of instability in 2022. To close, let me cover capital. Our fully loaded capital ratio remain at a comfortable level of 12.2%, backed by a strong organic capital generation, which was again 10 basis points net of dividend accrual in the quarter.
We accounted for the buyout of the minority shareholders in Mexico, which cost 4 basis points in terms of capital. We also had a series of other small positives and negatives this quarter that almost offset each other. We continue to focus on profitable growth opportunities, which is reflected in a frontbook RoRWA of 2.9%, up from 2.5% in the first half of 2022, which is equivalent to a return on tangible equity in excess of 15%, so in excess of the current group return on tangible equity, which will support profitability going forward. Additionally, we continue to increase balance sheet mobilization and the percentage of risk-weighted assets with positive economic value added, progressing well towards our Investor Day target of 85 in 2025.
This increased profitability will help us continue to build capital over the next few years. We are confident our capital ratio will remain above 12%, even after taking into account the final implementation of Basel III on January 1st, 2025. Let me turn it back to Héctor for his concluding remarks. Thank you.
Héctor Grisi (CEO)
Thank you,José. In summary, Q2 of 2023 was another strong quarter, supported by customer growth, double-digit revenue increase, and also backed by a strong performance by all the regions and businesses. We are accelerating the structural change to a simpler and more integrated model through One Transformation, spreading the initiative all across the group, which is driving efficiency improvement and also profitable growth. A rock-solid balance sheet and robust credit quality are contributing to growth, value creation, and shareholder remuneration. In summary, we have a very strong first half of the year, and we are confident that we will achieve our 2022-2023 targets, and remunerate our shareholders in line with our 50% payout policy, supported by our Global and Network businesses, while we continue with our structural model transformation.
We see upside potential for further net interest income growth in the coming quarters, as tailwinds in Europe and Mexico are expected to remain, inflation and interest rates in our largest Latin American countries seem to have peaked or nearly peaked, resulting in a positive outlook for margins in the next six to nine months. Cost of risk is normalizing in line with our expectation, in a context of an expected soft landing of the economy and strong labor markets. We continue to see resilient customer and corporate behavior in most of the geographies. Group RoTE reached fourteen and a half in the first half, we expect to close above 15% at the end of the year.
All in all, our TNAV plus cash dividend is growing at a double digit, well on track with our target of average growth through the cycle. Now, we will be happy to take any of your questions. Thank you.
Begoña Morenés. (Global Head of Investor Relations)
Let's open the Q&A session, please.
Operator (participant)
To ask the question, please press Star five on your telephone. We already have the first question from Carlos Peixoto from CaixaBank BPI. Please go ahead.
Carlos Peixoto (Equity Research Analyst)
Hi, good morning. Thank you for taking my call, my question. The first question would actually be on Brazil. margin stabilized quarter-on-quarter, is still a bit under pressure year-on-year. I was wondering what type of evolution you expect for the rest of the year. Also on cost of risk, what's the outlook there? The second question would actually be on capital. Basically, the capital generation in this quarter was only 3 basis points, a bit below the run rate you have discussed in previous quarters.
I reckon that this part partially has to do with the Mexico minorities incorporation, but I was wondering: how do you see this evolving throughout the rest of the year? Also, what is behind the increase in RWAs in this quarter? Thank you very much.
Héctor Grisi (CEO)
Thank you, Carlos. What I'll do is I'll ask the first question on Brazil. We'll give you a comment on capital, and then José will tell you a little bit about what's going on with increase in RWA. In terms of the Brazil margin quarter-on-quarter, as we said, basically, is explained by the following: On loans since 2021, we have become much more conservative, and grown volumes very selectively, changing the loan mix to lower risk. We mainly got out of credit cards, went on to consignado, auto loans, and mortgages. On deposits, also, the fast increase in rates has meant a rapid rise in the cost of deposits. As well as a change of the mix on the deposits.
