Banco De Sabadell Sa Ord

Good afternoon. Thank you for joining us on Banco Salvador's third quarter 2024 results audio webcast. Please be welcome. As in previous occasions, the presentation will be given by Cesar and Leo. They will cover the main highlights and details of the commercial and financial performance in the third quarter of the year. The presentation will be followed up by a Q&A session. We are aware that it is a very busy day, so we will try to squeeze the whole session in one hour. With no further ado, let me hand it over to Cesar. Cesar, the floor is yours.

Thank you, Gerardo. Good afternoon, everyone, and welcome to Sabadell's third quarter 2024 results presentation. Once again, Sabadell has delivered a set of excellent results. Let's begin with the key messages on slide four. First of all, commercial activity has continued to show positive momentum during the year, despite the typical third quarter seasonality. As a result, performing loans have grown by 2% year-on-year and 3% year-to-date. Secondly, the structure of our balance sheet and our management actions provide for a relatively lower NII sensitivity to interest rates. So, as our NII remained resilient with a slight decline of 0.7% quarter-on-quarter, while NIM slightly increased by four basis points. Thirdly, asset quality metrics continue to improve, with a remarkable 3% reduction in NPAs in just one quarter. Coverage has increased by one percentage point during this period. This positive trend in asset quality also reflects positively on the total cost of risk, currently stands at 44 basis points, two basis points less than the previous quarter. Fourthly, the group net profit reached 1.3 billion euros in the first nine months of 2024, with TSBs contributing 168 million euros. Our return on tangible equity, considering the last 12 months, and this is important, stands at 13.2%. On the other hand, our common equity tier one fully loaded ratio has reached 13.8%, with an increase of 32 basis points over the quarter. As you can see in the bottom of slide, in Q3, we have delivered record quarterly net profit of the history of Bank Sabadell. If we turn to slide 5, we can talk about volumes, performing loans decreased by 0.5% quarter-on-quarter, both in euros and at constant FX, due to the usual seasonality. On a year-on-year basis, we can see an increase across all geographies, segments and products. It is remarkable that in Spain we have also started to see positive year-on-year growth. Indeed, lending volumes have increased by 1.8% year-on-year or 1.3% at constant FX. This positive trend is more evident if we look at the year-to-year growth. at the year-to-date balances, that increased by 3% or 2.2% at constant FX. On-balance sheet funds, shown on the right-hand side of the slide, remained broadly stable in the quarter, whereas off-balance sheet funds increased by 2.8%, driven by positive net inflows and by the mark-to-market effect on mutual funds. All in all, total customer funds increased by 0.7% in the quarter. Similar to performing loans, these positive quarterly trends become even more pronounced and obvious if we look at the year-on-year comparison as well as the year-to-date evolution. If you go to slide 6, lending origination in Spain... The mortgage origination in Q3 increased by 8% quarter-on-quarter and 82% in a year-on-year basis. In the first nine months of 2024, it increased by 34% compared with 2023. On top of this, we continue to grow in a healthy way. New mortgages, risk-adjusted return on capital, Rayrock, remains stable in the quarter, and both loan-to-value and affordability remain at low levels. New consumer loans continue to perform well, growing by 18% on a year-on-year basis and by 3% quarter-on-quarter. In the first nine months of 2024, it increased by 17% compared with 2023. Moreover, the 91% of the origination comes from the pre-approved loans to targeted customers. Regarding business banking, loan origination and new credit facilities decreased by 43% quarter-on-quarter, impacted by typical seasonality, while on a year-on-year basis, they increased, of course, by 6%. In the first nine months of 2024, they increased by 26% compared with 2023. Finally, on the lower right-hand side of the slide, working capital financing posted a slight decrease in both quarter on quarter and year on year. As we explained in the previous quarter, we are observing stabilization here after posting relevant increases during 22 and the first half of 23. All in all, positive trend in commercial activity in Spain continues despite quarter seasonality. In slide seven, we see the payment-related services continue to perform remarkably well, both in cards and and retailer payment services. Cart turnover increased by 7%, while point of sale turnover increased by 8% year on year. In the first nine months of 2024, they increased by 7% and 9% respectively compared with 2023. These figures reflect solid growth in both cases. In the bottom half of the slide, we can see the evolution of customer funds in savings and investment products in Spain. which reached a total of 63.2 billion euros in September 2024. This represents an increase of 2.6 billion in the quarter, driven by 1.5 billion euros increase in term deposits and 1.2 billion euros increase in off-balance sheet products. On slide eight, performing stock, performing loan book XTSB and we broke it here down by segment. Starting with Spain on the left hand side. Performing loans remain broadly flattish quarter on quarter despite typical Q3 seasonality. However, the year on year comparison shows signs of acceleration with growth of 1.1%. Growth is even more evident on a year to date basis where loans grow