Banco De Sabadell Sa Ord

Good morning. Thank you for joining us on Banco Sabadell's first quarter 2023 results audio webcast. Please be welcome. In the next hour, our CEO, Cesar González Bueno, and our CFO, Leopoldo Alvear, will present the main highlights and details of the commercial and financial performance in the quarter. The presentation will be followed up by a Q&A session. Let me now hand it over to our CEO, Cesar González Bueno.

Thank you, Gerardo. Good morning, everyone, and welcome to Sabadell's first quarter 2023 results presentation. As we will explain today, the bank keeps doing well. I would like to start by sharing the key messages in slide four. First of all, in the current environment, we are focused on managing margins versus volumes. In this context, our loan-to-depot improved by 60 basis points in the quarter and stands at 95%. Second, the NII increased by 28% compared to first quarter. Twenty-two, our customer has spread, increased by 51 basis points year-on-year. Third, TSB continued to deliver positive results and posted a profit before taxes of 77 million pounds, 67% up year on year. Fourth, Group's net profit reached 205 million euros in the quarter. This represents an increase of 69% year on year if we exclude the 157 million euros of the new Spanish banking tax recognized in full in this quarter. Finally, our core Tier 1 reached 1278%, increasing 33 basis points year-on-year. Return on tangible equities stood at 9.9%, 11.4% if we exclude the new banking tax. On slide 5, we'll talk about volumes. Starting with the quarterly evolution of performing loans, volumes decreased by 2.2%, quarter on quarter, or by 2.5% at constant FX. This is mostly explained by the usual first quarter seasonality as well. as by weaker demand, slightly weaker demand for loans particularly, and that is more acute in the UK. On a year-on-year basis, lending volumes decreased by 1.4% or by 0.5% at constant effects. There are different dynamics by geography. In Spain, we had a maturity of 2.1 billion loans to the Spanish Treasury annually, Without considering the maturity of this loan, the rest of the lending book grew by 1.6% year on year. In the UK, the mortgage market remained weak in the year following the mini-budget episode last October. Thus, performing loans at TSB decreased by 5.2% in euros or by 1.5% at constant FX. In other international activities, we delivered a solid growth of 5% or 2.7% at constant FX. Moving now to customer funds. On the balance sheet, funds declined by 1.1% in the quarter. On the other hand, balance sheet funds increased by 2.7% in the quarter, driven by positive net inflows and markets performance. As a result, total customer funds decreased by 0.4% in the quarter. Finally, our commercial gap improved by 1 billion euros in the quarter and by 3 billion euros year on year. In slide 6, we take a closer look to our deposit base. 61% of our customer deposits at group level are insured by national deposit insurance and deposit guarantee schemes. Furthermore, our deposit space is granular. 76% of the total deposit base are retail deposits. This figure has remained stable in the past year. Looking at the breakdown by type of deposits, almost 90% are site accounts. This quarter, we have seen a flow from site accounts into term deposits, which includes also commercial paper. This is in line with the deposit beta we forecasted for the year. Finally, our loan-to-deposits ratio improved in the quarter and stands at 95%. So, it's a very stable deposit base. On slide 7, we review the commercial activity in Spain. Mortgage origination fell by 19% year-on-year, broadly in line with the market. We also decreased on a quarter-on-quarter basis due to both a market slowdown and seasonality in Q1. On the other hand, new consumer loans continued to perform well, growing by 32% year-on-year and by 12% quarter-on-quarter. Moving to business banking, in the lower left-hand side of the slide, new loans and credit facilities in Q1 remained broadly stable in the quarter and on a year-on-year basis. Working capital financing fell slightly versus previous quarter due to seasonality but increased 10% year-on-year. Slide 8. Payment-related services continue to perform remarkably well, both in terms of turnover and number of transactions. Cards and point-of-sale turnover posted a strong increase on the year-on-year basis, 11% in cards and 19% in point-of-sale. Quarter-on-quarter turnover decreased in both cases, but that's due to seasonality. Regarding mutual funds, we had a positive net inflow in Q1 of 125 million euros. Despite having net positive inflows, these were lower than in previous quarters. Allow me please to elaborate a bit on this. We have a broad portfolio of investment products to suit the needs of each customer according to their investment profile. Lower net inflows of mutual funds in the quarter were offset by higher net inflows in