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Edited Transcript of SAB.MC earnings conference call or presentation 25-Oct-19 7:00am GMT

Q3 2019 Banco de Sabadell SA Earnings Call

Madrid Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco de Sabadell SA earnings conference call or presentation Friday, October 25, 2019 at 7:00:00am 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. - General Manager & 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

* Benjie Creelan-Sandford

Jefferies LLC, Research Division - Equity Analyst

* Britta Schmidt

Autonomous Research LLP - Non-Designated Member

* Carlos Cobo Catena

Societe Generale Cross Asset Research - Equity Analyst

* Francisco Riquel

Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Mario Ropero

Fidentiis Equities S.V.S.A., Research Division - Senior Banking 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 morning and thank you for joining us for Sabadell's results presentation for the third quarter of 2019.

My name is Cecilia Romero. I'm Head of Shareholder and Investor Relations. And presenting today is our CEO, Jaime Guardiola; and our CFO, Tomás Varela.

During our webcast today, we plan to spend around 30 minutes presenting the results and another 30 minutes answering questions, which as a reminder, you will be able to ask live. (Operator Instructions) Our presentation will follow a similar structure to previous quarters. Our CEO will start by going through the key highlights of the quarter and 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.

I will now hand it over to Mr. Guardiola to kick off our presentation. Good morning, 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 morning, everyone.

This quarter, we recorded a net profit of EUR 251 million or EUR 783 million accumulated in the first 9 months. Year-to-date, we have generated a circa 7% increase in our tangible book value per share, which places us in the right track to achieve our year-end target. Return on equity in the first 9 months was 6.9%, while return on tangible equity was 8.6%.

Furthermore, this quarter, the Board has approved an interim dividend of EUR 0.02 per share, in line with last year interim dividend. The amount of dividend, net of withholding tax, will be paid by the delivery of up to a maximum of 90 million treasury shares and an additional amount in cash to complete the net amounted, if needed. Those shareholders not subject to withholding tax will receive the relevant amount in cash. At current market prices, this dividend would have a positive impact of circa 7 basis points in fully loaded CET1 ratio. The Board understands that dividends are an important part of the capital equation and that a fully loaded CET1 ratio of 12 has become the new norm for investors. The distribution of shares allow us to build capital to a level very close to this benchmark, which the Board believes is important for the investment case. At the same time, the Board also recognizes the importance of dividends to our shareholders. And the payment of these dividends with existing treasury shares should be considered as a one-off, as your -- as our intention continues to be paying our dividends in cash.

Overall, our business performance in the quarter was good.

Gross loans and performing loans both increased once again year-on-year. In this regard, it is worth highlighting that we executed a EUR 1 billion securitization of a consumer loan portfolio, which reduced our performing loans in the quarter but also increased our fully loaded CET1 ratio by 14 basis points. Tomás will explain the shareholders' benefits of this transaction in more detail shortly. Core banking revenue show resilience to the current low interest rate environment, maintaining a positive trend supported by increased volumes and a strong growth of fees, which were up 9% year-on-year.

For the 9 months ended in September, our efficiency ratio was 54.1%. Our risk profile continued to improve. Sabadell group's NPA ratio stood at 5% at September 30, considerably lower -- lowered year-on-year, while recurring cost of risk continued its downward trend, falling to 47 basis points at the end of the first 9 months of the year. This quarter, we made a remarkable progress in our NPA reduction with the execution of 2 institutional sales. Firstly, we sold our real estate developer, which at closing will have a positive impact on the fully loaded CET1 ratio of 5 basis points. On the other hand, we sold another portfolio of foreclosed real estate assets, which we'll refer to as Rex, which implied a provision of EUR 20 million net of taxes this quarter and a positive impact on fully loaded CET1 of 2 basis points when the transaction closes. Finally, it's also important to mention that we have already received the necessary authorizations and that we are on the right track to close the remaining NPA institutional sales announced in 2018 by year-end.

Our liquidity remained strong with a coverage ratio of 168%. It was up quarter-on-quarter following a TLTRO II early repayment of 2 million -- of EUR 2 billion, while the loan-to-deposit ratio stood at 100%. Regarding our capital position, our fully loaded CET1 ratio continued to increase in the quarter by 21 basis points to 11.4%. And the fully loaded CET1 ratio pro forma increased by 40 basis points to 11.8% in the quarter, including the full benefits of the announced disposals.

On Slide 5, we set out how our results of the first 9 months place us in a good position to achieve our year-end guidance.

Overall, our expectations in terms of group's year-end results are broadly the same as they were last quarter. Our NII progress continues to be on track with the lower part of the guidance range when excluding the impact of the securitization of a consumer loans portfolio, which reduced net interest income by EUR 2 million in the third quarter and EUR 23 million in the fourth quarter. On the other hand, this securitization have generated an extraordinary capital gain this quarter of EUR 88 million accounted as trading income. Excluding this securitization one-off as well as the impact on trading income of SAREB subordinated debt impairment incurred last quarter, we remain on track to meet our trading target.

Our fee revenue continued to post growth in the high single digits, in line with our expectations. Recurring cost of risk fell to 47 basis points. This excludes the one-off impacts of provisions of the institutional sale of our problematic asset, Rex. Moreover, TSB recorded a small negative contribution year-to-date of minus EUR 5 million, which for now falls slightly short of our expectations for TSB to make a small positive contribution in the year.

