Good morning and welcome to Sabadell's results presentation for the third quarter and first nine months of 2025. Today, we are joined by our CEO, César González-Bueno, and our CFO, Sergio Palavecino. The presentation will follow a similar structure to previous quarters. Our CEO will start by sharing strategic priorities and then discuss the key developments of the quarter. Next, our CFO will provide a detailed review of financial performance and the balance sheet before our CEO concludes with closing remarks. Finally, we will open the floor for a live Q&A session to address your questions. César, over to you.
Thank you, Lluc. Good morning, everyone. Before sharing the results of the third quarter, I will start my presentation today with a reflection on Sabadell's evolution since 2021, as well as the prospects for the upcoming years. In slide four, in early 2021, we launched a strategic plan focused on transforming each one of our businesses through specific levers for each one. This transformation would support the financial turnaround of the group. Since then, we have executed the strategy in a decisive and accelerated manner. We have talked about this many times. I won't elaborate into the details now. As a result of our transformation, a solid financial turnaround has been delivered. Return on tangible equity has jumped from 0% in 2020 to the current double-digit figures, which are above our cost of capital.
By the way, our transformation process and financial turnaround have not been affected by the hostile takeover bid, which we have been dealing with over the last year and a half. In July 2025, we presented our new strategic plan. An important milestone is the sale of TSB at very attractive multiples, which crystallizes the value created since we acquired TSB in 2015. The sale was signed with Santander and approved by our shareholders last August, and we expect the closing early next year. The new strategic plan is focused on growth and shareholder remuneration, as Sabadell has not reached its potential. In terms of profitability, we expect return on tangible equity to keep growing and reach 16% by 2027. We reaffirm all the objectives of the strategic plans in terms of return on tangible equity, growth, and shareholder remuneration.
On slide five, we have a quick reminder of the key elements that underpin our equity story. First, Spain. Following the sale of TSB, the vast majority of our businesses is now in Spain, one of the fastest-growing economies in Europe. Second, growth. Our approach is clear: prudent market share gains while preserving asset quality and pricing. Third, execution. We have a solid track record of delivering results since 2021. We are confident we will deliver on our current targets. Fourth, shareholder remuneration. We have a proved and strong ability to generate capital while growing our lending book. We will leverage on this to offer an attractive shareholder remuneration in the upcoming years. In slide six, we are reminding the financial guidance for 2027, which we announced in July and we confirmed today. To summarize, our return on tangible equity for 2027 is 16%.
We also announced cumulative shareholder remuneration between 2025 and 2027, and we expect it to amount to EUR 6.3 billion. In September, we actually improved our expectations on shareholder remuneration from this EUR 6.3 billion to EUR 6.45 billion. In slide seven, we provide more color on shareholder remuneration. The expected EUR 6.45 billion includes recurrent distribution based on a 60% payout ratio. This is executed through two interim cash dividends per year plus one final cash dividend. On top of the 60% payout, we are planning to distribute excess capital above the 13% quarter one threshold. Finally, we will distribute the extraordinary dividend from the sale of TSB once the deal is closed. As you can read in the bottom right-hand slide of the slide, we reaffirm that yearly cash dividends per share in 2025, 2026, and 2027 will be higher than cash dividends per share paid in 2024, which was EUR 0.2044.
Now let's move to the third quarter results highlights. In slide nine, the key messages of the quarter. Third quarter results are on track to meet 2025 guidance. Our recurrent return on tangible equity, that is, excluding one-offs and extraordinary items, stood at 14.1%. Quarter one reached 13.7%. We kept generating capital in the quarter and in line with our strategy. I will later elaborate on this. Commercial activity continued to accelerate. Both performing loans and customer funds grew by around 8%, excluding TSB. Core revenues remained in line with expectations. NII is on track to meet the EUR 3.6 billion target for 2025. Fees grew by 3.7% year- on- year. Asset quality continues to improve. Total cost of risk stands at 37 basis points, decreasing by 18 basis points year-on-year.
Finally, we are pleased to confirm a second interim cash dividend of EUR 7 per share payable on December 29. Let me remind you that 2025 shareholder distribution amounts to a total of EUR 1.45 billion. On slide 10, we turn to volumes. One more quarter, we delivered strong growth both in loans and customer funds. Performing loans ex TSB grew by 1.2% quarter-on-quarter, even with expected third quarter seasonality. On a year-on-year basis, loans ex TSB grew by above 8%. On the right-hand side of the slide, total customer funds ex TSB grew by 1.5% in the quarter and by 7.8% year- on- year. This is mainly driven by off-balance sheet funds, which grew by more than 15% year- on- year. Regarding TSB, volumes in euros were impacted by sterling depreciation but remained fairly stable at constant effects both quarter-on-quarter and year-on-year.
All in all, at constant effects, group performing loans grew by 5.9% and customer funds increased by 6.4%. If we move to slide origination and we talk now about loan origination in Spain, let me start with new mortgages. Origination in the first nine months of the year increased by 26% compared to 2024. Mortgage origination in Q3 decreased by 12% quarter-on-quarter, driven by seasonality. Our volumes of new mortgage origination remain reasonable. Our new lending market share is in line with our stock market share. Furthermore, we keep managing risk-adjusted return on capital rigorously for new mortgages to make sure growth is delivered in a profitable manner. Moving to new customer consumer loans, we continue to perform well, growing origination by 19% in the first nine months of the year versus previous year.
