Banco de Sabadell, S.A.

Good morning, and welcome to Banco Sabadell's 2021 Full Year Results Audio Webcast. As in previous occasions, the presentation will be run by our CEO, Cesar Gonzalez-Bueno; and our CFO, Leopoldo Alvear.

They will present the main highlights and details of the commercial and financial performance of the bank, both in the fourth quarter as well as throughout the year. The presentation will be followed by a Q&A session.

We expect the presentation and the Q&A to last 1 hour altogether. Thank you again for your attendance.

And let me now hand it over to Cesar Gonzalez-Bueno.

Good morning, everyone, and thank you for joining Sabadell's annual results presentation. Moving to Slide 4.

Commercial activity remains strong across all segments. Secondly, we have made significant steps forward in Sabadell's transformation, which is already yielding positive results.

In addition, TSB has recorded a net profit of £130 million in 2021, coming from £160 million net loss in 2020. TSB continues to show good commercial momentum.

Finally, Sabadell Group recorded a net profit of €530 million in the year, with a return on tangible equity standing at 5%. This figure for 2021 shows that Sabadell is heading in the right direction.

In Slide 5, our loan book grew by a solid 6.7% in 2021. We are meeting the objectives set in our strategic plan, which included growing in our core geographies, Spain and U.K., and shrinking the loan book in our international geographies.

In terms of customer funds, both on- and off-balance sheet funds grew in the year as customers continue to increase their savings and investments. On the next few slides, we will go through the commercial performance of the different segments and products.

Slide 6. In Spain, mortgages performed remarkably well in the year, with new lending in 2021 growing by 38% versus 2020.

Our mortgage stock market share is up by 12 basis points. The good performance of mortgages has been driven by a strong demand throughout the year, together with a product offering that includes an improved online simulator and a digital application platform for our customers.

However, the most remarkable improvement in our value proposition has been the specialized relationship managers pilot launched in the last quarter of the year. I will cover this in more detail later on my presentation.

Granting of new customer loans increased by 11% in the year as a result of the ongoing economic recovery. This growth has enabled us to gain stock market share during the year.

In sum, the positive commercial momentum in mortgages and consumer loans is also evident in our market shares for new lending which keep growing and are ahead of our market shares for the existing stock. New insurance production in '21 was almost 30% larger than the one of the previous year.

This dynamic has resulted in an increase of 74 basis points of our market share in life insurance premiums. Growth is mainly driven by the evolution of mortgage origination and the induced life insurance business it generates.

Regarding mutual funds, assets under management in Spain grew by 18.8% in the year, and our market share grew 11 basis points in the same period, mainly due to solid volumes of net inflows. Here, we keep benefiting from our partnership with Amundi.

Moving on to Slide 8. You can observe that payment-related services are improving along with the economic recovery in Spain and the easing of restrictions.

Looking at our cards business, you can observe a very relevant increase in its turnover, which grew by 19% year-on-year. However, our market share declined in the year.

This was partly due to the fact that the switch from cash to cards has impacted less our customers than the market as they were already heavy users than the average. Regarding payments through our point-of-sale devices, turnover increased by 18% in the year.

Despite being a very relevant increase, we lost 75 basis points of market share. I will come back to this topic later in the presentation.

Slide 9. As you can see in the upper right-hand part of the slide, the volumes of new lending are still subdued in 2021 due to the excess of liquidity that companies accumulated in 2020, mainly through loans guaranteed by ICO.

Nevertheless, it is worth noting that we have gained stock market share and that our positioning in this segment of the market remains strong. We expect demand for business lending to rise over the coming quarters and years.

Firstly, the liquidity accumulated by companies for ICO loans will go back to normal progressively. And on top of that, the deployment of next-generation EU funds over the next few years will increase both private investment and bank financing.

In this regard, a total €11 billion have already been allocated in 2021 to the regional and local authorities as well as to corporates and households. However, these funds have had very little traction over bank financing so far.

The Spanish government has included €40 billion in its 2022 budget. Finally, it is also worth mentioning that the government has announced its intention to request by 2023 the full amount of the €140 billion allocated to Spain.

As a result, Spain will be receiving not only the €70 billion of grants, but also the additional €70 billion of loans, in order to help companies, individuals and public administrations navigate this crisis, go digital and accelerate its transition towards a more sustainable economy. Slide 10.

After having reviewed the origination and commercial performance of the year, let's have a look at the detailed evolution of our performing loan book by segmented products. Looking at the data in Spain, which is on the left-hand side of the slide, you can see that we have managed to grow our loan book in our core segments, which are mortgages, consumer loans and SMEs and corporates.

In addition, as the result of the action taken in our international businesses, ex TSB, the international loan book continues to reduce its size, as you can see on the right-hand side of the slide. This is in line with our strategy of optimizing capital allocation and deleveraging on the overseas market.

A substantial part of this year-on-year reduction is driven by our divestments in Andorra. I would like to spend a bit of time in Slide 11, sorry, it's a busy one, as it is useful to understand the rationale behind our transformation and commercial initiatives.

In the chart to the left, you can see the commercial performance of each product. On the x-axis, you can see that the percentual variation of business origination between 2021 and 2019.

This illustrates how much of our origination is growing for each product when compared to pre-COVID levels. On the y-axis, you can see the stock market share variation for each product in 2021.

This illustrates where our stock growth is beating the market or not. In the interest of time, I won't go through the details of each product, but let me share a brief summary of the graph and, certainly, it is informing the way we look at business.

As you can see, there are 4 quadrants in the chart. In the 2 upper quadrants, we are gaining market share, and that is where most of our products are.

With the products on the top right quadrant, we are also increasing our origination volumes versus pre-COVID levels. So we will keep pushing there.

With the products on the top left quadrant, we are increasing market share, but with lower origination volume pre-COVID. We are ready there to grow when the market recovers.

The products on the bottom quadrants are losing market share. On the bottom right quadrant, we only have 2 products: cards and point of sale payments.

We are growing volumes, but losing market share. In cards, we are assessing the situation and redefining our strategy.

While in point-of-sale payments, we have been managing for profitability and not for volumes. Our profitability in this business is increasing despite the loss of market share.

So there, it is a very decided in advanced strategy. Finally, it is worth noting that we don't have any products decrease in both origination volumes and market share in the bottom left quadrant.

Slide 12. You can see the details of how we are implementing a key element of our transformation in retail banking, which is the deployment of specialized relationship managers.

As we have shared in the past, customers required specialized support and handholding to understand and contract 3 key products: mortgages, investments and insurances. We are transforming a significant amount of our retail banking commercial team from being generalist relationship managers to being specialists in a specific product.

