Banco Bilbao Vizcaya Argentaria SA (BBVA) 2023 Q4 法說會逐字稿

Good morning, welcome and thank you for joining BBVA's Fourth Quarter Earnings Conference Call.

With us today are Onur Genc, our CEO, and Luisa Gomez Bravo, the group's CFO. After the speaker's remarks on the group's results and our expectations for 2024, we will open a live Q&A session.

Now, I turn the call over to Onur.

Thank you, Patricia. Good morning to everyone. I will start -- I'll jump into it right away. Starting with Page #3. By highlighting the acceleration of our profitable growth strategy in the year, as the title says. First, I want to highlight that the best way that we can contribute to our stakeholders and the society in general is through our activity of lending, our activity of banking business, and through growing our business. In that sense, we have increased our loan portfolio by 7.6% this year, and we have acquired more than 11 million new customers.

Second, from the top, the financial results that we see today are the outcome of the significant progress in the execution of our strategy. In 2023, 79%, obviously a record, of our unit sales were done digitally. And we also continue at the front line of the industry in sustainability. In 2023, we channeled EUR 70 billion in sustainable business, again an all-time high.

Third, we have achieved the highest annual net-attributable profit ever over EUR 8 billion, an increase of 22% versus 2022, which translates into a 27% increase in earnings per share.

Fourth, we continue delivering on our commitment to value creation for our shareholders, with return on tangible equity at 17% and an exceptional 20.2% increase of tangible value per share plus dividends. All of this is allowing us to significantly increase distributions to our shareholders, for a total amount of EUR 4 billion, which is equivalent to EUR 0.68 per share, increasing payout, while at the same time our CET1 ratio remains comfortably above our target.

These highlights are what I would be expanding upon in the coming pages, but just to reiterate the common theme, in my view, of all the numbers in this page is that we continue growing and we are growing in a profitable way.

Moving to Slide #4, our positive impact on society. We continue to help our customers achieve their life and financial goals. We have increased our loan book, as I mentioned, by 7.6% in the last year. It's a very high level number at the top, but this implies, for example, that during 2023 we have helped more than 140,000 families buy their homes. We have supported more than 550,000 SMEs, self-employed individuals, and around 70,000 larger corporates in financing their growth, financing their business.

In terms of transactionality, we have more than 20 million payrolls collected by our clients on a monthly basis. As we grow our activity, we promote employment, we promote investment, and we promote welfare in the society.

Moving to Page #5, new customer acquisition, one of our important pages, and as we keep reiterating, expanding our customer base will allow us to continue growing our business in a healthy way, in a profitable and healthy way. And with 11 million gross new active clients in 2023, we have grown to more than 71 million active clients in 2023. And even more impressive is the share of those customers acquired through digital channels, which increased to a new record of 65% in 2023. And I do think that this is our key difference. The way that we acquire customers through digital channels is our key difference versus most of our competitors out there.

On Slide #6, our leadership in digital, it has proven to be essential and differential in serving our customer base as well. On the left-hand side of the slide, we have surpassed 52 million mobile customers, a figure more than twice of that in 2018, and a record high 74% penetration rate.

At the same time, our digital sales, it has reached 79% in terms of units and 63% in terms of value, again, one of the best, if not the best, in our industry. This leadership in digital, it has also translated into a higher client satisfaction. As you can see in the right-hand side of the slide, the Net Promoter Score, it continues improving in the group with clear leadership positions across the main countries of our footprint.

Slide #7, a message that again defines 2023, we continue growing, outperforming our peers. Our competitive advantages, like our digital strategy and our globality, it has supported our long growth, as you see on this page. And as you see in the bubbled numbers, in every single country, we have gained market share in total loans. And if you observe the trends over the last few years, because you have 5 years in this chart, we are gaining market share, especially in those highly profitable segments that we wanted to grow, I mean consumer credit cards and businesses, private businesses across our footprint.

Turning to Slide #8. Sustainability, as I said many times in the past, it's an incredible sustainability's and incredible business opportunity, and we are trendsetters in this area. As you can see in this page, we accelerated in mobilizing sustainable business volumes across segments, and we set a new record with more than EUR 70 billion channeled in 2023, and the total of EUR 206 billion since 2018. We maintain the top-ranked European bank position in the Dow Jones Sustainability Index as well, for the fourth year in a row now.

Moving to Slide #9, as you can see, on the left-hand side of the page, we have established clear portfolio alignment targets in key CO2 intensive industries for 2030, so that -- so that we get to net 0 by 2050. This last quarter, we have included targets in 2 more sectors in the list, aviation and shipping, as you can see, and during 2023, we have started tracking our performance against these targets, and included the degree of portfolio alignment as part of the compensation of those employees who have long-term variable remuneration. And as you can see in the chart on the right hand, starting from 2022, the baseline, we have already managed to reduce the emissions in the top 6 sectors by 19%.

Slide #10. From this slide on, I'm going to walk you through the financials. First, net attributable profit, as I mentioned, it set a new record. In the bars at the center of the slide, you can see the upward evolution of our annual results, wonderful trend in my view. 2023 has been an outstanding year, with profits at EUR 8 billion, and EUR 19 million, 22% higher than the EUR 6.6 billion recurring net profit of 2022, which was already an exceptional figure. These results bring our earnings per share up to EUR 1.32, an increase of 27% year-over-year, higher than the growth of the net attributable profit, thanks to the share buyback programs that we have been executing.

Moving to slide 11, our tangible book value per share plus dividends. It continues to show an outstanding evolution beyond the excellent figure of 20.2% year-over-year growth in tangible book value per share plus dividends. We wanted to remark that in the last 5 years, our tangible book value per share plus dividends increased by 68%, despite COVID -- despite COVID, 68%. This growth, in my view, is one of the most impressive figures in this presentation. And regarding profitability, we continue to improve our excellent profitability metrics, reaching 17% in ROTE and 16.2% in return on equity.

Moving to Slide #12. The best measure of our performance is the one where we compare ourselves to competitors. Obviously, this is how we live with it in the bank. We breathe this competitive success. In all the key financial metrics, we have done better than our competitors, 1 more year we remain clearly one of the most value-creating, most profitable, and most efficient European banks out there.

Moving to Slide #13. This is a summary of the pages to follow, where I will talk to you about the P&L. I will talk to you about revenue growth, costs, asset quality, and capital. So let me jump into it.

On Page #14 on P&L, I would like to highlight the excellent evolution of gross and operating income, growing 19% and 20% in current euros, respectively.

Slide #15. The P&L for the fourth quarter, I'll not stop long here, as the strong depreciation of the Argentinian peso in December has affected the comparisons for the quarter in both current and constant euros. However, all-in-all, in the fourth quarter, despite the negative seasonality of the fourth quarter, marked by the annual deposit guarantee scheme contributions, as you know, especially in Spain, we have reported once again at the bottom line a net attributable profit above the EUR 2 billion mark in current euros.

Slide #16. Let me focus a bit more on the revenue growth in our 2 core markets of Spain and Mexico. On the left-hand side of the slide, you can see the strong loan growth in the most profitable segments in both countries, especially Mexico. In the center of the slide, you can see the evolution of customer spreads. In the case of Spain, the improvement continued in the last quarter of the year, with spread reaching 3.42%. And for Mexico, customer spread is at 11.67%, a solid year-over-year increase. Although, reducing versus last quarter, explained by 2 reasons, 2 very straightforward reasons.

First, lower yields on loans due to some seasonality with the impact of the holiday period campaigns at the end of the year, especially obviously in credit cards. And second, switching from expensive wholesale funding, expensive market funding, to growth volumes in deposits from customers. This is financially neutral on NIM, but it obviously affects the customer spread.

