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.

Thank you, Leo. And now to finish our presentation and before opening the Q&A session, I would like to recap on the quarters development. And you can follow the details in slide 31. I think it's important to stress that the results of our transformation are already visible and that we still have a clear roadmap. So the transformation is not done, but it's progressing very well. Looking at our financial performance, NII grew by more than 28% year-on-year. This makes us optimistic. Thank you very much. even more comfortably on track to meet our target, and as Leo just mentioned, stating it at a 3.5% increase for the year. Total cost of risk reached 57 basis points, which is below our target of less than 65 basis points, which again gives us comfort. All this has brought our return on tangible equity to up to 9.9% or 11.4% if we exclude the banking tax. In both cases, pre or after banking tax, this metric is aligned, this new metric is aligned with our year-end profitability target. And with this, I hand over to Gerardo to kick off the Q&A.

Thank you, Cesar, and thank you, Leo. We will now begin the Q&A session. Please remember to press star six to unmute your line. Operator, could you please open the line for the first question? Yes, we will now open the Q&A session. Just remember that you need to press star six to mute your lines. Operator, could you please open the line for the first question?

First question is coming from Mass Mission from GB Capital. Please go ahead.

Hi, good morning. Thanks for the presentation and taking our questions. Sorry. The first one is on outlook for long-loop growth. And I was wondering if you still expect loan book to grow slightly in 2023? The second one is on NII in Spain, and could we move beyond 2023? What kind of normalized customer spread should we expect for Sabadell going forward after rates were fully repriced? And the last one is on capital. I was wondering if you factor in any additional headwinds this year, and if not, would you consider distributing excess as you are currently generating? Thanks.

In volumes, yes, we maintain our view for the year. The evolution of performing loans is slightly below our guidance, which was flattish, but you have to take into account, as we mentioned, that there was, and this was expected in our budget, that this is slightly decline in the quarter because there is a maturity of a 1.4 billion loan to the Spanish Treasury. In the case of TSB, yes, it is below expectations, but as we mentioned, let's see if it materializes or not. But we see the applications recovering in the first quarter, which could mean an improved performance of the volumes towards the future. Nevertheless, as we've mentioned several times, from a strategic perspective, we believe that in times when the markets are not that strong and the volumes are not growing strongly, it is much better to focus on returns. The yield that you obtain by focusing on returns instead of trying to gain market share aggressively in times of softer markets I think leads us to follow that strategy very clearly. And a good sign also is that the commercial activity continues healthy, you know, with number of transactions in cards and point of sale growing very, very, very handsomely. I don't know if you want to add anything to this question, Leo. No, I think it's okay. Okay. I think the second question was around NII. Okay.

Yeah, I think, well, NII for the quarter is going to be the bottom of the year. So from now onwards, we shall see Q&Q that NII will be higher. And this is actually driven by the customer spread, which will also be the lowest of the year. And therefore, we see that it will keep on improving throughout the year towards probably something above 3%.

Yeah, and I think just to complete, only one-third, 30% of the credit book has repriced. Correct. Of the 70 billion. And, of course, we expect the beta to increase over time. It's quite low. The first quarter has behaved very well. So we have increased to around 15% XTSB coming from a 10%. So we remain with our expectation of 20-25% for the year and the guidance. We expect – I mean, we are even more confident of the behavior of the NIA. Yeah. I think there was a question also on the capital, no? I think any decision – we believe that the capital is going to behave in a healthy manner. You've seen the significant increase during the year to the 1278, and we expect a continued increase – supported by the results in the course of the year. As to what would then happen, I think I have to be very clear on this one. This is board-reserved material, the decision around the payouts, around the structure of the volume and the structure of the payouts. And the board makes this decision much more towards the end of the year or even with the books closed. So we should not expect any guidance on this respect until much, much later, much, much later in the year.

Yeah, and you asked about whether we have any headwind in capital, regulatory headwind going forward. No, the answer is no. We're not expecting any in due course.

Thank you. Operator Les, please move on to the next question.

Next question is coming from Ignacio Largi from BNP Paribas. Please, go ahead.

Hi. Thanks for taking my questions. I have two questions coming back a bit on NII and capital. In terms of deposit betas, you have said that the performance has been much better. Could you give us some sense on how the deposit beta evolved in March? Is there significant change between the first quarter and the evolution in March? Linked to the NII, I just wanted to get a bit of a sense on the deployment of the ALCO portfolio, whether you have invested partially or not, and whether the plans remain to continue increasing the size of the aquabook. And then on the capital front, I just have one question about whether there is any chance to do any other decision rather than shareholder remuneration, like, for instance, potentially buying back part of any of your JVs. I mean, I was thinking particularly on whether there is a chance to buy from Intrum, the servicer, which spends around 130 million euros. of course, every year if that could happen or because of a contract that cannot take place. Thank you.