In the last quarter of 2021, we launched the pilot with around 440 specialized relationship managers. The results of these pilots have been very positive, as you can see in the slide.

In insurance and investments, we are observing a higher productivity of these specialized RMs. In the case of mortgages, the sales process takes longer than in insurance or investments, around 3 months.

So it is still early to observe productivity improvements in terms of more sales. However, all mortgage leads generated have now been managed in less than 24 hours, while in the past the percentage was significantly lower and even over a longer period of time.

This, together with other conversion metrics, allow us to be optimistic about mortgage productivity improvements as well as the other products I've mentioned in the coming months. We are preparing the deployment at a higher scale of specialized relationship managers for these 3 products early in the second quarter of 2022.

We will increase our specialized relationship managers from 440 people to 1,200 by developing our current generalist relationship managers and converting them into product specialists. This is a radical shift in the way we originate and manage our retail business.

Slide 13. A brief recap on some recent ESG initiatives and financing activity.

In the left-hand side, you can see some relevant initiatives and milestones achieved in Q4 in the fields of environmental, social and governance. Regarding ESG finance, in the year, our volume sustainable new lending in Spain reached €3.6 billion, while the new lending of social financing reached €3.4 billion.

These initiatives and figures are sign of our commitment to sustainability. In the next Annual General Meeting of Banco Sabadell, we will be releasing Sabadell's sustainability report, where we will share detailed information on the topic.

Looking at TSB in Slide 14. Its new lending volumes have grown by 50% in 2021 when compared to 2020.

This has been driven by a booming property market in the U.K. as well as by an attractive value proposition from TSB to its shareholders.

As you are all aware, the mortgage market has partially -- has been partially supported by the stamp duty waiver in the first quarters of the year. However, on the left-hand side, you can see that origination volumes at TSB were still high in the fourth quarter once the stamp duty waiver had been suspended.

At the bottom of the slide, you can see that these origination volumes contributed to the evolution of the stock of performing loans where the book grows by 11%, driven by mortgage growth. This growth in origination and stock volumes is reflected in our market shares.

TSB, in Slide 15, delivered a remarkable performance across all P&L lines and achieved a net profit of £130 million in 2021. On the right-hand side of the slide, NII and fees grew substantially, while costs showed a downward trend.

Regarding efficiency, TSB is well advanced in its restructuring plan, which will enable it to achieve a cost base of less than £730 million by 2023. TSB continues to look for efficiencies.

In this regard, it has recently announced that it will close a further 70 branches in 2022. In addition, I would like to point out that TSB wrote back covered provisions in the year due to an improved macroeconomic outlook in the U.K.

In sum, TSB is focused on delivering on profitability and service quality. We see positive outlook for the future.

Slide 16, we see the group's recurrent core results grew by 12.6% in the year. In the chart, we have excluded the effect of nonrecurring costs in 2020 and 2021 in order to show the positive evolution of only the group's recurrent business.

Without excluding the one-offs, this evolution would have been better, but we thought that these analysis would be misleading. The three components of recurring cost results performed well in the year, as you can see on the left-hand side.

Moreover, looking at the right-hand side, the quarterly results had also positive momentum. They keep growing quarter by quarter, as shown in the slide.

Slide 17. And to finish with this part of my presentation, I would like to summarize the good financial performance we have delivered in 2021 which Leo will explain later in more detail.

Firstly, NII grew on a year-on-year basis. Fees performed extremely well in the year, while recurring costs continue to follow a downward trend as a result of the restructuring plans undertaken in Spain and the U.K.

As we just discussed, the evolution of recurring results was very positive. Furthermore, provisions in 2021 were substantially lower than the ones of 2020, since then we had the impact of the COVID pandemic.

These positive results bring us to an annual net profit of €530 million and a return on tangible equity of 5%. Regarding capital, we committed to maintain a ratio of above 12% with a solid MDA management buffer, and we have accomplished that.

We closed the year with a 16 basis point increase in our core Tier 1 ratio, which stood at 12.18. Furthermore, and this is relevant, this ratio has increased in a year in which our loan book grew by almost 7%.

And with this, I will hand over to Leo to cover our financial results in more detail.

Thank you, Cesar, and good morning, everyone. Let's move on to the slide of financial results.

And first, allow me to go through a quarterly P&L, where we have recorded a net profit of €161 million at group level, as you can see. This, obviously, contributed positively to the €530 million of net profit for the year that Cesar just presented.

Our quarterly results were mainly impacted by 3 elements. On the one side, we have the EDAC and deposit guarantee scheme annual payments which accounted to €149 million.

And these, as you know, are usually accounted for in Q4 each year. Second, we have the capital gain on the disposal of our renting businesses, which amounted as expected, to €41 million in net terms.

Remember, this has no impact in taxes, and a positive of €56 million in taxes as a result of fiscal assets reorganization. Additionally, and although we will later comment in more detail, we have recognized €19 million of extraordinary costs related to the closure of 70 branches at TSB as Cesar mentioned before.

Now turning to the annual P&L. We see NII and fees growing in the year, which allow us to have a growth rate for 3% in core banking revenues at group level.

With regards to the cost line, recurring costs, excluding the restructuring charges in Spain and U.K. have declined by 2.3% in the year.

This reduction, it's driven by the savings from the efficiency plans launched back in '19 at TSB and 2020 in Spain. But they do not reflect yet as we will later see the €130 million savings that we expect from our latest efficiency plan, which was launched in the quarter last year, 2021, and it's expected to be finished by Q1 '22.

All in all, excluding the restructuring charges for both 2020 and 2021, our core results, this is the addition of NII. Fees and costs increased by 12.6% in the year, underpinned by the solid NII and fee evolution as well as the cost savings already achieved.

Additionally, it is worth mentioning that total provisions went down by 46.2% in the year. This comparison, obviously, is affected by the extraordinary provisions made in 2020 related to COVID basically €650 million.

But we will dig a little bit deeper on this topic in the following slides. If we start with NII in Slide #20, we can see that NII decreased by 1.6% on a quarterly basis.

This was impacted by the ALCO bonds disposals carried out in Q3 as we anticipated and already shared with you in that port. The quarter evolution has been driven by different levers, which we can see in detail in the right-hand side of the slide.

Moving from left to right, the contribution to NII for the quarter has been €3 million higher. We have different impacts here.

Front book yields have been pressured in the last quarter, specifically in the last month and in the corporate banking space. As creditors sought to meet net lending targets, which was more than offset by tailwinds from FX and by higher loan volumes, particularly at TSB.