Overall, considering our evolution on the third quarter, we continue to be on track to meet our target levels of return on equity, tangible book value per share growth and organic capital generation. And finally, in terms of capital, I would like to emphasize that we have continued to build capital this quarter, and our CET1 ratio pro forma stands at 11.8%.

Moving on to business performance.

Looking at our performing loans by region. You can see on Page 7, this page, that this quarter's growth was mostly driven by the strong performance of foreign branches and renewed momentum in the U.K. Year-on-year growth remained robust across geographies. Volumes in Spain, which include foreign branches decreased by 1% in the quarter, impacted by the third quarter seasonality and the maturities of large-scale public sector loans. However, this is not unusual, as activity in this segment tends to be very volatile. Beyond this, volumes in Spain increased by more than 2% year-on-year, and foreign branches had a very positive evolution in the quarter. Volumes in Mexico dipped slightly through the syndication of risk in the quarter, but they were still up by more than 13% year-on-year. TSB volumes grow by 1.6% in the quarter and 0.7% year-on-year, showing renewed commercial momentum.

Overall, group performing loans remained stable in the quarter and were up 2.4% year-on-year.

This slide shows customer's balances ex TSB. On the left-hand side, you can see the breakdown of performing loans. Overall, performing loans decreased by 0.7% in the quarter and increased 3% year-on-year. As mentioned earlier, the quarter-on-quarter performing [explained] by the volatility in lending to public administrations and third quarter seasonality. Corporates was the main segment driving credit growth in the quarter. Another detail worth mentioning is that other lending to individuals was impacted by negative seasonality as the EUR 0.6 billion related to the social security payments reversed in the quarter. And as you know, this happens every year in the Q3.

On the right-hand side of the slide, you can see that our customer funds remained stable in the quarter and increased by just over 2% year-on-year. On-balance-sheet funds remained stable in the quarter and increased by 6.4% year-on-year. The growth of on-balance-sheet funds is being driven by sight accounts, which increased over 1% in the quarter and 11% year-on-year. Off-balance-sheet funds remained stable in the quarter and fell circa 7% year-on-year, impacted by the decline in mutual funds.

In Spain, we observed a strong commercial momentum across products. I would like to highlight that, in terms of new mortgages and consumer loans, we have consolidated the upward trend observed until now, posting an overall growth of 6%. We are leaving behind the dip that we saw in the first quarter caused by regulatory uncertainty related to the distribution of mortgage costs. Our commercial momentum is reflected in the growth of the main market shares, for instance, 12 basis points in customer loans, 84 basis points in retail payment services turnover or 107 basis points in life insurance premiums. Finally, our customer funds markets share fell by 4 basis points due to a decline in mutual funds, which was partially offset by an increase in the market share of customer deposits.

Customer experience and service quality continue to be one of our key focus areas and our of -- 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 large enterprises and personal banking.

TSB continued to regain momentum this quarter. On the asset side, net lending increased by more than it did last quarter, posting an increase of just over 1% as strong growth in mortgage applications continued to generate higher levels of completions. Core mortgages once again showed the highest quarterly growth post-migration at 1.7%. Unsecured lending was stable in the quarter, which is also a first since migration, as we continued to increase our product and service offering through digital channels. Year-on-year, net lending is up by 0.6%.

On the liability side, customer funds remained stable in the quarter as term deposits continued to give way to personal current accounts. Business banking deposits also increased by 6.5%, partially thanks to the incentivized switching scheme, part of the RBS incentives, but also due to our improved digital offering and a competitive savings proposition. Year-on-year, customer funds increased by circa 2%, with positive growth across segments driven mostly by current accounts.

In regard to TSB, this has been the strongest quarter for mortgage new lending since the beginning of 2018. Growth was nearly 19% year-on-year in the first 9 months. In addition, TSB unsecured new lending continued to improve quarter after quarter and was up by more than 11% year-on-year. And finally, I would like to highlight that the bank's NPS and mobile NPS have both continued to improve. The bank NPS stood at 11.1% -- sorry, an 11.1, and it should be noted that the monthly score reached in September is 15.3. In addition, the mobile NPS is at virtually the same level it was before the IT migration.

On the Slide 13, you can see that our digital transformation is progressing at a good place -- a good pace. The group digital and mobile customers were up 5% and 16%, respectively, year-on-year. Moreover, digital sales of unsecured loans in Spain increased by 52% compared to the previous year, representing 37% of the bank's total sales. Digital sales in the U.K. also improved compared to last year. They represent 44% of TSB total sales and has grown by 24% year-on-year.

Lastly, I would also like to highlight some of our most recent digital initiatives. In Spain, we have incorporated Nomo into our value proposition for self-employed customers. Nomo is an app that helps freelancers with their day-to-day basis business management, offering the chance to acquire products and financial services that add value to their business. In the U.K. we have partnered with Square to make payment services accessible to TSB business banking customers. With this partnership, we will provide our customers with easier access to credit and debit cash services and help them to manage their finances more easily. Furthermore, Square will also act as the new customer referral channel.

And now I will 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. - General Manager & CFO [3]

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Thank you, Jaime. Good morning, everybody.

Regarding our quarterly results. Our reported group net profit was EUR 251 million, representing an 8% decrease quarter-on-quarter or a 4% when excluding the impact of nonrecurring items. This is a positive result considering the effect of Q3 seasonality and the evolution of interest rates quarter-on-quarter. In terms of nonrecurring items, this quarter, net profit was positively impacted by EUR 88 million of capital gains coming from the consumer loan securitization transaction, which was included in the trading income line; and the extraordinary provisions for EUR 28 million associated with the institutional sale of the NPA portfolio that we called Rex.