other investment products, such as structured deposits, commercial paper, or savings insurance, which altogether increased by $2 billion in the quarter. Finally, in the lower right-hand side of the slide, in new protection insurance premium, there is a downward trend as expected and as previously explained. in previous results presentation. In life insurance, we are moving from single premium insurance to renewable premiums, which results in lower upfront payments by the customer. The downward trend will continue for the coming quarters. Slide 9. On the x-axis of the graph, you can see the year-on-year variation of business origination for all products in Q1. On the y-axis, you can see the year-to-date stock market share variation. All products in the A group are performing well. In consumer loans, cards, business banking, and point-of-sale, we are increasing our origination volumes while maintaining or increasing our market shares. So good performance there. Slide 10. Despite increasing marginally our market share, origination volumes are decreasing. As explained before, this is due to a softer mortgage market. In the C group, protection insurance and mutual funds. As I explained before, the performance in protection insurance is in line with our expectations, mainly due to shift from renewable premiums in life insurance. As I also explained, the lower net inflows in mutual funds in the quarter when compared with the previous year is offset by the performance of other investment products such as structured deposits, commercial paper, or savings insurance. So, in summary, good commercial performance in Spain. In slide 10, I will share an update on the progress of our transformation. In retail banking, we had three clear strategic priorities. More digital customers, more digital processes, and more specialized service model. Regarding digital customers, remarkable progress here. In 2021, digital onboarding wasn't even available, while currently we are acquiring more than 50% of our new customers digitally. Regarding digital processes, we are also progressing notably well. For example, digital and remote sales of consumer loans have increased from around 40% in 2021 to more than 70% in Q1-23. Finally, we are deploying a more specialized service model. As we have shared in the past, we have already deployed around 800 specialized RMs for mortgages, investment products, and insurance, and we launched a new private banking model earlier this year. But, of course, we have not finished our transformation process in retail banking. The degree of execution of each strategic priority is different, but in all cases we have specific projects and initiatives to be delivered in the upcoming future. A sample of them have been included in the right-hand side of the slide. Moving on to business banking, the strategic priorities are different to retail banking. verticalization of our value proposition for businesses, deployment of enhanced risk-granting processes, and offering a better day-to-day experience to customers leveraging on technology. I will not expand for the sake of time into the details of this, but I can assure you that here again we are seeing good progress to date and clear initiatives to be delivered in the upcoming future. In short, the results of our transformation, I firmly believe that they are already visible and having an impact, but we still have a clear roadmap looking forward. Moving on to slide 11. Well, but the question is, how have we been able to accelerate the delivery of our transformation initiatives without increasing IT capex? The solution is relatively simple. As you can see in the slide, we have transformed our IT model and reduced unit costs of IT projects by 38%. Furthermore, we have upgraded our data centers and implemented a new infrastructure architecture which delivers a 10% cost avoidance in the total cost of our IT infrastructures and data centers. As a result, we have been able to double our capacity to invest in digital customer solutions while maintaining the total IT capex broadly stable. On top of that, we have also organized our teams to work on a more productive way with a higher degree of integration between IT and the business units, which results in faster and more efficient time to market in our transformation initiatives. Moving on to slide 12. In January, we announced the disposal of our merchant acquiring business. This took place in the framework of a long-term strategic partnership with Nexi, a leading industrial partner. This has been certainly an industrial transaction, and that has been the rationale. The perimeter sold includes 80% of Sabadell's merchant acquiring assets and the transaction includes entering into a 10-year distribution agreement. This transaction will allow us to further build on our position in the payment business in Spain. where we had already acquired a 20% market share in point-of-sale