Banco De Sabadell Sa Ord

Good morning. Thank you for joining us on Banco Sabadell's first quarter 2024 results audio webcast. Please be welcome. In the next minutes, 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 first quarter of the year. The presentation will be followed by a Q&A session. We have a schedule around one hour, an hour and 15 minutes for the whole 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 2024 results presentation. I will start by going through the key elements of this quarter. Firstly, NII of the group grew by 1.7 percent quarter-on-quarter. More remarkable, customer margin increased by 10 basis points in the quarter and stands at 309%. Secondly, asset quality continues improving. The management actions we have taken to improve our risk models and processes are delivering results in the form of lower cost of risk. At the end of the first quarter, Group's total costs of risk stand at 50 basis points, having improved by 5 basis points in the quarter. Thirdly, Group's net profit reached €308 million in the quarter. This result includes the impact of €192 million of the Spanish banking tax recognized in full in this quarter. Fourthly, following approval by our annual shareholders meeting, the share repurchase program for up to 340 million euros is being launched today. This completes our shareholder remuneration on the back of 2023 results. At current share prices, this buyback represents around 4% of the bank's market cap. Finally, our Common Equity Tier 1 fully loaded ratio reached 13.3%. Moreover, the return on tangible equity stood at 12.2%. considering the last 12 months. Moving on to slide 5, quarterly evolution of performing loans. Volumes performed well despite quarterly seasonality. Performing loans in Spain remained stable in the quarter and increased by 2.3% quarter-on-quarter in TSB, which is 0.8% at constant FX. This behavior is a shift of the trend we observed in previous quarters. We believe that this performance should continue improving throughout the year. Moving now to customer funds on the right-hand side of the slide. On balance sheet funds... remain stable in the quarter. We can observe a year-on-year reduction as customers transfer funds from their current accounts to other higher-yielding off-balance sheet products, such as mutual funds, pension plans, and savings insurance. This trend, along with the good performance of financial markets, explains the increase in off-balance sheet funds by 3.9% in the quarter and by 6.7% in the year. In slide 6, I would like now to comment on the main initiatives we have implemented to support lending growth and, at the same time, reduce cost of risk. For each product and segment, we have deployed specific actions to foster and steer lending growth and to improve our risk quality. In mortgages, we keep improving our distribution model. We have currently deployed 250 remote specialized relationship managers who are supporting 100% of our branch network. Furthermore, these specialized RMs are attending customers through extended service hours, both in the morning and in the afternoon. Besides improving our distribution model for mortgages, we have improved our pricing models to increase the price segmentation so that prices can be adjusted even more to different risk profiles. In consumer lending, we have increased the number of customers with pre-approved loans. This is relevant not only to enable growth, but also to grow in a healthy manner from a risk perspective. Just two illustrative results of our actions in retail banking. Mortgage specialized RMs originate 55% of our mortgage new lending and 86% of our new consumer lending in the quarter was granted through pre-approved loans. In business banking, I would like to share four initiatives. First, New customer segmentation. Since January this year, we are offering to SMEs the premium relationship model that we offer to large companies. More skilled relationship managers, improved value proposition, etc., Second, we have extended the amount of pre-approved loans for companies. This is done in a different way for each segment, according to their specificities. For instance, we have digital pre-approved loans in the self-employed segment, while in larger companies, excluding corporate and investment banking, there is a pre-approved limit for each target customer, complemented with an accelerated risk-granting process. Third, we have specialized a large number of risk analysts and relationship managers by sectors. This results in a more agile and accurate response to new demand. Fourth, we have intensified even more the usage of data analytics to support RMs and risks analysis. This enables a better identification of target customers, meaning customers with good risk profile while identifying opportunities to grow. On the right-hand side of the slide, you can see some of the results of these actions in business banking. We have more than 20 billion euros of pre-approved loans for self-employed and businesses and more than 13 billion euros for SMEs and larger companies. All in all, relevant initiatives align with our strategy to grow volumes as the market picks up while reducing cost of risk. On slide 7, we will talk about lending origination in Spain. Mortgage origination fell 