The result of all, you can see on the right-hand side of the slide, the core revenue growth year-over-year in both countries, 32% growth in Spain and 12% growth in Mexico in constant, and also the growth on a quarterly basis in both countries.

In core revenues, some of you have been asking about the peak. When are we going to reach the peak? As we have been commenting in the past, and as this page also shows, due to the continued spread improvement in Spain and the strong volume growth in Mexico, we believe we will continue to post healthy core revenue growth in 2024.

Slide #17, on costs. I would highlight the fact that, once again, we end the year with positive jaws, with gross income growing about 30%, clearly more than the costs, at 19.7%, which is affected mainly by the high inflation rate in some of the countries of our footprint. Also, you can see on the right side of the page, our efficiency ratio, one of the best among our European peers. It further improved to 41.7%.

Slide #18. In this page, you can see that the evolution of our asset quality metrics, it remains in line with our expectations in the context of the activity growth in the most profitable segments, as we have been saying, and also the higher interest rates. First of all, on the left-hand side of the page at the bottom, you see the stand-alone cost of risk in the fourth quarter remained at the same level as the ratio in third quarter. And this derives accumulated cost of risk to 115 basis points year-to-date, so some stability quarter-over-quarter, and the yearly number is 115 basis points as we have guided you in the last quarterly call.

As such, this is in line with our expectations, and there are 2 trends here that we anticipated to you last quarter. Once again, the mixed effect, as activity growth is biased to highly profitable, but higher cost of risk retail segments and emerging market geographies. And second, a gradual deterioration of the macro environment in South America. Then, on the Page, the NPL ratio on the right, it remains stable in the year-over-year comparison at 3.4%, and our coverage ratio slightly reduces to 77%.

Slide #19, on capital, our CET1 fully loaded ratio as of December '23 remains at a very strong level, 12.67%. Needless to say, this level is well above our target range of 11.5% to 12%.

Following the waterfall, main impacts of the quarter are, first, our strong results generation that contributes 57 basis points. Second, the dividend accrual and AT1 coupon payments all in, detracting 32 basis points. Third, 36 basis points for RWA growth, a figure that embeds some annual catch-up this quarter for operational risk, as capital for operational risk is a function of the gross income, which showed a better than expected performance, as you all know. And last, the bucket others of 5 basis points, positively impacted by the credit in OCIs coming from the hyperinflationary countries and the good performance of the Hold To Collect and Sell bond portfolios. The combined effect, more than offsetting the negative postings to highlight the Argentinian peso devaluation this quarter and some higher than usual model update impact.

At this point and in a full year view, let me stress that, once again, our ability to generate organic capital has allowed us to keep financing a desirable profitable growth, to significantly remunerate our shareholders with an increasing momentum, and an extraordinary share buyback of 32 basis points, as you know, EUR 1 billion, and still showed a year-end CET1 ratio well above the upper part of our target range.

Regarding shareholder compensation, next page, Slide 20, as we have again repeatedly stated, we have a clear focus, clear focus on value creation for our shareholders, which guides all of our decisions, everything in the bank.

In this regard, and in line with our payout policy, I'm very happy to announce that the proposal to be sent to the next Annual General Meeting, it contemplates the distribution of a total amount of EUR 4 billion for 2023, equivalent to a 50% payout at the maximum end of our distribution policy, and obviously above the 47% payout of last year. This payout is equivalent to a total shareholder remuneration of EUR 0.68 per share. It's split into 2, a total cash dividend of EUR 0.55 cents, which is 28% higher than last year in cash dividends, which implies EUR 0.39 per share to be paid in April, to April '24, complementing the EUR 0.16 per share interim cash dividend that we already distributed last October, October '23.

In addition to the cash dividend, we will be proposing a new share buyback program of EUR 781 million equivalent to 1.6% of BBVA's market cap, including this new payout. In total, the shareholder distribution would be EUR 13.2 billion since 2021, EUR 5 billion of that from the results of 2023, including the EUR 1 billion extraordinary share buyback that we did in 2023. And in terms of share buyback programs and assuming yesterday's market price for the execution of the EUR 781 million of the share buyback, we would have reduced BBVA's total outstanding shares since 2021 by 14%.

And finally, Slide 21, regarding our long-term targets announced on the Investor Day, let me not go into each one of them for time purposes, but on all the metrics, we are well on track to realize our upgraded expectations, clearly, clearly beating all of our original goals.

And now for the business areas update, I turn it to Luisa. Luisa.

Thank you very much, Onur, and good morning, everyone. In -- starting in Slide 23 with Spain, in 2023, we truly believe we have delivered an outstanding year in Spain. In a context of strong competition, we have demonstrated our commercial strength and digital lead with loan origination growing by 10% year-on-year, achieving important market share gains in all portfolios.

As such, despite lower demand from credit in the system, our loan book deleverage remained contained, stable over the last 2 quarters. In terms of P&L, NII stands as the main engine for revenue growth. NII accelerated throughout the year, achieving a 48.9% growth, levered on high rates, effective price management, and ultimately ongoing customer spread improvement, increasing 128 basis points year-on-year. In a context of higher rates, we have successfully managed to limit the rate pass-through on deposit costs, thanks to an effective customer funds management. This was achieved primarily by offering our customers seeking higher returns, mutual funds, which, as you see, grow 12% year-on-year, while benefiting from a highly transactional deposit mix, supported by the acquisition of new customers, close to 900,000 in the year.

In the last quarter of 2023, these trends remained. We continued benefiting from loan book repricing and from our sound deposit mix, with deposit costs well contained. In terms of fees, very sound dynamics in the fourth quarter across the board, but I would like to highlight the contribution from asset management, supported by strong net inflows in the year. In this particularly quarter, this heading also includes the success fees coming from the portfolio's performance in the year.

Turning to operating expenses, the increase in the quarter is explained by the final adjustment in annual variable compensation accrual, as earnings have exceeded expectations. All-in, strong revenues in the year lead to an outstanding efficiency ratio below 40%, more than 7 percentage points below 2022.

On the asset quality side, impairments and cost of risk evolution are aligned with our guidance. In short, another very positive quarter for BBVA Spain, leading to a record net profit close to EUR 2.8 billion, the highest figure in the last 15 years.

Looking forward, we remain very positive on Spain's performance for 2024. We expect NII to grow at mid-single digit in 2024, as there is still some repricing on the loan book to come, and we expect a contained deterioration on the deposit costs. Expenses growth will slow down to close to 5%, as we still carryover 2023 effects, maintaining the efficiency ratio below 40% also in this year.

Finally, our expectation for cost of risk in Spain is for it to stand at around 40 basis points, a quite contained level in a context of a still high interest rate environment. The start of the easing cycle will be supportive as the year progresses in terms of NPL entries.

Moving on to Mexico in Slide 24, I'd like to emphasize that we feel extremely positive about this franchise. The economy continues to outperform expectations, with a strong labor market, resilient consumer demand, and positive news coming from near-shoring. Thus, the loan portfolio is benefiting from this momentum, growing close to 11% year-on-year.

In the quarter, also positive dynamics have unfolded, with retail portfolios remaining, while the Wholesale segment is also gaining some pace, balancing a little bit the growth in the book. All-in, one more year, we have outpaced the market being able also to further strengthen our leadership position. As you know, we are the #1 franchise in the country across the different loan segments in the country.

On the income statement, we continue to deliver on top line, with core revenues growing by 20% year-on-year, bringing net profit to EUR 5.3 billion in the full year 2023. Positive NII dynamics remained in the fourth quarter, supported by sound activity close to 3% growth, geared towards retail. And looking forward, as we have been anticipating loan growth will be the main driver for NII growth. High fees increasing by 24% year-on-year. To note, as in the previous quarters, the growth in credit cards and payment fees, along with an increase in contribution from asset management, and higher fees from CIB.

