Banco De Sabadell Sa Ord

Good morning and welcome to Banco Sabadell's third quarter 2023 results presentation audio webcast. Thank you for joining. 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. Let's start the presentation with the key messages on slide four. First of all, NII grew by 6% in the quarter, while our NIM improved by 14 basis points quarter on quarter. Second, asset quality remains stable. Group's total cost of risk stands at 55 basis points, improving by one basis points compared to the first half of the year. Third, group net profit reached 1,028,000,000 in the first nine months of the year. DSB delivered a net profit of 152,000,000 pounds. Fourth, the Board has approved the distribution of an interim cash dividend of 3 cents per share to be paid at the end of December, which represents a 50% increase on last year's interim dividend. Finally, our return on tangible equity stands at 11.6%, and our quarter 1 reached 13.13, increasing by 59 basis points year to date. On slide 5, you can see the evolution of volumes, starting with a quarterly evolution of performing loans, volumes decreased by 1.4%, quarter on quarter, both in euros and constant FX. This was mostly driven by a reduced demand for credit both in Spain and in the UK, but also by the seasonal effect of the 650 million euros social security advance payment in Spain booked in the previous quarter. Our other international businesses recorded a quarterly growth of 3.6% or 2.2% at the constant FX. When looking at the year on year evolution of our lending book, same trends apply and the book is decreasing by 3.3%. Moving now to customer funds on the right hand side of the slide, we can see that on balance sheet funds decreased slightly by 0.5% in the quarter. Of balance sheet funds decreased by 0.9% quarter on quarter, largely explained by the mark to market effect on mutual funds. Looking at the year-on-year evolution of customer funds, we can observe that unbalanced sheet funds decreased by 0.8%, but this reduction was offset by the 3.4% increase in off-balanced sheet funds. Our commercial gap improved by €1 billion in the quarter, as a result of the evolution of our lending and customer funds volume, driving our loan-to-deposits ratio below 95%. In slide 6 we can see the transformation in retail banking. Let me quickly recap on our strategy for retail banking which we announced in 2021. First, we intended to reduce our cost base. In two years we have reduced our workforce in Spain by close to 20% and our branch network by 30%. Second, we intended to improve our value proposition in mortgages, insurance and investment products by offering more personal and expert support to our customers. By September 2023, we have deployed 800 specialized relationship managers and mortgage specialists, for example, and these, for example, already originate 48%, close to 50% of our new mortgage lending. And third, we intended to digitalize our value proposition for three products, current accounts, unsecured lending, and cards. You can see some examples of what we have achieved. 55% of our customer acquisition is currently digital, coming from zero, and 75% of the origination of consumer loan takes place digitally or through remote channels. In other words, we have significantly reduced our cost base while improving our capabilities as a traditional bank and building up new direct banking capabilities. At this point, the next step in our strategy is to become the main bank for more customers. And this brings us to the new digital account. As you may recall, in the second quarter of 2022, we launched our digital account. We are satisfied with its commercial performance as it has allowed us to acquire new customers with a more digital profile. 55% of the new customers' acquisition takes place digitally. The new customers we are acquiring are more digital, of course, than our existing customers, and they are younger, as you can see in the chart. Furthermore, we are growing our customer acquisition more aggressively in those regions where our branch network is present but has a lower density. This good commercial performance has been achieved without impacting deposit beta. As you can see in the lower left-hand side of the slide, our cost of customer funds in Spain remains marginally lower than the one of the sector. What we are aiming with the revamped digital account we presented this week is to continue attracting new customers and to become their main bank. We have enhanced the value proposition of the new account to increase the engagement of the customers we attract. We are offering a current account, this is not the savings account, a current account with a 2% interest rate for the customer on their average monthly balance capped at €20,000 and with a 3% cashback on utility bills. We are convinced that this is an attractive value proposition for customers to use Sabadell as their main bank, that is, not a promotion but a way to attract engaged customers. In slide 8, we can see the evolution of lending origination in Spain. Mortgage origination