devices. Moreover, it will reduce our investment needs and it will provide cost savings in the future. It will also help us accelerate growth by providing our clients access to more advanced payment systems. The total value of the transaction amounts to $350 million, adding 14 basis points to our core Tier 1. Additionally, it is expected to be P&L accretive from the first year of the agreement. On slide 13, performing loan book by segment XTSB. Consumer loans grew by 3.6% in the quarter. Mortgages, as well as SMEs and corporate lending, remain slightly subdued in the quarter because of seasonality and lower demand for loans in the current macroeconomic scenario. Performance of leading... of lending to the public sector in the quarter was impacted by the maturity of 1.4 billion in the Spanish Treasury loan. Excluding this effect, it would have posted positive growth. Looking at the year-on-year dynamics, we have managed to grow both mortgages and consumer loans. Lending to SMEs and corporates declined slightly as companies are still delaying long-term investments. Regarding our international business, we delivered quarterly negative growth in all geographies, although we still see robust growth in Miami and Mexico on a year-on-year basis. Let's move now to the UK in slide 14. New lending volumes in TSB in the first quarter of 2023 were impacted by low levels of mortgage applications in Q4-22 in line with market dynamics. TSB's mortgage book declined by 3.5% in the quarter, driven by a weaker market. However, mortgage applications have started to recover in Q1, and the volume of applications in March is close to the average monthly volume of the first months of 2022. Moving to TSB's financial performance in slide 15, TSB posted a net profit of £54 million in the quarter, which represents the highest quarterly net profit since 2017. NII grew by 18% year-on-year and benefited from a higher customer spread as well as a higher contribution of the structural hedge. Core results increased by 59% year-on-year thanks to NII performance that offsets lower contribution of fees and slightly higher costs as you can see on the right-hand side. In slide 16, financials on a group basis. We recorded a net profit of €205 million or €361 million, excluding the payment of the new Spanish banking tax. These results entailed a return on tangible equity. of 9.9%, 11.4% if we isolate the impact of the new Spanish banking tax. In addition, our core results, which include NII plus fees minus total cost, grew by more than 46% year on year on the back of the NII performance. In terms of solvency... Our capital ratio stands at 1,278%, which implies a solid increase of 33 basis points year on year. With this, let me hand over to Leo, who will cover the financials of the bank in more detail.

Thank you, Professor, and good morning, everyone. Moving on to the financial results, net profit reached €205 million, posting a quarterly increase of 37% and 4% below Q1 2022 figures. Nevertheless, it is important to take into account that these quarterly results include the full impact of the Spanish banking tax, which in our case amounts to €157 million and is non-tax deductible. In other words, without this extraordinary impact, our net profit would have increased by more than 140% and by 70% on a quarterly and annual basis, respectively. Now, the aforementioned net profit represents a return on tangible equity of 9.9% or 11.4% when the Spanish banking tax is excluded. And this is well ahead of our guidance. In terms of P&L, we will take a closer look at the figures in a minute. But before we do so, I would like to say that overall, the quarterly evolution was healthy, which reflects the good momentum that the business is undergoing. NII grew by 2.2% Q&Q, mainly driven by the current positive interest rate landscape, while on a year-on-year basis it increases north of 28%. Fees were down 5.9% in the quarter, driven by seasonality in decline of both service and asset management fees. as we will see later. And from a year-on-year perspective, the evolution has been minus 2.4%, in line with our low single-digit decline. Costs increased slightly in the quarter by 1.4%, which is actually below our budget. And this, combined with a downward trend in provisions, consistent with a NASA quality backdrop that is holding up very well, boosted the aforementioned net profit figure. Let's go through the different P&L items in more detail. Starting with NII in slide 19, group NII increased, as mentioned before, by 2.2% on the quarter and by 28.3% year-on-year. On the top right-hand side, we can see the drivers that explain the quarterly evolution. Moving from left to right, customer and I.I. contributed with 71 million euros. Within it, customer margin added 107, underpinned by a faster increase of interest rates on the loan book than on the cost of deposits, mostly due to the fact that Euriber