by 2.4%. The volumes of mortgages and consumer lending grew in the quarter, supported by the strong levels of the new lending that we just saw a few minutes ago. Year on year, the mortgage book is now growing after almost two years of deleveraging, while the consumer loan book keeps growing at a similar pace to previous quarters, rising by 7.15% year on year. The SME and corporate loan books shrank slightly in the quarter due to the usual seasonality. However, the year-on-year variation is already positive too. On the right-hand side of the slide, our international business loan book declined in the quarter by 3.7%, explained by weaker lending activity in Mexico exacerbated by the volatility of the Mexican pesos. Considering constant FX, the evolution of the quarter would have been flattish at 0.5%. Nevertheless, the year-on-year comparison shows positive growth in our international businesses. This is mainly driven by foreign branches where we launched a plan to grow by focusing on customers with higher ROC and improving the share of wallet in our customer base. Moving on to the UK business in slide 9. This quarter, as anticipated by the lower level of applications in Q2, new mortgage lending declined, which caused the stock to slightly shrink by 0.7% quarter-on-quarter. However, mortgage applications increased by 16% quarter-on-quarter, with September posting the strongest growth since May 2022. This suggests that the new mortgage lending has followed a positive trend in Q4. On the other hand, new lending grew by 24% year-on-year and we believe that we could see a flat or even positive mortgage book by year-end. On the liability side, customer funds continue to slowly flow from current accounts to savings accounts. As a result, the cost of deposits closed at 1.59%. seven basis points above last quarter's cost. This is a similar pace of growth to the previous quarter. It is worth mentioning that the remuneration on 10 billion pounds worth of saving, which is almost half of the savings book, had been reduced by 10 basis points at the end of September. This will impact positively from next quarter onwards. On slide 10, TSB has achieved a net profit of 59 million pounds in the quarter, which translates into 138 million pounds in the year. That brings its contribution to Sabadell to 168 million euros, up by 4% year on year. Over the quarter, NII grew by 3.5%, as expected, supported by structural hedge income, as this instrument is replacing with a substantial spread, given the difference between current interest rates and its average yield. Fees are up quarter on quarter, having been negatively affected by a one-off in Q2 related to cards. Total recurrent costs decreased by 6.7% in the quarter. Recurrent costs have been benefited have benefited from savings delivered by the efficiency plan announced last year and executed in Q2-24, along with a £10 million partner rebate. On the other hand, there are non-recurrent costs related to a new efficiency plan launched this year. I will go over this new plan in a minute. Provisions increased in the quarter to a more normalized run rate. In terms of solvency, TSB has achieved a fully load quarter one ratio of 16.6%. Return on tangible equity stands at 8.1%. Adjusted to a 14% benchmark quarter one ratio of our UK peers, that would be equivalent to 9.6%. As we mentioned in previous presentations, 2024 is a transition year for TSB. TSB is progressing as expected and we are feeling more positive about its financial performance over the next two years as we explain in the next slide. Here we present the main levers for TSB to improve the profitability in 2025. Beginning with NII, the structural hedge will contribute an additional 100 million pounds in 2025 and an even higher amount in 2026. This supporting factor, along with a positive evolution of volumes, should result in an NII recording a compounded annual growth rate in the high single digits in 2025 and 2026. Regarding costs, we have recorded 27 million pounds of restructuring charges over the first nine months. On top of the savings from the efficiency plan announced last year and fully executed in Q2, TSB will benefit from an additional £27 million in savings, 100% of which are due to materialize in 2025, onwards with a payback period of roughly one year. Therefore, taking into account both of the efficiency measures in place, we should see total costs continue to decline by 3% in 2024 and by a further 3% in 2025, delivering savings 2 percentage points higher than initially guided. In terms of provisions, cost of risk will remain stable at around 20 basis points. All in all, we see TSB's return on tangible equity returning to double-digit figures in 2025 and beyond. Slide 12. Coming back to the group's standpoint, I would like to briefly summarize our good financial performance. Leo will explain in more detail later on. We recorded our highest quarterly net profit ever, with more than 500 million euros. In the first nine months of the year, net profit reached 1.3 billion euros, a level close to full year 2023 net profit. These results entail a return on tangible equity of 13.2% if we look at the four workers in areas. Our core results, which include NII plus fees minus recurrent costs, dropped slightly by 3% in the quarter, driven down by lower NII stable fees and cost inflation. Provisions decreased once again in the quarter, underpinned by resilient asset quality. In terms of solvency, our capital ratio stands at 13.8%, which implies a solid increase of 32 basis points quarter on quarter. With this, let me hand over to Leo. with my warm hand, thank you for the last four years, who will cover the financials of the bank in more detail.

