Welcome, everyone, and thank you for joining us. We are delighted to have with us today Cesar Gonzalez-Bueno, CEO of Banco de Sabadell, and Sergio Palavecino, CFO. Good morning, Cesar.
Thank you.
Good morning, Sergio.
Good morning.
It's a pleasure to host you today. Thank you so much for taking the time.
Big pleasure.
We have about 35 minutes together to go through the investment case. We will follow with some Q&A from the audience, and then we will close with a short investor survey, which you can take part in using the device in front of you. Should we move into the fireside?
Let's go.
Addressing, I guess, the main topic for the story right now, the 10-day offer by BBVA, I wanted to ask, from your perspective, how do you assess the BBVA proposal, particularly in light of the government conditions and integration timing? What do you think should be the key considerations for Sabadell shareholders when assessing the bid against your standalone plan? Is there a level at which you would recommend tendering?
OK, I think there are many elements that have to be explained before we go into the answer. The first one is that this offer is most probably not the last one, because everybody's in agreement that this offer lacks merits. I can say this openly because the board already rejected an offer that was better than this one 16 months ago. In that sense, I'm not precluding what the board might decide. On second instance, anything that we say today is relative in the sense that it has to be quite objective. It has to be based on the parameters of what we're observing. It is pending the board decision that has to come in the first 10 natural days after the tender, after the offer. That is pending. With all those caveats, let me make some few comments.
The first one is that we saw along, also in the first offer, that it was lacking a little bit of specificity. Again, we see issues with very clear issues with the synergies. The synergies, they are supposed to happen in the fourth year in full. The assumptions, because of the regulation that has been established, mean that there would be autonomy of management. That is, that both banks will be managed solely to the interests of their own shareholders and without seeking synergies for three to five years. They take the long range. That's the first one that is somewhat aggressive. The second one is that they assume that instantly, immediately after those three years have passed, the merger will be authorized. It is a prerogative of the government. Usually, on top of that, it takes time. It requires the board, both shareholders meeting, and then a legal authorization.
It can't happen in the first day, immediately after. Second, that all the synergies occur exactly in that first year. On top of that, they're higher than the ones that existed before. They include things that are objectively not very realistic, which is like, for example, the €100 million, close to €100 million in synergies in financing, when the gap has closed so severely that they are almost insignificant, the gap in financing synergies, and as we see in the way our emissions are going. That's one. Another element that is very relevant and that has not been mentioned in the prospectus is the impact on retained shareholders, because it's not trading shares. It's the equivalent of selling your shares and buying shares of BBVA. The impact from a tax perspective is very, very, very high. That is because there is a cash component.
There are several other elements that will have to be reviewed. There is an element that is quite peculiar in the presentation of BBVA. They say that the EPS for Sabadell is 25%. It has some conceptual, I don't know how to call them, it has some things that are not precise or that are not correct.
Methodologically, for example, and it's quite flabbergasting, it doesn't include the €2.5 billion, and they are not reinvested to calculate that EPS, the €2.5 billion of extraordinary dividend out of the proceed of the sale of the TSB. Therefore, there are so many elements that in due time, the board will review. I insist, this offer, I mean, common sense leads to believe that it can't be the final one, because the value of Sabadell is quite clear. The value of Sabadell is quite attractive. If you look at the trajectory for the last four to five years, it has been the best-performing stock in Europe, the best-performing of the banks, the best-performing stock in the IBEX 35.
We are not done, because if you look at elements like what is our PE compared to the pure Spanish banks, or what is our multiple to book, although that reference is getting every time less relevant, we are still below. We have been catching up for the years and years and years. We are not done for many strategic reasons that we might cover later.
Right. Thank you. That's very clear. If we move now to that value creation that you were discussing in your standalone investment case, talking about organic growth, in your capital markets debate, you set organic growth as one of the key four pillars of the new business plan. Could you walk us through the main areas that you see driving that growth and how it contributes to your medium-term target?