In new loans and credit facilities to SMEs and corporates, there was the expected quarterly seasonality. Year- on- year, evolution has been broadly stable. Finally, third quarter origination of working capital finance declined slightly compared to Q2. However, it increased 3% year-on-year. Yearly cumulative origination in SMEs and corporates remains broadly stable compared to 2024. All in all, current levels of new lending in all products allow for growth of the loan book. On slide 12, performance of payment systems remains strong. In the first nine months, card turnover increased by 6% and point of sale turnover rose by 2%. We can see a slower growth in point of sale turnover. Taking into account our already strong market share in this business, we are now focused on pricing and profitability.
This approach has resulted in a reduction of certain exposures with very low margins, but we have increased total fees coming from this business. In the bottom half of the slide, you can see the evolution of savings and investment products. They grew by EUR 4.8 billion in the year, driven by an increase of EUR 6.8 billion in off-balance sheet products. On slide 13, we show the breakdown of performing loan book ex TSB across segments and geographies. In Spain, our performing loans were up by 0.9% quarter-on-quarter and by 7.6% year-on-year. All segments and products keep growing. The stock of mortgages grew by 5.6% year-on-year, consumer loans by 19%, and SMEs and corporates grew by 6.2%. International operations were equally strong, with performing loans up by 11% year-on-year. In sum, performing loans ex TSB grew by 8.1%.
In slide 14, I will elaborate on our strategy to enhance capital generation while growing loan book. I think this is a crucial element of our strategy, which we have shared before. We keep growing our book significantly, yes, but on the left-hand side of the slide, you can see that the probabilities of default of new lending originated in 2025 are much lower than those of new lending originated in previous years. This is the result of our approach to create growth, as we explained in the presentation of our strategic plan in July. In the last few years, we have been working very significantly on improving our risk models and processes. We have done this on a portfolio-by-portfolio basis. Once the risk origination capabilities of a given portfolio were improved, we fostered lending growth in that particular portfolio.
Furthermore, the quality of the risk we are granting after improving our models and processes is much better, as we are able to skew new lending towards lower-risk segments in each portfolio. On the right-hand side of the slide, you can see a simplification of the implications of our strategy. In each portfolio, we might be obtaining lower loan yields, but at a lower cost of risk. As our resilience of our franchise improves, we generate more capital. As a matter of fact, we have already generated a very handsome figure of 176 basis points of capital year to date. This is fully in line with guidance that we shared in our capital markets day of 175 basis points per year. This is for the first nine months of the year, the 176 basis points. Let's turn now on slide 15 to the U.K. business.
As expected, volumes remained broadly stable in the quarter. Net profit of TSB reached GBP 59 million in the quarter, which translates into almost GBP 200 million in the year. That brings its contribution to Sabadell to EUR 242 million year to date, up by 44% year-on-year. Standalone return on tangible equity was 13.8%, despite having a high solvency that remained strong with a quarter one of 16.3%. Finally, the TNAV increased by GBP 104 million between April and September. This will be included in the final proceeds coming from the sale of TSB to Santander, ensuring TSB continues to contribute to Sabadell until the transaction closes. On slide 16, we can see a summary of our Q3 results. Net profit ex- TSB amounted to more than EUR 1.1 billion in the first nine months of the year. Net profit of the group reached almost EUR 1.4 billion.
This implies a recurrent return on tangible equity of 14.1%. This level of profitability allows us to grow our loan book while accruing a 60% dividend payout and still generate capital. We have already, as I said before, generated 176 basis points of capital year to date. Indeed, this is a high capacity to generate capital, and it is a key factor supporting our high shareholder remuneration. With this, I will now pass the floor to Sergio, who will provide a more detailed overview of the bank's financial performance.
Thank you, César, and good morning, everyone. Let me start by showing the detailed P&L for the quarter and for the first nine months of the year. As always, we have prepared the full group P&L as well as the P&L ex TSB, which will be the relevant perimeter going forward once we close the TSB sale.
The performance of the different lines of the P&L is aligned with our year-end guidance, and we will review them in a minute. Whilst we are on this slide and before going into the detail of each of the lines, I'd like to point out that on the trading income line this quarter, we recorded an extraordinary gross expense of EUR 23 million. This reflects mainly two items: -EUR 8 million one-off related to liability management and -EUR 15 million related to FX hedging on the entire proceeds from the sale of TSB, which will be quarterly incurred until the transaction is closed. We will now go through the different P&L items in more detail, focusing on Sabadell's performance excluding TSB. Starting with NII on slide 19, I'd like to highlight that the net interest income is broadly stable this quarter, and future growth will be primarily driven by volumes.
Excluding TSB, NII closed at EUR 899 million in Q3, reflecting a marginal quarter-on-quarter decline of 0.8%. Now let's look at the top right-hand side of the slide to understand the drivers behind this quarterly evolution. Moving from left to right, customer NII had a negative impact of minus EUR 5 million. Within this, the customer margin decreased by EUR 24 million, mainly due to lower loan yield. However, quarterly average volumes of both loans and deposit had a very positive impact in the quarter, contributing EUR 8 million and EUR 12 million positively, respectively. The FX effect was marginally negative, subtracting $1 million due to the depreciation of the US dollar. The excess liquidity and other items had a combined impact of EUR 19 million adverse. This reflects the combination of reduced excess liquidity used to finance volume growth invested at a lower ECB deposit facility rate.