I'll just take the last one. No, there's not on the table any analysis or negotiation to purchase back any of the JVs. They are working fine.

On the BITAS, what we saw is from January an increase in the three months. Has it been exponential in March? No. And it's not been neither in April. So I think it's been, as I said, as Tessa was mentioning before, it's actually below what we budgeted. Therefore, we remain pretty confident that at this stage, and given the trends that we've seen in the first four months of the year, With our guidance for NII, I think all things being equal, our NII should grow in the very high teens this 2023. As per the ALCO, no, we have not reinvested. We had around €3 billion to reinvest in the year. And as you can see in the numbers in Q1, the ALCO book was almost the same. I think it grew €300 million. So we have not gone through that yet. And there is a chance, yes, that we will do it through the year.

Thank you. Please move on to the next call.

Next question is coming from Borja Ramirez from Citi. Please go ahead.

Hello. Good morning. Thank you for taking my questions. I have two questions, one on wholesale funding. The NII guidance that you provided in January of high teens growth, since then you've did a lot of front-loading in February of wholesale funding at low spreads. Was this better than expected in your original NII guidance? And then my second question is on the UK. It seems that TSB has recently lowered rates for new fixed mortgages. Could you please provide more details on the competitive environment in the UK, as well as volume and market share outlook? And one quick follow-up, if I may. When you define deposit beta, could you please explain how this is calculated? Is it the final cost of a deposit? by the final Euribor and also what is the Euribor expectation in the deposit data. Thank you.

Shall I take the first and the third? So in terms of wholesale funding, yes, the truth is that we anticipated, I think we made a good strategic decision and we anticipated most of the MREL issuances of the year in the first couple of months of the year and we did so because there was a good market, there was a lot of appetite, and we were able to print at lower yields. So it is a little bit better than expected in terms of yields, although it was earlier than expected also in terms of the funding plan. So it's positive for 2023, and it's more positive for 2024, if you wish, because the yields were lower than the budget. And as per the third, yes, as precisely as you mentioned. So the way we are defining the beta, it's the final cost on deposits on the current URIBOR, on the URIBOR that is on the market right now.

On the UK, I think the market has been very soft, very soft because the last quarter of the last year of 22, the demand was very low. And when the market is very low, it's also very low in terms of pricing. In general, I think we are defending reasonably well the margins there, but it is certainly a market that probably should not remain in the same situation as it has been recently. It adjusted downwards very quickly. We see the demand growing in the first quarter as we covered during the presentation, and it's very hard to make a prediction, but we think it's going to go to more normalized levels in the course of the year and certainly in the years to come.

Thank you. Let's move on to the next question, please.

Next question is coming from Karch Peshut from Cashabank BPI. Please, go ahead. Yes.

So a question on cost of risk. So as you mentioned, first you can devote your guidance for the full year.

My apologies. We are not hearing you as clearly as we would like. Can you get closer to the mic or whatever?

It's better now? Yeah. Is it better now?

Thank you.

Okay. So, yeah. Again, thank you for taking the call. So as I was saying, the cost of risk in the first quarter – came below the guidance for the full year, as you already mentioned. I was wondering here if you see here scope for upgrading this guidance, whether you think that the upcoming quarters could be a bit tougher. Well, basically, what type of insights do you have in terms of how vintages have been evolving and overall asset quality indications? And then a second question, a bit of a follow-up on the NII, a very high team's growth. If you could split it between your expectations for Spain and TSP, I would appreciate it. Thank you.

In the cost of risk, I think we mentioned already, both Leo and myself, that the cost of risk at 45 basis points in credit and 57 for all concepts is slightly below our original expectations for the year, which gives us confidence for the rest of the years. We are seeing... No signs of credit deterioration. That doesn't mean that they will happen or not happen in the course of the year, but we are not seeing them in all the advanced and early indicators, both on retail and in SMEs and even in corporate. So we are confident that our guidance is achievable, and we are even more comfortable than we were with our guidance, and it could be slightly better.

And regarding NIA, yes, so the guidance is, as you mentioned, the very high tins. And this is going to be driven mainly, obviously, by Spain because of all the repricing that we've mentioned several times. Of the asset side, I think the repricing in Spain will be well over 20%. And while the evolution of NII in TSB is obviously going to be more mild, milded, because we already saw quite a lot of it in the last couple of years. So it's going to be in the region of the mid single digit.

