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Edited Transcript of SAB.MC earnings conference call or presentation 30-Jan-20 5:00pm GMT

Q4 2019 Banco de Sabadell SA Earnings Call

Madrid Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Banco de Sabadell SA earnings conference call or presentation Thursday, January 30, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cecilia Romero

Banco de Sabadell, S.A. - Head of IR

* Jaime Guardiola Romojaro

Banco de Sabadell, S.A. - CEO, MD & Executive Director

* Tomás Varela Muiña

Banco de Sabadell, S.A. - GM & CFO

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Conference Call Participants

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* Alvaro Serrano Saenz de Tejada

Morgan Stanley, Research Division - Lead Analyst

* Andrea Filtri

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Britta Schmidt

Autonomous Research LLP - Non-Designated Member

* Carlos Peixoto

Banco Português de Investimento, S.A., Research Division - Analyst

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Marta Sánchez Romero

BofA Merrill Lynch, Research Division - Director and Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [1]

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Good afternoon, and thank you for joining us for Sabadell's results presentation for the fourth quarter of 2019. My name is Cecilia Romero, I'm the Head of Shareholder and Investor Relations. And presenting today, we have our CEO, Jaime Guardiola; and our CFO, Tomás Varela.

During our webcast, we plan to spend around 30 minutes presenting the results and another 30 minutes answering your questions. (Operator Instructions)

Today's presentation will follow a similar structure to last quarter. Our CEO will start by going through the key highlights of the quarter and the main milestones of the year; I will then provide details on our business performance; our CFO will then discuss financial results, capital, liquidity and asset quality; before our CEO concludes with some closing remarks, including the outlook for 2020.

I'm now handing over to Mr. Guardiola to kick off the presentation. Good afternoon, Mr. Guardiola.

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Jaime Guardiola Romojaro, Banco de Sabadell, S.A. - CEO, MD & Executive Director [2]

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Thank you, Cecilia, and good afternoon, everyone.

This year, we have earned a total net profit of EUR 768 million versus a net profit of EUR 328 million in 2018. During the fourth quarter, we recorded net results of minus EUR 15 million. This followed the closing of EUR 8.2 billion of real estate disposals that entail extraordinary provisions totaling EUR 72 million net, as announced last December, and which affected our results.

Return on equity for the year was 5.9%, while return on tangible equity reached 7.4%. Tangible book value per share increased by around 6% above our guidance.

Furthermore, I'm pleased to announce that our Board has approved a final dividend of EUR 0.02 per share, which brings the total yearly dividend to EUR 0.04 per share. This is EUR 0.01 higher year-on-year and implies a circa 40% dividend payout on profit, excluding the capital gains from Solvia and the consumer loan securitization.

Overall, our core banking performance in the quarter was good. Gross loans and performing loans was increased once again year-on-year. Core banking revenue show ongoing resilience to the current interest rate environment and continuing with its positive trend, supported by increased volumes and a strong growth in fees, which were up 7.6% year-on-year. Our efficiency ratio for the year was 55.6%. Our risk profile also continued to improve. Sabadell Group's NPA ratio was brought down once again and stood at 4.8% at year-end, while NPL ratio was 3.8%, both improving considerably year-on-year.

Recurring cost of risk for the year stood at 52 basis points following an increase in the fourth quarter due mainly to a higher level of NPLs, write-offs and provisions related to a specific single-names NPL exposures in the period.

This quarter, we made significant progress in our balance sheet derisking, closing several institutional real estate portfolio disposals, which means that a considerable amount of problematic assets were transferred out of our balance sheet. All NPL disposals announced to date have now been closed, with the single exception of our real estate developer disposal, which we are on track to close this year. Furthermore, our liquidity remains strong, with a coverage ratio of 172%, which was up quarter-on-quarter despite a TFS early repayment of GBP 1.5 billion, while the loan-to-deposit ratio stood at 99%. Our fully loaded CET1 ratio continued to show good progress in the quarter and increased by 34 basis points to 11.7%. The pro forma ratio increased by 76 basis points to 12.1% in the quarter, including the benefits of the disposals of our asset management unit, which I will review in more detail later on in the presentation.

Looking at the year as a whole, I'm pleased that we have achieved our key priorities in 2019. Overall, our business performance has been good. And core banking revenue has shown resilience in the current interest rate environment. We execute our NPA plans by decreasing our NPA stock by approximately EUR 1 billion in the year, which brought the group NPA ratio down by 78 basis points to 4.8%. We also delivered on our commitment to close all of the institutional real estate disposals announced in 2018 before year-end. Our cost of risk has improved significantly year-on-year.

We have rebuilt our capital from CET1 ratio of 11.1% in December 2018, adding more than 100 basis points in the year, Sabadell's fully loaded CET1 pro forma stood above our medium-term target of 12% at the year-end.

In the U.K., TSB regained commercial momentum and is rebuilding its reputation. Moreover, in 2019, TSB made several changes to its leadership team and presented the new strategic plan. TSB is now ready to start a new chapter of growth.

Finally, we have delivered on our promise to increase tangible book value by more than 5% in the year, and we have also declared a dividend of EUR 0.04 per share.

Moving to Slide 6. Here, you can see our results versus our year-end guidance. Our NII ended the year in line with the lower end of the guidance range when excluding the securitization of our consumer loan portfolio, which reduced net interest income by EUR 19 million in the year. Furthermore, our fee revenue continued to post growth in the high single digits, in line with our expectations. We also achieved our trading income guidance even when excluding the gains on the securitization and the impact on trading incomes, tariffs, subordinated debt, debt impairment incurred in the year. Our recurring cost of risk was slightly above the guidance of 45 basis points mainly due to an increase in NPL's provisions for a specific single name exposures and for write-offs. TSB's contribution in the year fell short of our guidance for TSB to make a small, positive contribution. This was driven by restructuring and other one-off charges in the year, some of which were still related to migration, as we explained in the presentation of TSB business plans in November. Overall, taking all of these developments into account, we ended the year slightly below our return on equity guidance at 5.9% reported and 5.2% excluding one-offs, but ahead in terms of the guidance for tangible book value per share growth and capital.