Wholesale funding costs contributed positively with EUR 14 million, supported by lower funding needs, the maturity of early amortization of expensive instruments, and the benefits of the floating rate hedges. One additional business day in the quarter had a marginally positive impact of EUR 3 million. Overall, we can see that the positive contributions from larger volumes and lower wholesale funding costs helped offset the drag from lower customer margins and reduced liquidity contribution. TSB added EUR 303 million in line with Q2, as the higher contribution from the structural hedge was fully offset by the depreciation of the sterling. All in all, we are on track to meet our 2025 NII ex TSB guidance of EUR 3.6 billion. Let's now move on to the fees on the next slide. For Sabadell, excluding TSB, the quarter saw a decrease of 4%.
This was mainly due to the usual seasonality in the quarter, particularly in credit risk, as well as service banking fees, which were lower during the summer season. However, year-on-year performance remains positive, with fees growing by 3.7%. This growth reflects strong contributions from asset management and insurance products, which continue to support fee income. Based on this going forward, we confirm that we remain on track to meet our guidance of mid-single-digit fee growth in 2025, excluding TSB. Now moving on to cost on slide 21. Total group costs remained contained, reflecting disciplined cost control and supported by depreciation of the British pound. On a year-on-year basis, costs remain broadly stable, increasing by just 0.5% year-on-year. In this context, we confirm again our guidance of low single-digit growth costs in cost, excluding TSB. On the next slide, we cover cost of risk and provisions.
The cost of risk continues to evolve in line with our year-end targets, or even better, reflecting prudent credit risk management. Looking at the bridge on the top right-hand side of the slide, from left to right, we booked EUR 88 million of loan-loss provisions, excluding TSB, during the quarter, which leads to a credit cost of risk of 21 basis points in the year. Next, a positive of EUR 5 million in provisions, driven by foreclosed asset provision releases, along with capital gains on real estate assets. MPA management costs and other provisions, mainly related to litigation and other asset impairments, in line with the usual run rate. Finally, TSB provisions contributed EUR 16 million this quarter. All in all, total provisions equate to a cost of risk of 37 basis points when excluding TSB.
Looking ahead, we expect the total cost of risk, again excluding TSB, to remain in line with our full-year guidance, or a touch better. Slide 24 provides a closer look at non-performing loans, which continued to improve both quarter-on-quarter and year-on-year. The NPL ratio for the ex-TSB perimeter declined further to 2.75%, representing a quarter-on-quarter reduction of 6 basis points and a year-on-year reduction of 96 basis points. Meanwhile, the coverage ratio remained broadly stable during the quarter and increased by 5 percentage points over the year, reaching almost 70%. This, once again, confirms that our cost of risk is improving, but not at the expense of our coverage ratio.
Looking at the exposures and coverage level by stage on the right-hand side, we can see that stage two and stage three exposures at ex TSB level decreased by circa EUR 1.8 billion and EUR 1 billion, respectively, over the last 12 months, which I believe are remarkable figures. Moving on to the next slide, we can see that the stock of foreclosed assets continued to decline quarter after quarter. This is virtually a run-off portfolio, with very limited entries and sales over the last 12 months of 20% of the stock, at an average premium of 11%. Total MPAs, which include both MPLs and foreclosed assets, decreased by 19% year-on-year. To sum up, over the past 12 months, we have seen a strong improvement across all the three pillars of asset quality. Firstly, MPAs are down by around 20%.
Secondly, the coverage ratio has improved by 4 percentage points. All this has been done provisioning less. Turning now to liquidity and credit ratings, all indicators show that we ended the quarter with a very solid liquidity position, as you can see from this slide, with the loan-to-deposit ratio ex TSB showing a slight increase to 94%. Moving on to the credit ratings, Moody's upgraded Banco Sabadell's long-term rating to Baa1. This upgrade reflects the bank's improved solvency, supported by the continued enhancement of both asset quality and profitability compared to past performance. Also, Fitch affirmed our long-term rating at BBB+ giving it a stable outlook once the hostile takeover bid is over. On the next slide, we present our current MREL position. We are comfortably meeting our MREL requirements in terms of both risk-weighted assets and leverage ratio exposure.
In addition, we have built a solid management buffer across all requirements, which eases our funding plan needs and will help to reduce wholesale funding costs in the coming quarters. For the last quarter—sorry, in the last quarter, we issued one senior non-preferred and one SRT transaction. For this fourth quarter, the last one of the year, we expect one more SRT transaction to take place. Turning now to capital. At the end of September, our CET1 ratio reached 13.74%, reflecting an increase of 18 basis points during this quarter. Looking more closely at the quarterly evolution, we recorded 49 basis points of capital generation per dividend accrual. This includes 60 basis points from organic CET1 generation after deducting 81 basis points, zero impact from fair value reserve adjustments, - 11 basis points from risk-weighted assets growth.
