Banco De Sabadell Sa Ord

Good morning and welcome to Banco Sabadell's second quarter 2023 results presentation audio webcast. Our CEO, César González Bueno, and our CFO, Leopoldo Alvear, will present the main highlights and details of the commercial and financial performance of the bank in the quarter. The presentation will be followed up by a Q&A session. We have a schedule around one hour for the whole session. Let me now hand it over to César González Bueno.

Thank you, Gerardo. Good morning, everyone, and welcome to Sabadell's result presentation. As we will explain today, the bank is in good shape and keeps performing well. Let's start with the key messages in slide four. First of all, NII grew by 6% in the quarter, and our customer margin increased by 16 basis points quarter on quarter. Second, asset quality remains stable. Group's total cost of risk stands at 56 basis points in line with the first quarter of the year. Third, net profit of the group reached €564 million. In the first six months of the year, TSB continued to deliver positive results and posted a net profit of 105 million pounds. Fourth, our share-by-back program was launched in June once the ECB's approval was received. So far, as of the 24th of July, 19% of the planned 204 million euros have been repurchased. Finally, our return on tangible equity stands at 10.8%, while our Q1 ratio reached 12.87%, increasing by 33 basis points year-to-date. Let's talk about volumes. Starting with the quarterly evolution of performing loans, volumes remained quite stable, growing slightly by 0.8% in the quarter and remaining flat considering constant effects. The evolution is positively impacted by the seasonal effect of the Social Security advance payment in Spain, as well as by positive growth in our other international businesses. On a year-on-year basis, lending volumes declined by 2.7%. Moving now to customer funds in the right-hand side of the slide. On-balance sheet funds remained stable and increased by 0.3% in the quarter, marginally supported by the strength of the sterling pound. On-balance sheet funds increased by 0.5% in the quarter, driven by positive net inflows of mutual funds. As a result, total customer funds increased by 0.3% in the quarter. Slide 6. I would like to make a brief comment about our transformation here. As we have explained in the past, we are undertaking a radical transformation in retail banking. In the upper part of the slide you can see the significant leap forward we have made. And these are just some examples of the activities that have been carried up to date. For instance, we already are acquiring more than half of our new customers digitally. We didn't have this option available in 2021. 75% of new customer loans sales take place either digitally or through remote channels, which is almost twice as much as two years ago. And for those products where the customer demands required specialized advice, we have deployed these relationship managers. And mortgages is just an example. Almost 40% of our new mortgages lending is already being originated through these specialized relationship managers. A radical transformation in retail banking is accelerating. And most importantly, this transformation is enabling us to keep growing our customer base that then will be served and is being served with value-added products with our specialists in the network. Moving on to business banking, we have a solid franchise here, and we are deploying an evolutionary transformation. These are just some examples. We keep focusing on increasing the use of analytics to drive growth in order to increase the profitability of our loan portfolio. As a result, the risk-adjusted return on capital of our loan portfolio has improved significantly from 18% in 2021 to 25% by the end of the first half of 2023. We also have launched a sector-specific offering for 34 sectors. This has translated in a 53% increase of customer acquisition in these sectors that we understand so well. Finally, as a result of the revamped web and app for business banking customers, the number of logins have increased by 20% over the last two years. This is mainly driven by the maturity On slide seven, the review of our commercial activity in Spain. Mortgage origination in Q2 increased by 7% quarter on quarter. In the first half of 2023, it decreased by 23% compared to 2022. And this is broadly in line with the market slowdown. New consumer loans increased by 9% quarter-on-quarter and by 23% year-on-year. New loans and credit facilities in business banking increased by 44% quarter-on-quarter. But this is mainly driven by the maturity of the three-year-old ICO or ICO-granted credit facilities in 2Q 2023, which were renewed into regular credit facilities. This has no relevant impact on the stock. although it does have a significant impact on repricing. Finally, on the lower right-hand side of the slide, working capital financing continued to perform well, posting a 7% increase quarter-on-quarter and 4% year-on-year. Slide 8. Payment-related services continue to perform well for another quarter in terms of both turnover and number of transactions. Cards turnover increased by 9% quarter-on-quarter and by 5% year-on-year, while point-of-sale turnover increased by 18% quarter-on-quarter and 9% year-on-year. In the lower left-hand side of the slide, net inflows of mutual funds amounted to 