Thank you. Let's please operate or move on to the next caller.

Next question is coming from Sophie Petersens from GP Morgan. Please go ahead.

Yeah. Hi. Here is Sophie from JP Morgan. So I was just wondering if you could give details around what your I-board levels you could still meet the high net interest income guidance for 2023 and also kind of the very high net interest income guidance that you know have what drive or are you basing that on is it the forward curve or is it a lower level than that and and yeah that's it thank you

Sure. So we budgeted on the basis of 3% arrivals, so it is below the current curve. It was well below the curve that we saw in February, and now, although the curve has gone down, it is still below. I think this will not print a major difference for – I mean, it will be positive for certain, all things being equal. This is if we reach the deposit beta that we are aiming for in 2023. But I think it should have a further impact in 2024 because of the average of the repricing of all the assets I know, which doesn't happen from 1st of January. As we said, we're only 30% done with the repricing. And therefore, this better URI than the one that was included in the budget will be positive for 2023, but moreover for 2024.

Thank you. Let's please move on to the next question.

Next question is coming from Ignacio Celizio from UBS. Please, go ahead. Ignacio Celizio from UBS. Please, go ahead. Ignacio Celizio from UBS.

Please, go ahead. Nacho, if you're hearing us, remember to press star six to unmute yourself.

Yeah, hi, sorry for that. Yeah, I was saying, actually, thank you for taking my questions. I've got three, if I may. The first one is on NII, following up on Leo's comment right now around 24. In Q4, actually, you said that you were expecting NII growing as well in 24. Are you still confident that that is going to be the case, or you think there's a bit of front-loading of that growth in 23? Second question is on the buyback of the results of last year. if you have already applied for the ECB authorization and how long can it take. And the third one is if you can give us a little bit of color on the deposit cost per segment in Spain, breaking it down between retail corporates and institutional large corporate CID. Thank you.

Sure. Let me start with our view of 2024. Now, I think it's a little bit early, but we are four months closer than what we were in December. I think we are still seeing NAI growing in 2024, moreover, because of the rates that I just mentioned. There's a bunch of variety of reasons why we think this should happen if we meet the deposit beta guidance that we have shared with you. So on the one hand, there's a part of the loan book which will still reprise next year. We have to take into account that most likely the rates will end up or the end of the year rates will be the highest of the year. And therefore, there is a space for reprising the book in 2024. towards those higher rates. I think the ALCO book will have a higher contribution because of the rates also. Remember, 40% of the book is hedged, and therefore it's floating. So this shall give us some good news also in 2024. If we are able to make the replenishment of the ALCO book, which was basically 3.5 billion euros, Also, the contribution of this replenishment will be higher, obviously, in 2024 than in 2023 because of when we buy it. The structural hedge results in TSB shall also be positive given that the back book of the hedge is around 1.2% and the five-year swap is, I don't know, 3.7, 3.8, something like that in the current year. standards. And then the negatives would be the deposit beta, which we believe that it will increase in 2024, obviously, and potentially the wholesale funding, a little bit of wholesale funding. All in all, we are still positive with 2024.

In terms of the payback, We have already, of course, we did so immediately after the announcement of the results or soon after. And the response should come between the end of the second quarter or the beginning of the third quarter. And therefore, we will implement soon after. As per the cost per segment, allow me here to be qualitative. I don't think we would like to disclose with all the color and the detail that insider information. But from a qualitative perspective – and this only makes common sense, so you could have deducted this yourself – Retail is moving slower, although we are there, as we said, offering alternative products. SME is marginally in line with retail. Private banking, a little bit more aggressive, a little bit more aggressive, little conversion into fixed-term deposits, more alternative products. And wholesale, very scattered. Some much more demanding, others more... more scattered, and certainly the public sector and there the payments are mainly due in current accounts have been among the most aggressive. And if you allow me, I would leave it at that.

In any case, I think it's worth remembering our structure of deposits because we are mostly retail and SMEs, but we have very little of CIP deposits. It only represents 2% of our deposit base, and that's where... the broadest sensitivity is, if you wish. For the remainder segments of deposits, what we're trying to do is offering alternative products because the world doesn't end with savings. And therefore, we've been able to commercialize over 2.5 billion euros or more of different alternatives to our clients based in mutual funds, guaranteed mutual funds, structured deposits, insurance savings, commercial paper, treasury bills, et cetera, et cetera, et cetera. So that's why while still offering profitability and profitable products to our clients, the PITA is still managing better than what we expected. And then finally, I think you asked about the buyback process. Yes, we did start it. We started after the submission of our ICAP, therefore about a month, basically a month ago, not even a month ago, so a few weeks ago. And everything's going as it should.