The accrual of a 60% dividend payout represents an impact of - 31 basis points. Now, looking at the right-hand side of the slide, in terms of available capital to meet the announced shareholder remuneration, we already have EUR 3.7 billion of accrued and non-paid dividends plus excess capital above the 13% CET1 ratio on a performer basis. This means after the sale of TSB. This capital has already been generated. Now, let's talk about the expected distributions on the next slide. We expect to distribute EUR 3.6 billion in the next six months, which is equivalent to more than 20% of our current market cap. This amount is the result of a second interim dividend of EUR 350 million already agreed by the board, and that is EUR 7 per share in cash, which will be paid on December 29.
This will be followed by the final dividend plus the excess capital over 13% CET1 to be paid after the annual general meeting. The estimated amount is around EUR 750 million, and its composition, which may combine a cash dividend and a share buyback, still needs to be defined by the board of directors. Finally, the extraordinary cash dividend of EUR 2.5 billion that will be paid on the last day of the month following the closing of the TSB sale. As we have seen in the previous slide, the capital required for this remuneration has already been generated. I will now conclude my part of the presentation by highlighting our shareholder value creation and the impact of the TSB sale on Sabadell's current valuation multiples. Sabadell continues to deliver strong value creation for its shareholders.
This is reflected in a 17% year-on-year growth in tangible book value per share plus the dividends distributed over the last 12 months. Finally, given the importance of the extraordinary dividend related to the sale of TSB, let me share one aspect about the valuation. When we look at the 2027 consensus estimates, the Sabadell perimeter obviously already excludes TSB. Therefore, in order to accurately compare that figure with the current market cap, this extraordinary dividend for the sale of TSB must be adjusted for. When adjusting for the EUR 2.5 billion extraordinary dividend, the market cap is EUR 14.5 billion. This adjustment obviously does affect the valuation metrics, particularly price-to-earnings ratio. When using the adjusted market cap as of November 11, Sabadell's P/E is below 9x and compares to an average of more than 10x for Spanish peers.
With this, I'll hand over to César, who will conclude today's presentation.
Thank you, Sergio. To conclude, I would like to review our financial targets ex TSB for 2025. We are on track to delivering these yearly targets. Starting with NII, we have delivered EUR 2.7 billion in the first nine months of 2025, so we are well positioned to achieve the full-year target of EUR 3.6 billion. Fees and commissions have grown by 3.7% year-on-year, consistent with our mid-single-digit expectations. On the cost side, total expenses remain under tight control. We are well within the low single-digit range. Risk metrics remain robust, with total cost of risk at 37 basis points, in line with our guidance and close to—that is, close to 40 basis points.
In summary, all P&L lines ex TSB are on track to meet year-end guidance, and we remain confident in delivering a group return on tangible equity of 14.5% by year-end. Finally, let me highlight that shareholder remuneration is projected at EUR 145 billion for 2025, reflecting an improved outlook. With this, I will hand over to Yuk for Q&A.
Perfect. Thank you, César. We will now begin the Q&A session. As we have a limited amount of time, I would kindly ask you to limit the number of questions to no more than two. Operator, could you open the line for the first question, please?
First question is coming from Maks Mishyn from JB Capital Please go ahead, pressing star six.
Hello, good morning. Thank you very much for the presentation and taking our questions. Two questions for me. The first one is on costs. Could you confirm if all the costs related to the tender offer have been booked already, or is there anything else left for the fourth quarter? If so, in what line? On medium-term growth, do you expect the strong trend to continue in 2026? If the loan book grows faster than the mid-single digit you have put in the plan, can this have any implications for the capital distribution? Thank you.
Okay. The costs related to the tender offer have all been booked, provisioned, and paid or paid, except the new that will come on Q4, which is related to the shares to be granted to employees. As you know, it is 300 shares per employee. This will come as extraordinary in Q4. All the rest are already taken care of. In terms of the medium-term growth, I think we remain exactly on the guidance that we gave, and therefore, for sure, no implication, and we see no risk in terms of our capital distribution versus the guidance. Anything to add?
Thank you, Sergio.
No. Thank you.
Let's jump to the next question then. Thank you.
Next question is coming from Francisco Riquel from Alantra. Please go ahead, pressing star six.
Yes, morning. Thank you for taking my questions. My first one is on NII. I would like to refer to slide 19 of your presentation. Here, the quarterly bridge of NII, I see that new volumes are contributing with EUR 20 million NII in the quarter, loans and deposits. But then there is the column liquidity, which are negative of EUR 19 million, so most largely offsetting the new volume growth. It seems to me that redeploying liquidity positions out of the ECB or elsewhere is not accurate to the group with the new volumes. I wonder how can you reassure us that you are not chasing volumes at the expense of pricing. That is my first question.
My second question is regarding NII also. You are targeting NII of EUR 3.6 billion in 2025 and EUR 3.9 billion in 2027. That was based on mid-single digit growth in volumes, but you are growing high single digit in year one. However, the guidance for 2025 probably anticipates flattish NII again in Q4. What shall we expect going forward? You can share with us some color for NII in 2026. You can share with us at this point. Do you think that there is upside risk to your 2027 guidance, assuming you keep on growing mid-single digit for the remaining of the plan, or do you see margin headwinds? Thank you.