Thank you, Cesar, and good morning, everyone. Let's start by taking a look at our financial results. We've had another quarter of positive results, although we'll go over in the most relevant details line by line in the next few minutes. First, I'd like to bring your attention to just a few items. Core banking revenue was almost flat in the quarter, with fees partially upsetting NII performance. In the other income expenses line, I would like to point out that this quarter we had recorded extraordinary revenues of 30 million net. And this is a combination of two one-off items, as shown in the bottom of the slide. Recurring costs rose by 2.7% Q&Q, driving the year-on-year increase to 2.5%, perfectly in line with our guidance for the year. As we will analyze in detail, as the quality continues to improve, and this quarter, we once again recorded a reduction in provisions and impairments. All these lines have driven net profit in Q3 2024 to 503 million euros, representing a quarterly increase over 4% and a record quarterly benefit for the bank. If we add this figure to the results for the first half of the year, net profit for the first nine months comes to 1,295 million euros, over 25% higher than last year's figure, and almost the same amount as total net profit for 2023, as Tessa has just mentioned. This net profit represents a return on tangible of 13.2%, considering the last 12 months. And now let's go through the different P&L items in more detail. Starting with NII on slide 15, Group NII was down 0.7% in the quarter, as your rival repricing is starting to be reflected in the customer margin. Despite this, NII still showed a 6.7% increase year-on-year, which makes us very confident that we will meet our mid-single-digit growth target for the year. Also, and this is very important, you can see the role that TSB plays in upsetting part of the pressure on the remaining components of NII, since its NII is already growing 3.5% this quarter. Let us now look at the top right hand side to see the drivers that explain the quarterly evolution of the net interest income. So moving, as always, from left to right, customer and I contributed 3 million euros within it. And we can see that customer margin decreased by 22 million euros, which is mainly explained by lower loan yield. But quarterly average volumes had a very positive impact in the quarter, adding a contribution of 30 million euros. The FX effect was marginally negative and deducted 5 million euros due to depreciation of the Mexican peso on the US dollar. Moving along to the right, capital markets show here as ALCO, Portfolio, Excess Liquidity and Wholesale Funding produce a combined net effect of minus 13 million euros. Within this, there is a combination of lower excess liquidity along with lower benchmark rates. As you can see on the bottom left part side of the slide, our customer margin decreased by seven basis points in the quarter to 3.11%. And this is due to the repricing of the floating rate portion of our portfolio, as the cost of deposits remain almost stable, increasing by just one basis point in the quarter. In terms of NIM, we closed the third quarter at 2.06%. This is four basis points below last quarter. Moving on to the next slide, allow me to explain why we believe Sabadell's NII will be more resilient than other peers going forward. As usual, we have a split NII into three different blocks. Firstly, customer margin excluding TSB. Secondly, the contribution coming from capital markets, that's to say Alco plus access liquidity minus wholesale funding costs. And thirdly, TSB's NII contribution. Starting by the first one, Sabadell's XTSB customer margin is the most important part of the group. It accounts for 70% and I would like to share two ideas here. On the one hand, we believe that the weight of fixed rate exposures within our balance sheet, 60% of a loan book, should make us less sensitive to interest rates. As you can see the table of the cycle of interest rate hikes, this is since the end of 2021, Our customer margin has only increased by 1.6 times, whereas our peers have recorded a twofold increase in the customer margin. We believe that these facts, which weight somehow on upward movements, should offer also some protection when repricing downwards. On the other hand, we've seen that this lower interest rate environment is supporting demand for credit, and we've seen loan growth once again. In fact, our loan book, excluding TSB, has grown by 2.5% year-to-date, and this growth should provide a further support for this block of the NII. Let's now look at the second bucket, the non-customer NII excluding TSB. This is the bucket through which we are reducing our NII sensitivity by managing the variable interest rate exposure of both the ALCO portfolio and the wholesale funding. As you can see, Since the last quarter of 21, we have reduced our NII sensitivity for 100 basis points decline in the interest rate curves for currencies and levels from 6.7% to our current level of 2.9% for the first