Let's get on with the show. All right, good afternoon, everyone. We've got another exciting session, I think I would say. We've been 16 months on and M&A is still on the table. We're live with the deal. We're going to try to be respectful of that. We're super pleased to have César González-Bueno, CEO of Banco de Sabadell, and he's joined today by Sergio Palavecino, Group CFO. Thank you both for joining us.
Pleasure. Thank you, Antonio. Thank you, everybody.
I think let's dive straight into the main topic and start with the tender offer. We are live with the offer period. When you and your board rejected the offer, I think you formalized a number of points as to why that was the case. Three in particular. Bear in mind I've asked the same question to Onur earlier. Please correct me or complement me if you think it's wrong. The first point you mentioned was the offer significantly undervalues the potential of Banco de Sabadell. Two, standalone, you can create more value for your shareholders with, of course, an emphasis on capital distribution. Three, you said the BBVA shares have some risks that Banco de Sabadell shares don't have. I'm sure there's a lot of your shareholders in the audience. What would you tell them here?
I think this question, unfortunately, is going to take a bit of time. If I see people snoring, I will try to improve the speed. Certainly, this is at the core, the response of... It was not an excessively long board, but it was a long board. We covered a lot of subjects. We analyzed with our full responsibility the offer at hand, and we concluded unanimously that the offer was, in our opinion, the recommendation to our shareholders was to say no. I don't think that came as a surprise, given the price of this thing. We first said that it did significantly undervalue Banco de Sabadell. Banco de Sabadell has been the best performing stock for the last close to five years, with it multiplied by more than 12% the value of the banks in Europe. It has been the best performing stock in the IBEX.
That, of course, doesn't say about the future. About the future, our consideration was that the fundamental value of the bank was ranging, and the investment banks that presented the fairness opinion and so forth, they were ranging it around four, north of four euros per share. On top of that, you would have to add a premium. The consideration was also shareholder remuneration. You have to understand that we are distributing €3.8 billion in the course of less than nine months. That is very attractive because that represents almost 40% of the market cap of the bank in the total of the three years, which is €6.3 billion. It's very front-loaded. That has also a tremendous value because shares are a risky business. When the upfront distribution is so heavy, certainly the risk diminishes. Furthermore, in order to reduce further the risk, it's a Spanish equity story.
Spain right now is perceived as, and it is, safe and sound, growing healthy at 4%. We're growing a little bit faster than that. Very handsome distribution and in a safe environment. That's different from what is being proposed. We will see in a second the impacts of being in an environment that is more emerging markets. That's not good or bad, but it's different and it's riskier and it carries some consequences. We talked then at length about the synergies. BBVA, and I'm sorry I have to refer to what they say and contradict it, and this doesn't pretend to be contentious, but I think it is relevant to clarify different points of view. They said the synergies will come at €900 million and will come in the year four. Okay. There are going to be three periods. One is what is called autonomy of management.
There cannot be any synergies there. The definition of autonomy of management is that they have to be managed individually. If there was any possibility of having synergies with anyone, they would be the same with BBVA or with Santander or with whoever. Any synergies that would need to be obtained in order to fulfill the mandate of the autonomy would have to be really checked if they can be hired with someone else. During that period, there are none. Is it three years or five? That is still to be seen. What there cannot be is furthermore any preparation during those three years. Whoever has done a merger with a bank knows that the preparation paralyzes a bank, a preparation for merger. You have to stop the systems, you have to freeze everything, and you have to concentrate in the migration.
That is completely forbidden by the decision of the government because what it has required is that autonomy of management means that the products will continue to be improved, the services will continue to be specific to the needs of the clients of each of both entities. Furthermore, it is assumed that the merger would be allowed in the next nanosecond of the three years, which might be five, of the autonomy of management, and then immediately the merger would happen. After that instant merger, the 4,000 people would be laid off in the first day and all the other synergies. In order to attain the full synergies in the full year 2019, that is unrealistic. Let's start one by one. First, there is no evidence whatsoever that the merger would be authorized. Whoever is a Spaniard understands this much better.
Catalonia is the main place where the elections are won or lost at this point in time. For the people on the right, for the people on the left, for the people who are Catalan nationalists, for the people who are patriots for Spain, for everyone, Banco de Sabadell represents something very important. There has been so much opposition to this transaction because there has been a social opposition. It is perceived to be a very relevant player. The fact, let's assume that there is a change of hands and that, which I don't think will happen, and that BBVA takes over and has a majority stake at Banco de Sabadell. In the perception of the public, that is not really as relevant as the brand disappearing, the merger occurring, people being laid off, and losing the people with whom you're related as an SME.