Okay, let me start. I will give you some color, but certainly Sergio will complete the explanation. I think you're spot on. I think slide 19, which reflects that there is a EUR 19 million negative in liquidity and others. This is mainly driven by the fact that although we have grown significantly in customer liabilities, the deposits part is lower than the growth of the asset part. This is very clearly explained by a very simple reason. We have been below, and we will continue probably being slightly below our expectations for new customer acquisition on all fronts because of the result of the hostile takeover.
We have delivered approximately 75% of our target in terms of growth of new customers and volumes on the unbalanced sheet deposits and liabilities, which is below our target. If I look at it at face value, what is quite extraordinary is that we did the 75%, given the uncertainty and the difficulty for new customers to join the bank in such a period. This going forward should improve, and we should again rebalance the growth of our unbalanced sheet growth of deposits with the growth of assets. Therefore, that would affect positively that EUR 19 million that you're seeing there. I think I'll leave it at that and pass it on to Sergio.
Yeah, thank you, César. Paco, I think you need also to take into account that liquidity part is affected by rates as still looking at the third quarter rates at the ECB were invested at a lower rate than in the second quarter. That does affect. On that part of the breakdown is also the others, which include some hedges related to the fixed income, sorry, to the fixed-rate mortgages that have been brought to floating because the amount of fixed-rate mortgages that we have is a lot, and part of them are hedged. The rates part is also affecting that component. Going forward, as rates stabilize, we will expect not an adverse, not so big adverse contribution from that portion. The volume component to be present during 2026. We expect NII to start growing during 2026.
With this, we will basically reconfirm in our expectation that this year we will end that NII at EUR 3.6 billion. NII will start growing during 2026. For 2027, our estimate is that this EUR 3.9 billion that comes with after mid-single digit growth of both loans and customer funds. Related, your mention of high digit on the loan book, that is at the end of the—that is at the very end of the period, which typically has a peak in terms of loan demand. When you look at the average volumes for the loan book, we are rather on the mid-single digit that we expected. So far on volumes, I think things are progressing in line with our expectations.
If anything, we're lagging a bit in customer acquisition, as César described, which for sure, I'm sure that the hostile tender offer affected a little bit in that part of the business. Now, luckily, the hostile tender offer is over, so we don't have that going forward.
Although we will have it for the beginning of the next quarter because, of course, the tender offer ended mid-October. If I may make a general comment on the NII, and I think although we've said this many, many times, I think it's important to repeat it because it's at the core of our strategy. First, the NII is in line with our guidance, and the improvement of the credit quality of new lending, of course, partially dilutes also loan yields. We are growing with lower yields but with better credit quality.
This is a strategy because it means lower cost of risk and higher capital generation, and it furthermore makes the franchise significantly more resilient. When you look at line per line, sometimes it is difficult not to realize this underlying shift in strategy, which I think is very positive and at the core of our endeavors.
Yeah. I think that answers also, Paco, your comment that if we make sure that growth is not done at the expense of margins, and that is not the case, as I explained, that we focus on returns and we have a very strong discipline of allocating all cost, cost of risk, and capital to all the lending. We only grow as long as it makes sense to do it.
Okay. Shall we move to the next question, please?
Next question is coming from Álvaro Serrano from Morgan Stanley. Please go ahead, pressing star six.
Hi, good morning. Thanks for taking my questions. They're kind of follow-ups from the previous questions on loan spreads. First of all, we've seen in the press, and it looks like some of your competitors are repricing mortgages up and repricing loans up over the last few weeks. Can you comment on what you're doing on new production? Do you recognize those comments, and are you also repricing up? Related to that, Sergio, you mentioned that contrary to some of your competitors, you do hedge and you do swap those mortgages. Can you give us a feel of what the spread is once the mortgages are swapped, what the spread is at the moment? I guess sort of related to that, in your 2027 NII target, EUR 3.9 billion, what spread on loans does that have factored in?
What should we be thinking about on the loan spread when we put everything in? Where should it stabilize? I realize in the short term, obviously, there's some repricing to lower your IBOR still going on, but once during 2026, where do you think the loan spread can stabilize? Thank you.
I'll take just the first part of the mortgage question. I think we are following very closely all the comments also from our competitors and following the market. It is very clear that we are growing in mortgages at our market share. That means that, of course, the market is competitive, has always been. What has transformed dramatically the way we look at mortgages is that we are now fully Railrock-based. The average Railrock of new mortgages is around 20%.
That means that we price correctly, but we also include it's based on a segmentation approach, and we are aiming and attracting high-value clients. The pricing includes, and the Railrock, the impact of cross-selling. That is, if a mortgage offer discounts when customers are also purchasing other products that increase their overall contribution. What has changed also is that before, that was only set at the time of the issuance of the mortgage. Now, that is a condition. For example, if there's an insurance attached to a mortgage, it has an improved pricing, but if that insurance is canceled, then the price is automatically adjusted as per agreement with the client. I think it is very clear we are all focusing very carefully.
The market is growing. is a lot of demand for mortgages, but we are all focusing on, and certainly we are, on not increasing our market share on this segment, growing with, and that is our strategy, and that is what we have executed, and measuring very carefully what is the value generation.
Yes. And Alberto, your question related to mortgages and its ALM-related mortgages, the origination of mortgages is fixed rate in the vast majority. More than 80% of our origination is coming in fixed. And it has been the case now for, I think, the last maybe seven or eight years. The book is definitely turning very much onto the fixed rate. That is also combined with the fact that in the last quarters, the origination volumes are higher. It is a pretty good amount of fixed-rate loans. Yes, we do swap that part connected with our ALM policy.