Overall, we reported a net profit of EUR 783 million, which is significantly higher year-on-year.

Moving now on to the quarterly evolution of net interest income.

Group NII increased by 0.9% in the quarter and decreased by 1.2% in the year in constant FX or 1.1% as reported. Looking at the quarterly evolution: NII was positively impacted by having 1 more calendar day, which contributed to EUR 7 million; and by volumes, which added EUR 2 million. Other factors which negatively impacted NII in the quarter were the securitization with an impact of EUR 2 million; wholesale funding costs, which increased by EUR 3 million as a result of the issues that we completed, the senior nonpreferred instrument issued in May and the senior preferred instrument issued in July; a lower ALCO contribution, which had a negative impact of EUR 1 million; and finally, interest rates, which are negative of EUR 2 million.

Overall, group average volumes continued to be on track with our target level for December 2019 of EUR 141 billion, which has been revised in this case for -- to exclude a EUR 1 billion securitization. And the volume reached EUR 140 billion this quarter, as you can see on the lower right-hand side. Finally, in terms of sensitivity to interest rates. Using the balance sheet as of the end of this quarter, an additional decrease of 10 basis points in all the relevant rates would impact NII by EUR 17 million in the 12 months following the rate cut.

In this next slide, what we are highlighting is the different features that make our balance sheet more resilient to further interest rate cuts. On the asset side, in terms of sensitivity to interest rates, I would like to highlight that circa 65% of our lending is not sensitive to decreases in Euribor. In regard to the variable part of the portfolio, it is also worth noting that secured lending is linked to the 12 months Euribor. And then repricing happens over a year, so these reprice once a year. This means that, if current Euribor rates stay at these levels, it will take a year for the floating-rate mortgage book to fully reprice. Moreover, in regard to our ALCO portfolio, we currently have a very low reinvestment risk, as only circa 11% of the portfolio, which yields 1.3% on average, will mature over the next 2 years. We include the details on the following page.

Moving on to the liability side. It is worth highlighting that the bank has different levers at its disposal to mitigate the impact of interest rates. Firstly, we have EUR 39 billion in wholesale deposits, and there is the possibility that there could be a gradual repricing of these deposits. Currently, we are passing through the cost of negative interest rates to EUR 2.5 billion of these wholesales deposits. Secondly, we still have very expensive outstanding wholesale funding liabilities maturing over the next year, of which here we highlight around EUR 900 million at an average coupon of circa 5%. This should help us improve our wholesale funding costs in 2020 despite the MREL requirements.

And finally, the new ECB measures that will be in place from October 30 should help reduce costs on excess cash balances. In our case, tiering should exempt more than EUR 6 billion of deposits currently at the ECB. And tiering-related savings will amount to circa EUR 30 million yearly.

Based on the -- on those, what I said about our protection in the ALCO portfolio, in this slide we show the details. We expect our ALCO portfolio's contribution to NII to decrease slightly next year and then remain broadly stable. Firstly, on the left-hand side, we show how the amortized cost portfolio has increased over the quarters, reducing the sensitivity of capital to changes in the valuation of the fair value OCI portfolio. On the right-hand side, we show the maturity profile of the portfolio, which shows that only 11% is due to mature over the next 2 years, and 19% in the next 5 years. It is also worth highlighting that the average maturity of the total portfolio is 9 years.

Looking now at front book yields across products. This quarter, yields have been marginally lower for both mortgages and SMEs and corporate segments and once again impacted by movements in the long-term interest rates. This shows that we were able to manage front book pricing despite declines in those rates. In particular, the lower rates have impacted new fixed-rate mortgages as well as longer-term loans to SMEs and corporates. And also, spreads actually increased despite the movements in the rates for these specific segments. And this is significant, very significant. Credit lines were also impacted by a slight compression of shorter-term rates during the period. And consumer loan yields recovered due to an improved mix, with a larger portfolio coming -- or a larger proportion of the portfolio coming off online loans, which typically have higher yields. Nevertheless, front book yields continue to be above the back book in all these products.

Overall, the group's customer spread was 3 basis points lower in the quarter, driven mostly by lower yields in Spain. And the group cost of customer deposits improved quarter-on-quarter as TSB lowered the price of its current and savings accounts in the U.K. In the case of ex TSB, the cost of deposits remained stable. And at TSB, our customer spread was up 3 basis points in the quarter, driven by lower cost of deposits.

Group net interest margin increased quarter-on-quarter by 2 basis points, driven by the early repayment of more than EUR 2 billion of TLTRO and circa EUR 500 million drawn from the TFS. This effect was partially offset by lower loan yields and the cost of new MREL issuances, which pushed up the wholesale funding cost in the quarter. As for fees, at group level they remained stable in the quarter, impacted by asset management fee seasonality, but the performance year-on-year remained strong at plus 9%. In terms of segment evolution, it is worth highlighting that we saw growth in all products except asset management for the reasons I just mentioned. And in the case of TSB fees, also increased both quarter-on-quarter and year-on-year as the bank continues to regain the commercial momentum.

On this following slide, we show the evolution of core banking revenue ex TSB over the years. The compound annual growth in this period was 6.7%, while the Euribor dropped by more than 220, actually 228 basis points since 2012. Year-on-year, at the end of the third quarter of 2019, the core banking revenue growth was 1.8%. And once again, our core revenue base has proven to be resilient despite the challenge of the rates and the economic fluctuations. These positive results are possible thanks to our high structural resilience to lower interest rates, which I explained earlier in the presentation.