Yeah. I mean, growth, the growth that we have projected is very conservative, because Spain is growing at more or less projected to grow at 4%, 2% GDP plus 2% inflation. We are talking about the mid-single digit. What have we done during the last year, so year on year, during the first half of 2025? We have, for example, grown by 20%, 20.1%, I think, in consumer lending. We have grown by 5.7% in mortgages, in line with the market. This one in line with the market. The previous one clearly ahead of the market and gaining market share. 3.2% in SMEs, clearly above the market and gaining market share. We have done that while reducing the cost of risk. What we have done already is very much in line with the projection.
Furthermore, and I say this with candor, in a complex situation, because 16 months of a hostile takeover is not the ideal environment to grow and to engage clients and to everything. It's like climbing a mountain with your bicycle with a tree, trailing a tree, with a rope. Let's cut the tree. Let's see what happens. Let's see the speed that we are able to attain. Also, the result has been very positive and very much in line with our projections in fees. We are taking off through private banking, which is growing very handsomely in assets under management. The insurance business, we have reviewed everything, all the products in combination with our partner, all the products, all the journeys, all the everything. It's growing very handsomely. Let's see payments.
Let's see payments, because, of course, there's a deal that is pending and that I think both parties still are excited about, which is the dealing payments with Nexi. Furthermore, the growth in clients. We have been growing very handsomely in new clients with all the media noise. Can you imagine? A few years ago, four years ago, we did zero client acquisition in retail digitally. Now it's more than half. The transformation has been phenomenal. It's in progress. I'm sure we will talk later about the risk and other things which have been at the core of the transformation of the bank.
Thank you. Getting a little bit more specific on NII, you've set ambitious goals for NII growth. Could you talk to us through the main drivers that you expect and the unforeseen growth, like whether it's repricing, volume growth, funding mix, and how do you see this evolving given the competitive environment?
No. I'll leave this one to Sergio, because he's the super conservative of us. I leave the questions that are more sensitive. Tell them how conservative you are about NII.
Sure. Thank you. Let me focus on the XDSB perimeter, because I think it's going to be the relevant one going forward, right? In the first half of the year, we achieved a €1.8 billion level. We are guiding to €3.6 billion for 2025, and then this will grow. In 2026 and 2027, the level will be around €3.9 billion, which was the level that we had a year ago. We're expecting a second half NII similar to the first half. On a quarterly basis, the NII is already stable, as we saw in our last results presentation. I think it's good looking into that to understand the moving parts, right? What we had is, of course, headwinds and tailwinds. The main headwind is coming from rates, given that ECB was up about 4% a year ago.
The ECB has been cutting rates to a normal level today, 2%, and that has affected margins in a way. It's been a headwind, but that has been already fully offset by the growth in volumes that Cesar just explained and the savings that we are able to achieve from our full self-funding transactions, which are coming at a cheaper level because of the upgrades in our ratings and also because we have lower needs. We will have lower needs going forward, right? These are the drivers for the quarter. I think we have explained quite in detail how those drivers then play going forward to 2027, while rates are expected to be more so to stabilize at some point in time, while volume will continuously kick in, right? To what we explained in the capital markets debate, we see still volumes growing positively. We are optimistic about volumes.
Let me remind you that our loan book grew more than 6% in the first half of the year, and customer deposits more than 4%. That's continuing. That's good news. That's in line with our expectation. Rates, if anything, are a bit touch more higher, because we were expecting ECB potentially to get to 1.75%, but it seems that the market is expecting rates to be already stable at 2%. We see already inflation risk quite well balanced. We think that rates are a bit more supportive, and therefore, we are absolutely confirming our expectation that NII will grow from now to 2027.
Thank you. If we move to cost, you see cost growing at around 3% CAGR over the next three years, even as you continue to invest in IT and digital. You incentivize your workforce to compete for growth, and you absorb M&A-related costs. How do you strike the right balance between keeping efficiency on track and investing and funding the long-term growth you're discussing?