We're swapping between 30%-50% of the new entrants. After swap, it depends on the different portfolios, but the final spread after swapping stays at 30-50 basis points. Please take into account that all the business we do, we do with customers. The mortgage profitability is assigned in connection with other products that the customer takes. We make sure that the round rock, all in all, makes full sense.
As for the total number, where do you think the spread could stabilize consistent with that EUR 3.9 billion?
Yeah. The spread for the asset, the loan yield currently in the ex-TSB perimeter is at 3.68%. When compared to ECB or Euribor, it means that in average spread, it's at above 150 basis points. We think that that kind of a spread is sustainable over time. We might see maybe a little bit of additional reduction, maybe, but then the mix and the rates, we think that spread is sustainable over time.
Thank you.
Thank you.
Nice to hear you again, Álvaro, in our quarterly calls. Good to be back. All right. Let's jump to the next question, please, operator.
Next question is coming from Borja Ramírez from Citi . Please go ahead, pressing star six.
Hello. Good morning. Can you hear me?
Perfect, Borja.
Yeah.
Perfect. Thank you very much for taking my questions. I have two. Firstly, on the capital distribution, I would like to ask if you could provide more details on the cash dividend growth, if that applies every year, since the DPS will be higher year over year. I think your capital distribution target does not include the potential capital from the payments JB, so that could be upside to your target. My second question would be on the NII. I would like to ask if the customer NII has bottomed in Q3. I think you have a competitive advantage compared to domestic peers because I think you still have tailwinds from lower cost of wholesale funding to come. I think you pointed to EUR 200 million of upside until 2027. I'm not sure that that's in consensus. Thank you.
Okay. In terms of the capital distribution, I think that what we are guiding, and we are very guiding with confidence, is that the cash dividend per share, and that includes also numerator and denominator, so the number of shares will be higher in 2025, 2026, and 2027 or equal than the one of 2024. That is what, that's how we are guiding. Of course, it does not include Nexi. Precisely. Exactly. Regarding your question on NII, I think the third quarter might be the bottom or sort of a valley, as we expect the last quarter of this year to have similar levels of NII. Then, as mentioned before, we expect NII to start growing in 2026.
When you discussed the, when you mentioned, Borja, the wholesale funding savings that we expect, and we touched on them in our capital markets day, and we were comparing, I think, 2027 to 2024, there were meaningful expenses. That was a combination of two things. The lower, or maybe three, lower rates, lower spreads in the market for us in connection with our ratings. That is clear. That is structural. That is strength going forward, for sure. There is another component, which is that the sale of TSB is going to reduce our wholesale funding needs. That is connected to some income that we get in the ex-TSB ALCO book because in the ex-TSB ALCO book, on the asset side, we also have the envelope from TSB.
I think it's not fully that sort of benefit that goes into NII because it will be somewhat offset by the Enbrel bonds in the XDSB Alco book.
That will be sold to Santander.
Exactly. Also with TSB. Exactly.
Perfect.
Thank you, Borja. Operator, could we jump to the next question, please?
Next question is coming from Carlos Peixoto from CaixaBank. Please go ahead, pressing star six.
Hello. Good morning. A couple of questions from my side as well. To begin with, there was a small decline in the 3-4% decline in customer funds in.
Carlos, I don't know. Carlos, sorry to interrupt you, but could you?
Better now?
Yeah, much better. Thank you.
Sorry, I wasn't a speaker. As I was saying, there was a 3%-4% decline in deposits and overall balance sheet customer funds in the first Q standalone, excluding TSB. I just wonder whether you see that mainly related with a big impact that you mentioned before or whether there is something else that explains this decline. On trading gains, you had the tier two impact in the quarter and the hedge cost. Still, the underlying trading would actually be slightly negative. I am just wondering whether you see this as being the trend for upcoming quarters in trading as well. Sorry, just to overstep, but if I may, just on other provisions, if you could also give us a clue on how sustainable these levels are.
Should we look at the suggested by the EUR 5 million that I value because EUR 5 million from a recovery right back in terms of foreclosed assets provisions? If we adjust for that, should we see there more or less a recurrent level of provisions or just your outlook on this? Thank you.
I'm going to try to answer the first question, but I'm not 100% sure I understood it fully. If I miss the answer, please come back. I think you were referring to customer funds growing less than our asset side and if that was perturbable over time. I think that what we already tried to explain is that that difference in growth between assets and liabilities on balance sheet from clients, it's mainly due to a weaker acquisition of new customers versus our expectations due mainly to the tender offer.
Therefore, we expect that to be reverted over time and to come back to our original plans with the nuance that that would not happen fully during Q4 because the transaction ended at mid-October. I do not know if that was your first question and if I answered it to your satisfaction.
What I was actually referring to was between June and September, you had a decline in overall stock of deposits. I guess.
Term term deposits, you mean. Carlos, are you?
Overall stock of deposits.
Deposits. Term deposits.
Excluding TSB.
Yeah. Excluding TSB. Term deposits, I guess. Okay. You mean term deposits.