Rates are staying higher for longer, has prevented that the cost of deposit from coming down, impacting NII. Remember that in Brazil, we have negative, sensitive sensitivity to rates. Okay? Brazil NII in the second quarter of 2023 is already flat. Okay? As we said, and José was very precise on that, the worst seems behind us, and we are already seeing a reduction on the average cost of deposits, and we also see an improved customer spread. Okay? We expect NII in the second half of 2023 to be higher than the first half of the year, leading to a flat NII in the year, with a substantial improvement in 2024. Okay?
In terms of the cost of risk, not only the macro outlook is improving. Since 2021, as I explained, we've been very selective in the approach of the new lending extension and focusing to more secure and higher rate customers, as I explained. Okay. This is showing good results. We believe the worst, as I said repeatedly, Sorry, the worst is behind now. Cost of risk in the second quarter is already improving versus the first quarter. The vintages are showing really good performance, as we have seen. We don't expect cost of risk that will deteriorate in Brazil in 2023 versus 2022, excluding the one-off that which implies staying close to around 4.6%. Okay.
To be on capital, to be very precise, we expect to generate at least 10 basis points of organic capital on average per quarter, with the current shareholder remuneration policy that we put in place. As a result, we will be on track to meet our target to be above 12%, even when the final implementation of Basel III comes into effect on January 1st, 2025. Okay? With that, I don't know, José, if you can comment on RWAs, please.
José García-Cantera (CFO)
Yes, thank you. Morning, Carlos. No, you're right, loan growth was zero, but risk-weighted assets grew more or less 2%. Half of that growth is due to FX, as we consolidate the Latin American, basically the peso and the Brazilian-based assets into the group. Of the other half of the other half, so a substantial amount, corresponds to a stock finance.
This is due to the recovery of the new Auto business in Europe. This will eventually translate into auto loans. This is obviously short-term, that will eventually lead a higher profitability going forward. We look at the outlook, as Héctor said, we don't expect any significant regulatory or supervisory capital impacts in the second half of the year. We see no inorganic charges in the second half of the year. Obviously, it looks like the available-for-sale portfolio valuation also will stay relatively stable. We see improving profitability, as we have mentioned, particularly driven by higher NII in the second half, and risk-weighted assets that should be probably under control.
Net-net, we see a stronger capital, organic capital generation in the next couple of quarters, again, leading to a capital that will remain well above 12% every quarter, and building up sufficient capital to be above 12% post Basel III.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Héctor. José, can we have the next question, please?
Operator (participant)
Next question from Alvaro Serrano from Morgan Stanley. Please go ahead.
Alvaro Serrano (Managing Director)
Hi, good morning. Thanks for taking my questions. A couple of questions, please, from my side on U.S. and Spain. U.S. has obviously done much better in provisions. I know you've touched on it, Héctor, but maybe you can give a bit more detail as to why the provision was so low in the quarter. Is it collateral? Is it default rates? When you think about the rest of the year, maybe you can update us about the guidance. What do you expect in cost of risk for the full year? I think you gave us some color in Q1, maybe an updated view on all the moving parts there. Second question on Spain. Deposit is much more stable this quarter, previous quarter.
I wonder if you can give, again, a bit more color on the deposit migration remuneration, and when would you expect NII to peak in Spain? I'm extrapolating Spain, Portugal, which I assume it's the same dynamics. Thank you.
Héctor Grisi (CEO)
Thank you, Alvaro. Okay, let me give you our look in the U.S., okay? I explained it... It's basically the same dynamic I explained you on the first quarter, okay? Credit provision, as you know, decreased, as credit quality is remaining robust and credit net charge-offs, actually, what we call realized losses, show better than anticipated performance. This is basically on the back. Used prices continue to be strong, okay, as I explained, and declining at a slower pace than we previously anticipated. The change in auto loans portfolio mix towards more prime. Remember that I told you that before 2018, we had a lot more subprime than prime, and the change on the mix has helped. Also, we have robust and better-than-expected labor market in the U.S., okay, which is sustaining that, okay?