Moving on to business performance. Looking at our performing loans by region, you can see on Page 8, the loans grew quarter-on-quarter and year-on-year across all geographies. Volumes in Spain, including foreign branches, increased by around 1% in the quarter. In the year, volumes in Spain increased by almost 3%, including a strong growth in foreign branches, both in the quarter and over the year. TSB volumes grew at a similar pace to the group as a whole by 0.7% in the quarter and by more than 3% year-on-year, showing that TSB commercial momentum is increasing. Volumes in Mexico returned to growth in the quarter at almost 3% and were up by approximately 8% year-on-year. Overall, group performing loans grew by 0.8% in the quarter and by almost 3% year-on-year.

On the right-hand side of this slide, we show our business distribution across geographies. The U.K. represents 26% of our performing loans and 15% of our risk-weighted assets, so it is currently not contributing to profit. As explained in our TSB business plan presentation last November, we expect the U.K. to achieve a 7% recurring return on equity by 2022, which will significantly boost the group's profitability.

Slide 9 shows customers' balance sheet excluding TSB. On the left-hand side, you can see the breakdown of performing loans. Overall, performing loans increased by 0.8% in the quarter and increased by 3% year-on-year. Corporate SMEs, mortgages and consumer lending were the main drivers of growth both in the quarter and in the year.

On the right-hand side of the slide, you can see that our customer funds increased by over 1% in the quarter and by 3.5% year-on-year. Our balance sheet funds increased by 2% in the quarter and by circa 6% year-on-year. This growth is mostly driven by site accounts. Off-balance sheet funds decreased by circa 1% in the quarter and by circa 2% year-on-year as a result of the smaller volumes of both pensions and mutual funds.

In Spain, we have delivered a strong business momentum across products during 2019. All right. New loans and credit facilities to SMEs amounted to nearly EUR 19 billion, growing by 2%, excluding real estate development. Together with working capital loans granted, we achieved a 4% increase in new lending to SMEs. That's all right. Thank you. The other main activity indicators show high single digit of double-digit increases. Our commercial momentum is reflected in our market share -- in our market share growth in the main product segments. For instance, customers' loans were up 7 basis points, excluding EUR 1 billion of consumer loans securitized in September 2019, retail payment services turnover was up 70 basis points and life insurance premiums increased by 98 basis points. You can see that our market share of customer funds has continued to fall slightly by 2 basis points year-on-year. However, this is an improvement on the previous quarter as the change in mutual funds was partially offset by increase in the market share of customer deposits. In particular, as we'll explain the next slide, the agreement with Amundi will be a key lever to improve our performance in this segment.

As you might already know, on January 21, we announced the disposal of our asset management unit as well as long-term strategic partnership with Europe's leading asset manager, Amundi. This transaction will allow us to further build our out -- to build out our position in the savings and investment segment in Spain. It would also help us to increase penetration and accelerate growth in the medium term by providing our customers with access to a stronger, broader and more diversified investment position than the one we had before. This includes an outstanding ESG offering as we step up our commitment to responsible investments. It also provides us with access to Amundi world-class expertise on retail networks and will allow us to leverage their scale. This will reduce investment needs and expenditure in the future. By joining forces with Amundi, we will also be able to strengthen our digital capabilities for this specific segment and have more time to fully focus on client acquisition and relationships. The perimeters sold includes EUR 21.8 billion of assets under management and earned a net income of EUR 34 million in 2019, including EUR 65 million in net fee income and EUR 17 million of operating and staff expenses, among others. The transaction represents the capital gain of EUR 351 million net of taxes, adding 43 basis points of fully loaded CET1. Additionally, an earnout of up to EUR 30 million may be received and will be payable in 2024. EUR 15 million of this capital gain is subject to specific guarantees over the length of the agreement. Accordingly, 7 basis points out of the total 43 basis points impact on CET1 will be accrued over the next 10 years rather than realized at closing. Closing of this transaction is expected for the third quarter of this year.

Regarding customer experience and service quality, this continues to be one of our key focus areas and one of our main competitive advantages. We continue to perform better than the industry average in terms of service quality, and we retain our place as the bank with the highest Net Promoter Score in Spain for SMEs and the second-highest NPS for personal banking.

Turning now to TSB, which continued to regain commercial momentum this quarter. On the asset side, net lending increased in line with last quarter, posting an increase of just over 1% as a strong growth in mortgage applications continue to generate higher completions and customer retention levels improve. Core mortgages once again show one of the highest quarterly growth rates post migration at 1.5%. And secured lending was stable in the quarter as we continue to increase our products and our product service offering through digital channels. Year-on-year, net lending was up 3.6% driven by an improved service offering and a wider product range in mortgages.

On the liability side, customer funds increased both in the quarter and the year with growth across products. Business banking deposits increased by 9.4% in the quarter, partially reflecting the incentivized switching scheme part of the RBS incentives but mainly due to a new competitive savings proposition. The year-on-year customer funds increased by around 4%, which grows across segments driven mostly by current accounts and also by savings.

On this slide, we show TSB's improvement in business momentum through the year. As expected, due to the end-of-year seasonality, new mortgage lending and new unsecured loans decreased in the last quarter. However, year-on-year, new mortgage lending increased by over 21% and new unsecured loans by 37%.

Regarding the bank's Net Promoter Score, we are pleased that both bank and mobile NPS experienced significant growth in 2019 of around 20% points each as TSB continues to rebuild its business reputation.

Finally, on this slide, you can see that our digital transformation is progressing at a good pace. The group's digital and mobile customers were up 5% and 14%, respectively, year-on-year. Moreover, digital sales of unsecured loans in Spain increased by 50% compared to the previous year and accounted for 39% of the bank's total sales. Digital sales in the U.K. also improved compared to last year. They represent 45% of TSB total sales and have grown by 42% year-on-year.

Regarding strategic alliances. I would like to highlight that we have signed a 10-year agreement with IBM as we are consolidating our IT suppliers. This partnership will make things easier for us because it simplifies our operating model. Furthermore, the team improves our IT scalability, resilience in security and enable us to launch new digital products faster and more effectively. Finally, the agreement will result in annual IT savings.

I will now hand over to Tomás, who will discuss financial results, capital, liquidity and asset quality.

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [3]

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Thank you, Jaime, and good afternoon, everyone.

Regarding our quarterly results, as Jaime said, we reported a net result of minus EUR 15 million in the quarter. Reported results were impacted by seasonal items typically incurred in the fourth quarter, such as the tax on deposits in great institutions and the deposit guarantee fund payments as well as unusual items, such as the provisions associated with the closing of the NPA disposals and the earnout received on our insurance business disposal. And all of these items amounted to minus EUR 143 million net. You can see the retail on the left -- lower left-hand side of the slide.