Yeah, yeah, yeah. The EUR 2.5 billion. Yes. That is a mix, and that is a shift. If you see the growth in the slide, I think it is more than EUR 5 billion growth excluding capital appreciation on mutual funds. I think we have always pursued a greater growth in our mutual fund strategy in our off-balance sheet. Part of that is cannibalization. That -2.5% of term deposits is also a significant shift towards mutual funds. That is overall what yields the growth of close to circa 8% year-on-year on our overall funds from customers both on balance sheet and off-balance sheet. It is the mix of the on-balance sheet that I was explaining previously that has had some impact on our NII together with all the other elements that we already commented. Despite that, let me also highlight the remarkable growth in the off-balance sheet products growing at a very nice double digit. Very successful, I think, part of the business.
Carlos, your other questions, the second one was related to trading. In the trading line, the way we see things are, of course, it's probably the most volatile line. However, if we were to say a recurrent path, it could maybe be between EUR 5 million-EUR 10 million per quarter. As we have explained, we are hedging the entire proceeds coming from the sale of TSB, and that is going to have a cost of EUR 15 million every quarter during this process. This is up to, as in our expectation, the first quarter of next year included. Those are the numbers, and we will be, I think, in that range. Regarding provisions, yes, we think that this is sustainable. This is in line with our longer-term expectations that we shared with you in the capital markets day. We guided to also 40 basis points cost of risk in 2027.
When we look at all the portfolios, they are doing a little bit better than expected. That is why we are actually below 40 basis points of cost of risk this year. I think it is important to take that in connection with the important transformation that César has described, where we focus all the organization in originating better quality portfolios that might not have such a big spread, but it comes with lower cost of risk. At the end of the day, we are seeing that the capital generation is actually higher. Quite happy with the transformation and the story. At risk of becoming too repetitive, I think the probability of default reduction is very, very significant. It is around 50% the first nine months of the year versus 23% new lending. That flows through the balance sheet over time because it is the new production that improves.
After that comes the book improvement overall depending on the maturity, term maturity of every product. Then the models in which you calculate risk also are adjusted. It all takes time, but it is in the right path. Immediately, it is producing exactly as Sergio was saying, the improvement in capital generation. Loan growth is not at the expense of credit quality. On the contrary, it is based on three pillars. The first is risk. The pre-approved loans by limiting the probabilities of default both on average and taking away the cues. The second one is pricing. Sometimes it yields to lower NII, but it is with higher rare rocks considering everything. The quality of the metrics has improved dramatically. Third, it also comes at the expense of processes.
I think one thing that is undervalued usually in banking is that the way you conduct your processes in the sales have a significant impact in your growth, all the rest being constant. It is what we call the funnel. The funnel. The focus on funnels. There is now an obsession around funnels here. That means that, all the rest being constant, you can have with the same pricing or equivalent pricing, the same risk, you can have higher growth. These are the three pillars of growth, and we are focusing very much on the execution of the three of them.
Right. Operator, could we have the next question, please?
Next question is coming from Ignacio Cerezo from UBS. Please go ahead, pressing star six.
Nacho, please remember to press six. We cannot hear you.
Yeah, sorry.
Okay. Yeah.
I think I am muted. I'm sorry for that. Thank you for taking my questions. I've got one actually on the mortgage yield discussion. If you can tell us on your standard mortgages, if you own, how much yield you're adding on cross-selling and how is that broken down between different products. The second one, if you can remind us the breakdown of your Miami book and if you're seeing any deterioration based on, I mean, the developments on private credit, U.S. credit quality in general. Thank you.
Unfortunately, I don't think we are able to respond to the first question. I don't think we have that breakdown or that we are sharing that breakdown. It's a changing game continuously. We would show you averages, but that would also not mean a lot because it is based on every mortgage one by one, and the pricing is based on rate rock on a one-per-one product. It basically only includes the rate rock, the elements that are contractual. On top of that, you have an additional tailwind which comes with high liabilities, higher payrolls, a number of things. That is as much as we can share. On the breakdown on Miami, no deterioration at all in our Miami book. It is not in the activities that might be more affected, but we are seeing no deterioration at all. It is a very high credit quality book.
Right. Nice to hear you again also, Nacho. Thank you. Can we jump to the next question, please?
Next question is coming from Luis Pratas from Autonomous. Please go ahead, pressing star six.
Hey, good morning. Thank you for taking my questions. The first one is on the Nexi deal. If you could provide any update on the negotiations with Nexi, if this is still a priority by management, and when shall we expect any news on this? My second question is on the customer spread. On the loan side, you commented that 150 basis points is sort of sustainable. I wanted to ask you about the deposit spread ex-TSB. Where do you see this landing once repricing stabilizes? Just one final clarification on the CET1. You mentioned that there should be another SRT in Q4. If you could provide any expected basis points impact from that, and if you also expect any operational risk inflation in the last quarter. Thank you.
Okay. On the next year deal, I think both sides have been very, very clear that there has been a very long time elapsed, and the market has changed significantly since the prior agreement. What we have engaged is that, first, there is no ongoing obligation. Second, we are both engaged in continuing exploring if there's a way to come to a new agreement or not. We haven't given each other a fixed date, or we haven't given each other a fixed commitment. We just have a mutually agreed approach to continue exploring opportunities. Certainly, if that happens, it will be in probably very different terms and scopes than the original one. We'll see how this evolves in the following months.