11% year-on-year, although it increased by 20% on a quarter-on-quarter basis. We are observing higher demand for mortgages, and we are also reaping the benefits of the transformation carried out during the last three years, which I just explained briefly. As you can see in the right-hand side of the slide, we are optimistic about the upcoming quarters. As you can observe in the chart, the number of early-stage applications in a given quarter is a good indicator of mortgage volumes in the next quarter. In Q124, we have had a remarkable increase of early-stage applications, which have increased by 59%. We don't necessarily expect mortgage origination to grow dramatically, by that number next quarter, but we certainly expect a significant increase in Q2 versus Q1. Finally, origination of consumer loans continued to perform well. It grew by 13% on a year-on-year basis and 6% on a quarter-on-quarter. Let's go to slide 8, business banking. Origination of loans and facilities increased by 45% quarter-on-quarter and by 48% year-on-year. Part of this significant growth is explained by a limited number of large structured finance single names, which are volatile by nature. However, if we didn't take this into account, the quarterly growth would be above 30%, which would still be a very positive growth rate. Furthermore, medium and long-term loans have now increased have been the main driver of lending origination, which is also a very positive sign. Finally, working capital financing is stabilizing after posting relevant increases during 2022 and the first half of 2023. New origination fell by 5% on a year-on-year and 4% quarterly, impacted by seasonality. On slide 9, we can see the payment-related services that continue to perform well, both in terms of turnover and number of transactions. Card turnover increased by 7%, while point-of-sale turnover increased by 11% year-on-year. Quarter-on-quarter turnover decreased in both cases, clearly due to seasonality. At this point in time, I would like to update the status of our agreement with Nexi, which we expect to close in the second quarter this year. Once the closing is executed, we will obtain a capital gain, which could be used in management actions that make sense financially. In the following results presentation, we will update you on this matter. In the bottom of the slide, we can see the evolution of customer funds in savings and investment products in Spain, which reached a total of 58.7 billion euros in March 2024. This represents an increase of 2.1 billion euros compared to 2023 year-end. Term deposits increased by half a billion euros, while of balance sheets, products increased by 1.6 billion euros. In this regard... We had a positive performance in mutual funds and net subscription, reached €650 million in the quarter, mainly among private banking customers. In slide 10, we present our performing loan book XTSB by segment and by product. Mortgage lending in Spain declined slightly in the quarter, changing the trend from previous quarters. This was supported by higher production, as we have just seen, and lower prepayments. On the other hand, the SME and corporate loan book increased slightly in the quarter, and consumer loans maintained the growth momentum delivered in previous quarters. Altogether, performing loans in Spain remained stable in the quarter and decreased by 3% year on year. Finally, as you can see on the right-hand side of the slide, lending volumes in our international businesses increased by 0.4% in the quarter and north of 5% in the year, mainly driven by Mexico. Moving on to the UK business on slide 11. We are starting to see positive dynamics in the UK mortgage market. New mortgage lending increased by 14% in the quarter and by 41% in the year. These new lending volumes delivered positive loan book growth and performing loans increased by 0.7% in the quarter, reversing the trend of previous quarters. Moreover, mortgage applications, which are a leading indicator of new lending volume in the future, keep growing. This suggests that mortgage lending should maintain this positive momentum looking forward. On the liability side, the gradual trend of customer funds switching from accounts to saving accounts continued during the quarter. This migration largely explains the increase in the cost of deposits, which closed the quarter at 147%, nine basis points above last quarter. This quarterly increase is much lower than in 2023, when the cost of deposits increased by 24 basis points in average each quarter. Moving to TSB's financial performance in slide 12, TSB contributed 46 million euros to Group's net profit this quarter. NII evolved as expected in the quarter and increased slightly versus the previous quarter. We have a positive view on the evolution of lending volumes, but this has had no material impact on NII in the first quarter yet. Total recurrent costs increased by 4% in the quarter due to higher administrative costs, but remain broadly stable on a year-on-year basis. We expect significant performance improvements in this line in the coming quarters, as savings from TSB's efficiency plan will start coming through from the second quarter of the year onwards. Provisions declined by 33% on the quarter but increased slightly year on year. Out of