On the expense side, our main focus is to maintain an efficient operation, while continue to invest to establish the basis for future growth. As it has been the case in Spain, expenses quarterly evolution is also affected by the final adjustment in the annual variable compensation accrual. All-in, operating jaws remain positive in the year, leading to further improvement of the cost-to-income ratio to an extraordinary level of 30.7%.

Finally, asset quality has performed within expectations, being consistent both with our strategy in the most profitable segments, and with the tightening monetary cycle. All-in-all, the cumulative cost of risk stands below 300 basis points in alignment with our guidance.

To sup, Mexico continues delivering outstanding results quarter-on-quarter on the back of its indisputable leadership and structural strengths. These will allow us to maintain growing earnings going forward and continue outperforming our peers.

More specifically, for 2024, we expect the loan momentum to continue, and the loan book to grow at a double-digit pace. Based on this sound loan growth and our proven capacity to preserve spreads, we expect NII to grow at high single digits in 2024 slightly below activity growth.

With regards to expenses, growth will slow down to high single-digit preserving positive jaws. And on the asset quality side, we expect the moderate increase of cost of risk to around 325 basis points consistent with our growth strategy in a context of still high rates especially in the first part of the year.

Moving on now to Turkey on Slide 25. Turkey, with the gradual transition towards the orthodox policies has started to surprise on the positive side in particularly in monetary policy a sign of the country's commitment to tackling inflation. Last week, we saw the policy reach -- a policy rate reached 45% still relatively low given high inflation, but already favoring capital inflows, international reserve build-ups and the Turkish lira.

Looking at the performance of our franchise in the full year 2023, the net profit reached EUR 528 million in line with 2022 despite the very challenging environment we have been facing. The magnitude of the rate hikes during the year and the regulatory measures in place have put pressure on deposit costs and ultimately on spreads and NII. However, our franchise managed to offset these headwinds on the P&L through higher fees mainly coming from payment services, brokerage and asset management and higher net trading income, thanks to a strong performance from global markets. Very low cost of risk is just 25 basis points due to low and net NPL entries in a negative real rate environment and strong recoveries in repayments in the commercial segments also unfolded.

In 2024, Turkey's earnings contribution to the group could be similar to that of 2023 in a still challenging environment. This guidance includes an expected increase in the cost of risk to around 110 basis points in 2024 after an abnormally low level in 2023. Overall, we expect 2024 to be a transition year in which the basis for a more healthy a more sustainable growth model is implemented in Turkey. Without a doubt, Garanti is the best bank in the country with proven capacity to overcome short-term challenges and take advantage of opportunities going forward.

Moving on to South America on Page 26. Finally net profit amounts to more than EUR 600 million in 2023. The region maintains a strong performance in total revenues. NII growth remains as the main driver for the P&L in 2023 in a context of loan growth and the most profitable segments and improving spreads.

Higher fees also and strong NTI supported the gross income growth of the year. Despite expenses being pressured by inflation, pre-provision profit growth more than offsets the increase in impairments due to higher provisioning in a quite challenging macro environment. All-in, cost of risk ends up at around 250 basis points in line with guidance. For 2024, in an improving macro scenario in the region, we expect loan growth to be somewhat higher than 2023 and cost of risk to be around 280 basis points, although we expect some inertia in the NPL inflows in the retail segment, especially in the first half of the year, the easing monetary cycle across the geographies will be an important supportive factor for asset quality trend going forward.

And now back to Onur, who will highlight the main takeaways of the quarter and the outlook for 2024.

Thank you, Luisa. So we always have this goal to finish in half an hour. So let me not go into every single bullet point that you see here on the page. The only thing I would say is that we are very happy, very happy with BBVA's performance in 2023.

As a team, we are very focused on creating value for our stakeholders, our stakeholders, our customers, our shareholders, our employees, and the society in general, very focused on that. And as I mentioned to you multiple times in the past, that it's kind of a circle and it all starts with delivery. You have to deliver. You have to deliver your commitments and you have to deliver the numbers. And we do think that that's what we did in 2023.

But 2023, it's already gone. So we have to look forward. We have to look into 2024. So maybe jump, let me jump into Slide 29 and the guidance. Luisa has just explained the country. So you can see the guidance for every country on the right-hand side of the slide. And all of this combined, the respective guidance for the countries, it then translates into the following group guidance on the left-hand side of the page. And the group guidance is, we expect our NAP, Net Attributable Profit, to continue to grow in 2024. We expect ROTE at high teens and above 2023 levels, about 17%. And on efficiency, we expect to beat our 42% long-term goal.

With this, I conclude the presentation. I give the floor to Patricia to govern the Q&A. Patricia?

Yes, thank you, Onur. We are now ready to start with the Q&A session. So the first question, please.

(Operator Instructions) The first question today comes from Maksym Mishyn from JB Capital.

I have three on Spain. The first one is on your NII guidance. Any chance if you could update us on your NII sensitivity to interest rates, but also shed some light of what kind of evolution of interest rates do you bake in your mid-single digit growth guidance?

Then the second question is on loan growth outlook. I was wondering if you could just share more visibility on what you expect for loan book growth in Spain per segment?

And then finally, on deposit costs, you mentioned you expect contained deterioration in deposit costs. I've noticed that the share of time deposit increased notably in the fourth quarter. And I was wondering if this was related to some particular campaigns or this was a sector pressure? And what kind of beta evolution you expect throughout 2024?

On the NII change, the NII sensitivity that you talked about, we have been putting this into the appendix of our presentation so that you can clearly see it, because I really do think it's the right question and it's a very important number to look into.

If you remember, this sensitivity to 100 basis points, it's a symmetric number, plus/minus 100 is the same.100 basis points step function decline in the curves would have implied more than 20% NII impact. So minus 100, minus 20% NII, not long ago, 1.5 years ago. That number, we have been managing that number since that period in the last 2 years, every single quarter. The last number that we are putting into the appendix, as you would see, is now plus/minus 5%. So every 100 basis points step function change in the curve would imply now a much lower sensitivity because of the ALCO strategies that we have been implementing. And now the number is minus 5% in NII.

You asked about in the guidance that we have given, what is the rate implication, rate reference, and so on. We have multiple scenarios. The base case that we are now working with, EURIBOR 12 months is a clear reference rate for us. It's a clear important number to look into. Again, it's a range. We have multiple scenarios. In all the scenarios, we see a growth in NII. But the latest scenario that we have is the EURIBOR 12 months, the average of 2024 will be around 300 basis points. With that assumption, we are guiding mid-single-digit NII growth.

You are asking about the loan growth in Spain per segment because we are guiding flattish growth overall. It's going to be more or less like 2023. We foresee growth again in the consumer portfolio. We foresee growth, a segment that we have been focusing. You would have realized that every single quarter, we are posting very good numbers there. What we call the medium-sized enterprises. So the enterprise segment is very important to us. Our average market share in Spain is about 3%, but it's in certain products of retail, it's 15.7% in credit cards for example. So we are more inclined to retail banking. And our enterprise banking is around 13%, so lower than our average.

We do see that there is some potential to grow there. And in private enterprises, you would continue to see that we grow.

Then you're asking about deposit, deposit in the fourth quarter, Maks, it's the trend in the market. You would see, we were expecting this obviously, some move has happened and some move will continue to happen. And combining them all, we still guide you at mid single-digit NII growth.

In the presentation, I said it wrongly, I was saying that the customer spread will continue to improve in Spain, NIM, not customer spread, customer spread has already reached or is going to be slightly higher or slightly lower in the first quarter. Customer spread is not the key thing. It's the NIM margin, because of the ALCO strategies that we have been implementing, NIM will continue to improve in 2024. So I correct myself in the presentation, I said customer spread will continue to improve, it's more than NIM.