Auto customers that are delinquent, exactly as I was explaining in the first quarter, for more than 90 days, are rolling into charge-off status at historically low levels, okay. Normally, they were above 90%-95%. Last quarter, they were around 59%. This quarter, around 67%, okay. It's still much better than we expect, and much better than it was actually happening pre-COVID, okay. In fact, in 2023, we expect cost of risk to continue the normalization at around 2%, and after 2 years of artificially low figures, given COVID, et cetera. As I was saying, normalized levels should be below pre-pandemic. Cost of risk at around, If you remember, pre-pandemic was around 2.85%. It's never gonna get there, okay. Because of the change of mix and what I was explaining, okay.
In terms of the Spain, in Spain, the deposits, I mean, continue to be stable. At around EUR 299 billion. We have excess liquidity in Santander, Spain, LTD is around 78%, as this is the case for the whole Spanish system, that is around 80%. Quarterly decline is mostly linked to CIB deposits, flat in retail in the quarter, despite the early repayments of mortgages. 60% compared to the same period of 2022, and increased volume of deposits moving off balance sheet products. Also, what we see between the first half of 2023 versus the first half of 2022, is +0.9%.
We have a different change of the mix, with time deposits going up at around 61% up year-on-year, while demand deposits are going down around 5% on the back of the higher rates, driven by the growth of CIB, which allows us to maintain also our, and maintain a stable net liquidity position. Okay? In terms of what I was saying, NII, we don't expect to peak yet. I mean, we have still revisions, and I will have José explain to you in detail exactly how we see NII evolution in Spain.
José García-Cantera (CFO)
Morning, Alvaro. Let me talk about the corporate center, because Santander say more than Spain, because this is gonna give you a better view of our euro sensitivity to rates in Spain. So we have assets of EUR 330 billion, 60% floating, 40% fixed. This fixed includes the ALCO, which is EUR 27 billion that we've been buying recently, with an average duration of 6 years and an interest rate of over 3%. We also have intra-group transactions, et cetera, money markets that are fixed, but these are very short term, so they will reprice as short-term Euribor actually goes up. Of the floating, EUR 200 billion, EUR 65 billion will reprice or reprices with 12-month Euribor.
We expect if we use today's 12-month Euribor compared with the average of the first half, let's assume that the Euribor remains flat in the first half of next year, we have at least 50 basis points pick-up in the repricing of this part of the portfolio next year. Then we have EUR 60, sorry, EUR 30 billion, which reprices with the 6 months, EUR 40 billion with the 3 months, and EUR 65 billion with one month. We would still expect significant repricing upwards in the first half of next year, as interest rates in Europe, they may go up once or twice, but as they stabilize, we will still have significant repricing of a big chunk of the portfolio in the first half of next year. Obviously, the asset yields are expected still to expand well into 2024.
Obviously, margins will depend on the cost of deposits, but we as Héctor said, we are not seeing any pressures today to increase the remuneration of retail deposits. We are already paying almost Euribor for CIB deposits, institutional deposits, but we don't see any pressures on the retail side of deposits, which means that probably the peak in net interest margins will not happen until well into 2024 in the Eurozone.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Alvaro, for your questions, and José and Héctor for the answers. Can we have the next question?
Operator (participant)
Next question from Francisco from Alantra. Please go ahead.
Francisco Riquel (Head of Equity Research)
Wanted to ask about NII in the U.K. and in the U.S. If you can please update your guidance in the U.K. I see lending is weak, falling, local mortgage market is declining, asset spreads are low, the deposit beta is still relatively low. How do you see all these dynamics going forward on the NII? Also in the US, you are gaining market share, are you gaining new clients, or are you paying up for deposits? How do you see the beta compared to the local peers and also in absolute terms going forward and the NII there in the U.S.? Thank you.