this 2023 net profit, TSB distributed £120 million in a cash dividend to Sabadell, which represents a 70% dividend payout. After this distribution, Q1 still stands at a very high level of 16.4%. In the right-hand side of the slide, we recap on the main trends for TSB's P&L for the rest of 2024. NII will gradually improve as the cost of deposits stabilizes and the structural hedge contribution increases. This will be more material in the second part of the year, but specifically in 2025, as I will explain later. No one-off items are expected on fees, which we expect to remain stable at 2024 first quarter run rate levels. On costs, 77 out of the 53 million pounds total savings expected for 2024 have not yet materialized in this quarter. This leaves ample room for costing to improve throughout the year. In terms of provisions, cost of risk will remain stable considering the first Q provisioning going forward. Finally, I would like to talk a bit, and Leo will talk more about this, about the structural hedge at DSB. The structural hedge is a $22 billion portfolio of five-year swaps for which TSB receives the fixed rate leg. Every month, some swaps mature at low yields and are renewed by new swaps at significantly higher yields. Maturing balances have an average yield of 1.5 and will be renewed at the prevailing five-year GBP swap rate, which currently stands at around 4%. However, due to a technicality of the structural hedge, which Leo can explain later in more detail, the balances of monthly swaps maturing in 2024 are not fully renewed. But from 2025 onwards... Swap balances maturing at low yields will be 100% replaced by new swaps at much higher yields, and that's why the contribution of the structural hedge to TSB-NII will grow very substantially in the second half, starting in the second half of 2024, but much more substantially in 2025 and 2026. Considering these dynamics, we expect TSB's net profit to improve in the second half of 2024 and improve much more materially in 2025. In slide 13, we present a summary of our quarterly financials on a group basis. We recorded a net profit of €308 million in the quarter and our return on tangible equity reached the 12.2% considering the last 12 months. Our core results, which include NII plus fees minus total recurrent costs, grew by more than 13% year-on-year, supported by NII performance. Additionally, provisions keep decreasing, underpinned by improved asset quality. On the back of our solid report, quarterly results, we are improving our return on tangible equity guidance for the year to more than 12%. In terms of solvency, our capital ratio stands at 13.3%, which implies a solid increase of 52 basis points in the last 12 months. And finally, I would like to remind that today we kick off our share buyback program for 340 million euros, which completes our payout on the back of 2023 results. With this, let me hand over to Leo, which will cover the financials of the bank in more detail. Thank you.

Thank you, Cesar, and good morning, everyone. Now, moving on to the financial results, we see that net profit reached $308 million, having increased by more than 50% year-on-year, with figures broadly similar to last quarter's. Nevertheless, it's important to take into account that these quarterly results include the full impact of the Spanish banking tax, which in our case amounts to 192 million and is non-tax deductible. This contribution has increased by more than 20% compared to last year, as is linked to revenue growth of the domestic banking business. Now, the aforementioned net profit represents a 12% rolling return on tangible equity of 12.2%. In terms of P&L, we will take a closer look at the figures in a minute. In any case, overall, the quarterly evolution was healthy, which reflects the good momentum of the business growth. NIA grew at 1.7% Q&Q, mainly driven by a positive customer margin evolution, while on a year-on-year basis, the increase was close to 12%. Fees increased slightly in the quarter, explained by a stable quarter in terms of both service and credit risk fees. And on a year-on-year basis, the evolution has been minus 3.1%, in line with our guidance. Recurrent costs remain flattish, which is in line with our expectation of contained inflation for the year. Now, taking a look at our core results, the addition of NII plus fees minus recurring costs, you can see the performance has been positive, as they grew 2.6% Q&Q and 13.8% on an annual basis. These core results, combined with the downward trend in provisions, consistent with the benign context for asset quality as we anticipated, boosted the net profit figure. We'll now go through the different P&L items in more detail. Starting with NII in slide 15, NII increased, as mentioned previously, by 1.7% Q&Q and by 12% year-on-year, assuming a positive quarterly growth trend. On the top right-hand side, as always, you can see the drivers that explain the quarterly evolution. Moving from left to right, customer NII was by far the main driver, contributing €20 million. Within it, customer margin added €32 million as it continues to improve. as we will see in a minute. On the other hand, as you can see, average volumes for the quarter had a negative impact of €20 million, while the FX effect was positive and