153 million euros in Q2. a figure above previous quarters. In the current context of raising interest rates, however, we keep offering a wide range of savings and investment products to our customers beyond mutual funds. In the lower right-hand side of the slide, you can see that the total volume of customer funds in our portfolio of savings and investment products, both on balance and off balance, grew by 5% quarter on quarter and by 8% year on year. We manage this product portfolio to maintain customer deposits in our balance sheet broadly stable in the quarter, as we have discussed before. Slide 9, performing loans by segment ex-TSB. Let me start with our business in Spain. Consumer loans grew by 3.5% in the quarter and by 12.3% year-on-year. Sound demand is supported by improving unemployment rate in Spain. On the other hand, the stock of mortgage lending remained slightly subdued in the quarter and decreased by 0.8% quarter on quarter. This was mainly due to a lower demand of new mortgages because of the fast increase of interest rates in the last few months. Loans to SMEs and corporates also remained flattish because of lower demand as companies are still postponing long-term investments. It decreased by 0.5% in the quarter. Finally, the 19.1% growth of other lending in the quarter is due to Social Security advance payments of 655 million euros. This is a temporary effect. It happens every year in June and it's reversed in July. All in all, performing loans remained fairly stable in the quarter, increasing by 0.3% quarter on quarter. Regarding our international businesses, performing loans grew by 3.1% in the quarter, 1.8% at constant FX. Both Mexico and our foreign branches delivered positive growth in the quarter, while Miami posted a small decrease of its lending book. Moving on to the UK and TSB on slide 10. New mortgage lending volumes at TSB in the second quarter were impacted by the lower activity in the UK housing market and origination declined by 5% quarter on quarter. Mortgage applications were up 20% in the second quarter versus the first quarter, which is positive news, but they remain below the levels observed prior to the mini-budget episode. In terms of stock, TSP's mortgage book declined by 1.1% in the quarter, driven by a weak mortgage market. Moving to customer deposits, they have also decreased in the quarter by similar levels. Total customer deposits decreased by 0.9% in the quarter. Funds are gradually flowing from current accounts to savings accounts, but at a slower pace than the average of the system. In this regard, we have an average deposit amount below £7,000, than five years. Moving on to TSB's financial performance in slide 11, we see that TSB recorded a net profit of 50 million pounds in the quarter and 105 million pounds in the first half of the year. NII for the first six months grew by 14% year-on-year. Core results in the first half of 2023 increased by 35.6% year-on-year. Good and high performance offset by TSP's decrease of fees and commissions and slight increase of cost, as you can see on the right-hand side of the slide. Let me highlight that despite high inflation, only a marginal increase in cost has been registered. Finally, net profit as of June posted growth above 70%. This jump compared to the first six months of 2022 is partly due to the impact of the bank's levy reversal in first half 2022, as we explained to you in this very same webcast last year. This good performance allowed the return on tangible equity to reach 11%. In slide 12, I will quickly go through the financials on a group basis, which Leo will explain later in more detail. We recorded a net profit of 359 million euros in the quarter and 564 million euros in the first six months of the year, which is a record figure for us. This positive evolution was significantly driven by our core results, calculated as NII plus fees minus total costs. Core results grew by more than 42% year-on-year on the strength of our NII performance. Return on tangible equity stands at 10.8%, while our core tier 1 ratio stands at 1287%, recording a solid increase of 33 basis points in the first half of the year. Moving to shareholder value creation in slide 13. At the end of June, after receiving the regulatory authorizations, we launched our first share buyback program. This was one of the main points approved at our general meeting shareholders. The share buyback, together with the increase in profitability of the last few quarters, has contributed to shareholders' value creation. Tangible book value increased by 6.6% over the last 12 months, including the distribution of a cash dividend of 2 cents per share paid in March. If we consider the full execution of the share buyback program pro forma, value creation rises to 8.5%. Finally, in light of the recurring good evolution of our results, we have improved our return on tangible equity guidance for the year, and to remain around 10.5%. Let me share that we expect the closing of the alliance of our merchant acquiring business with Nexi, which we signed last February, to take place in the first half of 2024. Therefore, our close to 10.5% return on tangible equity guidance for 2023 doesn't include any capital gain from the deal with Nexi, which will be booked in 2024. And with this, I will hand it over to Leo, who will cover the bank's financials for the quarter in more detail.