Moving now on to costs. Efficiency stood at circa 54% year-to-date and continues to be on track to meet our year-end target of circa 55%. Group total costs increased by 2.3% in the quarter, driven by higher recurring costs ex TSB, in particular related to affiliates and the seasonal fixed costs that usually materializes in Q3 such as credit card membership fees. So this has to do with the pattern of how costs evolve throughout the year. But as we can see on the higher right-hand side of the slide, recurring costs increased year-on-year, including both expenses and amortization, at 0.5%. Nonrecurring costs were lower in the quarter and included EUR 15 million of restructuring costs at TSB, which in total amounted to EUR 25 million year-to-date.

In terms of impairments, the recurring impairments and provisions declined in the quarter by almost 10%. And our cost of risk for the first 9 months was down to 47 basis points. Year-on-year, our provision charge, excluding extraordinary provisions related to institutional NPA sales, has improved significantly and decreased by 33%.

We now move to balance sheet, and I will start with asset quality.

Our problematic asset ratio is down from 9.1% a year ago to 5% today, which shows tremendous progress in the transformation of our balance sheet. The nonperforming loans ratio increased slightly from 4.05% to 4.08% in the quarter, and this was mostly due to the impact of the securitization transaction that obviously reduced the denominator of the calculation. The stock of NPLs increased slightly by EUR 12 million due to lower levels of recoveries. We also completed 1 of the 218 (sic) [2018] APS NPL sales, which means that the NPLs sold, highlighted here in gray, have been completely removed from our balance sheet.

In terms of foreclosed assets, as we explained earlier, we executed 2 institutional disposals: the sale of the so-called Rex portfolio and our real estate developer Desarrollos

Inmobiliarios. Taking these into account, our foreclosed assets stock decreased considerably from EUR 1.9 billion to circa EUR 1 billion in the quarter. Shaded in gray, we show the foreclosed asset stock which has already been sold and it's -- and is therefore no longer part of our NPA stock and is sitting in noncurrent assets available for sale, waiting for the transactions to close. Furthermore, it's also worth noting that the stock composition improved considerably this quarter as the land portion of the stock decreased from circa 28% at -- of the total to circa 7%. And this actually is the reason behind the coverage drop quarter-on-quarter. It is related with the change in, of course, the composition of the mix of the portfolio. The stock of nonperforming assets was down by EUR 830 million in the quarter, while overall NPA coverage remain broadly stable.

In terms of liquidity, it's worth highlighting that the group finished the quarter with an even stronger position with an LCR of 168%, a loan-to-deposit ratio of 100% and high-quality liquid assets of circa EUR 43 billion at -- and total liquidity assets of circa EUR 47 billion. Furthermore, in terms of TLTRO II, we currently have EUR 13.5 billion outstanding after having repaid another EUR 2 billion ahead of time this quarter. In addition, as I've mentioned before, we have also repaid early EUR 500 million of TFS to the Bank of England.

With regard to our funding plans, this quarter, we have made further progress in reaching our MREL targets with the issuance of EUR 1 billion senior preferred and EUR 0.5 billion senior nonpreferred. We also completed the securitization that I referred to earlier. We only intend to have one more benchmark transaction left in the rest of the year.

Here we have some highlights on the consumer loan securitization transaction. It had an implicit cost of core capital -- of cost of capital of just 5%, which means that it was efficient from the point of view of both funding and capital. On the right-hand side, we list the different financial impacts. In a nutshell, this transaction -- with the transaction, we are giving up EUR 137 million in terms of NII in -- aggregated during -- in aggregate during the next 4 years, but at the same time, we will have no cost of funds and no risk or provisions associated with the portfolio during the period, the same period. As of today, the capital gain is, out of the EUR 137 million, we receive back in capital gain EUR 88 million, which was recognized in the trading heading. And a total of EUR 448 million in RWAs have been released. This translates into 14 basis points of fully loaded CET1, which today represent circa -- the equivalent in equity of this will be, of course, EUR 120 million. This was generated at an implicit cost of just 5%.

We have used the securitization as an efficient balance sheet management tool for both capital and liquidity. And it's important to note that, while we sold the portfolio, this is not any business piece of our core business. It's just assets. And we continue to operate with those customers with which we have a range of products, including mortgages, credit cards and name it. So it's just a tool of making more efficient use of capital in our balance sheet.

Moving on to capital on the following slide, we can see the quarterly evolution of the group's fully loaded CET1 ratio as well as our pro forma position. We ended the second quarter of 2019 with a reported fully loaded CET1 ratio of 11.2%. And going to the right in the slide, we show the different drivers and capital impacts in the quarter. The organical -- organic capital generation including net profit, which at the same time includes provisions associated with the Rex NPA disposal that I explained earlier, includes also AT1, dividends, intangibles and other deductions and the decrease in organic RWAs. This total organic generation provided 10 basis points in the quarter. In addition, the increase in capital deductions driven mainly by value adjustments added 1 basis points. And finally, the consumer loan securitization carried out in September implied 10 basis points when we -- in the reported, given that we accrue here the 50% payout ratio, but on the right-hand side, we will see the additional effect of this.

Taking all of these into account, our fully loaded CET1 ratio on a reported basis stood at 11.4% at the end of Q3.