The lower contribution of the ALCO bonds, together with the excess of liquidity generated have had a negative impact of €17 million, in line with our expectations. However, we will have the option to offset part of this impact by reinvesting excessive liquidity in government bonds through 2022.

Marginally, we had lower wholesale funding costs and some covered bonds matured during the quarter, which has been offset by other moving parts on the NII line. We confirm that we have met the ECB net lending target to benefit from the extra yield of the TLTRO III, which, as you know, was already accrued in NII.

And finally, as you can see on the bottom-left part of the slide, the customer spread remained broadly stable in the quarter. In the next slide, we show a track record of NII every quarter as well as, obviously, the full year accumulated.

We've seen a positive growing trend Q-on-Q, building from bottom levels seen in Q1, and this has allowed us to achieve a positive growth of 0.8% in the year, in line with our Investor Day's guidance of low single-digit growth for 2022. We've had an average quarterly NII of €856 million, which can be taken as a reference for 2022.

And as you can see, it's below Q4's numbers. Going forward, if we look at the expected evolution for 2022, we identify the following as the main moving parts.

On the one hand, we will have a lower contribution of the ALCO portfolio bonds due to the disposals carried out in Q3, but we're also short of over €8 billion bonds. And therefore, we have the option to reinvest and hence, should offset most of this impact.

This impact from 2022 only for the disposals made in Q3 was -- is going to be minus €60 million. And as I said, we should be able to offset most of this impact by the reinvestment of these bonds.

On the other hand, we have the end of TLTRO III benefits, which should reduce NII by around €75 million. And this, on the other hand, we will -- should be offset by the positive mortgage market in the U.K.

This market is supported by volume growth as well as interest rate hikes and should more than offset potential margin compressions and all in all, the impact from TLTRO III. It is also important to mention that we have not factored any rate change in 2022 in Spain, and we have only taken into account 25 basis points in the Bank of England base rate.

With all this in mind, we expect NII to remain flattish in 2022. With all positive elements, especially TSB, contributing to naturalize the biggest negative impact, which will be TLTRO contribution.

Turning on to fees on Slide 22. Group fees increased in the quarter by 10%, mainly driven by the positive seasonality related to asset management and insurance businesses success fees.

The higher service income evolution is explained by the good performance of syndicated loans, also somewhat affected by seasonality and €3 million of nonrecurring fees in TSB related to current accounts. On the other hand, asset management and insurance fees recorded a very positive quarterly performance with an increase of €25 million, of which, as I mentioned before, €17 million are related to success fees.

In any case, as mentioned, the quarter evolution is affected by positive seasonality. But as we can see, when comparing Q4 '21 with Q4 '20, which had its own seasonal success fees, figures are up 13.5%.

Finally, when looking at the full year amounts, fees have grown north of 8% year-on-year. In the following slide, as we previously did with the NII, we show the evolution of fees every quarter as well as the accumulative figure for the year.

We've recorded a positive growth trend in fees as we saw the bottom levels in Q1. On the back of this evolution, fees have achieved a growth of 8.7% in the year which allow us to outperform our Investor Day's guidance of mid-single-digit growth for 2021.

As was the case with the quarterly NII, you can see that our average fees per quarter in 2021, which should be the reference for 2022, was €367 million and is again below Q4 numbers. For next year, the continuation of the good performance in asset management and insurance fees as well as the positive trend in economic activity should be the main drivers supporting this line, where we expect a low single-digit growth.

Now leaving the revenue line to one side and moving on to costs. In the following slide, we can see the total recurring costs slightly increased in the quarter as we have not yet seen the savings for the second phase of the efficiency plan in Spain.

And last quarters of the year always have -- or come along with some extraordinary volatility in expenses. In addition to the seasonal impact, this quarter, total costs also reflects €90 million of extraordinary expenses related to the closures of 70 branches at TSB that will take place during 2022.

On an annual basis, leaving 2020 and 2021's extraordinary costs aside, the restructuring charges, we can see that the underlying cost base is improving since it's decreasing by 2.3%. This is explained by the fact that savings from the execution of the first phase of the efficiency plan in Spain as well as the restructuring plan at TSB have already yielded positive results as we have been seeing through the year.

These results can also be seen in the evolution of the group costs as a percentage of business volume, where we have reduced the weight of costs on our activity by 8 basis points in the year. To end with the cost line, as we shared with you last quarter, we expect 85% of the €130 million in cost savings from the second phase of the efficiencies plan in Spain to be already seen in 2022 and, of course, 100% of those savings to be seen in 2023 onwards.

Taking this into account, we expect total cost to reduce around €110 million in 2022. In Slide 25, we look at the recurring core results, which include, as mentioned before, NII plus fees minus the recurrent costs, this is all cost, but the restructuring charges of both 2020 and 2021.

As you can see, this quarter, group recurring core results have increased by 3.6%, while on an annual basis, this number goes up to 12.6%. The different elements that led to wider jaws in the quarter are included in the left-hand side of the slide.

NII and costs contributed negatively, but this was more than offset by the positive evolution of fees. In the case of NII, as we have seen, it shows a solid underlying evolution despite the lower contribution of the ALCO bonds.

While recurrent costs grew slightly as a consequence of the seasonal impacts that we mentioned before. On the contrary, as we saw, too, fees have had a very strong performance offsetting board effects.

For 2022, we expect this positive trend in just to continue, and this will be driven, as mentioned before, by a flattish expected NII by growth in fees and more importantly, by a significant reduction in costs, the €110 million mentioned before, therefore, providing a high single-digit growth in recurring core results. Now leaving those aside and moving on to cost of risk.

The group's year-to-date credit cost of risk stood at 49 basis points. If you recall, this was 51 basis points as we closed Q3 and 53 basis points in June.

The group's total cost of risk, including all the provisions in the quarter, the before mentioned credit impairments with the provisions of foreclosed assets, the NPA management costs and other provisions for many legal and fiscal risks reached 72 basis points, basically stable compared -- if compared with Q3 numbers. Analyzing the Q4 in detail, we see credit provisions amounted to €195 million, which is a slight decrease of 1% in the quarter, where TSB released more provisions due to better macroeconomic U.K.

-- or outlook in the U.K., driven by lower unemployment rates and higher house pricing index. The release is similar to the one accounted in the second and third quarter of the year.

Taking a view at the breakdown of total provisions at the top right-hand side, we booked the aforementioned €195 billion of loan loss provisions, also €23 million for charges on foreclosed assets, whereas costs related to management of NPAs were booked at €44 million. And finally, €52 million were recognized for other provisions.