Thank you, Cesar, and good morning, everyone. Now, moving on to the financial results, starting with slide 15, we show a quarterly and half-year results evolution. So net profit in Q2 reached 359 million euros. When added to the first quarter results, half-year profit stands at 564 million euros. This is 44% higher than last year's figure, despite the Spanish banking tax occurred in Q1 of 157 million euros. The aforementioned net profit represents a rate of 10.8%. Overall, as we can see, the quarter evolution was healthy, which shows the good momentum of the business with a solid year-on-year performance, which provides a good estimate of the expected evolution for the full year 2023. Core banking revenues, this is net interest income and fees, grew by 4.6% in the quarter. This is explained by strong NII, which grew by 6.3% Q&Q, partially offset by the fee line, which declined minus 1% in the quarter. For the first half, the core banking revenues amount to 3 billion euros, representing an increase of 19.4% year-on-year. This evolution was also driven by NII, which increased by 29.2% in the first half of the year, offsetting the 4.4% decline observed in fees in the same period. Cost inflation accelerated slightly in the quarter, with growth of 2.4%, Q&Q, or 2.7% in the first half of the year. This is in line with our expectation that costs should continue to increase throughout the year, to a total increase of 3.5% at year-end. The combination of core revenues and costs drove our core results upward by almost 7% in the quarter and a remarkable 42% in the year so far. This, combined with a stable evolution of cost of risk, drove the aforementioned net profit figures. It is important to mention that within the numbers of the quarter, the P&E recorded a single resolution fund payment of 76 million euros, which is usually incurred in Q2 of each year. This marks the end of the SRB's funds build-up phase, and therefore, going forward, 2024 and onwards, the contribution should be negligible, as we will only have to cover the potential increase in the European deposit base. We'll now go through the different P&L items in more detail. Starting with NII in slide 16, group NII increased, as mentioned before, by 6.3% on the quarterly basis and continued to accelerate in annual terms to north of 29% year-on-year. On the top right hand side, you can see the drivers that explain the quarterly evolution. Now moving from left to right, it has been another quarter where Euribor reprising is coming through, and this will continue to be so over the coming quarters, and according to the forward curve, at least until the second quarter of 2024. Customer and I.I. contributed €60 million. Within it, customer margin added €72 million, underpinned by the fact that a loan book appreciated once again at higher interest rates, while the cost of deposits remained at contained levels. The higher ALCO contribution, driven by the repricing of the hedged portion of the portfolio, which accounts to 44%, along with the remuneration coming from the excess liquidity deposited at the ECB, more than offset, as expected, a higher wholesale funding cost, producing a combined net profit impact of €8 million. Finally, the others category, which includes some hedging and other miscellaneous items, have a negative impact of €4 million, while the addition in day count represents an impact of plus €6 million in the quarter. The customer spread increased by 16 basis points to a 2.89% in the quarter, driven by the repricing of the variable rate portfolio, as well as by the higher yield on new originations, and, as we just mentioned, by a contained evolution of our customer funds cost. On the other hand, NII grew by 9 basis points in the quarter to 1.88%. With all this in mind, and with half a year behind us, we revise upwards our guidance and believe that NII in 2023 will grow above 20% on a year-on-year basis. Leaving the fee line and moving on to fees, this posted a decrease of 1% in the quarter and 4.4% on an annual basis. This underperformance was mainly attributable to service and asset management fees. However, credit risk fees remain broadly stable in the quarter and have posted a positive growth in the year. Service fees remained roughly flourished in the quarter, and these were supported by commissions related to payments and cards, where we had a higher activity, as Cesar explained at the beginning of the presentation. And on the other hand, they were offset by lower maintenance fees for current