This is a question that was already raised five years ago. Five years ago, everybody said, oh, you're not a digital bank. It was true. We were very good with clients, but we were not digital. You're going to have to invest so much that your costs are going to go through the roof. Here we are a few years later. We have had an amazing track record in cost management, an amazing track record. We have modernized the bank and done a phenomenal job in digitalization. Why is this? It's not that we are magicians. We are not that. We are not magicians. It's quite simple. First, the things that are really demanding from an IT perspective, we have partners. We have world-class performance. In insurance, we have Zurich. In assets under management, we have Amundi.
We are working at the highest level with the highest partners and with limited investment. Payments, it's pending. It's the other one that we want to do. We don't want to do it because of raising capital. We have proven an ability to generate capital that is very good. We are doing it for industrial reasons. That will happen next. Those are the three that really consume a lot. You have the back end. Our back end was already very good when I came into the bank four years ago. What we were missing is the front end. The front end is cheap. It's easy. It's just a question of understanding customer needs, of having every people working together, of not failing in the project, of being demand-driven and really focused on what you do. We have proved that we have become excellent at that. We are leapfrogging, clearly leapfrogging.
Another very relevant element in terms of investments is certainly everything that is related to risk. I think the models that we have developed, the ability to understand the probability of default of every transaction, of every client, of everything, we have really leapfrogged. Is there an issue? No. We expect to grow our payrolls with inflation, which is good. We expect to continue gaining efficiencies through technology. Let's not get our mouth here very big about AI and all these things. It's solid work. We are applying AI in the areas that can be applied. We will be not in the bleeding edge. We will be in the leading edge, which is always the smart place to be. Some people try just to cope with the first lines of the newspapers. They overspend. They really make mistakes. The good place is the leading edge and looking at.
In terms of technology and depreciation, we will be slightly above inflation because we have invested. That's fair. Overall, I think that 3% is absolutely reasonable, with a continuation of a journey that is very close to completion.
Thank you. That's very clear. In terms of, and you were pointing to this before, one of the main levels of profitability improvement for Sabadell has been asset quality, no doubt. It's a very impressive track record you've built over the past three years. You guide into a total cost of risk of 40 basis points by 2027, which will mark a further step up in asset quality resilience. What are the drivers of this improvement? What are the areas that you're watching most closely?
There you go. I think these are the core. I think we were in a conference, and I was still with Leopoldo Alvear. There was a question, like there's going to be a question now. The question was, what is the thing that is going to be the most relevant as a driver for the future profitability of the bank? The vote was NII. Leo and I were, and it was improvised, I have to say, looked at each other and said, no, no, no. It's going to be the cost of risk. Four years ago, we got together in a management retreat, the management team. We thoroughly looked at what was the one lever that would change. There were others. What was the one lever that would change the performance of the bank? That was cost of risk.
There has been an alignment between the commercial people, second line of defense, risk people, the distribution network, everybody around that. Now we measure the expected loss product by product, client by client. That is at the core of our decision-making. That makes a tremendous difference. The incentives before were all based on top line. We were missing everything that is related to real value creation, which has to include the cost of risk, which has to include the cost of capital, which has to include the direct costs. That is how we manage now. We are still in transition. It has been a journey. We first introduced the railroad as a metric. Then we introduced limits in terms of the risk that you could assume in every transaction. Before, when you were just measuring the income, people took decisions that had impact on risk on the longer term.
They were not there anymore or whatever. There was not really accountability. Now I think we are getting really to a state-of-the-art type of management situation in which everything is measured in terms of value creation and going forward. The implementation, we are at 50%. Nevertheless, you look, and I think we showed that very clearly. I'm not going to bore you again here during Q2 presentation. We saw that all the expected loss of all the products of the very recent future is even much better than the one of the near future. When we compare it to 2023, and we compare 2024 and the first half of 2025, the expected loss of the new production is completely different. That is going through the book over time, because it's not instant. You generate new production.
It has to go through the book to really alter the whole thing and to alter the models. During the first half of the year, we had 37 basis points. We're aiming to 40, so we are aiming to a somewhat deterioration of the cost of risk, marginal, despite the fact of all these tendencies. Why is that? Because we are focusing on the products that are more profitable, which is SMEs, consumer lending, which necessarily will have a little bit more of cost of risk. What happens during the period of transition between when you go to one model to the other model? We're just in the middle of it. That necessarily, there's a transition period in which your volumes grow less than they could, because you're stopping to do a number of transactions that you should not be doing.