And in addition, there are a number of factors that bring us to the pro forma ratio. Firstly, the remaining capital gain on Solvia and the securitization, which is expected to be converted from accrued dividend into capital at year-end, will add 8 basis points. And in the case of the -- 8 for Solvia. And in the case of the securitization and as I was alluding to some seconds ago, an 4 additional basis points will be the recovery of the accrued 50% payout ratio of the securitization transaction. Secondly, the Board has also declared this quarter the payment of an interim dividend with a combination of cash and existing treasury shares, which at today's market prices would add 7 basis points to capital. The institutional disposal of NPAs announced last year are expected to close in by -- in this fourth quarter in -- of 2019 and should add a further 18 basis points. In addition, the sale of our real estate developer announced in August and expected to be closed by year-end will mean 5 basis points and additional 1 basis point was -- that was already realized in Q2. And lastly, the disposal of the NPA portfolio called Rex, which we announced back in August, will add 2 basis points as a result of the associated RWA release.

At the time, we announced that the impact was neutral, but you need to take into account that the negative impact of provisions has been already accounted for this quarter. These elements bring our fully loaded CET1 pro forma ratio to 11.8% as we continue to execute on the fully loaded CET1 rebuild. Finally, we are expecting to generate up to 3 basis points in Q4 and end the year at around 11.8%.

Now 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 23 basis points. Our reported phase-in total capital ratio stood at 15.3% at the end of the quarter, 216 basis points above our requirement of 13.1%. Our total fully loaded capital stood at 14.7%. In addition, our phase-in leverage ratio stood at 4.98% at the end of the quarter.

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

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

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Thank you, Tomás.

To end our presentation today, I would just like to summarize a few key conclusions that can be drawn from this quarter's developments. Firstly, commercial activity in the year continues to be positive. We have seen no slowdown in our customer's activity aside from the usual Q3 seasonality. Lending continues to be dynamic in both the short and long term. Our core banking revenue continues to show positive evolution underpinned by robust volumes, strong fee growth and a high structural resilience to interest rates fluctuations. This is thanks to a higher proportion of SMEs and corporate clients in our portfolio and a higher proportion of fixed-rate loans in both the front book and the back book. Efforts continue in relation to asset quality, and the recent transactions have helped us to accomplish a significant reduction in our stock of foreclosed assets in the quarter. At the same time, recurring cost of risk continues along the right path. Once again, this quarter, we have increased our tangible book value. And finally, we have consistently built capital through the year, and our pro forma fully loaded CET1 ratio today stands at 11.8%.

Finally, we are ready with a new plan in TSB, which will place a renewed focus on customer's growth and service with a strong digital presence, and which will deliver much needed improvements in efficiency at the bank. This plan will be presented to the market in London on November 25.

And with that, I will now hand over to Cecilia.

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

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Thank you very much, Jaime.

We are going to open now the line for questions. So operator, first question, please.

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Questions and Answers

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Operator [1]

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The first question is coming from the line of Mario Ropero from Fidentiis.

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [2]

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My first question is on capital. You are now approaching to the 12% level. You said that 12% is the new norm. I wonder if you could qualify how much cushion above 12% you intend to accumulate ahead of Basel IV potential impact. And then the second question is if you could help us to understand the main -- and quantify the main headwinds and tailwinds that we're going to see in NII in the coming quarters. You mentioned -- you clarified the headwind due to the securitization. Could you also, please, clarify the additional ones?

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

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Okay. Thank you, Mario. Regarding capital, we don't intend to accumulate any buffer. We're seeing the 12% as the ambition. You referred to, ahead of Basel IV, what -- nothing has changed on this front in terms of Basel IV in -- we said already that in terms of credit risk, we don't see any meaningful or relevant impact. And in terms of market risk, it's not relevant for us neither. And in terms of operational risk, we also have always said that the -- this is a question mark since there is no clarification yet on the what the national authorities can do, as there is a national discretionality on some parts of it. So we are not expecting anything in particular that needs to be taken into account in this path. So the 12% is the ambition set, and there is nothing more than this.

In terms of headwinds or tailwinds on NII, the thing to keep in mind, as you already referred to, is just the impact of the securitization. Other than this, nothing in particular. And we've shown in the presentation several pieces that help understand the NII dynamics, the protection that we have on the asset side in terms of -- both in terms of the natural hedge in our loan portfolio; in terms of the structure that we have in embedded floors; and the proportion of fixed rates, so the relatively small proportion of the loan portfolio that is exposed to further decreases in Euribor. Also, the ALCO portfolio has a strong protection in terms of reinvestment risk because the runoff is very, very slow. And on the liabilities side, we also show the levers that we have to mitigate. So also, our front book, prices keep being -- and they've been -- actually, over a number of at least 10, 12 quarters, front book prices have been above of the back book prices. And the pace at which the loan portfolio, fixed-rate portfolios, show attrition is relatively slow. So all these are factors that help to understand the NII behavior, and there is nothing new. If anything, even now, the rates are a bit better than they were in the last quarter. So I think those are the factors that need to be taken into account.

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Operator [4]

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Next question is coming from the line of Francisco Riquel from Alantra Equities.