In terms of the performance of our recurring business, the commercial dynamism within the bank continued. Expenses were higher in the quarter, although the annual total was in line with expectations. The same thing, as per the expenses being higher in the quarter, happened in 2018 last year. So it's a seasonality effect. Nothing that signals any change in brands or any structural factor. There is some degree of seasonality here, as I said. And also in terms of provisions, they were also higher. In this case, mostly driven by single-name NPL exposures and higher NPL write-offs.

Overall, we reported an annual net profit of EUR 768 million, which is significantly higher year-on-year. Reported net profit was positively impacted by a net EUR 97 million of unusual items. It is also important to highlight when looking at year-on-year comparisons that net interest income, operating expenses and amortizations were influenced by the implementation of IFRS 16, as we explained already at the beginning of the year. So it started in January 1 and it's gone all the way through the year. You can see the retail summary in this page.

Moving on to the evolution of net interest income. Group net interest income dipped by 0.9% in the quarter and by 1.8% in the year in constant FX. Looking at the quarter, NII was positively driven by volumes by FX and tiering-related savings and cheaper wholesale funding. Factors which reduced NII included our securitization and the interest rate levels. Overall, group average volumes ended the year slightly above our latest guidance, reaching EUR 142 billion, as you can see on the right-hand side, and excluding the execution of our securitization in the third quarter.

Finally, as I will explain in more detail shortly, in terms of sensitivity to interest rates. Based on the balance sheet as of the end of this quarter, an additional decrease of 10 basis points in all relevant rates would affect NII by EUR 18 million. This is EUR 18 million, 1-8, in the 12 months following the rate cut.

From book yields across products, this quarter has been lower, influenced by the mix of new lending and the interest rate environment. In particular, in mortgages, from book yields reflected a lower contribution of fixed-rate mortgages to the new volumes in terms of weight on new volumes, along with falling long-term market rates, which hit a new low in the second half of 2019. It is important to note that some of the new mortgages here were priced in Q3 when rates were lower since it takes some time for mortgage granting to be completed. In addition, SME's and corporate's new production included a higher level of corporate transactions this quarter, which are usually priced at lower yields.

And finally, consumer loan yields were affected by a larger proportion of loans to expansion current accounts. You may remember that this is a prime customer current account, so loans to these customers usually are priced lower in average, also other finance loans which typically have lower deals as well.

The group's customer spread was 3 basis points lower in the quarter, driven by lower yields in Spain, which were mostly explained by the securitization that lowered the average and rate cuts in Mexico as well as lower deals in the U.K. As a result of this, in this case, is as a result of the extraordinary effect of waivers and commissions. Group cost of customer deposits improved considerably quarter-on-quarter as TSB repriced its current non savings accounts and as reference rates were cut in Mexico. Overall, the group net interest margin remained stable quarter-on-quarter, thanks to tiering-related savings and cheaper wholesale funding. And in addition, it is also worth noting that early repayment of GBP 1.5 billion from the TFS.

In this next slide, as we showed last quarter, we highlight the different features that make our balance sheet more resilient to further interest rate cuts. Starting with the asset side. In terms of sensitivity to interest rates, around 2/3 of our lending is not sensitive to decreases in Euribor. In addition, the ALCO portfolio, we continue to have a very low reinvestment risk as only 11% of the portfolio will mature over the next 2 years. In fact, 7% of the portfolio will mature in the first quarter of 2020, yielding 1.2% on average.

Moving on to the liability side. It is worth highlighting that the bank has different levers at its disposal to mitigate the effects of interest rates. Firstly, we have EUR 39 billion in wholesale deposits, and there is a possibility that there could a gradual repricing of these deposits. Currently, we pass through negative interest rates to EUR 3.7 billion of these wholesale deposits, which is EUR 1.2 billion higher in the quarter. And secondly, we still have some expensive, outstanding wholesale funding liabilities maturing over the next few quarters, of which here, we highlight EUR 400 million Tier 2 issuance with a coupon of 6.25%. This should help us make our wholesale funding cheaper in 2020 despite new issuances.

Finally, the new ECB measures that were put in place from October 30, 2019, are already helping to reduce costs through an excess cash balances. In our case, tiering will exempt more than EUR 6 billion of deposits currently at the ECB. Tiering-related savings amount to EUR 32 million in the year.

Now based on the details in this slide, our ALCO portfolio's contribution to NII is expected to fall in the first quarter as a consequence of what I just said, the EUR 2 billion maturing, but it is then likely to remain broadly stable. Fairly on the left-hand side, we show how the amortized cost portfolio has increased over the quarters, limiting the sensitivity of capital to changes in the valuation of the fair value of CI portfolio. On the right-hand side, we show the maturity profile of our fixed income securities portfolio, which shows that only 11% is due to mature over the next 2 years, with the bulk of these maturities occurring in the first quarter of 2020, as I said. But if we look at the proportion that matures over the next 5 years, including the 11% I just mentioned, only 20% matures over the next 5 years. Finally, the average maturity of the Sabadell portfolio continues to be 9 years.

Group fees increased in the quarter driven by the positive effect of asset management fee seasonality. The performance year-on-year remained strong at plus 7.6%. In terms of the segment evolution, it is worth highlighting that in addition to asset management growth, we saw growth in credit and contingency -- or sorry, contingent risk fees in the quarter. Service fees were down slightly as price increases in this segment have already been fully accrued in the fourth quarter. There is a new pricing plan for service fees, including further price increases, which is effective from January 1, so the beginning of this month. In the year, fees had a positive performance across all segments, including a mortgage rise from asset management.

On the following slide, we show the positive evolution of core banking revenue excluding TSB. The compound annual growth has been 6.8% over the period 2012 to 2019. Despite Euribor in the same period has dropped by 2019 basis points. Year-on-year, at the end of the fourth quarter of 2019, core banking revenue growth was 1% or 1.5% if we exclude the effect of the securitization. These positive results are possible, thanks to our improved structural resilience in -- to interest rates, which we explained earlier in -- earlier on in the presentation.