Héctor Grisi (CEO)
Thank you, Francisco. Okay, let me give you the details, okay? Let's talk about, first about the U.K. NII was up double-digit in the first half of 2023, okay? It was driven mainly by higher rates and the strong focus on managing the spreads and profitability, although the U.K. tends to be more competitive than other European markets, as you know, okay? We're putting profitability ahead of market share, okay? We have a lower risk appetite, but we're expecting good performance to continue, leading to an NIM expansion, okay? We expect it to stabilize towards the second half, okay? 2023, with a high single-digit growth on higher rates, and despite the lower volumes that we have because of what I just explained about profitability, okay? In the second quarter, NII was flattish, okay?
Higher yields on loans did not offset the higher cost of retail funding and the slowdown in new originations, okay? In terms of the betas, José will tell you afterwards, that I tell you about what's going on in the U.S. In terms of the U.S., overall, as you have seen, has done better than expected, given the change of mix towards prime, okay? As I explained in detail, lower yield, but also better risk profile and the lower credit provisioning, is helping us, okay? NII is flattish in the quarter and year-over-year on funding pressures on the wholesale retail. As you know, a lot of this is funded by wholesale as well, and a common trend, across the sector, which has been partially offset by higher yields that we have.
Sometimes the U.S. betas are above what we expected, but lower than the average of our peers, just to give you exactly what's going on. We expect NII to be down mid-single digit on lower originations, and also the higher funding pressure, again, in line with the peers. However, given the strong behavior that we have on the labor market and seeing the performance on the first half, the U.S. NII could do better than we expect, okay? U.S. NII is not the only one that has done better. Cost of risk and profitability are also better than expected in the country, okay? José, I don't know, you can comment on the betas, please.
José García-Cantera (CFO)
The betas in the U.K., when we look at the cost of deposits today relative to the level of rates today, that's around slightly below 30%. It's increasing slightly in the quarter, 3% points. We still think that that will continue. The U.K. is a market with less excess liquidity than Spain, for instance. We would expect, as Héctor said, that margins probably. They were stable in the second quarter relative to the first. We would expect them to remain more or less flattish in the third, and probably slightly going down from there. In the U.S., as Héctor said, we kept our deposits flat, paying less than our regional bank competitors. The beta in the U.S. is 36.8%, up 2% points quarter-on-quarter.
After the spike that we saw in February, March, the betas in the U.S. have remained very stable. We are actually increasing deposit market share at a lower cost than our competitors.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Fransisco. Can we have the next question, please?
Operator (participant)
Next question from Ignacio Ulargui from BNP Paribas Exane. Please go ahead.
Ignacio Ulargui (Managing Director)
Thanks very much for taking my questions. I have two questions. One is on the Spanish loan book. You could update a bit on the trends that we have seen in the quarter, year-on-year, I to see an 8% decline. If you could elaborate a bit on what are the dynamics there, and what we should expect going forward? The second question is a bit at a group level. If I just look to the first half course of risk is around 106 basis points. You are sticking to the guidance below 120.
I mean, is there any region besides the U.S. where we could see some deterioration in the second half that makes you to keep that conservative guidance, which would imply a run rate of around 135 basis points, 140 basis points in the second half to make the 120? Thank you.
Héctor Grisi (CEO)
Thank you, Ignacio. Let me tell you a little bit about what's the dynamics on the Spanish loan book, and then also José will talk about your second question. In the Spanish loan book, the dynamic that we have seen is quite clear. We have seen low demand of credit. Which is impacting us a little bit. Mainly, also, we have seen an increase on the prepayment on, mainly on the mortgages. Because of the increased rates. Remember that a lot of a big percentage of our portfolio is from variable rates and floating rate. In that sense, that's the dynamic that we have seen. We have seen, due to the increased rates, the corporates and the SMEs being more cautious in new credit demand. The dynamics we lived throughout the year.
Continue in that way, let's see what happens at the beginning of the year, also, if we can see more confidence, a little bit in investment, okay? Now we see the dynamics in that way. Please, José, on the second one.