in Q3 decreased by 19% quarter on quarter driven by seasonality and lower demand. In the first nine months of 2023, it decreased by 29% compared with 2022, broadly in line with the market slowdown. On the other hand, Consumer lending origination increased by 5% quarter-on-quarter and by 27% year-on-year. This strong growth is being delivered in a healthy manner due to improved credit granting processes and policies such as more pre-approved loans or more segmented pricing. Regarding business banking, new loans and credit facilities decreased by 32% quarter-on-quarter. There is lower demand for new loans as companies are holding their investment decisions in the current macroeconomic context and this translates into lower origination volumes. On credit facilities, the situation is different. As the quarterly evolution is heavily impacted by seasonality and the third quarter decline in the renewal of ECO-granted credit facilities. As I explained in the previous quarter, a significant amount of ECO-granted credit facilities were due in the second quarter of 2023 and they were renewed into regular credit facilities. On a year-on-year basis, total origination of new loans and credit facilities in business banking grew by 26%. Finally, on the lower right-hand side of the slide, working capital financing posted a slight decrease both quarter-on-quarter and year-on-year. In the first nine months of the year, nevertheless, we posted a 3% growth. On slide 9, payment-related services continued to perform well for another quarter. Cards turnover increased by 6% quarter on quarter and year on year, while point-of-sale turnover increased by 9% quarter on quarter and 12% year on year. In the lower part of the slide, you can see that customer funds in savings and investment products in Spain increased by 7.1 billion euros year on year, reaching a total of 54.5 billion euros. You can also see the breakdown of this 7.1 billion euros year-on-year increase. Term deposits increased by 2.1 billion, other unbalanced sheet products increased by 3.6 billion, and off-balanced sheet products increased by 1.4 billion. Slide 10 shows the performing loan book XTSB broken down by segments and products. On the left-hand side of the slide, you can see the detailed evolution of credit in Spain. The stock of mortgage declined in the quarter as lower origination volumes were not able to offset the amortization of the book. This trend is in line with the market. Consumer loans grew by 4.1% in the quarter and by 14.3% year on year. This includes consumer lending, both in the bank and in Sabadell Consumer Finance, our subsidiary specialized in lending at point of sale. As I explained before, we are performing well in origination and the consumer lending book is growing in a healthy manner in terms of credit quality. Growing this book has a material impact on NII and is partially offsetting the impact of the slight decline in the mortgage book, where volumes are higher but margins are lower. SMEs and corporates. 2.1% decline quarter-on-quarter and 3.8% decline year-on-year. As you know, companies continue to postpone long-term investment. they are deleveraging and shrinking their balance sheet which is the effect pursued by the monetary policy of the central banks all in all performing loans decline by two per cent in the quarter and by four point one per cent year on year On the right-hand side of the slide, you have our main international businesses. We delivered robust quarterly growth in Miami and Mexico and a slight decline in our foreign branches, while total international performing loans remained flattish on a year-on-year basis, somewhat affected by the evolution of local currencies. Now let's move to the UK and TSB on slide 11. New mortgage lending at TSB showed some signs of recovery in the quarter as origination increased by 31% quarter on quarter. But origination volumes are still 38% below those of one year ago. In terms of stock, TSB's mortgage book declined by 1% in the quarter. Customer deposits, at the right-hand side of the slide, decreased in the quarter by 1.6%. Customer funds continue to slowly flow from PCAs to savings accounts as customers seek to earn higher interest. However, this effect is less pronounced in TSB as our deposit base is very granular and sticky. On a year-on-year basis, customer deposits increased by 109%. The loan-to-deposit ratio currently stands at 104%, improving 3 percentage points year-on-year. Now, TSB financials on slide 12. The contribution of TSB to the group increased by 73% in the first nine months of the year. Over the first nine months, NII grew by 9% year-on-year, supported by structural hedge income. This instrument is repricing with a substantial spread, which partially offsets lower mortgage margins and balances. Total expenses increased by 3.7% in the first nine months of the year. This is a positive figure, well below core inflation in the UK. The core results in the first nine months of 2023 increased by 15.4% year-on-year, mostly driven by positive NII performance. The net profit of