accounts. In the year-on-year variation, the underperformance is mostly explained by lower revenues from Forex transactions. Within the asset management fees, insurance brokerage fees continues to be impacted by the product mis-change as we are selling regular premium insurance instead of single premium insurance. And this fee stream will recover gradually, as we mentioned in last quarter's result presentation. Due to this weaker performance in the overall fee line and anticipated a potentially less dynamic credit origination market than initially expected, we revised downward our year-on-year guidance to meet single-digit decline. In any case, it's important to mention that we expect fees to be higher in second half than they have been in the first half of the year. Leaving the revenue lines to one side and moving now on to costs on slide 18, we can see that this quarter, total costs presented a growth of 2.4%. In our year-on-year terms, costs grew by 2.7%, well in line with our expectations, as we had anticipated that they would increase gradually throughout the year. This rate is on track, as explained, with our year-on-year guidance of an annual cost inflation of 3.5%. When we combine the effect of the contained cost increase with the improvement of the revenue sources, as you can see on the right-hand side, the improvement in the efficiency ratio was roughly six percentage points in the last year. So at a group level, efficiency ratio now stands at 50.6%, while XTSB, it is 44%. On the following slide, we see the evolution of our core results, which include the core revenues. This is NII plus fees minus costs. This quarter, core revenues increased by 6.8%, driving the mid-year annual variation to north of 42% at group level. This positive trend is driven by wider JAWS, as we're seeing NII supported by normalized interest rates, which confidently offsets the declining fees and the before-mentioned limited inflation of costs. On the right-hand side, you can see the bridge of this year-on-year evolution. The increase of this metric is supported by FAR, by NII, which added a remarkable 513 million euros. The contention of costs made possible that we only have to deduct 38 million euros from this line, while fees had a negative impact of 32 million euros in the year. Now, going forward, we expect core revenues to be the main contributor to a continuous growth in core results. In the next slide, we cover cost of risk and the other P&L items between pre-provision profits and profit before taxes. The group's total cost of risk declined in the quarter to stand at 56 basis points at the end of the first half, which is slightly better than our year-end guidance. Credit cost of risk stands at 45 basis points at the end of June and remained flattish in the quarter. This instability is related to the fact that delinquency continues to be at low levels. Taking a look at the breakdown of total provisions on the top right-hand side, starting from left to right, we can see that we booked €187 million of loan loss provisions in the quarter, equivalent to the 45 basis points credit cost of risk that I've just mentioned. Next, we booked €12 million for charges and foreclosed assets, and €35 million of MPA management costs, which could be considered a run rate. Lastly, as you can see, we released 2 million euros in other provisions which are mainly related to litigation. All in all, total cost of risk is performing slightly better than our year-end guidance, fostered by a better-than-expected evolution of our MPAs. And in this context, and taking into account that half a year has already gone by, we improve our total cost of risk guidance from 65 basis points to below 60 basis points. This is, total provisions should be around 1 billion euros for the year. Moving on, in the next section I will walk you through asset quality, liquidity and solvency. In the first slide of this section, slide 22, we take a look at the group's non-performing loans, which showed a small decrease in the quarter, bringing the NPL ratio down to 3.5% and indicating that asset quality has remained more resilient than anticipated, with figures for half year looking materially better than those in our budget. Looking at the exposure and coverage ratios by stages, on the right-hand side, it is worth mentioning that our Stage 2 exposure, as a percentage of total book, has declined by 42 basis points in the quarter, or an equivalent decrease of 600 million euros. while Stage 3 coverage ratio is 40.1% at