Moving on to the next slide. Group total expenses increased by 4.2% in the quarter driven by higher general expenses ex TSB, in particular, related to marketing, IT as well as third-party advisory services. And also at group level, there was the influence of the appreciation of the pound. Sorry. Amortization was also higher quarter-on-quarter due to a higher level of IT investments. These, as expected, happens as IT programs tend to start at the beginning of the year and end in the second half. Therefore, amortization and investments are usually higher at year-end. On the other hand, nonrecurring costs were also higher in the quarter as expected driven by EUR 26 million of restructuring at TSB. It's worth remembering or highlighting that in the year, nonrecurring items included EUR 85 million of TSB-related items, EUR 50 million for restructuring and EUR 35 million in other charges. As we outlined at the TSB investor event in November, going forward, about GBP 45 million in this case of TSB restructuring will repeat every year up to and including 2022, while the remaining nonrecurring of EUR 35 million will not repeat from this year onward.

Finally, for those of you looking at the year-on-year changes, it is worth remembering, once again, that the implementation of IFRS 16 distorted year-on-year comparisons, particularly here between general expenses and amortization.

Recurring provisions increased in the quarter at both ex TSB and TSB level. In the year, cost of risk improved by 14 basis points. As explained briefly before, ex-TSB provisions increased by more than the average level reported quarterly this year, so in just above EUR 60 million, so higher EUR 60 million than the average quarterly charge of the year. And this was due to higher write offs, single-name exposures and to a lesser extent, seasonal revaluation of collaterals. The increase at TSB was driven by the recalibration of models, which is policy there, which takes place every quarter. And this is the -- this is what some of the things the policy consists of for different products and can make provisions a bit lumpy in any single quarter. Overall, the annual charge for TSB was EUR 74 million, which implies 20 basis points, in line with expectations and is 4 basis points better year-on-year.

On the following slide in this line, on the left-hand side, we show a detailed evolution of both historic and future cost of risk. This is the first time that we provide the -- this breakdown that we hope helps to understand better the dynamics of the cost of risk. As you can see in the chart, while it has improved considerably year-on-year, we ended 2019 at 52 basis points, which was higher than our 45 basis points guidance for the year. The bulk of recurring cost of risk in 2019 was driven by new NPL entries and NPLs with vintages of less than 2 years. You can see how this was 27 basis points in 2019, 26 basis points in 2018, so pretty similar. NPA-related expenses contributed -- sorry, 12 basis points in the quarter -- sorry, in the year. Excluding these NPA-related expenses charge, which some of our peers done including provisions, our cost of risk in 2019 would be 40 basis points. In addition, it is also worth noting that expenses and foreclosed assets provisions have been an important driver of the improvement year-on-year, thanks to the strong progress made in reducing the NPL portfolio. Going forward, we expect the recurring level to improve slightly in 2020, driven by fewer NPLs and foreclosed assets, as we continue to clean up our balance sheet. The regulatory item to consider in 2020 is the ECB expectation for prudential provisioning for NPLs. Part of this requirement will be covered by our recurring cost of risk in the year as every year, so it's part of the ordinary course of business. In addition, new actions to manage NPL exposures proactively may reduce the requirement and add anywhere between 5 to 10 basis points of nonrecurring cost of risk. Depending on these two components and on the final scope of the application of the guidance, since the guidelines may have exceptions on the application over the stock depending on a set of criteria established by the regulators, the final effect on CET1 could be up to 20 basis points, so less depending on how it's been dealt with through cost of risk within the ranges that I just explained. And this will be absorbed by capital generation in the year.

Moving on to asset quality. This slide shows a snapshot of the details of the final closure of the portfolios, commercially known as Coliseum, Challenger and Rex to Cerberus. The transaction involves 61,000 units, with a gross value of EUR 8.2 billion. Of these, there is a small amount of EUR 1.8 billion corresponding to 15,000 units that is subject to third parties' right of first refusal. This right can be exercised during approximately 6 months following the closing date of the transaction. If the third-party doesn't exercise its right to acquire the asset, the asset will be transferred to Cerberus under the agreed terms. Exercising this right cannot alter the financial impacts of the transaction for Sabadell as the disposals have been now closed.

In terms of the balance sheet, as a result of the deal, our assets available for sale has fallen considerably in the quarter. In addition, we have created an amount receivable to reflect the value of the assets with rights of first refusal, which will be liquidated once the rights expire.

Finally, as we have already discussed earlier in our presentation, there was an impact on results of a net EUR 72 million from extraordinary provisions related to the closing of these transactions. This comprised a net EUR 52 million due to the implementation of certain contractual clauses relating to assets -- to the assets involved in the transaction and a net EUR 20 million in cost related to the assets being transferred but not attributable to the sale.

Moving on to the next slide. Our NPL and NPA ratios have improved once again this quarter to 3.8% and 4.8%, respectively. The nonperforming loans ratio improved in the quarter. Our recoveries exceeded new NPL inflows. The stock of NPLs were reduced by EUR 250 million.

In terms of foreclosed assets, as I explained earlier, we closed a number of NPA disposals, which means that the corresponding amount of assets available for sale, highlighted in gray, has been completely removed from our balance sheet. Overall, our foreclosed assets stock increased by EUR 153 million to EUR 1.2 billion in the quarter. It is also worth noting that the foreclosed assets stock composition improved once again this quarter, and that is the reason for the lower coverage.

Overall, the stock of NPAs, which includes NPLs and foreclosed assets were down by EUR 98 million in the quarter, while NPA coverage was at 47%. As you can see on the slide, our asset quality metrics are in line with or better than those of our peers in Spain.

Turning now to liquidity. At the year-end, the group continued to have a strong liquidity position with an LCR of 172%, a loan-to-deposit ratio of 99% and high-quality liquid assets of circa EUR 46 billion. Furthermore, in terms of TLTRO II, we currently have EUR 13.5 billion outstanding. And in terms of TFS, we have GBP 4.5 billion outstanding after having repaid EUR 1.5 billion ahead of -- GBP 1.5 billion actually, ahead of time this quarter.

With regard to TLTRO III, no funding has been drawn at this point and we have no plans to use it at the moment. However, future withdrawal will depend on our euro balance sheet evolution.