TSB reached £152 million in the first nine months of the year, which is a 48% increase versus 2022, and return on tangible equity reached 10.5%. So, overall, good financial performance at TSB. In slide 13, we are presenting the financial performance of the group. We recorded net profit of 464 million euros in the quarter and 1 billion and 28 million euros in the first nine months of the year. This figure is already an all-time high net profit on a full year basis for us. Return on tangible equity reached 11.6%. Our core results, which include NII fees minus total cost, drove this positive evolution and grew by more than 38% year-on-year on the back of the NII performance. Additionally, provisions decreased in the quarter, underpinned by resilient credit quality. In terms of solvency, our capital ratio stands at a peculiar figure of 13.13%, which implies a solid increase of 61 basis points year on year. Therefore, very positive sets of results. And Leo, please. Ah, yeah, and Leo, yeah, you will go into more detail into all this set of results. Moving to shareholder remuneration and value creation on slide 14. As we have explained, the profitability of the group keeps increasing. Earnings per share increased by 65% year-on-year, reaching 22 cents per share in the first nine months of the year. The Board has approved a dividend distribution of 3 euro cents per share as an interim cash dividend to be paid at the end of December. As I mentioned before, this is a 50% increase of the interim dividend versus 2022. We are also about to complete the execution of our first share buyback program with progress of 89% as the 20th of October of this year. At the right-hand side of the slide, you can see that tangible book value per share has grown at a rate of 10.2% over the last 12 months. This percentage includes the distribution of a cash dividend of 4 cents per share paid in the last 12 months and the benefit of 4 cents per share related to the share buyback program launched at the beginning of July. Finally... In light of the recurrent good evolution of our results, we have once again improved our year-end return on tangible equity guidance, which is now around 11.5 for 2023. With this, now yes, I will hand it to Leo, who will cover the bank's financials for the quarter in much more detail. Thank you, Leo.

Thank you, Cesar, and good morning, everyone. Moving now On to the financial results, we've had another quarter of positive results, underpinned by NII, which remains pretty strong, and supported by resilient as a quality and controlled costs. NII showed a strong growth in the quarter, with an increase of 6.2% Q and Q. This, together with a flat evolution of fees, resulted in a growth of 5% during the quarter for the core banking revenues. This is NII plus fees. In terms of costs, this posted a marginal increase of 0.7% in the quarter. When we take the year-on-year increase, this adds to 3.2%. This evolution is well in line with our expectation that costs will have increased by a total of 3.5% at year-end. The combination of core revenues and costs drove our core results upwards by more than 9% in the quarter, delivering an increase of almost 40% year on year. These elements, combined with a reduction of cost of risk, were the main driving forces of the quarter. This quarter, there were no extraordinary contributions, payments, or taxes, and therefore our P&L is clear in terms of one-offs. As a result of all this, net profit in Q3 reached €464 million. When adding this figure to the results of the first half of the year, the net profit for the first nine months comes to 1,028 million euros, almost 45% higher than last year's figure. In spite of the 157 million euros accrued in Q1 for the payment of the Spanish banking tax. The aforementioned net profit represents a return on time of 11.6% for the first nine months of the year. Let's go now through the different P&L items in more detail, starting with NII on slide 16. As mentioned, Group NII grew by more than 6% on a quarterly basis and 29% in annual terms, almost 40% in Spain ex-TSB. On the top right-hand side, you can see the drivers that explain the quarterly evolution. Moving from left to right, customer and I contributed 37 million euros. Within this item, customer margin added 44 million euros, underpinned by the fact that the loan book appreciated higher interest rates, while the cost of deposits also increased, but remained at contained levels in all geographies. On the other hand, volumes had a negative impact of €15 million, as loan demand remained subdued in the quarter, as Cesar just mentioned. Moving along to the right, the ALCO contribution, which was pushed up by the repricing of the hedge portion of the portfolio, a 44%, along with the interest received on the excess liquidity deposited at the EZB, was more than enough to offset the higher wholesale funding costs related to some issuances, producing a combined net positive impact of €30 million. Finally, the others category, which include some hedging and other miscellaneous items, had a negative impact