added €8 million, mostly explained by the sterling appreciation. The higher ALCO contribution driven by a slight increase in size of the portfolio and lower excessive liquidity due to seasonal tax payments offset each other. The lower wholesale funding costs are explained by the fact that maturities more than offset the cost of new issuances. This combination of factors produce a positive impact of €3 million. And finally, the day count represented an impact of minus €6 million in the quarter, while other items added €3 million. Moving on to the following slide, we can see that our NII is performing better than what we budgeted at the beginning of the year. This is reflected on the evolution of the customer spread and NII, both at group level, but also and especially in the customer spread in Spain, which was driven not only by a resilient loan yield, underpinned by both URI repricing and fixed loans rotation, but also by the evolution of cost of deposits. In fact, we are already seeing both front book pricing and migration from site to term accounts stabilizing. Customer spreads at NIM and NIM at group level grew by 10 basis points and 7 basis points this quarter. On the other hand, in Spain, the loan yield grew by 15 basis points, while cost of deposits increased only one basis point, which represented a deceleration versus the quarterly rate of plus 20 basis points throughout 2023. As a result, customer margin increased by 14 basis points in the quarter at a higher rate than last quarter. With all this in mind, and given how interest rates have evolved year to date, we can now be more precise with our guidance, and we believe that Group NII in 2024 will grow around 3% on a year-on-year basis. Moving to the next slide, we show that the expected dynamics will continue to support our NII also in 2025. As usual, we split NIA into three different reprising blocks for both 2024 and 2025. Customer NIA excluding TSB, the contribution of capital markets, in other words, alcohol, wholesale funding and excess liquidity, and thirdly, TSB's evolution. Let's start with 2024. As per the ex-TSB customer margin, we still have 5.5 billion euros of fixed rate loans, mainly to corporates, to reprise in the remaining part of the year. Additionally, the evolution of deposit costs already accounts for a front book yield of term deposits below the back book in Spain, as well as a migration from current accounts to term deposits, which is, as we said before, stabilizing. Therefore, cost of deposits is increasing, but at a much slower pace than in 2023. On the other side, ALCO repricing and higher liquidity will be able to contract both the non-recommendation of the minimal reserve requirements as well as the higher wholesale funding costs as more expensive new issuances replace maturities and low-yield instruments. As a result, these two first blocks will more than offset the low single-duty decline in NII in TSB. The evolution of NII in our UK franchise is determined by the fact that the increase in the structural hedge contribution will not be enough to offset the rest of the headwinds. This is the spread tightening in mortgages and the higher cost of deposits. Nevertheless, putting these three drivers together, as we have aforementioned, we estimate that NII at a group level should increase by around 3% already this year in 2024. Now moving to next year, to 2025. The XTSB customer and AI will be driven by basically two movements. On the one hand, the negative one, a wider downwind trend in loan deal than the benefits of lower cost of deposits, both driven by a lower interest rate environment. On the other hand, the positive one, more dynamism in volumes, and 60% of mortgage stock in Spain in fixed rates, along with more than €4 billion of SME and corporate fixed-rate loans to be renewed with a pickup. And in any case, we expect that the impact of both movements will drag down NII in 2025. Nevertheless, with regards to ALCO and wholesale funding and excess liquidity, we see them overall as a positive contributor for NII in 2025, as we are managing assets and liabilities to lower the balance sheet sensitivity to interest rates. In the case of ALCO, We're doing this by reinvesting our maturities at fixed higher rates, whilst for wholesale funding, we are benefiting from lower costs as we have a large part of the portfolio which is hedged into variable rates. And finally, NII and TSB should increase in 2025, mostly driven by higher contribution from the structural hedge and positive loan volumes offsetting any other headwinds. Therefore, all in all, with these three moving parts, we believe next year's overall NII should be flattish versus 2024. Moving now to fees, this posted a marginal increase of 0.2% Q&Q and a decline of 3.1% on an annual basis. This quarter, the stable trend was mainly attributable to credit risk and service fees, despite their positive seasonality in Q4-23. Asset management fees posted positive growth in the quarter on the back of a stronger performance of the capital markets, as well as the net inflows of mutual funds, as Cesar mentioned earlier. It is important to mention that these fees still contain our mentioned acquired business, as we have not yet closed the agreement with NEXE, which is pending the final