Now with regard to our funding plans, our eligible MREL securities as a percentage of TLOF stands at 9%, which is above the new requirement of 8.3%. Our funding plan for 2020 will consider the following objectives: first, a AT1 and Tier 2 issuances as needed to keep this capital buckets full; second, senior nonpreferred debt issuance of approximately EUR 1.1 billion to EUR 2 billion to build up our additional MREL buffer; and third, EUR 2 billion to EUR 3 billion of covered bond issuances mainly subject to our euro balance sheet evolution.

Moving now to -- on to capital. On the following slide, we show the evolution of the group's fully loaded CET1 ratio in the fourth quarter as well as our pro forma position at the end of the year.

Starting from the reported fully loaded ratio at the end of the third quarter in the left and following the graph to the right, we show the different drivers and capital impacts in the quarter. First of all, the organic capital generation, including net profit. Net profit, in this case, excludes extraordinary provisions associated with the closing of our NPA disposals that are deducted from the contribution of these disposals in the slide. It includes also dividends, intangible assets, other organic deductions and a decrease in organic RWAs. So this total added 1 basis points in -- 1 basis point, sorry, in the quarter. Then an increase in deductions driven mainly by fewer tax loss carryforwards being rewarded in the quarter deducted 3 basis points. The closing of the NPA disposals added 16 basis points. And additionally, the remaining capital gains on Solvia and securitization, which were converted from accrued dividend into capital at year-end as expected, added 8 and 4 additional basis points, respectively. Finally, the payment of the treasury shares dividend announced last quarter added 7 basis points in the quarter. Taking all of these into account, our fully loaded CET1 ratio on a reported basis stood at 11.7% at the end of the year. In addition, there are a number of factors that bring us to the pro forma ratio. Firstly, the sale of our real estate developer announced in August and expected to be closed this year, will add 5 basis points. And lastly, the disposal of Sabadell Asset Management will add 36 basis points by closing, excluding the future value from the earnout. These elements will bring our fully loaded CET1 ratio to 12.1%. This is around 100 basis points higher than our reported CET1 a year ago.

To conclude my part of the presentation, on the following page, you have the details of our current reported capital base versus requirements. The strong capital generation in the quarter has allowed us to increase our MDA buffer by 40 basis points. Our reported phase-in total capital ratio stood at 15.7% at the end of the quarter. 256 basis points above a requirement of 13.1%. Our fully loaded total capital ratio stood at 14.99%. Both of these ratios would be around 37 basis points higher on a pro forma basis, as indicated in the slide, if we take into account the new Tier 1 transaction completed in January this year. In addition, our phase-in leverage ratio stood at 5.01% at the end of the quarter.

And with this, I will hand over to Jaime, who will conclude our presentation today.

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Jaime Guardiola Romojaro, Banco de Sabadell, S.A. - CEO, MD & Executive Director [4]

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Thank you, Tomás, joining our presentation today.

I would like to give some key highlights of the outlook for the year ahead. In 2020, there will continue to be challenges that put pressure on the sector's profitability. Negative rates are pushing banks to find new sources of income and to rethink the way in which we have traditionally operated. Expenses will continue to be linked to compliance, regulations and technology. NPL trends have ceased to improve materially, and the regulation is still consuming a lot of management's time. Key regulatory developments this year includes ECB provisioning guidelines, EBA guidelines and CRD V, Article 104, among others. And finally, competition to capture and retain customers is not getting any easier.

With this context, our priorities for the year are as follows: first, preserve revenue growth and keep up our business momentum, including containing costs; second, continue to improve our nonperforming exposures; third, deliver on the restructuring of TSB, as outlined in the plan presented last November; fourth, maintain adequate capital levels; and last but not least, continue to create value for our shareholders.

With this in mind, we have a clear strategy to help us overcome the market's challenges and deliver in our -- on our priorities. In Spain, our objective is to continue to focus on our core businesses. We aim to contain costs in a number of ways, including branch closures in the year. Last year, we closed more than 40 branches. And in 2020, we will close about 145. We will also continue to find ways to remove procedural problematic exposures from our balance sheet at a reasonable speed and an appropriate cost.

At the same time, we will focus on retaining our place at the top of the leaderboard in terms of customer experience in key segments by continuing to digitalize and improve the way we interact with our clients.

In the U.K., first and foremost, our aim is to improve the cost structure of the bank in a sustainable way by executing on the restructuring plan launched last year, which include more than 880 branch closures. We will also develop new digital capabilities that will simplify and improve customer experience. And finally, we will also focus on growing our revenues by building on the momentum of our retail business and expanding our business banking proposition.

In Mexico, our main objectives are to increase the profitability of our existing businesses, to focus on providing best-in-class services to corporate and SMEs customers, as we do in Spain, and to develop our retail banking business through new strategic partnerships.

Finally, it is also important to highlight that this strategy lays the foundation to realize the significant potential for improvement in the U.K. and Mexico return on equity in the medium term, which will be a key driver of group's profitability. In this regard, we have normalized return on equity of 7% in Spain, and therefore, normalized levels of TSB profitability would rise -- raise the group's overall return on equity to a higher level.

To finish this -- to finish our presentation, I will explain how all of this should translate into our financial performance. Our expectation is that fee growth and cost containment would support the terms next year. We expect core revenue and expenses to grow in the low single digits. As explained by Tomás earlier in our presentation, we expect the recurring cost of risk to be slightly improved. Taking all this together, the recurring return on equity is expected to remain broadly stable. And finally, our intention is to continue to grow tangible book value and maintain our CET1 at around 12%.

And with that, I will now hand over to Cecilia for the Q&A session.

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Questions and Answers

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [1]

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Thank you very much, Jaime. Operator, can we now open the line for a round of questions, please?

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Operator [2]

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The first question is coming from the line of Alvaro Serrano from Morgan Stanley.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [3]

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Two questions, one on provisions and the other on TSB, please. On provisions, I mean, you've just closed the EUR 8 billion transaction. And I think there was an expectation or at least I had the expectation of a material reduction in provisions, and they're actually going to go up. Can you maybe explain to us in a bit more detail the ECB supervisory expectations, how that plays? Because I thought most of the charge would be -- most of the charge would have been -- be capital directly. So maybe if you could spend a bit of time telling us -- explaining what the underlying sort of changes there are and why the recurrence is not going to go down as much, and maybe beyond 2020, how that's going to change your basic steady state or normalized provision charge.