Thank you. Let's please operate or move on to the next call.

Next question is coming from Witte Schmidt from Autonomous Research. Please, go ahead.

Yeah, hi there. Two questions, please. One is, could you give us a little bit of detail on your commercial real estate exposure? What is the total volume? What are the LTVs? And what's the share of office and retail, please? And the second one would be a little bit more conceptual. Do you think that there's going to be any impact from the new housing law and rent controls on the Spanish mortgage market?

Shall I take the first one? So our exposure in CRE, it's fairly small, around 2.5 billion euros out of a total loan book of 155, and of which in the U.S. is extremely small, 0.3 percent. Sorry, 0.3 billion. The breakdown by sector is split evenly among logistic, industrial, offices, retail, very low exposure to shopping centers, as well as hospitals, geriatrics, etc. So it's a very atomized portfolio, very well distributed into sectors, non-concentrated, and very little in the U.S., as I mentioned.

And the impact of the new law. First, it's still not final. Second, it's hard to predict. Certainly it could have a little bit more impact on the buy-to-let, but that's not the core of the Spanish market. So we don't think it will have an impact.

Thank you. Let's please move on to the next question.

Next question is coming from Carlos Cobo from Societe General. Please go ahead.

Hello. I hope you can hear me now. Just a couple of follow-ups. One is on the payment sale, and if you could elaborate on your match around that being net accretive from year one, how are the maths working? And the second, if you could elaborate a little bit more on the structural hedge in the UK, if you basically think on the sentence of UK banks and swap everything to protein, and then you have this fixed leg of the swaps repricing, what's the duration, the average duration of the swap, over how long does it reprice? and what would be the remaining contribution to NAI on a satirical basis. Thank you very much.

Yeah, on the – why is it net accretive, the next transaction, is basically because the cost reduction, which is slightly below the $100 million, will be compensated by the more or less similar amount in fees, which means – and that's for the first year. So we get the proceeds from a financial perspective. We get the proceeds of the sale. plus we will be more or less neutral or marginally positive during the first year, and from then on it should be positive. But let me remind, and I will always stress it, that this is a mainly industrial transaction. We have grown to a 20 percent market share with that segment with the point of sale in the point of sale market. And we think and we have done it with worse solutions than the ones we will have next year thanks to this agreement.

And if I may add, I mean, the magic behind being able to make this agreement net accretive in year one, it's basically driven by the fact that Cesar just mentioned, no? It's industrial, and therefore we're not seeking for a capital upfront. What we're seeking is for higher fees and commissions going forward next year. So that's a big part of what we have negotiated. And on the other hand, it's a reduction of costs. Doing this on our own is very expensive when you look at the amortization that you have to put through the P&L because of the machines, if you wish.

Indeed, Leo, and you're absolutely right. And the thing further is that going forward, it would have required a level of investments to keep up with a caliber of evolution, technological and others, of this element that, I mean, we are delighted with the transaction. It makes all the sense in the world.

And the second one, the structural hedge, basically is a hedge over 25 billion euros of deposits. It's a five-year hedge. It's a caterpillar hedge. The back book is around 1.2%, and the front book is basically the five-year swap, which today is at 3.6%. In other words, one-sixtieth of these 25 billion euros of deposits reprice every month, or 5 billion per year. And we are changing this 1.2% for this 3.6%. In other words, we shall see good news coming out of this hedge not only this year, but also in the following years to come.

Thank you. Let's please move on to the next question.

Next question is coming from Fernando Gildes Santimanez from Best Inver Securities. Please go ahead.

Hi. Good morning, and thank you for taking my questions. A question on cost, please. I think that the cost guidance is $3 billion for the year, and I think I heard that you improved a little bit the guidance on cost from growing 4% to 3.5%. So any comment on that will help a lot. Following up on cost, I still see that on Spain, the costing on razor is still at around 48%, which sticks a little bit higher compared to peers. I am wondering if you're looking at this and thinking maybe this is an issue for next business plan, potentially coming next year. And finally, would be, well, your targets are pretty much on track or exceeded during this actual business plan. Are we going to see an investor day or something at the end of this year for the next two or three years, please? Thank you.