I think the synergies are completely overestimated. If they were true, their price should be completely different. There's a certain contradiction here. Either there are synergies and they are in full, and they will happen in the near term, only with one year delay, as BBVA is saying, and then the price should be bumped significantly to provide the 30% to 40% premium that is customary in this type of transactions, or there are no synergies, or they are so uncertain that that creates a trouble. Let me address now the EPS accretion that BBVA is putting forward as a 25%. They say that in this transaction, the shareholders of Banco de Sabadell would have an EPS accretion of 25%. The calculation is wrong. It is significantly wrong because what happens is that it ignores, to begin with, the €2.5 billion of dividends. It assumes that they don't exist.
The reasonable thing to do, if you want to compare apples with apples, is to assume that those €2.5 billion are reinvested and therefore that they also have an impact on EPS accretion. They cannot just disappear. You can't just ignore them. That would reduce by 14 percentage points that 25% EPS. If you continue doing adjustments and you use for both banks the consensus from the analyst, which is the correct thing, then you go down another 4%. If you adjust minimally some synergies and so forth, you go to negative accretion. That 25% is not positive. It turns into a negative EPS accretion for shareholders. We come to the next thing that the board analyzed, and that is what is the ability to generate capital from one and the other end.
Of course, it's very noticeable that one has, in the case of BBVA, a 21% return on tangible equity. That's very good. Very impressive. Not all returns on equity are the same. If you take that 21% and just using the year 2024, but we've done the calculation looking backwards, then you have to subtract two very relevant elements. They are in very inflationary economies. 70% of the business of BBVA, which is not a European bank, it's a bank based in Europe, but 70% of its profits, 67% last year, comes from emerging markets. What happens then? What happened during year 2024? It's very simple. The first thing that you have is to adjust, and that is not adjusted in the P&L, it's adjusted in the capital afterwards. You have to adjust for inflation or devaluation of the currency more than inflation, which is, they are somewhat related.
That means if you do it over year 2024, you have to reduce that 21% by more than 5%. That's not the end of it. In order to have those returns, you have to grow your assets at a tremendous pace in these very inflationary countries. That means that you have to increase your risk-weighted assets in a phenomenal way, bumping your requirements of capital and reducing your ability to distribute capital. If you adjust that 21% to these two factors for year 2024, you go from 21% to 9% distributable increase of capital. In the case of Banco de Sabadell, you start at 15%, and the impact of those two factors is very small because we just operate in Spain and even more going forward. Even in 2024, you go from 15% - 14%.
In the end, that 21%, which compares with a 15% in terms of return on tangible equity, in terms of distributable capability, becomes a 9% for the case of BBVA and a 14% for the case of Sabadell. That means that we not only have the possibility to commit to extraordinary dividends in the short term on the back not only of what we generate, but also on the proceeds of a good transaction, which was TSB. On top of that, we have the longer-term ability to generate more capital to distribute. That is because using proxies and return on tangible equity is just a proxy. It's not the real thing. The real thing is capital generation, and that's to what we are devoting. I can't see very well. Is everybody sleeping? I think because there's a lot of light. Do you think they're sleeping?
No, no, I think they're still there.
I'm almost finished.
Yeah, go for it.
There will be, and we will go faster with the following questions, I promise. Furthermore, the board came to the conclusion that the current offer is worse than the original one that we rejected. Why? Because originally they were offering 16.2% of the resulting entity. Because we have given more dividends than them, and that has to be adjusted because it's already in the pocket of our shareholders, and because we have done more share buybacks, and the price is per share, now they are offering a meager 13.6%. We have been punished for being better for our shareholders because that's the way you adjust the offer, and that's what the prospectus said. It is not only that. For all the residents in Spain, it has lost neutrality because although they distribute less, although they pay less, there's a component in cash.
The moment that component in cash is above 10% of the nominal value of the share, it loses the tax neutrality, and our shareholders will have to pay in full the increase in value during this period, which has not been small.
As I said at the beginning, I like to say this a lot. We have increased the value of the bank by almost 13 times in less than five years. Finally, there's this complexity around below the 50% that the board also considered in detail. This creates quite some complexity. This was a last-minute thing. I don't know if everybody understood the consequences that this could have. What happens is that they opened in the last minute, in the last day, the possibility of giving up and waiving the limitation of withdrawing from the offer if they were below 50%.