regulatory authorizations. We are expecting to close the deal during Q2, and once this agreement is completed, the reclassification of P&L items will push our fees downwards towards the mid-single-digit decline that we guided. But nevertheless, as previously explained, it is important to mention that the declassification of fees will also reduce costs and provisions, and therefore it will not impact the overall profit before tax of the group. Leaving the revenue lines to one side and moving on to costs, this quarter costs remain stable when excluding TSB's non-recurring cost of four-quarter 2023. In year-on-year terms, costs increased by 2.9%. Considering that the cost synergies from the efficiency plan announced in Q4 last year in the UK have not yet come through, the year-on-year underlying trend is very much in line with our guidance for the year. As you can see on the right-hand side, cost-to-income ratio was down this quarter by almost 4 percentage points when compared with last year's ratio. and even when including TSB restructuring costs incurred in 2023. When we exclude TSB, the cost-to-income ratio stands at 41.5%. Therefore, once again, we are within our budgets to meet our guidance for 2024 of circa 2.5% growth versus 2023's recurrent cost, which is stood at €2,883 million. In the next slide, we cover cost of risk and the P&L items between pre-provision profit and profit before taxes. The group's credit cost of risk stood at 41 basis points, supported by an asset quality with no deterioration, as we will see later. This represents a reduction from previous year's levels, and as we mentioned back in February, we believe that it can be maintained, if not improved, throughout the year. The group's total cost of risk for the quarter stood at 50 basis points, which implies a decrease of 5 basis points versus last year, and is even better than our expectations. Take a look at the breakdown of total provisions, as always on the top right-hand side. From left to right, we can see that we booked €166 million of loan loss provisions, the equivalent of the 41 basis points of credit cost of risk that I have just mentioned. We released €1 million in foreclosed asset provisions, as we are setting these assets as a premium. 31 million euros of MPA management costs, which could be considered a run rate. And finally, other provisions which are normally mainly associated with litigations and other asset impairments, stood at 12 million euros. As you know, this line shows a little bit more volatility, but as we do not see any new sources of litigation, we do not expect this item to grow on average throughout the year. Going forward, a stable federal microeconomic context for households and companies, together with more idiotic factors such as our fixed loans or, more importantly, our risk management actions, should lead cost of risk to continue to the positive decrease in trend throughout 2025. Moving on now, in the next section, I will walk you through asset quality, liquidity, and solvency. Before reviewing our asset quality evolution in the quarter, allow me to take a step back to review the nature and composition of our current loan book. Sabadell's group performing loans amount to 151 billion euros. Retail mortgages, probably one of the safest products in terms of credit risk, account for 51% of the book. Mortgages are evenly split between our mortgages business in the TSV in the UK and our mortgage business in Spain. Mortgages at TSB typically have low loan-to-value. Additionally, the mortgage portfolio is very granular and widespread across the UK. By-to-let portfolios represent only 12% of the franchise and has steadily reduced its weight over the last years, while the interest-only has also evolved in a clear downward trend. All these characteristics provide a business with a very low cost of risk. The other half of our mortgage portfolio is in Spain, which comprises for one quarter of our loan book in Spain. More than 60% of this portfolio consists of fixed-rate mortgages, which are much more resilient in the current interest rate environment. This means that the bulk of our valuable rate mortgage exposures were originated many years back. In other words, the borrowers have been paying down debt for a long time, and the principal has been considerably reduced. The SME and corporate segment represent 39% of Sabadell's loan book and is characterized by long-standing customers. This is a segment that we know very well, and more importantly, where growth is targeted on the back of risk profiling, which should produce a lower cost of risk as new vintages start to come through. Regarding the consumer credit segment, more than 95% of the new lending at Sabadell and TSB franchises is with existing well-known customers. Moreover, we have been increasing the percentage of new lending through pre-approved loans, and they represent now 86% of the new lending, showing a significant upward trend when compared to previous years. This targeted approach is yielding very good results in terms of cost of risk for the new consumer loans vintages already. It will take some time to see the results from all these improvements in credit risk management, as well as the initiative that Cesar mentioned before, but we are confident that they lay