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Francisco Riquel, Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research [5]

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Wanted to start with same, capital, 2 questions here. So you are guiding for just 3 basis points of capital generation in the fourth quarter, which looks low to me. If you can please give a bit more color on what you expect in the fourth quarter; and if, for example, we may expect restructuring costs related to TSB; or any other potential impact that we are not aware of. And then the second question is if you can -- I mean, you mentioned that you want to reach 12% in capital. That target is within reach. So if you can please explain the rationale for the strategic alternatives that you are considering for the asset management unit; and if -- I mean, if you expect any potential need for capital, either regulatory or for -- or of any other nature, that would make you sell the asset management or any other asset.

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Tomás Varela Muiña, Banco de Sabadell, S.A. - General Manager & CFO [6]

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Okay. Thank you, Paco. Yes, we are guiding to 3 basis points of capital generation in the fourth quarter. You will remember that always the fourth quarter is, in terms of net income, a bit weaker; and weaker meaning less rich just because there are items that aren't accrued throughout the year, but instead are charged in full in the fourth quarter, like basically the deposit guarantee fee -- deposit guarantee fund fees in the quarter and also those taxes that are charged over deposits in some Spanish regions. So additional to these, you will remember that we -- in June, we guided towards 45 basis points of capital generation in the year. We stood at 40 at the end of the 9 months year-to-date. And we need to take into account the impact of the securitization in the NII. So therefore, basically, these 3 basis points embed all these factors in.

Headwinds coming from restructuring charges from TSB. Nothing relevant, nothing from TSB is going to additionally hit capital or the capacity to generate capital in the quarter. And therefore, there are no headwinds coming from here. In TSB, as you've seen in the presentation, in the 9 first months year-to-date, there are already EUR 25 million related to restructuring costs. There may be some more in the fourth quarter, but everything is all factored in and taken into account, so nothing unexpected coming from this front.

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Jaime Guardiola Romojaro, Banco de Sabadell, S.A. - CEO, MD & Executive Director [7]

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Paco, regarding the question about the asset management business. And indeed, in October, we published that we started a procedure to analyze a potential strategic alliance for our asset management subsidiary. And the reason, and that's the key point, it's not driven by capital generation. It has more to do with the situation of this industry and the importance of having a very strong asset management capacity, especially when we are facing this structural situation of the interest rates. There are a lot of elements in this industry that has to do with regulation and the need of making a strong separation between the distribution and the asset management. And in this sense, we are working, having a partnership with one of the leaders in the industry. And the transaction will have sense if we really realize that we have clear advantages to improve our offer, I insist, in this moment where the situation of the interest rates makes this business of investment so important. But the answer to your question that -- is that this hypothetical transaction is not based in capital generation. It's more based in having the best service to our customers.

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Operator [8]

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

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [9]

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Yes, I've got 2 questions, please, on net interest income. First one, looking at your reporting in the quarterly report, it looks like there was an increase in interest income from other interest income, around EUR 12 million or so, Q-on-Q. Is this on NPAs that are accounted under this heading, or is this from insurance income? Maybe you can just tell us whether -- what the source of this is and how sustainable this level is. And the second question will be on the U.K. TSB has reduced the pricing of some of its deposits, but should we expect this to be a scope for further reductions in the deposit costs to improve net interest margin?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - General Manager & CFO [10]

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Thank you, Britta. And regarding the first, this is -- it's not a reclassification, but it's an impact that goes across different lines. So it's related to hedge and related to currency, to dollars; and has a mirror impact in other lines of the NII. I don't have the detailed data now with me, but we can provide you with the details afterwards with IR or myself as you prefer, but it hasn't a net impact. And then in the U.K., yes, it's true. So the -- actually, last year, after migration, TSB increased the rate for customers in the prime accounts. And the commitment was to keep them for 1 year, and this has been reduced. And in general I think in the U.K. there is also some room for -- in general for customer funds cost reduction. We'll see how this unfolds, but yes, for the moment, we've seen the positive impact of this appearing in NIM in the U.K.

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Operator [11]

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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 [12]

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Yes. My first question is on originations on mortgage and consumer loan. In -- I think in Slide 9, you talk about very strong commercial momentum. You show 6% growth year-on-year in new mortgage and consumer loans. I have a question. If you could give us the growth rate in the originations of just consumer loans. Because what we've seen in system data from Bank of Spain is actually a significant contraction in August. So I just wanted to see whether you see the same trend or you are an outlier here. And the -- I mean a follow-up question here would be, if there is a slowdown, given that we are seeing signs of actual macro slowdown in the Spanish economy, whether you would be willing to sacrifice pricing in order to keep volumes or you would not actually be willing to do that. And the third point or the third question is on provisions. So growth is actually slowing down, as I mentioned. We saw yesterday actually, quite bad actually, unemployment numbers in Spain, so the question is whether you are expecting to -- I mean, provisions to increase on the back of actually IFRS 9.

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

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Well, regarding the first question. We have done well in consumer loans. You know we have 2 units doing this business. One is the unspecialized consumer finance company. The other one is the bank. I think that we have been less aggressive, the average of the competition. In this sense, we have been growing well but losing market share and basically, in my view, because we have been less aggressive. And in this sense, we are experiencing a -- less slowdown of the activity. That's the path of our peers, and we are not very worry about contraction. I think that we are doing the business basically in our customers, and in this sense, I think that we are suffering less this contraction that you say has been observed in the market since August.