José García-Cantera (CFO)
Morning, Ignacio. Cost of risk. Well, we see cost of risk normalizing in the U.S., as we discussed. Also in Mexico, where, we are seeing, you know, the normalization of the cost of risk as we change the business mix. In auto, it will very much depend on the amount of loans that we are able to sell, but it should remain stable in the second half of the year. We feel very comfortable that we will beat our 1.2% guidance for the end of the year. We expect it to be better than the 1.2% that we gave as a guidance.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Ignacio. Can we have the next question, please?
Operator (participant)
Next question from Sofie Peterzens, from JPMorgan. Please go ahead.
Sofie Peterzens (Executive Director)
Yeah, this is Sofie from JPMorgan. Thanks for taking my question. Can you just explain the difference between your reported net interest income, which was EUR 10.5 billion, and the underlying EUR 10.7 billion? What explains the EUR 200 million delta, and are there any more one-offs in net interest income that we should be aware of coming in in the short-term? The second question would be on the capital headwinds. You mentioned that you expect it to remain above 12%, but could you just outline what capital or CET1 headwinds you are expecting in the coming quarters, or at least on the year end? Also, if you could remind us what the Basel IV impacts are. Thank you.
Héctor Grisi (CEO)
Okay, thank you, Sofie. José will explain you the NII evolution. On capital, let me reiterate exactly what I said, and then José can expand a little bit. As I told you, we expect to generate at least 10 basis points of organic capital on average per quarter. That is included with the current remuneration policy that we have. As a result, what I told you, we will be on track to meet our target to be above 12%. With the final implementation of Basel III, comes into effect in 2025, to be precise on that point. José will comment a little bit more on that, and explain you the NII evolution.
José García-Cantera (CFO)
Yeah. Sofie, hi, good morning. As I said, we don't expect any headwinds, significant headwinds from any of the three big components that could affect capital. Regulatory or supervisory charges, inorganic charges, or other charges, basically market-related pensions, intangibles. We don't see significant headwinds in the second half of the year. In terms of Basel III, we have seen the proposal. It's still a proposal, so we need to wait to see exactly how the regulation is approved. We still think we will have an impact of between 40-60 basis points, probably, and again, depending on how this is finally written, probably towards the lower end of that range, if things are confirmed when the final proposal is approved.
In terms of the accounting, I think investor relations will give you more details about this. It's pretty detailed. In the first half, there is no impact, no adjustments between NII, statutory and underlying, zero. What happened in the first quarter is we had a positive adjustment of EUR 211 million, and we have reversed exactly the same amount in the second quarter. By the way, in terms of the EUR 20 billion, it's a very small amount. No adjustment to NII in the first half. What we added to underlying in the first quarter was reversed in the second quarter. There are other adjustments in the P&L, basically netting out, in most cases, what happened in the first quarter, in the second quarter.
Investor relations will give you all the details line by line of the differences between the first and the second quarter. Thanks, Sofie.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Sofie. Can we have the next question, please?
Operator (participant)
Next question from Marta Sanchez Romero from Citi. Please go ahead.
Marta Sanchez Romero (Director of Equity Research)
Thank you very much. My first question is on the digital bank. Could you please provide an update on your strategy for gathering deposits here? You've raised roughly EUR 3.4 billion year to date. That seems to be below what you had planned a few months ago. Your loan-to-deposit ratio is running at 200%. How much more deposits do you expect to get, and where do you feel like you need to put rates in order to be more successful in Northern Europe and Germany? The second question is a follow-up on mortgages in the U.K. You are shrinking pretty fast, EUR 4 billion per quarter. When do you expect to stabilize that book? Thank you.