Anything you want to add Luisa.

No. I would just say that on the beta side, I think that we are looking for a slightly higher beta for this year around 25% to 30%, but we achieved to be within the guidance this year and the beta below 20%. And with regards to the ALCO strategy, I think that, that will also be positively contributing, as you mentioned.

Next question, please.

Our next question comes from Antonio Reale from Bank of America.

It's Antonio from Bank of America. 2 questions for me, please. One on NII trends in Mexico, and secondly, on fees, please. The first one, on NII in Mexico, your outlook for high single-digit growth in '24 is very clear. You talked about seasonality in Q4. Could you maybe just elaborate how much of the quarter was affected by negative carry trades and the key moving parts for 2024, perhaps across spreads, volumes, and hedges?

The second question is on fees. Fees have been strong for a few quarters now, outperforming periods both in Spain and in Mexico. Can you talk about what are you doing differently here? What products you're placing? What are the main drivers? And how sustainable this is really going forward?

Thank you, Antonio for both questions. I mean, a similar strategy that we have been employing in Mexico, you can see it also in the NII sensitivity in Mexico. You would remember that a year ago, the sensitivity of a year, 1.5 ago, the sensitivity -- NII sensitivity of our Mexican franchise was around 3.7% to 100 basis points. So minus 100 basis points would have implied 3.7% decline in NII some time ago, and we have been reducing that sensitivity.

The latest number that we have is now 2.3%, 2.3%. Why? Because we have been increasing the ALCO book, we have been increasing the fixed part of the ALCO book and so on.

You are asking what part is negative carry. A good part is negative carry, but at the moment it's negative carry. I mean, you see it in the ALCO details again in the appendix. We have an EUR 18 billion, EUR 18.2 billion of securities in Mexico. The yield for that book is 8.5%, 8.5%. And we have both, a good part of this, you would see that in the last year only, EUR 6 billion increase, EUR 5.8 billion to be specific, EUR 5.8 billion increase in the ALCO book. And that has come with yields of 9% to 10% in general, 9% to 10%.

The central bank at the moment is paying us 11.25% for the liquidity, so we are taking the negative carry, because we wanted to manage that NII sensitivity. All-in, though, all combined, is the 2.3 number, 2.3% NII sensitivity in Mexico. As such, we are guiding mid-single -- looking into the Mexican numbers, the loans would be growing at double-digit, and the NII high single-digit close to 10%. You would see the numbers high single-digit in the coming year.

Regarding fees, the second question, overall, the business is doing so well, especially in the payment systems. A good part of Mexican fee situation is payment systems. 59% of the fee income comes from what we call payment services. 50% of the 59% is actually cards and POS, the acquiring business, and that has grown 20% in the years, 20% year-over-year, 12-month 23% versus 12-month 22%. So, and we are gaining market share in credit cards, as you know well.

Asset management is also important. It has grown 17%. So, overall, when I look into all the line items, I see very robust growth. So, we are quite positive on the fee income evolution in Mexico as well.

Next question, please.

The next question is from Benjamin Toms at RBC Capital Markets.

As a management team, you've historically spoken about your excess capital, but spoken less about timing and cadence of buybacks. I was hoping you could remind us of how you define your excess capital? And at what point do you expect to return the majority of that back to shareholders?

And then secondly, on cost of risk in Mexico, that's up 25 basis points, the guidance year-on-year. I mean, presumably that's at least partially driven by mix. Your consumer and credit cards are about 25% of your Mexican loan book. Where do you see that number ultimately going to? And will that come ultimately with a cost of risk that is higher than 325 basis points?

The second one, Luisa, maybe you take that one on the first one on the excess capital. We have been saying it all along and we will reiterate it once again today. We don't want to operate. We don't like to operate with excess capital. And we have a clear commitment to return the excess capital, as we have been doing, in my view, over the years, back to our shareholders.

So you remember that the upper end of our capital target range is 12%. That 12% is still our goal, our management's reference. In that sense, we will time it properly, obviously, but we will continue on the path that we have been having. The commitment is clearly there.

There is this regulatory impact topic. I mean, organic capital generation is very robust. We have guided you in the past that around 60 basis points, we will organically, beyond the regular payout that we have, we will continue to generate around 60 basis points organic capital. That is still our plan and our expectation. If you put that into the excess capital that we have, I do think that there will be more share buybacks to come along the way. But again, we will time it properly. Luisa, on the cost of risk in Mexico.

Yes. Well, I think that, as you mentioned, the increase to 325 basis points is primarily driven also, again, by the continued growth in the retail portfolios that yield more. So there is definitely a mixed effect there. I think the underlying trends as well on this year have been supported also by positive impacts on the recalibration of our models.

And we believe that the underlying trends as we grow in the retail portfolios continue to grow there will be more aligned with the 325 basis points cost of risk, while maintaining the profitable growth in the portfolios, as mentioned, in terms of returns. So that's primarily what drives the increase in the cost of risk.

And we also think that the start of the easing cycle expected in the first quarter of this year will help progressively improve the trends going into the year. And we have also been working in the fourth quarter in fine tuning our admission policies, specifically in the consumer segment, especially in the open market. So that obviously has implied a better, I think, admissions, quality admissions of the vintages that are new. But we still have to also see how the vintages, the older vintages progress. So that's why we have that view of 325 basis points going into the year. Again, more biased towards the beginning of the year than towards the end and supported on the continued growth in the retail side.

In Mexico, I would once again highlight something that we talk about all the time. The banking debt over GDP in Mexico is 36%, one of the lowest in all the emerging markets landscape. It's half of Brazil. It's 1/3 of Chile. It's -- again, we keep saying about it, but it's lower than Nicaragua. So the banking debt, it goes back to Tequila Crisis many years ago and so on. Benjamin, the lending book, that's why we are guiding a double-digit loan growth.

The banking book will grow in a healthy way, because the leverage in the system is very high. And credit cards, we have a much higher than average market share in credit cards. We are very well positioned. Our scale is very positive on that one.

You asked about the 25% weight of the loan book. In general, the loan book will grow. That's the key story in Mexico. And within that, given our strength, I would expect that 25% to go higher. But you would not expect a dramatically different number going forward, because the overall lending book will also increase in a very healthy way.

Next question.

Our next question is from Sofie Peterzens from JPMorgan.

This is Sofie from JPMorgan. So my first question would be how you view inorganic growth opportunities, especially in South America and also in Spain?

And then my second question would be in Mexico, neobank is becoming quite aggressive. They've had a huge success story in Brazil. But how do you see kind of competition in the Mexican banking market? And does it make any impact on BBVA?

And then just a final follow-up question. How should we think about the regulatory capital headwinds or any capital headwinds in '24? I guess you will see the share buyback deducted, but if you could just comment on that.

Thank you, Sofie, for all the 3 questions. Maybe on the regulatory topic, Luisa, you help me out. On the inorganic growth, there is nothing new. We are focused on organic growth. Our complete focus is on organic growth. It doesn't mean that we don't look into opportunities, but we are focused on organic growth and nothing more to say on that one.

On the Mexico question, I have this chart. I wish I could project it to all of you now, and you can see that, which is basically the neo bank's market share in the new cards that is printed in Mexico. So forget the base, forget the stock, the new cards that are emitted in a single month, what percent of that is the BBVA and what percent of that -- it's an estimation. It goes back to our own data. But what percent of that newly emitted cards and the spending from those cards come from neobanks in general. And some of the names that -- or one of the names that you mentioned, we respect them a lot. They're very successful, very nimble, very agile players, and we always respect our competitors, and we appreciate them.