of €1 million, while the additional day count for the period, the quarter, explains an impact of plus €6 million. Our customer margin increased by 10 basis points in the quarter to almost 3%. driven by the repricing of our variable rate portfolio, as well as by the higher yield on new originations and, as we just mentioned, by a contained cost of customer funds, with the deposit beta progressing marginally better than our expectations. Loan yield is increasing, as Euribor is repricing, And moreover, in our case for 2024, we have more than 8 billion euros of fixed rate loans, mainly corporate loans, which will be repriced. This repricing to higher rates ensures that with the current forward curve, our loan yield will keep improving until next summer. On the other hand, NIM is currently above 2%, having grown by 14 basis points in the quarter, at an even faster pace than the customer margin underpinned by the ALCO and the liquidity contribution. With all this in mind, and with the first nine months of the year behind us, we have revised our guidance upwards once again, and we believe that NII in 2023 will grow close to 25% on a year-on-year basis. Leaving now the NII line to one side and moving on to fees, these remained broadly stable in the quarter, posting an increase of 0.9%, while on an annual basis they decreased by 6.3%. The movements are mainly attributable to the improved performance of credit risk fees both in the quarter and the year. Services fees also recorded positive growth in the quarter, supported by fees related to cards, which saw higher levels of turnover during the summer season. In terms of the year-on-year variation, the underperformance of service fees is partly explained by lower revenues from current accounts, as we reduce maintenance fees to reflect the positive interest rate environment. Within asset management fees, insurance brokerage fees were impacted in the quarter by higher remuneration paid to customers on certain savings insurance products. Moving out from revenues to costs, this is slide 19. This quarter, total costs remained broadly stable with slight growth of 0.7%. In a year-on-year basis, costs rose by 3.2%, in line with our expectations, as we had already anticipated that they would increase gradually through the year. The evolution of this line is explained by higher marketing expenses and salaries at Sabadell XTSB. This was partially offset by amortizations that were €10 million lower this quarter, as the amortization period for TSB's intangibles core deposits have come to an end. In other words, this reduction will be recurrent. As you can see on the right, the effect of this contained cost growth combined with the improvement in revenue sources have brought the cost-to-income ratio down by approximately 5 percentage points over the last 12 months. With this, at group level, the cost-to-income ratio for the third quarter now stands at 48.7%, while if we exclude TSB, the cost-to-income ratio is down to 43.1%. On the following slide, we take a look at our core results, calculated as NII plus fees minus costs. A metric that is our understanding shows how our core banking business is doing. This quarter, core results have increased by 9.1%, bringing the total annual variation to almost 39% at group level. This positive trend is driven by water jaws, as we are seeing core revenues, especially NII, supported by positive interest rates, which comfortably offsets the above-mentioned limited cost inflation. On the right-hand side, you can see the year-on-year evolution of core results. The increase of this metric is underpinned, obviously, by a remarkable contribution of NII, which added €790 million. Costs explains a deduction of €69 million, while fees have a negative impact of €71 million in the year. On the following slide, we cover cost of risk and the other P&L items between pre-provision income and profit before taxes. The group total cost of risk improved slightly in the quarter to stand at 55 basis points, which is better than our year-end guidance, a sign that the resilience of our asset quality is there, as we will later review. Credit cost of risk stood at 43 basis points at the end of September, decreasing by 3 basis points in the quarter. This reduction is related to the fact that delinquency continues to be at low levels. Looking at the breakdown of total provisions on the top right-hand side, from left to right, we can see that first we booked €160 million for loan loss provisions in the quarter, equivalent to the 43 basis points of credit cost of risk that I just mentioned. Next, we booked €7 million for foreclosed assets provisions. We also had 35 million euros of NPA management costs, which could be considered a run rate. And finally, other provisions which have more volatility and mainly relate to litigations stood at 6 million. All in all, total cost of risk is performing well, bolstered by instable NPA levels and robust as a quality. Moving now to the next section, I will walk you through, as always, through asset quality, liquidity, and solvency. Let's