the foundations for better asset quality and therefore better cost of risk in the future. In the next two slides, we show the evolution of non-performing assets. Starting in 2023, looking at the exposures by stages and coverage on the right-hand side, our Stage 2 exposure as a percentage of the loan book dropped by 125 basis points year-on-year, which amounts to more than $2 billion or $400 million in the quarter. This evolution was mostly explained by repayment of those loans or reclassification mainly to Stage 1. We also managed to reduce the stage three loans by around 200 million euros in the year. The NPL ratio stood at 346%, decreasing by six basis points in the quarter. Finally, it is worth noting that the group coverage ratio improved slightly in the quarter, standing now at 59%. I would like to highlight that in this quarter, as in most recent ones, we have been able to decrease our MPLs in absolute terms, while increasing their coverage and, very importantly, when we have done so whilst incurring at a lower cost of risk. As we have guided in the past, we think that this capacity to reduce MPLs and cost of risk will be maintained going forward into 2025. Moving on, in terms of foreclosed assets, it is worth noting that the stock continued to decline both in quarterly and annual terms. This reduction amounts to 16% of the stock on a year-on-year basis. These assets benefit from having a sound risk profile, as 95% of them are finished buildings, while coverage remained broadly unchanged at 39%. We continue selling around 20% of our foreclosed assets portfolio every 12 months, and we continue to sell them at a premium, 5% in the last 12 months. We believe this trend constitutes a clear proxy that shows that our foreclosed assets are correctly marked to market in our books. Overall, total NPAs, which include both MPLs and foreclose assets, are down 5% year-on-year. Gross and net NPA ratios stand at 4% and 1.8% respectively, and total coverage remains stable at 56%. Turning now to liquidity. As you can see, after having fully repaid TL303N, our LCR remains at sound levels, explained by our substantial liquidity buffers. Our NSFR reached 144%. The loan-to-DEPO ratio remains stable at 94%, while total liquid assets at standard €60 billion, of which €44 billion, are high-quality liquid assets. Moving on to the central bank funding, which is illustrated on the bottom right-hand side of the slide. Firstly, the €32 billion drawn from the TLT03 facility has been fully repaid in less than two years. As per the UK, we repaid 0.9 billion of the TFSME in the quarter, leaving 3.1 billion outstanding, most of which will mature in the second half of 2025. To end this slide, I would like to highlight the recent upgrade to our S&P credit rating, which has been raised from BBB to BBB+. This upgrade reflects the agency's view that Banco Sabadell has strengthened the profitability of the business franchise, which is now commensurate with that of their peers. Along with this upgrade, our outlook is still rated positive by two agencies, namely Fitch and more recently Moody's, which revised our outlook to positive from stable in line with its recent upgrade of Spain's sovereign rating. In the following slide, we can see our current embryo position. This quarter, the embryo and subordination requirements for 2024, applicable to us on a consolidated basis, have come into force. As you can see, Sabadell has ample buffer on the requirements in terms of risk-weighted assets and leverage ratio exposures, both in total and subordinated exposures. This first quarter, we have front-loaded our plan by issuing more than 2.2 billion euros across the capital structure, including tier 2 issuance, senior preferred and senior non-preferred transactions. Additionally, TSB issued an inaugural cover bond in euros, which received very good acceptance from the market. In the following slide, we see that we continue to generate capital organically as our profitability improves. Our fully loaded CT1 ratio stands at 13.3%, having increased by 9 basis points in the quarter or 52 basis points year-on-year. Looking at the detail of the quarterly evolution, we can see that the organic capital generation, excluding the banking tax and considering the accrual of 50% dividend payout, was 21 basis points in a context where RWS subtracted 8 basis points in the quarter. We exclude the 12 basis points impact of the Spanish banking tax to reflect the underlying capacity to generate capital. This quarter, the fair value adjustments of our fixed income portfolio had no impact in terms of capital. From a regulatory perspective, the CT1 ratio stood at 13.3% on a phasing basis, with an MDA buffer of 437 basis points, increasing 9 basis points in the quarter. Finally, in terms of shareholder value creation, tangible book value per share increased 15% year-on-year, including the distribution of 5 euro cents through dividends paid to shareholders in the last 12 months. Moreover, we identified the impact of the former 2022 share-by-back program, which is equivalent to 4 euro cents per share. On top of this, as Cesar explained previously, we are starting our 2023's €340 million buyback program today. And with this, I hand over to Cesar, who will conclude our presentation today.