repricing is coming through. On the other hand, as you can see, volumes had a negative impact of 30 million euros as new lending volumes remain subdued in the quarter, as Cesar has just explained. The higher ALCO contribution, driven by the repricing of the hedged portion of the portfolio and more expensive wholesale funding broadly offset each other, producing a combined impact of minus 5 million euros. Additionally, TLTRO was the main headwind in this quarter. And as the end of the related income represented a negative impact of 58 million euros Q and Q. As you can see, part of this impact was offset by the excessive liquidity deposited at the ECB. And finally, the account represented an impact of minus 13 million. Now, when we exclude the impact of TLTRO and the calendar's difference, NII would have grown by 9.2% in the quarter. The good evolution of the customer margin can be seen in the performance of our customer spread, which by definition excludes TRTRO, that increased by 20 basis points to 2.73% in the quarter. This is driven, as mentioned before, by the repricing of a variable rate portfolio, with a higher yield on new originations, and by a contained evolution of our customer funds' costs. On the other hand, NIM, which does include TLTO impact, grew 15 basis points in the quarter, up to 1.79%. Moving on to fees, this posted a quarterly decrease of 5.9% Q&Q and 2.4% on an annual basis. This underperformance was driven by both service and asset management fees. Regarding service fees, this declined due to the usual first quarter lower seasonality, and lower revenues from forest transactions, while asset management fees were impacted by the fact that, as we've already announced, we now sell regular premium insurance instead of single premium insurance, meaning that this fee stream will now be recorded more gradually. Additionally, the quarterly comparison is affected by the fact that Q4 includes the positive contribution of insurance success fees that are recorded at year-end. In any case, we had already anticipated this performance in a low single-digit decline guidance for the year, and therefore we are confident that we are within budget. Leaving the revenue lines to one side and moving on to costs, this quarter, total costs increased by 1.4%. On a year-on-year terms, costs increased by roughly 0.7%. Finally, as you can see on the right, compared with the situation one year ago, efficiency has improved significantly, thanks to the different restructuring plans undertaken both in Spain and the UK, and also supported by the solid evolution of gross margin elements, and now stands at group level at 53.6%, while it's 48% ex-TSB. At this point, four months down the road, we feel confident to revisit our guidance for the year and to reduce the expected increase in the cost line from a plus 4% to a plus 3.5% year on year. On the next slide, we take a look at our core results, which include NII plus fees minus costs. As you can see on the left, the year-on-year performance of recent quarters is very substantial, as core results continue to grow at a high speed quarter after quarter. On the top right-hand side, you can see the bridge of this year's evolution. The increase of this metric is supported by NII, which added 242 million euros. The contention of costs made possible that we only must deduct 5 million euros from this line, while fees had a minor negative impact of 8 million euros in the year. Going forward, we expect NII to be the main contributor to the further improvement in core results. Moving to the bottom line of the P&L, we cover the cost of risk and other P&L items between pre-provision profit and profit before taxes. The group's credit cost of risk for the quarter stood at 45 basis points, as you can see, very much in line with 2022's average at 44 basis points. The stability in credit cost of risk is related to the low levels of delinquency that we are observing and therefore to the good evolution of asset quality. Total cost of risk reached 57 basis points, posting a quarterly decrease. Taking a look at the breakdown of total provisions on the top right-hand side, from left to right, we can see that we booked €186 million of loan loss provisions in the quarter, equivalent to the 45 basis points of credit cost of risk that I've just mentioned. There were no provisions related to foreclosed assets. Some foreclosed assets were sold at a premium in the quarter, and the sale proceeds offset the related provisions. MPA management costs amounted to 36 million euros. And finally, other provisions, which are mainly related to litigations, stood at 14 million euros. Now, moving on to the next section, I will walk you through as a quality, liquidity and solvency. In the first slide of the section, we can look at the group's non-performing loans, which showed a slight increase in the quarter, while on a year-on-year basis, the stock has nonetheless