When you're again at a stable level and at a run rate that is stable, your growth should be even more attractive, because you can be very proactive commercially. You can go really for growth, knowing that from an asset quality, it's quite resilient. I have to say it's a super, super exciting, super exciting project.
Really interesting, certainly. If we move to, OK, I guess a key topic, which is capital and return, you see ROTE raising from 14.5% this year to 16% in 2027, which implies significant value creation. How should we think about the balance between reinvesting to support organic growth, inorganic growth opportunities, and the potential for increasing shareholder return?
I think we have done those calculations very clearly and very conservatively. It's obvious that we can grow at mid-single digit without any problem and at the same time fulfill the expectation that we have given. We have given an expectation of 1.3% on the back of 25%, plus the €2.5 billion on the back of the sale. That means in a very short period of time, I mean, towards the beginning of next year, the sum, I'm not very good at math, 1.3% plus 2.5%, it's a ton of money.
Absolutely, 3.8%. It's as soon as it has already started.
€3.8 billion, wow.
The first dividend was paid at the end of August.
Yeah, the seventh century.
It's already happening.
Yeah, they're already happening. We expect another €2.5 billion on the back of 2026 and 2027. That's very handsome. That's around 40% of our market cap, 40% of our market cap until 2027. They're quite spectacular. I think that's how we are working, because our metrics have changed. You see, you can manage to EPS. It's great. You can manage to NII. That's great. You can manage to this. You can manage to that. The synthesis of the whole thing is capital generation for distribution. That's what we're doing. I think one of the beauties is when you are able to, because you can also swing to glory. That's always a solution. You give everything away, even your shirt. You give everything away. For a short period of time, it's pretty good. We are doing that and at the same time growing at a marginally faster rate than the market.
If you overdo it, it doesn't work, because then you break everything and competition in mature markets. That's why we are projecting only to get 25 to 30 basis points until the end of 2027 from our more or less 8% market share to 8.3% or something like that.
OK. You touch upon the next topic, which is TSB. On this specifically, how do you think about the value that you have crystallized with the sale? TSB has long been part of Sabadell's profitability story. Why was now the right moment to sell? How would you frame the trade-off between crystallizing value today versus the profits that you were going to get from TSB contribution? Also, regarding your UK IT platform, how much value do you see embedded in it?
I want to leave this question to Sergio, because I'm so passionate about the CSB and the whole story and the whole recovery that I would become emotional. Please.
No, definitely, we are. It was not an easy decision. When you decide to sell a good asset, it's never an easy decision. We were certain that it was an acceleration of value creation for our shareholders. It has all the components. Maybe let me discuss very quickly the components, the elements that we analyzed. On the back of being a very good asset and TSB management doing a fantastic work, as they are doing, we found a very credible buyer with lots of interest that had to compete for the asset, because there was more than one interest. It was a process that was run on the back of competition. It was a perfectly driven, competitive process.
On the back of this process, Banco Santander won with a price that clearly includes part of the synergies that they expect by combining TSB with their existing operations in the UK, and therefore improving the shape of the combined entity, right? The price that was obtained was £2.9 billion, equivalent to €3.4 billion. From any angle that we can look at that, it was a good price. It was a multiple of 1.5 times tangible book value. When we look at the price in pounds plus the dividends, actually, it means that Sabadell shareholders have doubled the investment. It was a £1.7 billion investment back in 2015, and it's been doubled. Price reaction at the day of announcement was definitely, it was clearly a testament of all this. As I'm sure you are aware, we are under a tender offer process currently.
Following Spanish passivity rules, we had to submit this to the shareholders. There was a shareholder assembly back on August 6. Attendance was as high as 75%. The approval rate was 100%, 100% approval with attendance of 75%. I think shareholders clearly back the decision and the proposal. Finally, getting to your question of the UK platform, the perimeter of the transaction is actually the shares of TSB and the bonds that we hold, the MREL. It is not the IT platform. The IT platform property remains within Sabadell. There is further value on the agreement, because Banco Santander has agreed to keep on using the platform for a number of years, as TSB is doing. We will receive the servicing fee for a number of years, and after that, we will have the property. I think it's early to assign a value.