Yeah. Regarding customer spread, we are now not expecting major movements, as mentioned before. Maybe some basis points less in customer yield, but also some basis points less in customer funds, in the cost of customer funds. Overall, customer spread should get stable or very close to these levels very soon. Relating to your last question, let me give a general view on the capital evolution for Q4. Certainly, you can be much more explicit on the SRT. I think for capital evolution in Q4, you should expect, as you know, we have shown already that we have covered already, more than covered our commitments for the year in the first three quarters. Nevertheless, we expect a positive contribution to capital in Q4, although it will be more moderate than the one that we have seen in the previous quarters.
The headwinds are seasonality of the quarter because we should expect volume growth and also an impact on operational risk, maybe around seven basis points or something of the sort. The tailwinds will be the retained earnings and certainly the SRT and now to Sergio.
No, I think you answered perfectly. I think it's going to be in all the moving parts of the last quarter, which typically is not the strongest in capital generation, but still we expect some capital generation because you spot on Luis with the risk-weighted asset inflation coming from operational risk in the quarter, but the SRT will offset this. SRT benefit in the quarter will probably be around eight basis points, eight to seven. So offsetting that risk-weighted asset inflation.
The conclusion is what César said, that we expect another quarter of capital generation, probably not as strong as this one, but some of that.
Perfect. We still have time for one additional question. Thank you. Operator, please.
Next question is coming from Ulla Groot from KBW. Please go ahead, pressing star six.
Hi. Thank you for the time. I just wanted to ask. The TSB dividend, the one-off dividend, I think you have a slide where you say that so far you're already generating EUR 2.65 billion. The target for the dividend is EUR 2.5 billion. If you end up generating more capital than the dividend that's been promised so far, will we get that with the one-off dividend, or will it be later in the year as you kind of mop up excess capital?
That's one of those, sorry. That's one of those mysterious questions because it is for the board to decide. At this point in time, what we are just saying is that we have already replenished in terms of capital generation to fulfill 100% and even a little bit more of our commitments to the market. What the decisions of the board will be in the future remains to be seen, and it's for their capabilities to address that in due course.
R ight. Thank you. I think a couple of analysts have just raised their hands. Operator, if we could include them in the list. Let's jump to the next question.
Next question is coming from Cecilia Romero from Barclays . Please go ahead, pressing star six.
Hi, Cecilia. Can you hear us? Cecilia, please check that you are not on mute. If not, we can jump to the next analyst, and Cecilia can join again, probably.
We're not hearing Cecilia.
Can you hear me now?
Oh, yeah, yes. Yes, we can.
I'm sorry. I was muted.
No worries.
My question is related to the last one on the dividend related to TSB. I was just wondering, you were mentioning that TNAV has already improved by EUR 100 million. You were targeting around EUR 200 million for the period up to April. Is this progressing according to plan, better than planned? Could this represent upside risk to your distributions? I also wanted to know if the timing of closing of the transaction is on track for April. My second question is regarding the SRT that you were mentioning that is going to be eight to seven basis points in Q4. Where is the cost of that SRT showing up?
Is that NII? Is that fees? Is that included in your guidance? Thank you.
Yeah. Shall I take this one, César?
Yes, please.
Yeah. The TNAV, as you have seen, has increased by EUR 104 million. And we guided for roughly EUR 200 million increase of TNAV in one year. It is progressing absolutely in line with our expectation. That TNAV is basically the increase in the book value coming from the net income in the period. That is flowing into the group results where the extraordinary dividend is connected with the capital gain and the risk-weighted assets release, which is basically the sort of picture that we had when we cut off as of March 31st. The TNAV is not affecting the capital release, and therefore the extraordinary dividend is well connected with that.
For your second question regarding the SRT cost, SRT are done in two different ways, synthetic and cash. In the third quarter, we closed a cash transaction. There was a securitization of consumer loans, auto in particular, auto. That transaction is SRT, and that is a cash bond. That is going through NII. The synthetic SRT transactions, the cost is going into the fee line because it is a fee that we pay for the guarantee. It is going into the fee. All of that is considered in the guidance.
Okay. We can now jump to the final questions. Operator, please.
Last question is coming from Fernando Gil from Intesa Sanpaolo. Please go ahead, pressing star six.
Fernando, let's check if you are also on mute.
Hello? Can you hear me now?
Yeah. Yeah, we can hear you. Please.
Yeah, sorry. My question is regarding the asset management business and the Amundi deal. Can you please remind us of the main terms of the deal? I think it was 2020- 2030. Sorry, 2030. Has the deal any voluntary breakup clause from Sabadell? If so, what are the costs and notice periods and some details that you can share, please? Thank you.
Hi, Fernando. Yes, it was a 10-year agreement for distribution in 2020 while we sold our asset management company to Amundi. That period therefore ends in 2030. We are very pleased with the agreement. We are very happy. The business is done. It is working very well. There is nothing that we can add at this moment on this. It is going well.
Perfect. That concludes our presentation today. Thank you, César and Sergio. As always, the investor relations team remains available for any additional questions or follow-ups. Thank you, everyone, for participating and for joining us this morning. Have a nice day.
Have a nice day.
Thank you.