And the second question on TSB. As you know, there's changes on overdraft fees, and also of late, the competition in mortgages has been particularly sort of intent. So the Bank of England didn't cut rates today, but it does look like there's a bit more pressure on margins than we previously anticipated. So can you maybe explain what the updated dynamics for this year in TSB are and if you're going to be able to remain profitable this year?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [4]

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Thank you, Alvaro. As for the first one, the dynamics you referred to, the views on how the expectations of the ECB would play out and, particularly, pointing out to the views where they would play out through a direct charge on capital, this is true and no change or, in any way, maybe more clarifications will be made. But of course, it's always above the level that is provisioned for or over the stock that it -- that remains outstanding in the balance sheet. So there is -- this doesn't correspond to a change in the ECB expectations. The ECB expectations are clear, are provided or shown through the policy or the requirements of complying with the specific percentages of coverage of the stocks as per the rules, and there is no more change or more interaction than this.

The increase, it's true. We expect it to -- the cost of risk -- the recurring cost of risk to be lower this year. The reality is we've seen this increase in the fourth quarter. It's related. So it doesn't have to do directly with an expectation of an increase in the cost of risk per se. It has been due to -- as I said, we have policies to examine, assess the different portfolio of the different exposures. We have models and over the models in a different set of criteria. We also apply the policies of assessment and review of our exposures. And these 2 -- basically 2 things and another third that I've mentioned have occurred. And the outcome of these reviews is known when it happens. So on average, it doesn't change things. So actually, the impact of this is upfront in maybe effects that could have been seen over time.

As you can see in the slide that we show, there is an implicit view that the recurring cost of risk will continue to improve and also that there can be some add-on in terms of nonrecurring cost of risk due to proactive actions of improving the stock. The reality is that we had an expectation of cost of risk in 2020 that we've exceeded, also in 2019. It was before knowing a number of things. It's true that -- it's clear that emphasis needs to be put on quick reduction of NPA volumes, and this means sometimes to -- in this productivity to upfront charges and losses, and it has an effect of saving potential impact on capital of the vast stock regulation. It's always been so. So the -- business as usual and recurring management of the stock always saves volumes and coverage once the policy is there, right? So -- but in this environment, of course, all things considered, and after having heavily derisked the portfolio, a number of new strategies appear, and average, the speedup of reduction should be quicker, and this may need or may mean some additional, so to speak, nonrecurring charge. This is the rationale behind all this. So it's not that there has been a change in the ECB expectations other than what we already know since the moment that the requirements or the guides were issued.

In terms of the TSB overdraft fees changes, when we issued our strategic plan presentation, we -- of course, we are very conscious of this, and this was taken into account. So different scenarios on the level of impact were considered also mitigants. It was all embedded in the outlooks that we presented. So the situation doesn't represent a change from what we presented in the strategic plan day.

Pressures on margins are still there, more or less the same. For some time, they appear to ease a little bit but keep being challenging. And yes, today's decision by the Bank of England is a positive, and we'll see how in the future this unfolds.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [5]

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Thank you. Next question, please, operator.

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Operator [6]

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Next question is coming from the line of José Abad from Goldman Sachs.

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José Maria Abad Hernandez, Goldman Sachs Group Inc., Research Division - Executive Director [7]

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Two questions from my side, credit quality and capital. On credit quality, a follow-up question here. I know that you made a point that you don't see a genuine deterioration in increased quality, but actually, the expected decrease in cost of risk is due to actually policies and single-name exposures and so on. Could you tell us at least whether actually this is actually taking place in specific sectors? And if I can be more concrete, if you could tell us where the cost of risk for your consumer book is today and where it was in Q4 '18. A follow-up question on this as well is whether -- are you planning to make any further consumer securitizations going forward, like the one you've closed in September last year? And my second question is on capital, whether you could give us some color on your potential, actually, Basel IV exposure impacts.

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [8]

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Okay. Thank you, José. No, we haven't seen changes in patterns as compared with 2018. You see in the breakdown that, actually, the more significant proportion of cost of risk comes from the ordinary course of business in terms of dealing with new entries and vintages lower than 2 years. So this is where we put the focus to keep saving cost of risk.

In particular, you were asking about consumer lending. The asset quality of the portfolio of consumer lending that we sold actually was outstanding, and we haven't seen changes in this. We are not disclosing further more granularity on the segments, but I can tell you that we haven't seen changes in the pattern of cost of risk in consumer lending. Of course, we have -- and we've talked about this in our interaction, often, we have a higher weight of corporate and SMEs, and therefore, cost of risk for us needs to reflect this as we have also the highest customer spread and NIM and so on. And the net-net is positive and rewarding. But particularly in consumer lending, we haven't had a change in pattern and not a particular change in pattern in any other segment.

In terms of can we do more consumer securitization in the future, it will depend on circumstances. I won't say we won't because we see it as a particular effective tool to keeping our strategic position with our customers and finding a very profitable way of optimizing the use of our capital, so optimizing our asset composition. So there is nothing definitive, but I won't say that we can't do more in the future.

Capital, Basel IV, as -- nothing changed there in terms of -- my view is that in Spain, in general, for credit risk, impact should be known or I don't know if for someone very little. For us, all our analysis, projections is no effects from credit risk, neither from market risk. And operational risk is always a question mark. The straightforward application of the known regulation could have some impact in terms of 35 basis points, something like this or above, but this doesn't take into account the -- all the national discretionalities that we don't know how they will unfold. The expectation is that there will be mitigants to this, and therefore, we keep being in the same place. So this anyway is for 2022 onwards with phasing and so on and so forth. So still, I think Basel IV is not a significant issue.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [9]

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Thank you very much, José. Please, operator, next question.

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Operator [10]

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Next question is coming from the line of Carlos Peixoto from BPI-Caixabank.

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Carlos Peixoto, Banco Português de Investimento, S.A., Research Division - Analyst [11]

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I'm sorry to just take a step back again on the cost of risk and the guidance on cost of risk that was covered. Putting it in numbers, should we assume that, basically, you expect cost of risk in 2020 to be somewhere between 52 to 62 basis points, with the second one being the figure including that leeway of 5 to 10 basis points that you mentioned for additional NPA management procedures?