It's a bit premature, but it's definitely something that is on our to-do list going forward. We have plenty of time to do it, to analyze what can be the uses and the value of the platform. The good thing is that it's on the upside attached to that.
Thank you, Sergio. Just to wrap it up on strategy, beyond the headline targets, what do you think are Sabadell's biggest strengths or underappreciated opportunities, areas where you feel the bank can surprise positively over the next few years?
I think Spain is an attractive market. Now we are a Spanish bank. We were mainly a Spanish bank, but after the sale of TSB, it's obvious that we are purely a Spanish bank. Second, I think we are focused on SMEs. We are a universal bank. We do a little bit of everything. I think we are growing everywhere in a healthy manner. I think our retail business, that was a problem, now it's a source of value creation. Having a very strong footprint in SMEs is very relevant. If you think about the future and you think long-term strategically, SMEs is where the new entrants are going to have a harder time. You see them entering in payments. You see them entering in aggregation. You see them entering in offering multiple platforms, mortgages. You see a lot of things going on. SMEs is not one of them.
SMEs require proximity, require technology, but it requires mainly that you have a commercial relationship and a trust that takes years to build. If you look at Porter and the barriers of entry, a place where there are barriers of entry and therefore there's a bigger opportunity of having reasonable margins and not being squeezed out, it's SMEs. That's where we are. I think we are in the middle of a trajectory that hasn't finished, that has been very much appreciated by the market to a very large extent, but that still has room to grow. If you look at the basic matrix, and we can go much more deep and much more complex, but if you look at PE ratios, if you look at the price to book, we are far beyond, far beyond, far below, and far away from our major competitors.
We should close that gap, and even potentially, let's see if we can even be able to improve it, because we have really leapfrogged. We have gone from an organization that was all passion for its clients and quality of service, and we have kept that. On top of that, we have added very significant and meaningful metrics that are completely aligned with shareholder value creation. Furthermore, we are very focused on distribution of that. We are not thinking of having any inorganic growth. That's not what we are chasing. I think what we are chasing is basically to develop this fantastic franchise to the next level. Can you imagine how much we can grow once we have put all these systems in place and we don't have the complexity of a takeover?
I think our projections in that sense have been, like always, and with this I finish, have always been extremely conservative. We have always exceeded them, and that's the way we like it to be and the way we hope it will continue to be.
Thank you very much, Cesar. Should we move now, given that we're running out of time, to an investor survey? Would you like that?
Who?
Investor survey.
Of course.
Yeah?
Oh, time to ask them. Scary, scary.
Let's see. First question, I will go only through the questions. You can read the options. What will cause you to become more positive on Banco de Sabadell shares? OK. Resolution of M&A uncertainty.
They think that we would go up if that was resolved.
More positive.
I think.
The resolution.
I think they should vote again. Is that really what they think?
I think that's what I think.
I'm surprised.
Very positive. They are saying that if there's clarity and the uncertainty, resolution. OK, resolution. What does that mean, resolution? Positive or not? OK.
On Sabadell shares?
Yeah. Very good.
What are you most concerned about at Banco de Sabadell? M&A risk. I think you answered that question, no? On the last one. Number three. How do you expect Banco de Sabadell's ROTE to develop over the next couple of years relative to 2025? Modestly higher. If we move to the next question, how do you see potential risk to Banco de Sabadell's capital and dividend? Upside risk on better earnings, 83%. That's consensus. Number five, please. How would you view significant acquisitions for the group?
I think I know this one.
Marginally negative.
Oh, OK.
How do you see Sabadell's medium-term standalone plan being valued by the market? Target loop will only fair. Thank you very much for taking the time to speak to us today. It was a real pleasure to host you. Thank you.
Thank you. Have a pleasure.
Thank you.