And this number is impacted by €25 million in extraordinaries, as a more cautious approach was accounted for contingent and litigation risks. And this should provide a lower pressure in these provisions for 2022, especially taking into account, and this is important, in my opinion, that no new sources of litigation risks have risen in 2021.

As you have seen throughout 2021, these 3 items: foreclosed assets, NPA management costs and other provisions have remained reasonably stable in the quarter, or quarter-on-quarter, just affected by extraordinary events that we have been sharing with you. These provision levels have allowed us to slightly beat our guidance ending the year with the cost -- credit cost of risk and total cost of risk slightly lower than H1 levels.

In order to see how 2022 could evolve in terms of cost of risk, it is worth mentioning or reviewing first the part of the credit book that enjoyed or is still enjoying, payment holidays or EQ guarantees. Beginning with the loan portfolio benefited with payment holidays in Spain, basically retail.

As of today, 100% of the total moratoriums granted has expired. Of the total of €3.5 billion granted, €500 billion have already been fully amortized, while the remaining €3 billion are all back paying down principal, as mentioned before.

On the total payment holidays granted -- or of the total payment holidays granted, 12% are in stage 3. Within that Stage 3, loans classified as unlikely to pay account for the vast majority, almost or more -- a little bit more than 80%.

It is important to note that the percentage of loans in Stage 3 have remained stable quarter-on-quarter, while the percentage of payment holidays expired have been growing towards the current 100% over the quarters. The starting point in Q1, 16% of Stage 3 was due basically to the fact that the first moratory to expire were those based on consumer loans, which, by definition, imply a higher risk than the mortgage loans.

Additionally, as mentioned before, 14% of the total payment holidays granted have been already amortized, the before mentioned €500 million. And this portfolio is represented by a larger amount of consumer loans, where 2/3 of the total loans granted -- consumer loans granted under this program have already been fully amortized.

Moving on to the ICO state guaranteed loans, this quarter, we have granted €260 million. So the total outstanding amount to date is €8.6 billion, where state guarantees cover an average of 76%.

Once the deadline for the request of potential extensions has come to an end, more than 60% of the ICO exposures are already facing principal payments in 2021, whereas the best part of the remaining 40%, approximately 80%, will end their grace period and therefore start repaying principal in Q2 2022, as you can see in the graph at the bottom right-hand side of the slide. From a risk quality perspective, it is important to note that circa 5% of these ICO loans are already classified in Stage 1.

And out of this 5%, 60% are unlikely to pay. This is they are not past due more than 90 days.

Moving on to the next slide. For 2022, we expect some catalysts in cost of risk to provide a downward trend in provisions.

First, let me briefly guide you through the evolution of cost of risk for this year. As is shown on the graph on the left-hand side of the slide, both credit cost of risk and total cost of risk ended the year converging to a more normalized figure.

Looking at the breakdown of the loan book, allow me to highlight the main drivers that we expect will support a positive trend in credit cost of risk. To this, we divide the book, as we have shared before, in 3 different subportfolios.

The subportfolio -- order portfolio which has not been affected by either moratoria or payment holidays, the portfolio covered with ICO guarantees and, lastly, the portfolio which received payments holidays. First, let us share our views for the nonaffected part of the book, which is, by far, obviously, the largest of the 3.

It represents 92% of the total. This is around €143 billion.

The portfolio -- this portfolio has had a very good performance in terms of credit quality in 2021. We have not seen anything extraordinary.

And as we have been sharing with you, the net inflows have remained at better-than-expected levels throughout 2021. We believe this tendency will continue in 2022 on the back of an even better -- better than 2021's macroeconomic outlook.

Secondly, we have the ICO loan portfolio where we have not seen any material deterioration to date. In fact, we have taken a conservative approach this quarter to advance some loss recognitions for those cases where we have seen or anticipated any potential significant increase in risk.

The evolution of this book will be linked to the development of the loans that will start to face principal payments from Q2 onwards, as explained before. In any case, I think it's very important to remember that these exposures are covered with a state guarantee by 76%, therefore, reducing any potential cost of risk effort to just 24% of the total exposure.

And thirdly, we have the payment holiday portfolio where, as mentioned before, 100% of the payment holidays have already expired, where the level of NPLs have remained stable since June, basically. This evolution as well as the more constructive macroeconomic environment allow us to believe that this portfolio will not generate further NPLs nor, obviously, cost of risk in 2022.

Therefore, considering all these drivers, we believe that credit cost of risk for 2022 should land between 2021's and 2019's. In terms of the total cost of risk trend for 2022, let me review the different dynamics across the different concepts, keeping in mind, as we discussed earlier, that excluding extraordinaries, this line should be reasonably stable.

In foreclosed assets, we will not have the €40 million of extraordinary provisions related to branch closures that were booked for in 2021. NPA management, I believe costs should remain reasonably stable in 2022.

And finally, in terms of other provisions, which are basically, as I said -- as I mentioned before, litigation and fiscal risks, we believe that would perform significantly better than 2022, among other things, because we have front-loaded €25 million in 2021. And moreover, on top of this, as mentioned before, we see no new sources of risks in 2021 and, therefore, this line should improve in 2022.

In conclusion, these drivers should allow for the total cost of risk to improve further also in 2022. As always, in the following section of the presentation, we will review the asset quality dynamics, the liquidity and the capital.

Starting by asset quality, we show the evolution of our problematic assets, and let's start with NPLs in Slide #30. NPLs have had an increase in the year of €395 million, but this has been impacted by one-off items that we will see in detail in a minute.

And as a result, our NPL ratio also went up by 6 basis points, up to 3.65%, while the total coverage on NPLs remains stable at 56%. The outcome, as we have been sharing with you every quarter, has been significantly better than what we had budgeted at the beginning of the year.

As per the increase of the €395 million in NPLs, I think it's worth taking into account that most of the movement has been due to nonrecurrent items. So on the one hand, you might remember, TSB in Q1 had an extraordinary increase of €190 million, which was related to regulatory changes for the definition of default of the mortgage portfolio.

The evolution since then has been very stable. And additionally, we have had €150 million of NPL portfolio repurchases throughout the year.

These repurchases are linked to the portfolios that were sold in 2019 and 2022. Therefore, we don't expect any further impacts going forward because all the portfolios have been cleaned, if you wish.

In addition, our exposures across stages have remained broadly stable Q-on-Q as well as our Stage 3 coverage, which stands at 41.2%. And finally, I think it's worth remembering that half of our current NPLs are classified as unlikely to pay.