The second question, about the slowdown of the macro Spanish economy and if we are sacrificing pricing to maintain volumes: I think that we are not doing so. I think that we have been able to preserve margins and at the same time, doing well in volumes. And probably this is due more to the mix that we have that -- and the strong presence in SMEs, where we have strong relationships and we are able to preserve the lending activity without sacrificing prices. The third question, about provisions. Tomás?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - General Manager & CFO [14]

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Yes. And regarding this, if I can add some data. So it's true that the seasonality of the third quarter makes it difficult to see how significant in -- it is. We sort of have had a view, the feeling that maybe the demand had weakened a little bit, but actually when we look at the data, we saw months in this quarter of consumer lending origination of EUR 85 million in 1 of the units, while we have seen over the year an average ranging between EUR 55 million to EUR 75 million per month. We have 2 units, as Jaime just said. In one of the -- in total, they -- we originate around EUR 150 million per month. I have the data of 1 of the units now. I don't have the other unit, but for this that I have, what I can say is that -- this EUR 85 million against an average that range between EUR 55 million to EUR 75 million per month in the rest of the year. So it's not clear that there has been a slowdown in consumer lending demand in our case, at least for the moment.

Regarding your third question, José, yes, it's true that, well, actually the soft data were more negative, so far, not only in Spain but everywhere that have data. And it's true that, the last hard data that we've seen, employment has been worse than it had been before. The sensitivity of IFRS 9 to -- or IFRS 9 models to a slowdown in growth is for every 100 basis points of GDP growth, the impact in cost of risk is 10 basis points for the year. Thank you, José.

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Operator [15]

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Next question is coming from the line of Carlos Cobo from Societe Generale.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [16]

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You've already touched on many of my questions, but if you could elaborate a little bit more on the asset management contribution, the subsidiary, the contribution to profit before tax. And how could you split that between the distribution and the [statutory] revenues and [sell-through] and to understand better what could be the [terms] you could use there if you decide to sell? And secondly, if you could touch again on the net interest margin. I was going back to Britta's question. She's, yes, identified the other interest income that you said has a mirroring impact in other parts of the net interest income. So you assume that's net. Could you explain a little bit better why net interest margin is actually [slowing] this quarter? That's the question. And quickly, lastly, if you could elaborate on the potential fines in the U.K. related to last year problems at TSB. Have you made any progress with regulators? Do you expect a fine, or you are more positive now and that is not likely?

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

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Yes, answering -- going a little bit further on your follow-up question regarding to -- related to Britta's. This -- as I said, this is related to hedging dollars with -- related to our position in deposits in dollars. So there is more volume of deposits in dollars, so there is appear -- here appears the impact of the higher hedge over those deposits. And therefore, it all comes together in the cost of deposits in dollars. That's -- it's -- you can see in the splits that we give in the presentation, implicit there. So this is -- and this is the concept. This is the relationship. We can be more precise offline on details if you need them. And in terms of your first question, the asset management unit which actually the revenues of which are the -- actually the management fees. So you know that, and you referred to, there are management fees and there are distribution fees. So the contribution of the asset management units, the net income per year is around circa EUR 40 million. And this embeds, of course, the fees, the revenues and the related costs. On top of that, in a group level, there is the contribution of the distribution fees that wouldn't be affected by any M&A transaction. And you know that basically -- I won't be precise, but basically, the distribution fees in any such kind of business amount significantly above the level of the management fees. And these are untouched.

In terms of the potential fine, yes, your -- I think you also questioned about if we are more positive. We can't be very open about whether we are positive or negative. We only follow the process. My impression is that this won't happen in 2019. And we don't have any feedback, only that I think it's -- the investigation is following a good process. And we are not expecting anything different from what we've been explaining about it, but in any case, we think it's going to happen before year-end.

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Operator [18]

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Next 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 [19]

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Yes. One question is on costs, and one on capital. On costs, when will we see the cost savings from the deconsolidation of Solvia? And should we see the EUR 15 million one-off costs you indicated this quarter at TSB as part of the restructuring charges you will make to turn around the unit? On capital, just a clarification: You are sitting on 11.8% pro forma now and fully loaded, and have indicated that TSB restructuring charges will not impact capital in Q4. Have you therefore changed the 11.6% target for 2019? Or will you be ahead of this level by the end of the year?

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Tomás Varela Muiña, Banco de Sabadell, S.A. - General Manager & CFO [20]

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Okay. Thank you, Andrea. Actually, the cost savings of the deconsolidation of Solvia are already running, and they've been running because part of them are -- accrue since their signing. There is another part of it that don't -- that doesn't happen until the closing. So these additional savings will start to appear after the signing that we expect by the end of the year.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [21]

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And how much would that be, Tomás?

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

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So we said that in total, the savings per year would be around EUR 150 million in the -- when -- at the beginning of the transaction, when the transaction happened. I would say that the additional savings will be like 30% of this, more or less.

In terms of the -- your second questions. What -- now what I said in -- is that -- for TSB, EUR 15 million in the quarter but EUR 25 million of restructuring costs in the 9 months year-to-date. So yes, those are restructuring charges that have to do basically with head count reduction, so far. And capital: Yes, what we are seeing -- so we are showing in the slide that our expectations is to -- are to reach the 11.8% fully loaded. We think that pro forma at the -- sorry, pro forma. We think that reported at the end of the year. And therefore, yes, this is what you can -- if you -- you can say this is the target. So 11.6% has already been left behind. This is -- 11.8% is what we expect to -- expect it to be at the end of the year. And in this question also -- sorry. I -- now I remember that you referred to TSB restructuring. Yes, I said that the restructuring charges from TSB, that there may be some more than this EUR 25 million in the fourth quarter, are already taken into account. And therefore, those don't hit this 11.8% that we are presenting here.