Then on the second question, I would like to the Chairman (inaudible). We have seen some recent comments from the group's Chairman pointing towards M&A as a sort of a solution for the banking sector and something that apparently you saw that we would be interested in or at least that was my interpretation of it. I would like to have some more details on what type of operations would you be contemplating and whether, indeed, that's the only pathway you see at this stage to improve profitability. Basically, this year, you're guiding us towards a 5% return on tangible equity, so (inaudible) return on equity. So my question is, basically, in the absence of M&A, would you -- what layers could you have to improve profitability in a way to cover your cost of equity?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [12]

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Thank you, Carlos. I will answer the first one and the last piece of the second one, but Jaime will answer the second one. So in terms of cost of risk, we haven't given the precise number in terms of guidance, as you've seen. But I think using the proportion of the bar, more or less, you all can come up with a range of numbers. And note that in terms of the add-on, we are saying between 5 and 10. It means between 5 and 10, no, not necessarily the 10 or the 5 but the range. And note also please that with this in mind, so taking this, including this and embedding this, we've given guidance on recurring ROE for the year. So we are seeing with this the ROE broadly stable and the CET1 to remain around 12%. I think it's important to consider all these factors together. And actually, if we see this higher cost of risk than what we had thought of, is linked to more proactive management of the stocks, of the portfolios. So we should say relevant reduction of the level of the portfolios, and the focus is on managing this. We don't want to get the cost of risk wrong. We are not allowing any risk of going off track on this. And therefore, and this comes up to the ROE, please note that we've been talking about ROE in Spain being around 7 or slightly above 7. And of course, we have TSB not contributing, and we have Mexico in around 3%. So I think the plan in TSB and the evolution in Mexico are drivers to improve this. So these are the -- probably the main drivers to make ROE grow. And Jaime's going to answer the...

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Jaime Guardiola Romojaro, Banco de Sabadell, S.A. - CEO, MD & Executive Director [13]

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Regarding these questions about the comments done by the Chairman, I think that his comment was more theoretical approach to consolidation, in line that consolidation makes sense from an industrial point of view, especially in a moment of the very low interest rates. But I think that the position of the bank is that, for us, consolidation has always been an instrument driven by strategy, in the sense that it requires strategic sense, be accretive for our shareholders and having an execution risk that is manageable. But the position of the bank at this moment is we are absolutely focused in the delivery of our strategic plan, and we are not contemplating any specific M&A in Spain.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [14]

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Thank you, Jaime. Thank you, Carlos. Operator, please, next question.

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Operator [15]

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Next question is coming from the line Sofie Peterzens from JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [16]

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Here is Sofie from JPMorgan. So I had a question on your NII bridge that you gave on Slide 19 quarter-on-quarter. Is there -- it looks like the volume of your NII by EUR 14 million while the securitization reduced your NII by EUR 15 million. What -- because the securitization, I guess, was EUR 1 billion, and volumes are slightly above EUR 1 billion in this quarter. But does that mean that the volume -- the new volume growth that you're putting on your book has over 7% yield because the securitization basically had 7% -- 7.4% yield? So how should I read this graph, especially the volumes and the securitizations? And can you also talk about your NII? Are there any one-off items or any extraordinaries that we should be aware of?

And then just a quick follow-up. On the cost of risk, so the -- when you mentioned the ECB prudential provisioning, do you refer to the calendar provision that you basically need to provide 100% of the unsecured book within 3 years? And is that the impact that you basically expected or the cost of risk to basically be driven by the new regulation?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [17]

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Thank you, Sofie. Yes. So the evolution, so the volume figures in Slide 19 show the average volumes. So the securitization wasn't there for the whole quarter, and therefore, the around EUR 1 billion of the securitization hasn't appeared at all in this. It's not included there at all. Therefore, the EUR 142 billion includes -- it was new lending. Please note that we have created an exposure for the closing of the portfolios of around above EUR 1 billion for what we described is the first refusal right, and this is included here. But it's been excluded in the -- it has very little impact in the average volumes because it was towards the end of the quarter. So actually, it's -- those volumes come from the evolution of the business. They have contributed not very much to NII given that they've -- the average volume, but therefore, the NII is contributing. There is a delay in contribution to NII, and therefore, it comes more into the second -- so the first quarter of next year.

It's true that the 7.4% deal of the securitization, and I referred to this in the presentation, is higher than the average yield of the new volumes. And therefore, we've noticed this in the loan deal, as is shown in the slides. No other of -- one-off items in -- on NII. So nothing in particular.

In terms of cost of risk, this is -- you are asking what about the calendar. Well, actually, this is -- so it is the calendar that it -- that was set by the ECB in their expectations, which drives the impacts on -- so on those volumes that are older than the given vintages in the calendar expressed by the regulators and that don't get to the coverage level required. Their regulation on capital fills this gap. So it applies to the remaining volumes that are older than the vintages required and by the gap from the coverage to the required coverage. But all this is factored in, in the guidance that we gave, so in the slide where we provide the breakdown of cost of risk, and we refer to the different impacts and the absorption of this in cost of risk of the year for next year, and the potential up to this 20 basis points that is up to, so probably less depending on how much we have absorbed through cost of risk and the efficiency in doing so. So this is all -- of course, the calculation is done granularly. The first year of application of the calendar, of course, takes on all the stock and, therefore, the -- all the reduction in stock and all the catch-up in the coverage done through cost of risk makes all the effect disappear going forward. So from the second year on, the impacts are significantly lower, and cost -- and the management of the stocks keeps reducing and reducing the impact.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [18]

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Thank you very much, Sofie. Just reminding you, please...

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Operator [19]

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Next question is coming from the line of Marta Sánchez Romero from Bank of America.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [20]

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Thank you, operator. I was just...

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Marta Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [21]

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On your guidance on capital, what are you factoring in, in terms of dividends? Do you expect to return to full cash in 2020? Do you have a cash payout target? And then on -- so I've got a lot of questions. On the deposit cost improvement this quarter, is it largely related to Mexico? You still have EUR 3.6 billion loans in the country, roughly EUR 1.1 billion, if I'm not mistaken. Do you plan to close that funding gap? And just a clarification on your guidance. Could you split the revenue growth between net interest income and fees? Are you keeping your ALCO portfolio flat next year? How much do you expect the new pricing policy prior to the fee line? And finally, a clarification on costs. The low-single-digit growth applies to the reported cost in 2019 to the EUR 3.3 billion you've reported.