group level and 43% at ex-TSB level, given that TSB's loan book is 90% mortgages, a product which obviously entails lower levels of provisions. Finally, it is worth noting that total provisions for the Stage 3 portfolio increase one percentage point and stand now at 56%. Moving on, in terms of foreclosed assets, it is worth noting that the stock continued to decline both quarterly and on an annual basis, and this reduction amounts to 15% on a year-on-year basis. During the last 12 months, 23% of the stock has been sold, with an average premium of 6%, which, in my opinion, shows that these assets are properly mark-to-market in our balance sheet. The coverage ratio for this portfolio remained broadly stable at 39%, and 95% of foreclosed assets, as you know, are Finnish buildings. Overall, total NPAs, which include both NPLs and foreclosed assets, were slightly down year-on-year. Gross and net NPA ratios stand at 4.1% or 1.9%, respectively. And total coverage increased slightly to 53%. Moving on now to liquidity, in the next slide, the group once again entered the quarter with a very comfortable liquidity position, even after having repaid the vast majority of the TLT03 facility, including the total amount maturing in 2023. This is reflected in the 47 billion of high-quality liquid assets, as well as in the LCA ratio, which is stood at 200% for the group at the end of June. The loan-to-deposit ratio ended the quarter at 95%, remaining broadly stable. In terms of the European Central Bank funding, as mentioned, we have repaid another 8.5 billion euros of TLTRO this quarter, and as a result, 27 billion euros, equivalent to roughly 84% of the facility, have already been repaid. 5 billion euros remain outstanding, with final maturity in March 2024. At the end of the second quarter, the liquidity deposited at the ECB, €21.7 billion, amounts more than four times the outstanding TLTRO balance of €5 billion. Finally, in the UK, we currently have €4 billion outstanding under TF-SME, most of which will mature in the second half of 2025. And on this slide, I would like to highlight the recent improvement that Fitch Ratings assigned to our rating outlook, which has been revised from stable to positive. And this grade has been assigned on the back of expectations of a structural improvement of Sabadell's profitability due to higher interest rates, contained credit provisions and improvement performance of TSB. With this latest improvement, we now hold a positive outlook for Fitch, S&P, and Moody's. Turning now to slide 25, we can see our current umbrella position. As you can see, Sabadell is already compliant with the requirements that need to be met from 1 January 2024 onwards, which have driven our funding plans in the last few quarters. It is important to highlight that the execution of the funding plan for 2023 has been concentrated in this first half of the year, with a total amount issued of roughly 4.5 billion euros. and we've been issuing senior preferred debt in green format in this quarter. The vast majority of embryo issuances have already been executed. For the remainder of the year, we only expect one potential senior unsecured debt transaction, as well as to keep being a cover bond issuer. Allow me to remind you that our AT1 and TA2 buckets are full, and therefore, we do not need to top the market on neither of these instruments in the medium term. Finally, moving to the next slide and to end my part of the presentation, let me share with you our solvency position. At the end of June, our fully loaded CET1 ratio reached 12.87%, having increased by 33 basis points year-to-date, of which 9 basis points in this quarter. At the end of June, our fully loaded CET1 ratio reached 12.87%, having increased When we look at the quarter's evolution in more detail, we can see that organic capital generation was plus 19 basis points after accruing a 50% payout ratio. Fair value reserve adjustments had a minor negative impact of 3 basis points. And finally, RWAs detracted 7 basis points to our CT1 ratio. From a regulatory perspective, the CT1 ratio stood at 1288% on a phasing basis, which implies an MDA buffer of 422 basis points. Finally, I would like to recall that no regulatory headwinds are expected in the coming quarters, although please note that from July, contracyclical buffer in the UK increases from 1% to 2%, and therefore the requirements for the group will increase by 20 basis points. And with this, I hand over to Stasar, who will conclude the presentation today.