Héctor Grisi (CEO)
Thank you, Marta. On the strategy of Open, the Openbank is quite clear. We just don't have Openbank as the only vehicle to raise deposits. We have some other vehicles also we have in some of the other different countries. We believe that the strategy is right, and the one that we manage in Openbank is going along our expectations, and we believe that we're gonna continue to manage that accordingly. In the some other different initiatives that we have, for example, in Germany and some other places, the strategy has been proving very successful, and we don't believe we need to basically continue raising rates, depending on what the market reacts to it. We're gonna be moving it according to the market.
In terms of mortgages in the U.K., I was very specific about what we're thinking in terms of profitability, okay? The way we're managing the portfolio. First of all, we've been very cautious in the way we manage, and our risk appetite is being very prudent in the way we're managing the U.K., okay? If we see there is a change of how we see the market, then we'll adjust at the point. Right now, we're concentrated in the two things I told you. First of all, profitability and being cautious on the risk appetite there. If we see one of these changes, then we'll adjust in any way. I don't know, José, if you'd like to-
José García-Cantera (CFO)
No.
Héctor Grisi (CEO)
Comment a little bit more.
José García-Cantera (CFO)
In the Digital Consumer Bank, that now includes Openbank, we have EUR 60 billion in deposits, like you said. I think we obviously manage that to maximize profitability. Not only a question of the amount of deposits, but the question is managing the margins in a business that has negative sensitivity to rates. I think we've been very successful. If you compare this figure to what it was a couple of years ago, you look at margins and interest rate sensitivity management, I think you have to look at the whole picture, I think we've been very successful in managing interest rate sensitivity in a business that is naturally that has naturally negative sensitivity to raising rates. Thanks, Marta.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Marta. Can we have the next question, please?
Operator (participant)
Next question from Andrea Filtri, from Mediobanca. Please go ahead.
Andrea Filtri (Managing Director and Head of Research)
Yes. We wanted to get more clear, basically, on page two is the of one. Can you go into the different geographies? Particularly, you've given a lot of detail on NII in a lot of countries. Can you do the same for Brazil, please? The second question is on Spain. If you could split the drivers of NII there between bit of increases in interest rates of deposit beta and the ALCO portfolio contribution. Thank you.
Héctor Grisi (CEO)
Thank you, Andrea. Let me explain a little bit the NII in Brazil. Then José will give you the details of the drivers of NII and the betas in Spain, okay? Sorry, in Spain. To start, I mean, Brazil NII, okay? Performance recent quarters is explained, first of all, on loans. Since 2021, been very specific on that. We have become very much conservative. We have changed the mix, okay? We have grown volume selectively, okay? Changing the low mix, the low mix to lower risk. On deposits, okay, the fast increase in rates mean the rapid rise in the cost of deposits, okay?
We expect NII in the second half of 2023 to be higher than in the first half of the year, leading to a flat NII in the year, with a substantial improvement in 2024. Okay? If we see that the rates basically start to come down, because it's very important to understand that Brazil has negative sensitivity to the rates, we should gain traction and we maintain, we're gonna maintain a cautious stance, but we believe that we can go back to the market, okay? We believe that the official rates could fall in the second half, bringing the costs down in retail funding. Okay? Then in the drivers of NII in Spain, and José will give you more details. Spain is one of the countries that has benefited most from the higher rates, okay?
We continue to see strong growth in clients. Just in the first half of the year, we have 300,000 more active clients, okay? NII in Spain is up around 57% in the first half of the year, and 60% just alone in the second quarter. It's mostly supported by repricing of the loan portfolio, the higher real yields, and a remain contained on the cost of deposit. We have been managing very well in that sense. We expect double-digit growth for NII in 2023, and regarding the peak of NII in Spain, there are several things to consider that José already explained you. Assets will continue to reprice, at least during the first half of 2024. Clients, which we expect, will continue to grow, and betas, which will be key.
We're still seeing a rational competition with low betas for individuals in a system which remains highly liquid, okay? As of today, we don't expect much high remuneration on the foreseeable future.