I think what we're showing to ourselves is that despite the fact that we continue to invest in digital solutions, and I think during the presentation it was more or less clear that we have doubled our investments there or our cash outs there, that nevertheless we are maintaining the cost of technology flat. And in all the rest of the costs, I think we are confirming with this guidance that we are giving of 3.5% instead of the 4% that we gave at the beginning of the year. that we are being very careful on the cost side despite this higher investment in development of client solutions. And this is a myriad of things. It's not in one place. It's just being careful everywhere. The 48% is not bad, we think, in Spanish level. And we hope to continue to increase it or improve it rather to increase it, which would mean to decrease it. I'm sorry. And it will come mainly from a low growth on the cost base, which we will continue very focused on, and a higher pace on the income. And that's where we would expect it to come. The other question was? Investor Day. Investor Day. No Investor Day. No, Investor Day, and let me be very clear here. When we did the Investor Day at the beginning of 2022, it was under very special circumstances. The bank had just come out of the expectation of a merger that didn't happen, and I think in hindsight for the good reasons. It had a very low very, very low market cap. That doesn't mean that the one that we have now is higher, that we are satisfied with it, but it's a completely different one. And there was major changes in strategy. I don't think it is sufficiently visible, but the change in... The organizational structure, the change in metrics, the forward-looking in terms of digitalization. As I mentioned before, 50% of our customers are now acquired digitally from zero two years ago. So it's a very major change of strategy, and we are pursuing that strategy, and we are going to continue pursuing that strategy. There's also no change in the perimeter. We are happy having in our books and in our perimeter DSV. We are happy having Mexico, and we are happy with the structure that we have in all fronts. And the thing that we also did two and a half years ago or something like that, no, two years ago. two years ago, was to establish a forward view of three years. And that made sense at that point in time. It made sense at that point in time because there were, I would say, more doubts about the visibility. There was a new team, and we wanted to share that we saw a clear future for Bank Sabadell. We were wrong. not by not seeing a clear future, which we continue to see, but by projecting a return on tangible equity of 6%. And as you heard today, we are projecting now a 10%. It is true also that the market conditions have improved. It's not only because of a better management of the bank, which I think is also there. So, no, we have no plan. And from now on, we will continue to give guidance as we are doing it lately, which is with a year of advance. During the year, we will fine tune the guidance that we give for the year. And let me say that the strategy in the stricter sense of the word is to continue executing, you saw before in the slides, that we are in the process and on our way.

If I may add, I think just on what Faisal was mentioning, guidance. We're giving you guidance every year end, but also every quarter. So, for example, this quarter we have revisited a little bit our guidance, and we have made a point that NII will be in the very high teens. Fees and commission should be around our guidance. This is in the low single-digit decline. Costs will be or should be better than what expected at the beginning of the year, so 3.5% increase instead of 4%. provisions probably at or better than our guidance in Q1. And therefore, we are seeing that our return on tangible equity, which in Q1 stands at 10%, should be more or less the level for year-end. This is well above our north of 9% guidance that we gave you one quarter ago. I think things have changed a lot in the last couple of years. Now we had a return on tangible equity of zero, and now we have 10. We were not distributing dividends. Now we are accruing 50% of payout. We had a capital CET1 of 12%. Now we stand at 12.78% despite accruing 50% of payout. And the valuation of the bank has improved, but we are still trading at 0.5 tangible book value, you know. When I look at these numbers and I take into account this return on tangible of 10%, this payout of 50%, and the 0.5 times book value, well, we are offering the market a dividend yield in the range of 10%, which I think it's an interesting proposition from my point of view.

That's used to say to that type of numbers, it could have been worse.

Yes.

And also to emphasize that we are very comfortable with the strategy that we defined. And the organizational structure, the bank is reacting very well, and it's very aligned. And these are, again, intangibles, but we are all aligned behind the main lines of development, which is the strategy that we defined two years ago, and we just want to persevere.

Thank you. I believe we have one more question. Operator, could you please give access to the last call of the day?

Next question is coming from Jacques-Henri Gollart from Clepe-Choperie. Please go ahead.

Yes.

Yes. Good morning. Thank you very much for taking my question. Jacques-Henri here. Just following up, gentlemen, It would be a shame if you didn't do another invest today, considering, and I was perusing through your presentation, how much things have changed, how much you have evolved. You've disposed of a lot of things. You've partnered with a lot of people. You could consider that you may want to actually reinvest somewhere else and just, you know, I don't know, try to, I would say, put in stone further progress from, indeed, your price change book value, which has already been multiplied by two and a half. and just not be simply, you know, another interest rate play. Just, you know, challenging you a little bit on that. Thank you.

Thank you. Okay. Well, I think that does it. Thank you all for your questions, and thank you, Cesar and Leo, for your answers. We now wrap up the Q&A session. As always, the full IR team is available for any further questions that you could have. Thank you all.

Thank you so much.

Thank you very much.