But I also see the trend in this curve. And when I look into this trend, it's a very nice trend. In the last 7 quarters, the peak, the neobanks market share in these new cards limited, it peaked in the first quarter 2022. And since then, every single quarter, it's coming down. This is a clear strategic program for BBVA. We are defending our turf. We are getting closer to our customers. We will do our best to make sure that we compete in the best possible manner.

And then regulatory headwinds?

Yes. Well, right now, we don't foresee for 2024, any specific regulatory headwind. I think the most relevant impact is obviously Basel, the entry of Basel IV into effect as of today, as of 1 of January 2025.

As we have stated, we expect a very limited impact around less than 40 basis on a fully loaded -- less than 40 basis points on a fully loaded basis. But really, of that, we would expect less than 30 basis points to come into effect in 2025. This is easily absorbed by our capital organic generation.

Nevertheless, I think that what we are looking at is that it would be reasonable to expect in 2024 CET1 ratio somewhat above 12% in order to avoid potential cliff effect of this impact in the first quarter of 2025.

Next question please.

Next question is from Ignacio Ulargui from BNP Paribas Exane.

I have two questions. The first one, it's on the healthy revenue -- core revenue growth that Onur mentioned for 2024. If you could give us a bit of a sense of what kind of growth levels you are thinking of in terms of revenues?

And alongside with that, I have noticed that you have high single-digit growth in Mexico in costs and 5% cost growth in Spain. I mean, is there room to adjust that cost rate? And then you have done plenty of initiatives to improve efficiency on the core side as well in the last few years. There is kind of an ability to manage costs in case revenues get a bit worse?

And the second question, just on the buyback. Has it been deducted already the EUR 781 million?

Let's start with the last one very quick. Of course, all the buyback numbers, then you see them. They are deducted from capital. So the number of 12.67% already incorporates the impact of the buyback.

The core revenue growth that you're asking, if I'm not mistaken, you're asking overall, Spain and Mexico and…

Yes, group level.

Growth level. I mean, it goes back to the countries, because you have to look into it at the country level to understand the dynamics. Once again, I will highlight this. NII in Spain is growing in our expectations, mid-single digits, which I do think it's a very fair number.

In the sense, once again, the NIM is going to help us because of the reduced NII sensitivity that we have had now, it will help us. And the volumes, as you also see in the guidance, it's going to be flattish. So there's some -- but within that flattish, as we commented a little bit in the beginning, there is some mix change. We are going to be changing our growth to higher return, higher value segments.

So some mix change and continued strength in the NIM will help us to deliver this mid-single-digit NII figures. And in the case of Mexico, the story is a bit different, obviously. It's about volume growth. Again, we discussed it many times in the past. All of you are aware of it, but I have to -- I need to specify it once again, something in our view, big is happening in Mexico. And the growth rate, GDP growth rate of Mexico is 3.2% in 2023. 3.2% -- 3.4%, 3.4% might seem, well, in the context of emerging markets, it might not be that high, and no 3.4%. If you look into the past 15 years of Mexico, the average is 2.1%. So as compared to the average and what Mexico has been living through, something big is happening. And that's something big is finally really this concept of new shoring, the concept of investments in Mexico.

I mean, FTI is up in the first 9 months of 2023, the latest published figure is up 30%, 3-0. Investments, private investments, especially in machinery and equipment and imports of capital goods is up 20%. And I mean we publicize, BBVA research publicizes, publishes this notion of the industrial parks and the space in the industrial parks. You cannot find in the North of Mexico, you cannot find open available industrial park space. So this notion of new shoring, and as you all know, in the first half of 2023, for the first time after decades, Mexico has become the #1 exporter to U.S., passing Canada and China.

This is happening, and this is driving private investments, and investments has always been the key issue in Mexico, and now it's happening. All of this -- and then I'll tie it back to our revenue growth expectations. All of this will drive, will fuel loan growth. We have grown double-digit this year. We are expecting the same, even a bit more in the loan growth, growing at double-digit because the rates will also start coming down a bit in the coming year.

As a result, the core revenues in Mexico will also continue to grow. And again, we do have a wonderful franchise, a wonderful franchise in Mexico. We are very confident that, that core revenue growth will continue and the NII growth as we guided high single-digit will be realized.

Then you asked about expenses. At the moment, we are seeing more opportunities to grow at the moment. As a result, we are guiding on the expenses, as we have guided in the case of Spain, close to 5%; in the case of Mexico growing at high single-digit, because we still see -- do see the opportunity of growing profitably in certain criteria in certain portfolios.

In that sense, we always have the options, but we don't see the need and the discussion to have this year when we are facing nice growth in the revenue side. Anything else you want to add, Luisa?

No, I would only say that, obviously, efficiency is always part of the DNA of the bank and all the countries have ongoing efficiency plans to support actually fueling continued growth. So I think that's compatible as well with the plans that we have in each country to address continued efficiency.

Next question, please.

The next question is from Francisco Riquel from Alantra.

Yes. Two follow-ups. First, in Mexico, your NII guidance of 2 percentage points below loan growth is consistent with your NII sensitivity to lower rates. But you also mentioned that the mix should continue to improve. You're capturing that in the cost of risk guidance, which has also been increased. But I would have thought that the NII would have grown faster. So I wonder if you can comment and you can help us reconcile some of increasing the cost of risk with the increase in the NII guidance for '24, particularly the deposit beta in Mexico. You mentioned that you are paying up for corporate deposits. So what's the impact there? And if that could offset the impact -- the positive impact from the loan mix?

And the second question is about the capital target that you have of 11.5%, 12%, specifically the 12% threshold to return the excess capital. You said that in '21 and since then, your res rep has gone up by 50 bps, is now 9.1%. Basel IV, you mentioned close to 40 bps. There is also noise about a potential countercyclical buffer in Spain. So with all this in mind, do you think that the 12% threshold on a 300, 350 basis points of MDA buffer. Is it still valid going forward pro forma for Basel IV? Or will you update that during the year?

On the first question, I wasn't sure whether you were confirming that we did have a proper guidance or you are challenging it. I wasn't sure. But what I can tell you is that in the case of -- because you are focused more on the asset quality, the mix change is already incorporated in that guidance that we are giving you. Quarter only, not year-to-date, but quarter only cost of risk in Mexico in the third quarter where we have seen some uptick, if you remember, was 308 basis points in the quarter only number.

In the fourth quarter, that number is around 300, 297 basis points. So the mix changed, that the fact that we are growing a bit more on high margin, high return, but high cost of risk segments is already incorporated in the number that you are seeing.

And why is -- and the deposit betas and why is the NII is growing at high single-digit, because there will be some slight decline in customer spread with rates coming down, I gave you the sensitivity also customer spread will come down and NII will come down, NIM margin will come down slightly. So as a result, we are going to grow in loans at double-digit, but the NII, we will be growing at high single-digit because of that impact, basically.

On capital, as you say, pro forma as of January 2024, as of this month, the requirement is going up to 9.1%, 9.09%, if I'm not mistaken, no. With the 12%, the gap, the difference is 291 basis points in CET1 buffer, 291 basis points. 291 basis points. What is the average of the largest banks in the European zone, the 15 peer group that we define, which is all footnoted in all the presentation pages, the ones who are in the EU in that list. What is the average of the buffer that others have? 243 basis points.

So we do have a larger buffer than the average of our key competitors. And I remind you, once again, we discussed it in the past. So I feel sometimes that I'm repeating myself, but it is important. If you take a 15-year, 10-year, 20-year, relatively long enough time frame, and you look into not quarterly, but annual organic capital generation and the standard deviation of that, you do see that our number is first of all, it's higher. So we do have a better number. But even the volatility around this is relatively low as compared to our peers.

In that context, a bank with a business model like us, a bank with a clear competitive advantage, I underline this, clear competitive advantage of having either the best or one of the best banks in the countries that we are in. I mean being #1, #2 or being #6 makes a big difference in banking in any country. And you look into us and you do see that the -- they do have really great banks in the countries that they are in.