Now in terms of foreclosed assets and total NPAs in Slide 31. You can see that the stock of foreclosed assets declined by €11 million in the year, representing less than €1.4 billion.

Coverage ratio for this portfolio slightly increased up to 38%. Regarding total NPAs, the stock went up and amounts to €7.6 billion, which is explained by the previous mentioned increase in NPLs, while the coverage remained steady at 53%.

Finally, the gross and net NPA ratios stand at 4.4% and 2.1%, respectively, with a year-on-year and a quarter-on-quarter evolution that have remained broadly stable. Moving now to liquidity.

We see that the group once again ended the quarter and the year with a record liquidity position. This can be reflected in an LCR of 221% on €57 billion worth of high-quality liquid assets.

Our loan to depo ended the quarter at 96%. So it's pretty solid numbers in my opinion.

We have -- in terms of European Central Bank funding currently have €32 billion of outstanding TLTRO-III. And in terms of TFSME for the U.K., we currently have £5.5 billion outstanding, of which £2.5 billion were drawn in the quarter.

And as per our capital position, we continue to generate capital even under a material loan book increased environment. Our CET1 fully loaded ratio stands at 12.18% at year-end, having increased by 16 basis points in the year, while our loan book has expanded over €6 billion.

Now when we look at the quarter's evolution, we see an increase, derived basically by organic capital generation despite the contributions to EDEC and the deposit guarantee schemes in the quarter and also accruing a 31.8% cash payout. Another positive movement, it's the strategic disposals that we have been sharing with you through the year.

Basically, rent in business and Andorra, which contributed with 17 basis points, as expected. It also should be noted that this quarter we have front-loaded a big part of the impact that we shared with you in previous quarters that we were expecting for the EBA guidelines.

We were expecting 15 basis points for 2022, and we have front-loaded 10 of those 15 in 2021 in this quarter. Therefore, the only regulatory impact that we expect for 2022 is just a minor 5 basis points coming from these EBI guidelines.

From a regulatory perspective, CET1 ratio stood at 12.43% on a phase-in basis. And consequently, our MDA buffer now stands at 391 basis points, having increased by 78 basis points in the year.

This buffer, as you might remember, is above our target of 350 basis points. And we see it increasing in the future since, what we've seen, what we are forecasting for 2022, is an increase in CET1 fully loaded.

To conclude this section, the following slide shows you our current MREL position and the requirements for 2024. As we are already compliant with all targets, the ones based on risk-weighted assets, the ones based on leverage ratio and also the subordinated ones, our issuance plan will be, therefore, focused on optimizing the funding costs and the funding sources as well as keeping our capital buckets full and a number of management buffer.

And with this, I hand it over to Cesar, who will conclude our presentation today.

Thank you, Leo. To finish our results presentation today, I would like to recap on the targets achieved in 2021.

I would like to signal that 2021, we have reached all targets set in our strategic plan. On the strength of core results and perspective for cost of risk, as per the guidance Leo just provided, we are bringing forward our 2022 the more than 6% return on tangible equity target.

Finally, the Board has approved to propose at the next Annual General Meeting a cash dividend payment of €0.03 per share, which implies a slightly higher than 30% payout and a dividend yield of around 5%. And with this, I will hand over to Gerardo to kick off our Q&A.

Thank you.

Thank you, Cesar. We will now begin the Q&A session.

We would love to take questions from all of you, and there are already many of you in line. So I would kindly ask you to try to make a reduced number of questions, if possible, please.

Operator, could you please open the line for the next question.

Cesar and Leo, my question is really about NII. I mean in Slide 21, I think, Leo, you mentioned the 8 56 quarterly average the reference for 2022 and there's 3 tailwinds, 3 headwinds.

Is that -- should we interpret a flat is a good sort of level of guidance or am I misinterpreting it? And related to that, can you maybe discuss what your loan growth sort of assumptions are and how you see loan growth panning out particularly in Spain?

And in the U.K., the margin sort of was down in Q4. And obviously, the rate -- the rates are going to go up and potentially 3 or 4x this year.

Can you maybe walk us through the rate sensitivity, which we know but how much of that, in particular, could be competed away? What do you think could be competed away?

Okay. Let me give it the first shot, and then I'll let Leo.

When we look forward, we, yes, think that NII should be flattish, because although the ALCO portfolio disposal of this year will be partially mitigated by reinvestment in government bonds and, there, the higher yield curve will help, and also it will be helped by wholesale funding cost, the net effect should be negative. Also, the TLTRO that ends in June '22, there, we think that it will be more than offset, and this links to your second question, more than offset by TSB.

Because TSB, although margins are going to have some pressure, will benefit from 2 significant factors, which are higher volumes and higher interest rates by the Bank of England. And our Bank of England rates in our numbers are relatively conservative and we might see some further tailwind.

In Spain, as you have seen, we are gaining market share across all products basically. And therefore, we consider that the volumes will continue to be healthy and will be offset somewhat by margin compression.

So overall, our guidance, and you're right in reading Leo's message, our guidance is more or less flattish. I think I have kind of answered the volumes response.

We spend -- we expect in volumes in Spain low single-digit growth across the different segments. Continuing hopefully to gain market share in all products, that's mortgages, consumer loans, SMEs and corporates, as we did in '21.

The tailwind of the next-generation EU Fund will come more in the second part of the year, the €40 billion that we were mentioning before. And in U.K., we are foreseeing a mid-single-digit growth in volumes.

Leo, I don't know if you want to add.

I think you answered most of it, let me just put some numbers, if you wish, on to that, so that we are as clear as we can. So basically, for the ALCO book, as we mentioned in third quarter, and I can refresh now, we -- I mean if we compare our current outstanding balances and the yield that we had in 2021 versus the one that we would have with those outstanding balances in 2022, we would have a negative impact of minus €60 million of contribution.

But we are short of €8 billion of bonds, and we expect to take advantage of the rate movements -- long-term rate movements. So we expect that we will reinvest all or a big part of that portfolio through the year.

So we should compensate most of that impact. Not total, because it will take time until we rebuild those portfolios with good rates.

But most of that should be compensated. Remember that in this current context, it's not only the yield that you get out of the bonds, but also the reduction of the excess of liquidity, which is very important.

The second impact is TLTRO, minus €75 million, sorry, for next year. And we believe, as Cesar explained, that this will -- should be more than offset by the TSB evolution.

TSB, we need to remember that we are counting on volumes next year, but it's not only volumes of 2022. We have to remember that TSB grew well over 11% this year.

And what we have from first January, it's the total volumes that we ended with -- we ended with in Q4. So it's significantly higher than Q1 '21.