José García-Cantera (CFO)
Hi, Andrea. The ALCO. In Spain, we have EUR 27 billion ALCO. EUR 21 billion is a structural long-term held to collect, with an average maturity of duration of 7.7 years and a yield of 3.3%-3.4%. We have EUR 6 billion, which is more associated with short-term liquidity management, average duration of 1.2 years, and yields slightly below 3%. We expect to continue increasing the amount of the ALCO portfolio in Spain to gradually reposition the balance sheet towards a lower positive sensitivity. As interest rates start reaching a peak, we don't want to run a balance sheet with such huge positive sensitivity to rates.
One way of doing that is not the only, we are also taking other measures, but one way is obviously increasing the ALCO portfolio. In terms of betas, the beta for deposits in Spain is 17.8%. If we exclude CIB, by the way, this is 3% points higher than in the first quarter. If we exclude CIB, the beta is 9.5%. The beta in CIB is around 60%. I think I've given you all the numbers to figure out exactly, you know, how we see the betas and the NII going forward. Thanks.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Andrea. Can we have the next question, please?
Operator (participant)
Next question from Britta Schmidt, from Autonomous. Please go ahead.
Britta Schmidt (Partner and Senior Analyst)
Hi there. Thanks for taking my question. Could you give a bit more color on the NII increase, the absolute NII increase in Spain, Q on Q? The customer spread was up less in the previous quarter, but NII was up a lot more. Secondly, could you also update us on the net interest income sensitivity in Brazil over 1 year and 2 years? Lastly, on the EUR 500 million rate benefits that you see more so than previously. Can you give us an idea as to where you see them, and how much of that has been recognized in the current run rate? Thank you.
José García-Cantera (CFO)
Okay, let me go backwards here. Yeah, in the first half, the sensitivity was more or less EUR 500 million higher than what we. The guidance we gave at Investor Day. We would expect more or less a similar amount in the second half, in EUR. Relative to the figures we gave at Investor Day, the interest rate sensitivity in EUR, due to the fact that obviously rates are higher and we are seeing better betas, remember that the betas we used to give that sensitivity at Investor Day in EUR were around 30%. We are below 20% right now, and it's already half of the year, we would expect another EUR 500 million more in the second half, over EUR 1 billion, higher than what we mentioned at Investor Day.
NII sensitivity in Brazil, I'm gonna give you the rest of the currencies as well. If today we had 100 basis points parallel shift upwards, we would make EUR 1.1 billion-EUR 1.2 billion more, GBP 250 million more in the U.K., flat, slightly negative in the U.S., and BRL 100 million less in Brazil. I think we gave you all the details to understand the NII sensitivity in Spain, we can take it offline and if you want a, you know, more detailed analysis, I think we gave you all the details. I gave you the composition of the balance sheet by repricing on the asset side, I think that's sufficient, I think. We will take it offline.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Britta. Can we have the next question, please?
Operator (participant)
From Carlos Cobo Catena from Societe Generale. Please go ahead.
Carlos Cobo Catena (Senior Investor Relations Manager)
Hi. Hi, thank you very much for taking my questions. Just a quick follow-up from me on capital. You mentioned the stock finance impact. Could you please quantify that in terms of stock and one single specific impact on risk-weighted assets, just to clear that out from other impact? Thank you.
José García-Cantera (CFO)
Okay, the stock finance is seasonal. It tends to go up in December, which is the peak in the year. It goes down in March, goes up a little bit in June, and then same September to peak again in December. This year, the increase in June was higher than we expected. We are talking around EUR 6 billion in total risk-weighted assets from stock finance in the first half.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Carlos. Can we have what I believe is the last question, please? If anybody wants to add another question, please press Star five on your phone. Thank you.
Operator (participant)
Next question from Fernando Gil de Santivañes from Bestinver. Please go ahead.