Even in very tough macro environments that we operate, we typically have either the best or one of the clear best banks in that country. If you look into volatility, the level of profitability that we have and this notion that we have wonderful franchises in wherever we are, I do think that this buffer is more than enough.

You mentioned about some other topics of the cyclical buffer -- the countercyclical buffer and so on. Countercyclical buffer, as you know, Francisco. It goes back to negative -- its credit cap. We are in the negative territory, and the trend is a downward trend. So the loans are not growing in Spain. So I really don't understand this discussion that we might need countercyclical buffers.

In an environment of credit declining, I don't see. But if it happens, okay, we put it in the number and we move along. But we are clearly confident that the buffer that we have is more than enough. Anything on Luisa?

No, I would only add as well that with regards to the Basel IV impact, we stated that, that around fully loaded would be around 40 basis points. But as you know, from the EBA impact analysis published in September '23, the CET1 would decrease by 220 basis points for the Group 1 entities. And when considering European Commission specificities, it would be 150 basis points. So we are going to be one of the lowest, I think, impacted banks on Basel IV.

I don't -- I rarely see this discussion at all in the market. One of the again, strength of BBVA is the fact that we have the highest leverage in Europe among the larger banks. We have the highest risk density and our WA density for BBVA is 47%. The average of European banks is 28%. Given that, we are not affected from out to the floor, and there's something called Basel coming and the impact on the whole sector will be quite important.

And the impact on BBVA is one of the lowest and that will be also a key differentiator for capital returns for many other discussions that we have been having. So I think it's an important point. It's not far away. It's a year from now.

Next question, please.

The next question is from Alvaro Serrano from Morgan Stanley.

I had a really follow-up questions. Onur, you mentioned the rate sensitivity in Spain, there was symmetric plus/minus 5%. I just want to double-click on that because maybe can you share -- and maybe this is more for Luisa, the deposit beta assumptions behind the minus 5%, because the fact that it's symmetric, I'm not sure if you're using the same deposit beta assumptions on the way up and the way down conscious that on my numbers, you've got 21%, 22% beta Q4 stand-alone. So it looks like the standard 50% beta on the way down could be optimistic, but I just want a clarification there, what assumptions are behind that number?

And second, and apologies if you've already mentioned this. Could you share the rate assumption you're using in Mexico?

Well, I said symmetric, but it's basically, the difference is there, but very little. So it's marginal plus/minus. But going back to the deposit beta, Luisa, you want to take it. It's basically -- how you calculate beta is important. What we are calculating is our deposit cost, the increase in our deposit costs, which was 0, when we started the cycle, divided, but what -- with what has happened to the deposit rate of ECB. ECB deposit rate has increased from minus 50 basis points to 400 basis points.

So the denominator is 450 basis points. And then in the numerator, what has happened to our deposit cost. It used to be 0. Now it's 86 basis points. Divided, you get 19% beta at the end of fourth quarter. With the same assumption, the rates will start coming down, but you take the average in the numerator of what has happened to the rate, and then what happens in the numerator, we are telling you that in our assumptions, it's going to be 25% to 30% at the end of December 2024, because with the decline of the rates in the numerator, we will also see some help in the velocity of increasing the deposit costs.

So, I don't see the -- I don't have the quarterly beta and so on, but at the end of December '23, the beta was 19%. No, Luisa?

Yes. And I think that -- as I mentioned before, we are expecting the deposit betas to go up to 25%, 30%. I think the idea that we have, from the ALCO perspective, is to maintain the sensitivity at these levels, and obviously, there's an active management of the portfolio behind that, so that we will see, depending on the velocity of the migration the -- eventual, price of the deposits, in terms of how they're managed, and obviously the rates. Those moving pieces will determine, the evolution, and our idea, as we mentioned, is to try and maintain the sensitivity at the current 5% level, with regard to those moving pieces.

Then, you asked about Mexico rate assumption, the end of period 2024, so at the end of December 2024, we are foreseeing the official interest rate to be 9%. At the moment, as you know, we are at 11.25%, and we will -- we are expecting the first rate cut to start in the first quarter of this year.

I would also, on this one, sometimes -- some of you mentioned this, and so on, independent of the rate evolution. We did see these in recent past. I mean, the rate, the official rate was 4.25%, 4.25% a few years ago, not too long ago, and when it was 4.25%, our customer spread was 10%. So, we do operate in Mexico with higher spreads, because of the nature of our bank, and because of the customer segments and the products. So, independent of this decline, we have proven in the past that we can operate with very high customer spreads. That is why we are guiding an NII sensitivity to be 2.3%.

Next question, please.

The next question is from Carlos Cobo from Societe Generale.

Carlos from Societe Generale here. A couple of questions. One is, again, on rate sensitivity in Spain. Sorry, I've lost my connection.

No, we hear you, Carlos.

Yes, yes. Can you hear me now? Sorry, the headphones went off. So, one is about the -- and how it changed from, say, 20% to 5% now. And you explained it very well. Part of that is the hedging. But what's the duration of that hedging? How could that be if you couldn't have those hedges? So, I'm trying to get a better feeling of what is the perspective for that in NII once those hedges expire in 2026, 2027? I know this is very dynamic, but it'll be interesting to get some color on that, if you could.

And the second one is on Mexico in terms of the growth and what is the mix? You said 11% growth this year. How much is corporate? How much is consumer? And if you could add how much you're getting from Banamex in terms of market share and what would be the growth mix expected for 2024? Because so far, we keep hearing about the near shore in, but consumer lending keeps getting a very big share of the growth in Mexico. So I was wondering if you expect an acceleration of that corporate loan demand to come through.

On the ALCO, do you want to take it, Luisa?

Yes, well, on the ALCO, as we've mentioned before, the focus has been obviously on locking in our rate sensitivity in the last quarters. We've increased the loan book EUR 8.5 billion in the year. It stands right now at EUR 38.7 billion. And the current yield is 3.1% coming from 2.5% of the last quarter of last year. Duration, including hedges, is 3.4. If we were to exclude the hedges, the duration would be at 4.4. I think that we've been managing also the yield at 3.1% level, especially through the hedges.

Right now, the portfolio composition stands at 85% is fixed, and the 14% or nearly 15% is floating rate. And I think these are the main variables of the portfolio. You know, we've been primarily buying medium term Spanish bonds and unwinding the hedges that we had. Going forward, as we mentioned before, we don't expect to be adding a lot onto the portfolio. I think we're happy with the size. We may keep it flat or slightly increasing, taking opportunities to invest maturities at attractive fixed rate levels if those come to be. But it will obviously be depending, as we mentioned before, on the balance sheet dynamics, especially on the deposit side. And this is what we expect for 2024.

Very good. I mean, I will give you one more number. The floating part of our ALCO portfolio at the end of 2021, 2 years ago, the floating part was 60%. And with time, every single quarter, we kept, or lately actually, in the last few quarters, we kept reducing it. And 60% floating 2 years ago is now 15% floating. So we are more fixed. So if rates go up, we might regret this decision. But our expectation is rates will not go up. So if that's the case, we have done the right thing.

Then regarding Mexico and the growth in Mexico, we do see the internal drivers of consumer growth still to be there. In that sense, once again, the overall leverage in the country is so low that there is room in both segments, in both areas, in different products, to grow. We do expect still a higher growth in retail. I just want to give you 1 number, though. In the case of commercial, the business side, the growth in the year, in 2023, you see it in the pages, but it's 6.7% growth on the commercial enterprise side. But this is partially impacted by the dollar devaluation or Mexican peso appreciation versus dollar.