So this adds also a lot of money for or a lot of NII for 2022. And on top of that, we're expecting to increase volumes in TSB in '22.

Now in terms of rates, I think we've been reasonably conservative, if you wish. So for Spain, we have not considered any rate movement.

I know there are a number of brokers that are coming out with more optimistic views in the last few weeks, but we have considered 0. And in terms of TSB, we've only considered 25 basis points, while the market now is probably facing more to 100 this year.

So I think, if anything, that should help. In any case, I'm talking about the NII sensitivity that you mentioned, Alvaro.

We need to remember that basically higher interest rates take some time to flow into NII because it takes time to reprice all the asset side. So I think in terms of sensitivity, we have a little bit more sensitivity in TSB than in Spain, but in a different context, if you allow me to explain it this way.

While in Spain or Continental Europe, Euribor is still at minus 50, so deep negative, we don't expect that any rate movement, whenever that comes, will have an impact on the liability side because, as I said, the rates are still very negative. So I think any movement in rates, whenever it comes, should be more or less trespassed -- fully trespassed to NII.

In TSB, it's a little bit different because the rate is already positive and it's at 25 basis points. So when looking at the NII sensitivity, we have to take an assumption regarding how much of that interest rate hike would be passed through to deposits.

But in general terms, in general terms, the sensitivity to NII for the group and for TSB should be around 2% to 3% of NII for every 10 basis points movement. But please remember that the impact of this NII movement, as we have shared before, is much more concentrated on the second year than in the first year because, as I mentioned before, it takes time to reprice the asset side.

I have two, if I may. The first one is on taxes.

I would appreciate if you could take us through the fiscal adjustments you included in the quarter. And the second one is on profitability.

You brought forward the above 6% return on tangible equity targets to 2022. I was wondering if you include any provision reversals at TSB in the guidance?

And also, now that things are going in line or even better than expected, why don't you want to be more bullish on the 2023 target?

I'll leave the taxes to you, Leo, and give a very, very high level on the profitability. On the profitability, to your specific question, if there's something about reversion in TSB, we have there still €30 million of potential reversion, but that's not material in our consideration of the profitability.

The profitability of the 6% is coming basically from flattish NII, low single digit in fees, contribution of €110 million of the saving costs and a significant reduction in risk cost. That's the main origin of the profitability looking forward and our confidence in the more than 6% for 2022.

But I'll leave Leo on the taxes -- sorry, on 20 -- yes for more than 6% in 2022. We are not giving any guidance for 2023 because we think that it's a little bit too early.

This is just 8 months old, and we don't think we should change the plan at this point in time. But certainly, we are more optimistic about beating the plan as we stand -- beating the plan of 2023 as we stand today as it's quite obvious from the numbers we have shown today.

And with regard to the taxes, basically in Q4 we closed some subsidiaries we've come from around 10 years ago, some real estate subsidiaries. That allowed us to contribute or consolidate €56 million -- sorry, €1 million of fiscal assets.

So basically, this has an impact, the positive impact in P&L, which is the one that you've seen, but has no impact in capital because basically there are tax losses carry forward. So basically, they are deducted from CET1.

This is a one-off impact that was due to arrive in this quarter. Yes, one more thing.

Remember that also in this quarter, we have the profit coming from the renting disposal, which is tax-free, okay? It does not contribute to the income tax.

I have two questions. One on fees.

I mean you have just sort of like gone through the NII, but I was wondering a bit on the low single-digit growth in fees. What are the main drivers behind?

And then a very quick one on the strong corporate lending growth production in the fourth quarter. How should we see that sort of like impacting NII in 2022, particularly in the first quarter?

I mean -- so I assume that a lot of the lending growth, syndicated lending growth activity, has been back and loaded in the quarter. So if you just could elaborate a bit on the dynamics of that portfolio in margins and in NII.

So first on fees, we had a very good year for 2021. It was better than what we expected.

We guided for mid-single-digit growth. We almost did 9%.

And I think we're very happy about the evolution. We are still seeing good momentum in 2022.

There's a number of things that should help us increase our fees in 2022, but we see a little bit less of an evolution than the one that we had in '21 because it was very big. So basically, that's why we're guiding for a low single-digit growth.

We're fairly confident that we can achieve it. This is based on basically the very positive commercial momentum in terms of AUMs.

Very happy with the evolution of AUMs. I mean when I look back now, basically, we are only 10% behind what we were making in terms of fees and commissions in AUMs before we sold the asset manager last year.

So basically, we are about to complete a 1-year payback, which is, in my opinion, quite impressive. And this is because, yes, the kind of products that we are putting or that we show in our customers was much better than what we could do on a stand-alone basis before.

And therefore, we are -- we're getting quite a lot of momentum on this regard. And we expect certainly this to continue in 2022.

We're also thinking that we can make some increases in terms of insurance basically, if only based on the evolution of our mortgage volumes and the insurance related to them. So we are positive in that regard.

And then activity, we believe that the activity will -- has to recover more in 2022 on the basis of the macro context. So we're fairly optimistic in fees in '22, but we don't think we will be able to achieve the numbers that we achieved in '21 because we were basically better than what we were thinking.

So positive but low single digits. And with regards to your second question, we saw in the quarter some pressure on the margins of especially corporate banking.

Banks were -- wanted to make certain that they were going to achieve the net lending targets. And therefore, especially in December, we saw a little bit of a drop in prices.

But I think it was a very seasonal impact, in my opinion. It was driven by this issue that I mentioned before.

And in terms of volumes for next year, as Cesar was mentioning, we believe that we should keep on growing on this segment, I mean on the SME segment. Next year -- or sorry, this year in '22, we have the -- we should start seeing the impact of the next-generation fund, but I think this is going to be, in my opinion, backloaded to the second half of the year.

But despite that, I think the recovery of the economy should improve the numbers here, not something spectacular, sorry. As Cesar mentioned before, we've seen low single-digit growth in volumes for Spain in '22.

My first question is on the ALCO portfolio. Can you please elaborate a bit more on the volumes you could be adding?

And what are you buying? Because you can get a bit of a yield now, but you're incurring in a lot of duration risk, particularly if the inflation impacts this year.

I don't know if it's a very consistent strategy. And the second question is on asset quality.

Can you please provide a bit more color on those repurchases of NPL portfolios? What is this?

And could we see more? And then more generally, what is your outlook for NPL entries in 2022?

We've seen that NPLs are up. You are a bit of an outlier here.

Banks that have reported so far have shown very, very down NPL trends. And also on asset -- sorry, on coverage.

Your Stage 3 loan coverage has dropped to 41%. Seems low, particularly when these 3 loans are going up.