start by the evolution of the problematic assets. Let's start with MPLs on slide 23. NPLs remained flattish during the quarter, even though this period is typically characterized by negative seasonality in terms of recovery activity in August, which tends to be reflected in the slightly higher net NPL inflows. Therefore, with stable levels of MPLs, the increase of MPL ratio during the quarter is explained not by increase of MPLs, but by a reduction of the loan book. Looking at the exposure by stages, on the right-hand side, it is worth mentioning that our stage 2 exposure as a percentage of the total book dropped by 68 basis points in the quarter, or €600 million, a similar reduction to the one that we saw in Q2. And this evolution is mostly explained by migration to State 1, which confirms robust levels of asset quality. Currently, our Stage 3 coverage is 40.8% at the group level or 43.8% ex-TSB, which is due to the fact that TSB's portfolio, mostly comprised by mortgages, requires less coverage as they hold real estate guarantees. Finally, it is worth noting that the amount of total provisions compared to the Stage 3 portfolio rose by 1% in the quarter towards 57%. Moving on, in terms of Oculus assets, the stock declined by 44 million euros in the quarter, or 14% year-on-year, to just slightly over 1 billion euros. 20% of the stock has been sold during the last 12 months, with an average premium of 6%, which, in my opinion, shows that these assets are correctly marked to market on our balance sheet. The coverage ratio for this portfolio remained broadly stable at 39% and 95% of foreclosed assets are finished buildings. Overall, total NPAs, this is NPLs and foreclosed assets, were slightly down Q&Q and year-on-year. Gross and net NPA ratios remained stable at 4.1% and 1.9% respectively. while total coverage increased two percentage points year-on-year towards 54%. Moving now to liquidity on the following slide, the group position improved further in the quarter and remains at very comfortable levels. This can be seen in the €50 billion of high-quality liquid assets, which increased by €3 billion during the quarter. Also in the LCR, which stood at 220% for the group, this is 20 percentage points higher than in Q2, having already repaid 84% of the TLTRO. Loan-to-Depot ended the quarter below 95%, marginally better than the previous quarter. In terms of European Central Bank funding, €5 billion ran outstanding, and this will mature in March 2024. In fact, at the end of the third quarter, the liquidity deposited at the ECB was more than five times the outstanding TLTRO balance, while ECB minimum reserve requirements reached €1.1 billion. Finally, in the UK, we currently have $4 billion outstanding under the TFSME, which will mature in the second half of 2025. 26th slide, I would like to highlight that we keep holding a positive outlook for both Fitch, S&P, and Moody's. Turning now to slide 26, we can see our current umbrella position. As of today, we are already compliant with the umbrella requirements for 2024 in terms of both risk-weighted assets and leverage ratio exposure. Moreover, we're also compliant with both the absolute and subordinated requirements, and we have built a management buffer that is amply above all those requirements. It is important to note that we have completed the execution of the funding plan for 2023, having printed a total of more than 6 billion euros in the first nine months of the year. The senior non-preferred debt issued this quarter was the last of the embryo issuances scheduled for 2023. Let me remind you that our AT1 and TO2 buckets, as well as the senior preferred and senior non-preferred, are already completed, so we do not need to issue AT1 or TO2 in the medium term. Or in other words, from now on, we have no need for new net issuances to be made. In the next slide, we can see that we continue to generate capital organically as our profitability improves. Our fully loaded CT1 ratio starts at this weird number of 13.13%, having increased by 26 basis points in the quarter or 59 basis points during the first nine months. When we look at the breakdown of the quarterly evolution, first of all, we see an organic capital generation of 31 basis points, including the accrual of 50% dividend payout, as this is the percentage that we distributed last year. Secondly, the fair value reserve adjustments of our fixed income portfolio had a small negative impact of minus one basis points. And finally, the evolution of RWAs was marginally negative in the quarter, reducing by four basis points, as the volume mix has tilted towards higher density loans in the quarter. From a regulatory perspective, the CT1 ratio also stood at 13.13% on a phasing basis, which implies an MDA buffer of 428 basis points, with an increase of 6 basis points Q on Q. The MDA buffer was impacted by the increase in the contracyclical buffer in the UK from 1 to 2%, and consequently, the requirement for sub-adult group rose by 20 basis points. And with this I hand over to Cesar who will conclude our presentation today.