If you isolate for this currency impact, because some of the loan book in the company segment is in dollars, if you isolate for this, the growth would have been 10.5%. So the enterprise segment is also growing. You don't see it as much because of this depreciation devaluation impact of dollar versus Mexican peso. But in the case of retail, it's 14.4% higher. And those dynamics will continue to be there because when rates come down, there will be more vibrant consumer spending and so on.

Again, we are very positive on Mexico. I mean, even this year, the growth that we are expecting for Mexico now, and typically in the last quarters, we have upgraded in a positive way the growth, but the growth that we are expecting in GDP for Mexico in 2024 is 2.9%, around 3%. It's still a very robust environment. And with rates coming down on the retail side, you will still see some strength.

Next question, please.

The next question is from Britta Schmidt from Autonomous Research.

So coming back on the topic of capital distributions, I mean, irrespective of the CERP and the counter-cyclical buffer, the messaging from the ECB is very clear that banks are supposed to maintain or increase their capital buffers. Does this messaging have any impact on how you think about the payout trajectory versus maybe a couple of quarters ago?

The second would be, could you explain a little bit the outlook for the Turkish customer spread with the kind of forced conversion of FX deposits probably still ongoing? Do you expect this to worsen further or has this bottomed now? And maybe you can also give us the FX and inflation assumptions you used in your guidance to a flat contribution?

And then lastly, just a clarification on Mexico. If I piece together the guidance, is it fair to expect around 5% net profit growth in local currency or could this be better in '24?

Britta, you are now asking us to give a profit guidance by country, but your number 5%, it should be slightly better than that. Yes, not slightly better than that. Let me say it that way.

In the second question, Turkish customers spread, it hasn't bottomed out. We are seeing some pickup in the number. In the month of January, it goes back again, as you said, to currency protected scheme and the requirements of the supervisor and the central bank in this case on this. You might have seen it, but the requirements of the renewal of what we call the central bank covered currency protected scheme, they have relaxed the regulation a bit. They relaxed the rules a bit. And as a result of that, we are seeing some pickup, not big one, but a slight pickup in the customer spreads in the month of January. So our expectation is that, given the situation that we are seeing some return to normal, return to orthodoxy in Turkey, we have seen the bottom in the fourth quarter is our expectation.

And then the first question was on the capital returns. I understand what you're saying, but you should all be aware, again, of the fact that there is a big discontinuity for the European banking sector, which is Basel implementation in January 2025. It's a year from now. In that context of Basel impact, I do think that the numbers that you would see today in terms of capital, they will be different and the base will change. Everyone will be affected. And Luisa has given the numbers and the expectation now for the European banking industry is around 150 basis points different.

So the capital of today and the capital after Basel, they would be 2 different numbers because the baseline would change or the calculation or the approach would change. In that context of there will be this Basel impact also, I cannot square the fact that, there will be further requirements and big requirements. I don't see that. But again, we are dependent on our supervisors, on our regulators, on these decisions. And let's see. Let's see what happens.

The thing that the on the capital returns, I would reiterate one thing which might not be that clear. We are, again, very committed as we have been telling you from the first day that we will return back to our capital target range, the upper end of our range, which is 12%. And we will time it properly, but we will continue to do share buybacks or extraordinary payments to our shareholders because we do have the success capital. And more importantly, we do create, organically we do create capital in every single quarter.

So the 12, to avoid the cliff effect, then let's again be very specific on this. The expected Basel impact for BBVA is less than 40 basis points. But less than 30 of this will come in 2025, in January. So there will be some phasing and so on. We always will look into fully loaded, but the impact in January 2025 will be less than 30. To avoid the cliff effect, we would not be immediately going below 12, because of the Basel impact and so on. Incorporating the 2025 Basel impact, we are still very committed to return the excess capital to our shareholders.

Next question, please.

The next question comes from Andrea Filtri from Mediobanca.

Yes. A more specific question on NII sensitivity, please. What would be the NII sensitivity with forward rates and flat beta? And the second question is on payout. Do you stand by the 50% regular payout split between 40% in cash and 10% in share buyback?

On the first one, do you have an answer? No. Note sure, why don't we get back to you on that one? We don't have the models in front of us, but we can get back to you.

This is the assumption that we have is the current basis of what we've been managing. So the other assumptions are not what we're managing. Let's call it that way.

Yes, but deposit beta being flat, what would be the sensitivity? We can come back to you on that one. Then on the regular -- on the payout of 50%, 40% plus 10%, we did talk to you in the past that we do have this tendency of having a significant part of our payout for cash dividends, which is the 40% that you have seen. Then the rest, it depends obviously on the share price, on the value that we create for our shareholders. But our threshold there or our level where we would then say, no, we won't do any more share buybacks is the fair, in our view, a fair value of the share price, which is not the tangible value of the share. Because the fair value, in our view, is much higher.

So there's still a lot of room to get to that level where we would not consider any more the share buybacks and we would only do the cash dividends. So I would say that 40%, 10% or in that range will be, obviously, it's the decision of the Board and it's the decision of the General Assembly. But our suggestion would be in these ranges going forward.

Next question, please.

The next question is from Ignacio Cerezo from UBS.

I've got 2, if I may. The first one is your best approximation of Argentina's profits in '24. How much are you budgeting versus the '23 number? And the second one is qualitative open-ended question. But how long do you think it's going to take Turkey to go back to a normalized profit contribution? I'm not going to ask you exactly what a contribution is going to be, but from a timing point of view, actually, is it like a 2, 3year period? Or do you think it can take longer than that based on what you have today in terms of macroeconomic assumptions and measures being taken in the last seconds?

On Argentina, you did become the expert on Argentina, Luisa. What is the?

Well, I think that the first thing that's what's important under assumptions is the macro scenario, especially on the devaluation front. So obviously, as you know, we saw a 54% devaluation in the last quarter of the Argentine peso. And we think there will be a further devaluation. And our research teams are expecting the depreciation or the currency to go to 15.42%. So that obviously affects the environment or obviously the P&L development. And also the inflation, because as you know, with hyperinflation, we also need to consider inflation. We see a context of inflation increasing in 2024. We will have an end of an average inflation growing.

Obviously, end of period inflation will come down. We had EUR 211 million at the end of 2023. And we're expecting end of period inflation of EUR 175 million in 2024. However, when you looked at that on an average basis, the average inflation will go significantly up in 2024. So that obviously impacts how we see the hyperinflation accounting and the net profit, net monetary loss. And obviously, these are moving pieces. But within those contexts of further strong depreciation of the currency, higher average inflation in the year, we're expecting Argentina to be around perhaps 20% to 30% below the numbers that we have in the year. But again, these are very much moving pieces. And this is in current terms.

Yes, it doesn't change the overall big picture, but slightly lower is what we are in the planning cycle. That's what we have. Regarding the Turkish situation, I just remembered that I forgot to answer Britta's question in full. The expectation of inflation in our numbers in the expectation for 2024, the inflation for the country is at 45% at the end of the year. 45% inflation in 2024. Obviously, the government is expecting less, but our forecast is 45% at the moment.

Then the question of natural on when do we expect Turkey to normalize is the 2, 3 year period or 5, 6 year period. Our expectation is 2 to 3 year period. What we have seen in the last 6 months in Turkey is even better than our positive expectations that we could have had. This return to orthodoxy is proving to be working. You are seeing it in multiple dimensions. You are seeing it in the CDS spreads. It went down below 300, like half of what it was some months ago. And then now it's a bit back up above 300. But the CDS spreads, the money flow, and there are something, they are going on the right path in our view. There's a new economic team, as you all know, in Turkey. And the economic team is doing what they need to do. And they are also keeping a very close focus on fiscal deficit. They are keeping a very close focus on inflation and so on.