been reduced by over 5%. Gross net entries were very much in line with previous quarters, and we're not seeing any deterioration of advanced credit risk indicators. As a matter of fact, the final numbers for the quarters exceed our budget. This is the total NPL portfolio is lower than what we were expecting at this time through the year. NPL ratio advanced 12 basis points in the quarter. Of these, 5 basis points are related to the above-mentioned increase in Stage 3 exposures, while 7 basis points are explained by the loan book reduction. Finally, it is worth noting that coverage ratios remained stable, standing at 55% when considering total provisions over Stage 3. Furthermore, although you do not have Q4-22 information on the screen, Stage 3 coverage increased slightly in the quarter. Moving on in terms of foreclosed assets, it is worth noting that the stock continued to decline both quarterly and on an annual basis. As a matter of fact, year on year, we see a reduction of 14% of the stock in foreclosed assets. The portfolio still benefits from having a sound risk profile as 95% of total foreclosed assets are finished buildings, while coverage remains unchanged at 38%. Overall, total MPIs, which include both MPLs and foreclosed assets, were down 7% year-on-year. Gross and net MPA ratios stand at 4.2% and 2% respectively, while total coverage remains stable at 52%. Turning now to liquidity, as you can see, we are operating with substantial liquidity buffers over both the short and long term, which can be seen in the LCA ratio, which stands at 220%, or the NSFR ratio, which reached 141%. Loan-to-Deposit ratio improves 0.6% in the quarter to 95%, while total liquid assets amount to 58 billion euros, of which 52 are high-quality liquid assets. In terms of central bank funding, let me elaborate a bit on the different geographies, which you can see in the bottom right-hand side of the slide. As per TLT03, of the 32 billion that we drew down as of today, 13.5 billion are outstanding. 8.5 mature this June, while the remaining 5 mature in March 2024. In other words, we have already repaid close to 70% of the borrowing due to be matured this year. Our LCR hasn't undergone major fluctuations as a result of the TLTO repayments, and this is due to the fact that when we repaid the facility, the collateral back in this lending was returned to us, and these collaterals are high liquid assets. Furthermore, at the end of Q1, the liquidity deposited at the EZB is equivalent to 2.2 times the outstanding TLT euro. Finally, in the UK, we prepaid 1 billion of TF SME, leaving 4 billion outstanding, most of which will mature in the second half of 2025. To end with this slide, I would like to highlight the recent improvement in the outlook assigned to our rating by S&P, which has been revised to positive from stable. This action reflects the view of the agency that Banco Sabadell will continue delivering and gradually improving the strength of profitability of our franchise over the next 12 to 24 months. Turning to the next slide, we can see our current embryo position. Sabadell is already compliant with the requirements that need to be met from 1 January 2024 onwards, in line with our funneling plans. And we comply both in terms of total RWAs, leveraged ratios, subordinated RWAs, or subordinated leverage ratio. It is important to highlight that the funding plan for the year has been mostly deployed this first quarter. As a matter of fact, the vast majority of the AMBRL subordinated issuances have already been executed. We have no need to issue any further 81 or Tier 2 in the medium term. In fact, the next 81 call date is not due until September 2026. Finally, moving to the next slide and to end my part of the presentation, let me share with you our solvency situation. At the end of Q1, our CET1 fully loaded ratio reached 12.78%, having increased 24 basis points in the quarter, or 33 basis points year-on-year. When we look at the quarter's evolution in more detail, we can see that the organic capital generation was 13 basis points, even assuming a 10 basis point impact linked to the Spanish banking tax, and after accruing, a dividend payout of 50%. Fair value reserve adjustments had a positive impact of 7 basis points. And finally, lower RWAs derived from lower volumes and better risk profile in the quarter, as well as other deductions such as the IFRS 17, added 4 basis points to our CT1 fully loaded ratio. From a regulatory perspective, the CT1 ratio stood also at 12.78%, which implies an MDA buffer of 413 basis points, which comfortably beats our target of maintaining a buffer above 350 basis points. Finally, in terms of shareholder value creation, tangible book value per share increased by 5% year-on-year, including the distribution of a final dividend of 2 cents per share that was paid to shareholders in March. And with this, I conclude my part and hand over to Cesar.