year. And finally, the third product refers to TSB, whose contribution represents none less than 25% of the group's NII. The structural hedge is already expected to contribute an additional £100 million next year. And very importantly, it shall contribute even higher, even a higher delta in 2026, and its contribution will continue well into 2027 and even 2028. This improvement in 2025 represents more than two percentage points of the total group's NII, providing a phenomenal offset to the lower rates to be faced by the rest of the buckets. In conclusion, we are combining these three blocks. We believe that NII will be resilient going forward in this new interest rate cycle. Now, leaving the NII line to one side and moving on to fees, fees remain broadly stable in the quarter, posting an increase of 0.2% Q&Q. This is mainly attributable to the improved performance of service fees, 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 evolution is partially explained by lower revenues from service fees related to site deposit accounts. Considering all this, we are confirming that we are on track to meet our guidance of a circa 3% decline in fees for the year 2024. Now, leaving the revenue lines to one side and moving on to cost on slide 18, this quarter, total costs increased by 2.7%. In year-on-year terms, costs increased by 2.5%, in line with our guidance for the year. This quarter, our expenses in Spain have been impacted by a 14 million one-off, which is upset by another positive one-off at TSB. Moreover, in TSB, our account costs have decreased, as it is the first quarter in which savings from the previous efficiency plan have fully accrued. As Cesar pointed out, it is important to take note that the extraordinary expenses incurred at TSB during the quarter, amounting 14 million, which along with the 6 million spent in Q2, will allow us to reduce total cost at TSB by 3% next year, this is in 2025. With all this context, we are confirming again our guidance of circa 2.5% growth versus 2023 for the recurring cost of 2024. In the next slide, we cover the bottom line of the P&L, basically cost of risk and the other P&L items between pre-provision income and profit before taxes. The group started cost of risk, improving the quarter to stand at 44 basis points, which is better than the guidance that we gave last quarter, a sign of the strength of our asset quality. Quality cost of risk is to the 31 basis points at the end of September, decreasing by 12 basis points versus 2023 levels. This reduction is the perfect testimony of the solid asset quality with which we are operating. Now, looking in more detail at the breakdown of total provisions on the top right-hand side, from left to right, we can see that first we book 121 million euros of loan loss provisions in the quarter, according to the 31 basis points credit cost of risk that I just mentioned. Next, the capital gains made on the sale of our real estate-owned assets offset the provisions required For our foreclosed assets, as you will see in a couple of slides, despite provisions in this line showing a net figure of zero, we actually increased the coverage of our foreclosed assets. We also had 35 million euros of MPA management costs, a similar figure to the one of previous quarters that can be considered probably a wrong rate. And finally, other provisions, which mainly relate to litigations, stood at 16 million. All in all, total cost of risk continues to perform well, bolstered by declining NPA levels and robust asset quality. Consequently, we have improved our total cost of risk guidance for the third time this year to around 45 basis points for both 2024 and 2025. Moving on to the next section now, we walk you through asset quality, liquidity, and solvency. Let's start with the evolution of non-performing loans on slide 21. The group's non-performing loans saw a decline of nearly 3% in the quarter, bringing the NPL ratio down to 3.1%, despite typical Q3 seasonality factors in terms of lower levels of debt recoveries. In parallel to the reduction of NPLs, the amount of total provisions compared to stage 3 loans increased, again, by 1 percentage point, standing at 61%. This is one percentage point increase versus the total provisions that were recorded in Q2. On a year-on-year basis, the stock of MPLs has decreased by 10%, confirming that asset quality remains resilient, even better than initially projected in our budgets. Looking at exposures by stages and their coverage on the right-hand side, our stage two exposure as a percentage of total loan book dropped by 60 basis points year-on-year, reflecting a reduction north of €850 million. This evolution is mostly explained by migrations to Stage 1, which confirms, again, robust levels of asset quality. Stage 3 loans, on the other hand, have decreased by more than €600 million in the year, and this reduction is driven by the combination of a lower level of gross NPL inflows and an improved level of debt recoveries year to date. Moving on, in terms of foreclosed assets, the