Sure. So on volumes, as I mentioned before, we are now short of €8 billion of bonds if we compare it to September 2020, which is when we started selling bonds in order to fund the restructuring plans.

As I've mentioned, there is a chance that we reinvest those bonds. I do not fully agree with your view on this regard.

I think -- obviously, we buy bonds, it's going to be in the held-to-collect portfolio. So it shall have no impact in capital in any case going forward.

And I think we need to remember that it's not only the yields that we're getting out of the bonds that we buy, but the excess liquidity, which is costing us 50 basis points at the current day. As I said, with this -- with the construction of this portfolio in 2022, we're probably not going to be able to fully offset the impact of the minus €60 million that I mentioned before because it will take time to build this portfolio and we're going to be opportunistic with the yields.

But I think it should help to offset most of it. With regards to asset quality, basically what we had in the year was a flowback of €150 million in NPLs.

I think it's worth seeing the context of this. This is €150 million on the back of over €10 billion of transactions, of the disposals of this portfolio.

So barely, I don't know, 1.6% of the total. And the reasons for these are basically 2.

On the one hand, in NPLs, is the difference between signing and the due diligence of the closing, which is basically that the purchaser identified assets not eligible, loans related to social housing, loans that have been repossessed during that period, et cetera, et cetera. This is absolutely normal, I've seen it in my previous job, I've seen it everywhere.

I think it's -- the numbers, in my opinion, are not very, very relevant. And then there's also another impact in the case of foreclosed assets, and this is due to the .

When this was implemented, any repossessed assets sold that did not meet the new would have to be reverted to the bank. And these REOs are coming back to the bank in the forms of NPLs.

In any case, we do not see any impact going forward because the portfolios that were sold in 2019 and 2020 are really clean. So this was more of a historical issue that was pending to finish, if you wish, and not anything that we still have going forward.

So this is €150 million of the movement of NPLs. The NPLs moved €395 million in the year.

And we also have another specific impact which accounted to €190 million in Q1, that was derived from TSB, as explained before. So all in all, we are saying that €350 million of the €395 million growth in NPLs in the year are basically explained by these 2 factors.

In my opinion, an evolution of €40 million, €50 million in 2021 of increase of NPLs, well, we're very happy with it. I think it's much, much better than what we ever could imagine in 2021.

So for next year, what's the outlook? As I tried to explain before, dividing the 3 different buckets of the portfolio that we have.

On the vast majority of the portfolio, over 90% of the portfolio, which is not affected by neither moratorias nor ICOs, trend is very good, has been very good in '21. And I don't see a reason to believe that the trend should not be at least the same or even better in 2022 because the macro is holding up very well.

Real estate prices are going up. Unemployment rate is going very well.

And GDP should grow from 5% to 6% next year. On the second book moratorias, I think that's done.

As I mentioned before, everything is already paying. €500 million out of the €3.5 billion have already been amortized.

So we don't expect neither new NPLs nor basically any kind of cost of risk for 2022. And on the ICO book, well, we anticipated and front-loaded a little bit of NPLs this quarter out of that book.

As I said, we have around 5% of the book classified as Stage 3. And out of that, 60% isn't likely to pay.

Therefore, it has not past due over 90 days. We will see and we need to wait a little bit on how this evolves.

I think the trigger here and I believe the sector will be second Q next year because 80% of the remaining exposure that is not paying in principle today will start in second Q. But in any case, the impact of this in cost of risk, I think -- well, it's certainly reduced, given the fact that 76% of this book is covered by state guarantees.

Therefore, we only have to provide for the remaining 24% in terms of cost of risk. So for the overall movement in NPLs, I'm not certain whether we have seen the peak at the end of 2021, but I believe that if we have not seen that peak, the movement in 2022 should not be relevant, in my opinion.

Yes, it's Benjie here at Jefferies. Just a question on the cost guidance, please.

Perhaps if you could just split out a little bit more detail the moving parts between the expected savings in 2022 versus the underlying inflation, wage drift, et cetera. Perhaps more specifically, just in terms of the outlook for wage growth going forward, is there any terms or deadlines that we should be aware of just post the recent headcount reduction agreements with unions that might impact upon wage growth and the potential impact on inflation going forward?

Sure. So basically, as explained before, we are expecting 85% of the expected savings out of our second efficiency plan, which we are now basically executing to be reflected in our numbers in '22 already.

We are out of -- at the end of January, basically, around 50% of the efficiency plan will have already been executed. So that's why we are confident that we will -- and the remaining 50% will be executed in February and March.

So that's why we're very confident that we will achieve this, at least this 85%. On the -- so that's -- in our case, we're very confident that we can meet those targets.

As per the inflation, yes, there is inflation in costs, but it's basically linked to electricity -- or the most, the biggest part of that is linked to electricity. So inflation is over 6% in Spain, if we go to the part that should be or could impact our costs, it's probably more linked to the service inflation, and that's more around 2%.

In any case, we are fighting to try to reduce that in this year. And we have some cost efficiency initiatives in order to offset that efficiencies in the field of the amount we are spending on consultancy.

The amount that we are spending in physical mailing, driven by the fact that our clients want to relate with us through digital and not physical. And that -- well, it seems silly, but there's a lot of money in that physical mailing, so I think we can save there some money.

And then as per your last question, which was wage inflation, for this year, we are accounted to -- or we are subject to the labor unions agreement, and that includes 1% of increase for 2022 which is obviously considered in our numbers.

And 4% for the U.K.

Correct. And 4% for the U.K.

Yes, sorry, that was Spain.

A question on capital and dividends. You have declared intention to pay €0.03 tax dividend.

I was wondering if there is any change for the payout policy during 2022 given the guide that you have provided on the capital to be better? And the second question is on TSB, the strategy of the asset in the group.

We still don't know other potential fines that may be coming. Do you have any inputs that you can share with us on that?

And yes, that will be it.

Okay. So on dividends, there is no guidance and there's no decision from the Board for future besides what has been communicated today around the distribution over the 2021 results.

The logic and the mood would be that, logically, as results continue to improve, payout would -- should also naturally increase. But there's no more than we can say at this time because there is no formal decision from the Board.

In terms of the TSB fine, it's still early, although we think that the movements will happen probably this year. I think there are 2 factors here.

One is the fine, which is uncertain. And the other one is the recovery from the insurance, which is also uncertain.

The way we see it is that we expect that there will be no material impact from that because they will tend to compensate each other. And the only thing that we do is we expect the timing difference between the potential fine, which should come earlier than the recovery from the insurance on the matter that we are discussing.