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

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Thank you, Andrea.

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Operator [24]

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Next 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 [25]

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Two quick questions, please. On -- I've got a follow-up on TSB. And obviously, you had a good quarter in NII because of the low funding costs, which you've explained, but if I look forward, do you think the NII is sustainable at the current run rate? I'm thinking yes. You've highlighted room for low deposits, but obviously, the mortgage market, you have -- the front book is considerably lower than the back book in asset spreads. And 2% NIM for [effectively] mortgage backed looks high. So do you think, between funding costs and volume growth, the NII is sustainable, is the question. And second, and I apologize if you've discussed this already, can you give us an update on when the closing of the NPA disposal is going to happen? Obviously, it was expected before year-end. It feels that it should be imminent, but what are we waiting for? And is there an expected date of closing?

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

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Thank you, Alvaro. Yes. So in TSB, it's true that the environment is -- competitive environment is challenging, and we've already seen this over the last 1.5 years. The reality, what we are seeing is that the NIM is remarkably resilient. So we've taken the pain already of the hit on the new lending, the front book hit on spreads. And with this, still the NIM is proving remarkably resilient, so far. We've seen that customer stickiness to TSB, the brand and the franchise, our brand, is good. So -- and then additionally, we have the potential that already appear, showed up this quarter of the positive contribution of the reduction in customer funds. What we've seen as a result of all these factors is the mortgage yields have been stable. And also, over the last days, we've seen also a behavior of the swap rates, the 5-year swap rates in the U.K. are much more benign that (sic) [than] what it was expected only maybe 2 or 3 weeks ago. So all these are factors that need to be taken into account to assess the future sustainability of the NIM and the NII.

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Jaime Guardiola Romojaro, Banco de Sabadell, S.A. - CEO, MD & Executive Director [27]

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And Alvaro, regarding the second question about an update on closing the NPA disposal. As I've said in the presentation, we have already received the approvals, one coming from the Fondo de Garantía de Depósitos and one from the ministry of economy. So we are ready to achieve the closing of the transaction. And it's a huge transaction, more than 60,000 assets. And we are preparing the closing, and the expected date is going to be the 1st week of December.

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Operator [28]

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

Carlos -- Carlos disappeared. Sorry. The line disappeared. The line -- the next question is coming from the line of Benjie Creelan from Jefferies.

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Benjie Creelan-Sandford, Jefferies LLC, Research Division - Equity Analyst [29]

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Just 2 questions from me. First of all, a broader question on costs. And I mean, if we look at the branch footprint and the head count in Spain, it appears that you've made a lot less reductions than many of your peers have in recent years. But just wondering. Is there a strategic reason behind that, or do you see scope for any meaningful reduction going forward? Or could we expect more savings in the Spanish footprint going forward? And the second question is on asset quality. If we look at -- or if we strip out the impacts of the large-scale disposals, then the NPA ratio was pretty much stable this quarter, and coverage was down, which I think is the second quarter in row now that this has happened. So I just wonder if you could give us any more color on underlying asset quality trends and why organic NPL reduction seems to have stalled.

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Jaime Guardiola Romojaro, Banco de Sabadell, S.A. - CEO, MD & Executive Director [30]

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Well, regarding the first question about the reduction of branches. I think that if you compare with our peers in a long basis, in a long period of time, I think that we compare well, but obviously we are continuing with these branch closures. I think that the -- we are planning to do in the next year, more or less, 200 branches less than we have now.

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Tomás Varela Muiña, Banco de Sabadell, S.A. - General Manager & CFO [31]

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Okay. Benjie, thank you for the questions. Regarding asset quality, it's true that the focus has been this year, in the 2 last quarters, in the conclusion of the big portfolios. And therefore, we've seen some -- a stagnation in the pace of reduction organically. At the same time, we've redesigned a little bit the management framework and structure, and we've developed new strategies for the rest of the portfolios, the remaining portfolios. And so our teams have been busy working on this as we close the big transactions. Therefore, it -- those 2 quarters need to be seen on this -- under this perspective, but the ambition and the focus remains the same. So as we've shown over the last years, many years, we've been very proactive in reduction of the stock. The -- actually the -- if you -- when you look at the numbers, it's very, very impressive. So we keep the same. And the quality of the remaining portfolio is similar to the portfolio that we've sold. In fact, if you look at the foreclosed assets portfolio that remains after the closure of the so-called Rex portfolio, the profile is different. So the land was included in the Rex portfolio, so what remains is basically finished properties or residential or commercial properties. And the focus there is organic, although we also, as we did in the past -- and not referring to the big portfolios even. We -- I'm referring now to portfolios that didn't have this visibility but were institutional portfolios. So the strategies include a range of alternatives, including institutional sales and also retail and organic sales. And as I said, the quality is similar to -- it's just a matter of time when they were closed, when they -- and when we had the new entries. And the stock is now fed with items that were included in the portfolio afterwards. And the quality and the profile is similar both for foreclosed assets or for NPLs. So I hope that, from this same quarter onwards, the pace of reduction will again show pretty similar to what we had in the -- until the first quarter of this year.

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Cecilia Romero, Banco de Sabadell, S.A. - Head of IR [32]

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That was the last question, so we thank you very much for joining our webcast today. We also thank Tomás and Jaime.

And so as always, the Investor Relations teams and I will remain available for the rest of the day to answer any questions that you may have.

Have a great day, everyone.