stock has declined by 31 million euros in the quarter, or by 16% year-on-year, to levels already below 900 million. The coverage ratio for this portfolio increased by 1% to 40%. It's worth mentioning that 24% of the stock has been sold during the last 12 months, with an average premium of 7%, which shows that these assets are correctly mark-to-marked on our balance sheet. Moreover, taking into account that 94% of these assets are finished buildings, which makes them more easily marketable and allows us to maintain the rotation levels that you have been seeing. Overall, total MPAs, which include both MPLs and foreclosed assets, are down by 11% year-on-year. Gross and net MPA ratios stand at 3.6% and 1.5% respectively, improving both in the quarter and also in the year. On the next slide, allow me to summarize the latest developments in terms of asset quality. Firstly, the NPR ratio has been steadily reduced by 38 basis points over the last seven quarters to the current level of 3.1%. Secondly, coverage of stage three loans is at 61% and has gone up by more than six percentage points during this period, ensuring robust protection of non-performing loans. And thirdly, cost of risk has been continuing coming down quarter after quarter, accumulating a reduction of 13 basis points. In other words, in the last seven quarters, we have seen a positive evolution across all asset quarterly metrics, which proves that asset quality remains resilient, supported in particular by an enhanced risk management process. This solid delivery, quarter after quarter, reinforces our improved guidance for total cost of risk to around 45 basis points for this year and the following as adjusted trend. Moving on to liquidity on the following slide. The group position improved further in the quarter and remains at very comfortable levels. This is reflected by the 46 billion euros of high quality liquid assets, which increased by 2 billion euros during the quarter. Also by the LCR, which stood at 209% for the group, remaining at very sound levels and actually four percentage points higher than in Q2. The loan-to-depot ended the quarter at 95%, marginally better than the previous quarter. On the right-hand side, we can see the credit ratings, and I would like to remind you that over the last three years, the bank has benefited from four notch uplifts and two outlooks upgrades to positive from the agencies that cover us. Most recently, Moody's, which upgraded their outlook to positive in their last review. Turning now to slide 25, we can see our current embryo position. We are confident in meeting embryo requirements in terms of both risk-weighted assets and leverage ratio exposure. Moreover, we are compliant with both the absolute and subordinated requirements, and we have built a management buffer that is well above those requirements. It is important to note that we have issued a total of more than €5 billion year-to-date across the capital structure, as well as through liquidity instruments, namely cover bonds. I would also like to mention that in September we successfully issued an inaugural senior preferred deal in pounds sterling, which is eligible for embryo purposes. All in all, in terms of 2024 funding plan, we have no need for any new issues to be made. We may nonetheless consider some opportunistic issues in the senior or senior non-preferred space if the circumstances are right. And finally, in the next slide, we can see that we continue to generate capital organically, while accruing a 60% payout ratio. Our fully loaded C81 ratio stands at 13.8%, having increased by 32 basis points in the quarter. When we look at the quarter's evolution in more detail, we see an increase of 26 basis points derived from organic capital generation, mainly attributable to retained earnings after 81 coupon payments, There is also an increase of 10 basis points at steaming from the positive fair value reserve adjustments. And finally, an impact of minus four basis points from RWS, which is mainly due to the business mix. This quarter, the performing low book remains stable when excluding the Social Security advance payments, which don't consume capital. And lastly, looking at context effects, we've grown in businesses with a relatively higher density, such as Miami and other foreign branches, while leveraging in the UK, which is mainly mortgages. From a regulatory perspective, the CT1 ratio stands at 13.8% on a phasing basis also, with an MDA buffer of 485 basis points. This level of CT1 is 0.6 percentage points above the threshold for excess capital distribution, considering our expected Basel IV impact. Finally, in terms of shareholder value creation, tangible book value per share increased by 13% year-on-year, including the distribution of 14 euro cents through dividends paid to shareholders in the last 12 months. as well as the 2 euro cents impact of the executed part of the share buyback from 2023 earnings. And with this, I hand over to Cesar, who will conclude our presentation today. Thank you, Leo.