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [22]

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Thank you, Marta. The dividends, so for the guidance on capital, what we are factoring is the continuity of our current policy. So as we expressed it already in the past, so between 40% and 50% dividend payout, excluding the positive capital gains in cash, no changes. In the future, regarding cash, it could be dividends, or now that the path of share buybacks has been clarified, it could be either of the 2, but the policy is in cash, and there is nothing decided on that. And as I said, the -- as per the payout, the policy remains the same.

Deposit cost improvement, Mexico, as we -- as I said, plays out but also the other geographies as well. Mexico, the closing of the funding gap is it keeps going the same way that we've been doing, nothing particularly material or no structural change, particularly material to highlight there. Revenue growth not in -- breakdown, not in -- not précising figures, but volumes support NII stability throughout the year, and fees has -- have a higher growth than the average that we are guiding here for.

And the ALCO portfolio, as was implicit in the presentation, will not suffer significant changes. There is this maturity in the first quarter. We will be opportunistic in the market, seeing options. So we might refill this, but we are not thinking of changing dramatically the size of the portfolio.

And in terms of reported cost, so the guidance on cost is on the reported.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [23]

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Thank you very much, Marta. Next question, please, operator.

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Operator [24]

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Next question is coming from the line of Britta Schmidt from Autonomous Research.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [25]

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A couple of questions, please. Coming back to the provisioning guidance, how much of the nonrecurring cost of risk will, therefore, recur in 2021, '22, '23? And the capital impact of minus 20 basis points, shall we expect that something will come in the following quarters as well to build up to an overall provisioning level? Or do you expect that to be an offset by the nonrecurring elements in loan losses? And slightly related to that, the return on equity guidance to a stable recurring return on equity, am I right in assuming that this then excludes any nonrecurrent items from the cost of risk and the base for that is the 5.2% reported for 2019? And then lastly, just wanted to know, how do you treat the asset management operation in your revenue and your cost guidance? Am I right in reading that half of the -- a half year of contribution is included in that guidance of these growth rates?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [26]

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Sorry. I realized that I haven't -- I was -- the micro was off. Sorry, Britta. So provisioning guidance, this is for 2020. As we keep managing down the portfolio even quicker, we reduce the cost of risk. We -- you see that we've reduced a number of items in the breakdown. We've reduced related costs. We expect to keep reducing the company now of less than 2 years of vintage in the portfolio. In terms of -- you will have noticed that in terms of the portfolio older than 2 years, the contribution to cost of risk is small. Maybe it's worth clarifying that there is a charge there. And also, netting it, there is amount of recoveries from write-offs. So -- and this, anyway, keeps being a reduced amount. The -- and the piece, the portion of the nonrecurring that we are giving us guidance for 2020, we don't see it. I don't see it to be replicated in 2021 and going forward. Anyway, we -- this needs to be taken into account in the framework that we are not providing guidance for 2021 onwards because this will be part of our new strategic plan that we will present in due time, okay?

In terms of the quarters, I think the most appropriate way to look at it is to consider the quarters as average, the quarters of this year for 2020 as a starting point. Return on equity, when we clarify that this recurring ROE, that it's aligned with recurring cost of risk, and anyway, in the guidance that we give around capital, there is a margin room for parts of the nonrecurring. So everything is quite aligned.

How do we treat the asset management operation? So assuming that, as we said, we expect it to close likely in the third quarter, we think that up until that moment, the contribution of the asset management business will be accounted for through the different lines of the P&L. And then when the transaction is closed, the accumulated net income coming from these months that the operation will get going will be deducted from the level of capital gain that we've announced. So the -- but the contribution either to revenue or costs, therefore, to the guidance is relatively limited but because half of the year is already included in the P&L going forward. And anyway, the amount of it is limited. So this is not a material impact.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [27]

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Thank you very much. We have time for one more question. Operator, please.

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Operator [28]

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The last question is coming from the line of Andrea Filtri from Mediobanca.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [29]

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I wanted to ask, first of all, about capital. Why do you guide CET1 at 12% in 2020 if you start from 12.1% and you consider 20 basis points of hurdles from NPL guidelines? Are you changing the dividend policy, which, I think, before you said you aren't? Or are there other hurdles that you are embedding within your guidance on capital?

And then I wanted to ask you about Article 104a of CRD V. You have hinted at that. Just wanted to understand, in light of your capital repair of 2019, how are you considering using this instrument? What do you need to see to put it into place? And is it more of a potential buffer against further hurdles like Basel IV? Or could that change your capital return policy in the future?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - GM & CFO [30]

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Thank you, Andrea. So in our guidance, we are saying around 12% for capital. The -- so starting, as you said, pro forma in 12.1%, you need to consider the guidance we are giving in terms of recurring ROE, cost of risk with this and with our track record in how our RWAs evolve with volume growth. You can come up with some views on capital generation. The 20 basis points we are saying is -- as I said, is up to, and depending on how much we absorb within the guidance we've given in cost of risk and how efficient we are in reducing the stocks. And so with all these, I think you can get to the 12% that we are not giving as a precise and absolute target, we are saying around. It's not that we are saying that if we are above 12% a little bit, we will give back the excess, or if we are a little bit below, we will do something to get back to the 12%. So if we are 10 basis up or 10 basis down, it doesn't mean that we will do something very quickly and very proactively. So this is sort of a corridor averaged in the 12%. So for the future, until something changes, that makes us as an industry and particularly us, seeing that the levels of expected required capital change and we need to consider a number of things. So the guidance, I think, if you -- and you know that and probably you've done already, if you put all these together, the around 12% makes sense. There are no other things that are not ordinary cost of business.

And in terms of Article 104, we are not saying anything because what we just wait for is to see how eventually this is confirmed and precise. Of course, the ACV have done some signal in favor of -- or in favor, meaning that they would go forward with this. Still how needs to be précised and it needs to be translated into a specific legislation. So that's why we are prudent, and we are not saying anything. Of course, depending on how this works, for banks in general, it would mean that a different coverage of the capital requirements with a different mix of instruments would sort of ease the requirement on CET1. That is, of course, but we are prudent because I think -- we think that around this, which is marginally positive or is positive, some precisions need to be done by the regulators.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [31]

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Thank you very much, Andrea. That was our last question, and this brings our webcast to an end. We thank you very much for joining us. And obviously, our Investor Relations team will be available for what's left of the day to answer any questions that you may have, and have a great evening, all. Thank you.