So I wanted to ask about TSB. So you have reached 7.7% ROTE at TSB in '21.

Obviously, this is with the help of write-backs. So I don't know if you can comment on how do you -- how do you see ROTE for TSB going forward?

On the 1 hand, the writebacks, you mentioned that there is a still room for provisional writebacks in '22. You were guiding also for a 20 bps cost of risk normalized but for a few mortgage monoline bank maybe conservative.

The cost base, I understood you were also mentioning that if you could meet €730 million guidance for the cost base. So you have some one-offs also in fee income, positive.

So if you can please comment on the overall sustainability of this profitability for TSB going forward. And then also, strategically on TSB, any update on developmental views on this asset?

Shall I take the profitability one? Okay.

So basically, for TSB, we're also positive, if you wish. It's true that we have been able to reach this 7.7% ROTE -- sorry, return on tangible equity in '21, which is well ahead of our initial guidance, which was north of 6% for 2023.

So things are improving. Things have improved more than we thought.

I think with regard to the -- of the management of the bank, things are going very well. And also, the macro is improving much faster and it has helped a lot, for example, in terms of the volumes that have been done both for the market and both for TSB in 2021, which was not in our expectation.

In any case, moving forward and looking at 2022, as I said, we are positive. We think NII should expand because of the reasons I mentioned before.

So basically volumes, we're going to grow volumes in '22, but also we are starting the year with the volumes of Q4, which were significantly higher than in Q1. So this is going to have to be -- it's going to be -- should be fairly positive for 2022, despite the fact that we are not considering all the full rate increases that the market it's now taking into account, just 25 basis points out of the 100.

So pretty confident on NII. Fees, I think we had a very good year in 2022 -- sorry, in 2021.

So we are aiming for perhaps a flattish number in 2022, something reasonably stable. Costs are going to go down in '22 because of the execution of the restructuring plan in '21.

So year-on-year, they're going to go down. And then cost of risk.

We have no cost of risk in '21 because of the write-backs. We believe that cost of risk going forward on a normalized basis should be fairly low, the 20 basis points that you mentioned, Paco.

Basically, this is a mortgage monoliner. As you very well know, the mortgage market in U.K.

is very different to the one in Spain. We're talking about mortgages that have less than 2-year duration because of how the market evolves there.

So basically, historically, mortgages in the U.K. have had very, very, very little basis points in terms of cost of risk, I would say, less than mid-single digits.

And we're expecting -- we are forecasting 20 because we have a little bit of consumer finance. And on top of that, there is a chance that there's still some provisions that were booked in 2020 and that if the macro has a good evolution could be released.

But even without that, we are confident that return on tangible equity in '22 should improve. And Cesar?

Yes. In terms of -- I mean, TSB is generating capital to fund its own growth.

We are very satisfied with the way management and the market and the evolution of the numbers and the strategies going forward. Sorry for being boring, but there are no plans to engage in corporate activity.

So no change.

And my first question is on customer spreads. We have been hearing in the industry that customer spreads should tend to be stable.

But actually, we're still seeing pressure. So I would like to hear your comments going forward into 2022 perhaps.

A little bit of thoughts about different segments. And then the second question is just a detail one.

If you could provide the percentage of ICO loans that are under stage 2.

Okay. I think we have been all along saying that customer spreads are under some pressure, both in Spain and the U.K., across the different segments, both retail and commercial.

The question is, and I think in the guidance that, I mean the forward-looking that we're giving, we are saying that this would be compensated by volume growth. So it's not dramatic, but we see some minor reduction in customer spreads that should be offset or more than offset by volume growth.

In terms of capital, this is also managed because we are being more efficient in the way we deploy it. So overall, it's a positive outcome.

And as per the ICO loans, we have around 18% of the portfolio classified as Stage 2 at the end of the year.

Well, thanks a lot. We're starting to run short of time.

We'll give access to one more call, and we'll see if we can fit yet another one behind that. So let's please give access to the next caller.

I've got two quick ones. Can you tell us what the macro provisions are that are left in Spain and what the expected cost of risk on the NPL inflow is at, at the moment.

And then secondly, are calendar provisions included in your cost of risk outlook? Or do you expect this to potentially impact the shove or not have any impact whatsoever?

Sure. So in terms of macro, we -- if we consider macro, what we provisioned in 2020, as per COVID, that was €650 million.

We are not considering any release of these provisions in 2022. This is important to mention, okay?

So our view of the evolution of cost of risk in 2022 is, if you wish, the recurrent evolution of cost of risk. So we're not foreseeing any kind of write-backs of these provisions in 2022.

And as per the calendar provisions, we are including those in the cost of risk. So we do not expect any kind of impact in capital and, of course, nor in this ramp.

Thanks a lot. That was quick.

So we'll try to squeeze one last question, please.

It's just about if you could explain literally how much of your loan portfolio is now at fixed rates. And how are you thinking about that?

If you are starting to swap that to hedge the interest rate risk. At the same time, on pricing, have you already started to increase the front book prices of fixed rate mortgages because inflation is in some pressure there?

If you are accommodating that risk in the front book as well? How are you thinking about that pricing policy?

If you still want to promote fixed rate mortgages as the way to go forward so you are going to change that in the new environment.

Yes. Around 80% of the new mortgages lending in Q4 have been fixed, but the majority of the portfolio, if you look at the portfolio as a whole, is variable.

We are tending, yes, to produce a more balanced -- the market is more or less a 50-50 fixed and variable. And we will progressively tend to reduce our production of fixed mortgage lending and balancing it with more production of variable.

Also -- not also from a book perspective but also from a demand -- customer demand perspective, we think that's a trend to a more balanced composition. .

And as per the hedging that you mentioned, Carlos, basically, we hedge the book through our ALCO committee evolution. So basically, we hedge it through the hedge of our bonds portfolios and the hedge of our funding.

So of course, we take into account the evolution of the book and the evolution of the -- whether the book is more fixed or more floating. And taking that into account, we hedge the balance sheet.

In any case, we are now more hedged to increasing rates, among other things, for example, because the fact -- because we sold bond portfolios. So because short our portfolios now, we're more hedged to increase of rates.

If we were to buy some of those or rebuild part of those portfolios, as I mentioned before, we would, of course, apply some hedging or leave the hedging where it is right now through hedges on either those bonds or the wholesale funding that we produce.

Thanks a lot. We now wrap up the Q&A session.

Thank you all for your questions. As always, the full IR team is available for any further questions that you could have.

Once again, thank you all for joining us today. Have a good day.

Thank you.

Thank you very much.