If the path continues, which is our base case expectation, then Turkey will come back to normal in 2, 3 years. This is what also the government has in the plan. I mean, they are expecting, if I'm not mistaken, 33% 2024 inflation. And 2025, they are expecting around 15% inflation, which basically says that they will normalize. Turkey will normalize in 2 years. So there might be some margin around these forecasts of the government. But if they continue on the path that they are on, then it's a 2, 3 year time frame that we are talking about.

And when that happens, there's this option value that we talk about Turkey. Turkey is a very large country, more than $800 billion of GDP and so on. If that happens, if that path continues, we have an amazing option value in Turkey. If there was no hyperinflation in Turkey, hyperinflationary accounting in Turkey, we would have posted not EUR 500 million, EUR 2 billion of profits this year. In local currency, it's in that range, EUR 2 billion. If Turkey continues on this path, we do have this upside that will be coming along from Turkey.

Next question, please.

The next question is from Marta Sanchez Romero at Citi.

My first question is on the structural hedging in Spain. So, you've got EUR 39 billion of ALCO portfolio. Are you expecting to increase that over time? What is like the end target? And then if you could add any color on receiver swaps that you may have, that would help us with our model. So any receiver swaps that you've added in your book?

And on capital, the, I think Onur mentioned, plans to generate 60 basis points of capital per year organically after dividends. But this year, you've only generated 14 basis points, even if I strip out the 1 billion share buyback last year. So my question here is, are you expecting any other recalibration of models that you've been doing to get back to you in 2024? Are you working on optimization of internal models that would release some risk-weighted assets? And related to this -- sorry, the impact of recalibration that we've seen this year will be very helpful.

On the first one, on ALCO.

Okay. Well, as I mentioned before, we are looking at the size of the ALCO book to be reasonably the one that we would like to have. We may be ending the year at this level or slightly above, depending again on the rate levels and if we find opportunities to renew maturities at these levels or not. And obviously, as again, depending on the dynamics of the customer fund evolution in the year.

With regards to the swaps, I think that aside from the hedges that we have on the ALCO books, primarily, as you know, we hedge the mortgages around 30% of retail mortgages are currently a fixed rate. And out of the 70% floating rate mortgages that we have, we have hedges in place for around 45%, 50% of the book. And therefore, we do have some hedging in place on the mortgage book that we, again, dynamically manage going into the year.

Very good. On the second question, which is a very precise, very right question. Marta, thank you for the question. First of all, I mean, at the surface, we have reduced the capital of the bank has been reduced by 13 basis points. The share buyback of 1 billion is 32 basis points. 32 basis points plus minus 13 basis points, it's 19 basis points. So 19 basis points is what we have organically created as it seems on the surface. But if you remember when we said the 60 basis points organic capital generation, we always said it excludes 2 things, regulatory impacts and model updates and also the M&A. We didn't do any M&A, but in the year there were, if you remember in the first quarter, we told you at the time there was a 20 basis points regulatory impact in the models.

And in the fourth quarter, we discussed it as I was going through the presentation. There was this annual model update and this year it produced more than usual negative impact on the capital figures, which was around 20 basis points. Then you add the 19 basis points plus the 20 basis points that you have seen in the first quarter, plus the model updates. Again, we are not expecting in the coming years that the annual update would produce as much. But when you add this year's number of around 20 basis points, you get to 60 basis points. And that's our guidance for next year as well. We are, when we look into our numbers, the organic capital generation, excluding regulatory impact and model updates, excluding M&A, should be around 60 basis points.

Next question, please.

Our next question is from Fernando Gil from Bestinver.

Three quick ones, please. First one is, can you please update on the unrealized losses on mechanical portfolios? I think in Q3 was less than 250 basis points of tangible book. The second one would be, can you please comment on asset quality and Stage 2 increases we saw in Q4? And finally, the last one is, are you going to plan to do an Investor Day during this year for the next 3 years?

Very good. Let's do it very quickly because we are running out of time a bit. The unrealized losses in the hold-to-market, hold-to-maturity books is around EUR 400 million -- EUR 400 million, very low as compared to many other banks out there. And it's mainly Turkey, by the way.

And then the Stage 2 on the Q4, the increase in the Stage 2, it's mainly because of them. If you go country-by-country, it's mainly because of the mortgage portfolio in Spain. Given their variable rate mortgages and so on, we did help our customers in the last few quarters on restructuring their mortgages. And we do apply new definition of default into those portfolios. When you do the restructuring, although the customer is fully fine and paying and so on, the fact that you do the restructuring takes them to the Stage 2 or Stage 3, even in certain cases. This is also one of the reasons why the coverage has come down a little bit because it's mainly the increase in the NPLs also is mainly because of the mortgage portfolio, which typically are covered.

As you know, I mean, the LTV of our mortgage portfolio in Spain is 42%, if I'm not mistaken, around 40%. So these are very nicely covered portfolios. But given the fact that we are helping our customers, our accounting obviously implies that we have to increase the Stage 2s, 3s, and this then also implied lower coverage.

Investor Day, we are planning for it. Yes, in the coming years, we are in the process of thinking about it, on when and how. We will be updating you when we clarified it. But the last time that we did it was 3 years ago. We will be recapping what we have achieved versus the goals that we have set. And yes, we are planning to do it probably in the first quarter of next year. That's the current thinking, but we will update you when it's finalized.

Next question, please.

Our next question is from Carlos Peixoto from CaixaBank.

Yes. A couple of questions from my side, a bit of a follow-up actually. So on Turkey, the question was actually you do flag or you do mention in your guidance that it's reaching in cost of risk to around 110 basis points, but you expect net profit contribution to remain broadly stable. I was wondering, if you could shed some light on the main drivers of setting the payback from a higher cost of risk.

And then the second was a follow-up on what Luisa mentioned on Argentina. When you -- I believe you mentioned the contributions net profit should be something like 30% lower than this year. But this would be in constant euros. And then you mentioned that Argentinian peso -- you're expecting it to iterate to 15.42%, so around 42% devaluation, if I'm correct. So should we flag, should we put this on top of the 40% drop you were mentioning before? Or how should I look at it?

Well, maybe on the second one, very quickly, it's in current euros.

Yes.

It's in current euros. Just to be very clear, and some of you also write this in your reports and so on, complication of understanding. In the hyper countries, it's very simple for us. We always look into current euros, current euros, okay? So the number that you see is the final number. So in the case of numbers, if you talked about the profits of Argentina and so on, current euros. Cost of risk, in Turkey, you're saying with the higher cost of risk, how come Turkey will deliver more or less the same profit? The answer is in the customer spread. We have seen the bottom, in our view, in the fourth quarter, and the customer spread will continue to improve in the coming year. Anything anyone else? Are we done?

There is another question. Next question, please.

Our last question comes from Hugo Cruz from KBW.

I just wanted to ask you about the long-term potential for loan growth in Mexico. Is there a point where we could start to see the loan growth to decline? And so can I think about the cap in terms of nominal GDP or in terms of bank loans to GDP, where you could see that loan growth coming down? Or how do you think about that?

Hugo, I mean, you partially mentioned that the banking debt over GDP is 36% in Mexico. Banking debt over GDP in Brazil is 72%, double. Given the dynamics of Mexico, and I will repeat myself, we do think that something big and positive is happening in Mexico. The market of the U.S. market is so big. And this notion about near-shoring, shortening the supply chains, the drivers, the tendency is so big that we are very positive on the loan growth, at least in the coming 2, 3, 5 years, it's going to be quite positive. There's still so much room. It goes again, it goes back to -- I really looked into this. It goes back to the tequila crisis and everything there. The leverage in the country is so low that there's room to grow in a profitable way.

So this was the last question. Thank you very much. Thank you, everyone, for participating. And as always, let me remind you that the entire team will be available to answer any further questions you might have. Thank you.

Thank you to all. Bye-bye.

Thank you.