Fernando Gil de Santivañes (Head of Research)
All right, thank you for taking my question. Two questions, please. One is in Poland, what do you expect in terms of mortgage provisions related to Swiss francs going forward? If you can comment on that, this will help a lot. Second one is on RWA growth. I'm looking at U.K. figures and Poland figures, I'm looking at loans, loan growth, and FX impact, and it seems like RWAs are increasing faster than that. If you can comment on why it's happening that, in those particular regions will help a lot. Thank you very much.
Héctor Grisi (CEO)
Sorry, Fernando. What you said at the beginning was mortgage provisions in Poland? Yeah. Fernando, let me tell you exactly how we are in Poland, okay? Up to today, and with the extra that we did, we believe that is completely adequate, okay? We're talking about that in the blended provisions that we have, we are provisioned up to 58% of the outstanding that we have, okay? We believe that's enough to sustain exactly what needs to be done over there, given the dynamics that we have seen in the market. If you basically changing to zlotys when these mortgages started, they'd be about there, okay? I believe that we're at the right point, and we believe the provisions at this level is completely adequate, okay?
On the second one, I will have José.
José García-Cantera (CFO)
No.
Héctor Grisi (CEO)
Give you the answer. Thank you.
José García-Cantera (CFO)
As I explained, loan growth year on year was 0, at risk-weighted assets increased 2%, half of which is FX. I can take you through the composition of risk-weighted assets by country. Half of the risk-weighted asset inflation has to do with FX. Of the other half, we had some positives and negatives. As I said, we have contraction in the U.K., we have contraction in terms of risk-weighted assets, X stock finance in auto, a slight contraction in Europe. We had the stock finance expansion in Europe and also risk-weighted asset growth, both in ex-FX, in Mexico and in Brazil.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Fernando. I'm unclear if there are any further questions.
Operator (participant)
We have a question from the line of Ignacio Cerezo from UBS. Please go ahead.
Ignacio Cerezo (Equity Research Analyst)
Yeah. Hi, good morning. Sorry, it's just a quick follow-up on Brazil. If you can give us a little bit more color or at least ballpark magnitude of the substantial growth of NII you're expecting in 2024, and the sensitivity to rates José was mentioning suggests probably around, yeah, 1% for 100 basis points decline. Just trying to understand basically what kind of magnitude in terms of acceleration of NII you are expecting next year in Brazil. Thank you.
Héctor Grisi (CEO)
Thank you, Ignacio. I will answer the first part of the question. José will help me out with the rest. This is sensitivity. What I told you is that we believe that the worst is over in Brazil. We're starting to see a little bit more growth in the portfolio. We're changing that around. We're starting to basically go back to the open market, which, you know, in 2021 we decided basically to come out of it, given the what we saw in the current environment. At this point, we believe that Brazil is gonna be able to turn around, and also we see that the rates are gonna be helping us out, because we believe that the rate in August should start coming down.
In that sense, we don't know exactly, how the trends are gonna work, but we see that is, this is coming much better than we expect, okay. We see that, we're gonna end up the year basically flattish, to where we started, okay.
José García-Cantera (CFO)
Hi, Ignacio. We believe interest rates in Brazil will start coming down in August. They are at 13.75%. Our central scenario is for rates to end the year at around 12%, 12.25%, and then probably below 10% by the end of next year. NII, when you look at sequentially quarter-on-quarter, NII probably will be flattish in the third, but it should increase in the fourth and more so into next year.
The exact sensitivity, I mentioned the sensitivity to higher rates, but the sensitivity in Brazil to 100 basis points, but this is a parallel shift, I insist, a parallel shift, which is not what will happen probably, because what we will see is lower rates in the short end of the curve, but flattish in the long end of the curve. Through a parallel shift, a drop in 100 basis points will generate EUR 140 million higher revenue in Brazil. Thank you, Ignacio.
Begoña Morenés. (Global Head of Investor Relations)
Thank you, Ignacio. I believe there are no further questions, so thank you everybody for your attendance, and the investor relations team is at your disposal for any other questions that you may have. Thank you very much.