Below 30%, they've given up the possibility, but between 30% and 50%, they could accept and go on. It is different than the Italian regulation. In Spain, to keep something between the 30% and 50%, you have to launch another transaction, another offer, another tender, pull in cash for the 100% of the remaining amount. It was yesterday that the chairman of the CNMV, which is the market's watchdog, clarified that this would be at a price that is equal or higher than the one of the original offer. You find yourself in a very complex situation. Should I go to the first offer? When the probabilities of going above 50%, and they prove it themselves by opening this possibility, is very low, we have a large share of retail shareholders with this price, the probability of going above 50% is very small.
If there was a price bump or if there was, who knows, maybe they could go in the terrain of 30%- 50%. This creates enormous problems because whoever goes to the first transaction loses the opportunity of having the tender in cash. As per the saying of the one who has the ultimate goal, the ultimate word, which is the CNMV, at a price that will equal or higher. Furthermore, BBVA will have to make this decision days before the price is known. The pressure on going forward in an amount that is unknown, at a price that is unknown and full in cash, is very relevant. The people who go to the second transaction will not be diluted because, of course, this would require a share increase.
If that share increase occurs, the people who go to the first transaction and get BBVA shares will be diluted, but the people who get the cash at a higher price won't. It could mean that all these prospects of the €36 billion in the course of more years, because otherwise they wouldn't have matched our prospects and they had to extend by a year until 2028, will have to be diminished because they will have to pay it from their own capital. With all these considerations, the board said no.
Perfect. I think it was clear because Chris is here, and I think you made your point.
Clear and short, no?
To the point. Now, you've talked about BBVA's return on tangible. You've touched briefly on your own tangible returns. Why don't we dip into a little bit more? You've recently upgraded your guidance for a return on tangible equity above 14.5% this year, and you're looking to reach 16% in 2027 ex-TSB, so excluding your UK unit. Maybe let's start by going through some of the key moving parts to better understand what is driving this expected performance.
Shall I? Yeah, sure. Yeah, as you said, Antonio, we're guiding to a 16% return on tangible equity in 2027. We're convinced of that improvement in profitability. Equally important, we are guiding to a tangible book value of €10.5 billion because this is just for the ex-TSB perimeter. It will be after the sale of TSB. We think that that's important in order to help people. If you do the maths, the return on the tangible, then if you multiply it, you get to a net income, which in our model is close to €1.7 billion. Actually, 16%, €10.5 billion is €1.68 billion. By that, we mean that we think that net income is going to be close to €1.7 billion. The moving parts that will allow us to get there, in the Capital Markets Day, we shared a breakdown of the different moving parts.
If you remember, from 2024, we expect revenues to add 1.6 points. We expect costs to be that 1.4 points of royalty. We expect cost of risk to add 1.3 points. It's been already six months of the pre-year. Interestingly, it's a plan that six months are already gone. What we can see is that the improvement in cost of risk is done already. That component is not backloaded. It's completely front-loaded. The improvement in cost of risk is already taking place, has already taken place. On the cost side, we are guided for a 3% CAGR. When we look at this year, we're running below 2%. We have left ourselves plenty of room to maneuver in the years to come. We're very comfortable with that guidance tool. On the revenue side, when compared to 2024, we see NII stable, 2024, 2027.
We see fees going up at a mid-single-digit CAGR. Again, fees have already started going up. This is happening. Of course, NII has gone down because of rates, but we showed stability on a quarterly-quarterly basis. The NII dynamics are a bit more complex, but all those components are well aligned with our guidance and things are going well. We can only confirm that expectation.
Right. They do it every time. They undershoot and then we overperform. Leo did this to me. Sergio is doing this to me. This will never end. We are this way.
Earlier, we've talked about capital distribution, how that's an important part of your strategy and, of course, something that your shareholders value. You've committed to pay €2.5 billion in special dividends from the sale of TSB. You're at a 13.6% CET1 ratio and you've set your payout at 60%. You've increased your capacity to remunerate shareholders to about €6.3 billion, including ordinary, over the next three years. Tell us maybe a bit more how you get to that number and how shall we think about your shareholder remuneration and mix going forward?
I think first, it's important to consider that we are establishing to distribute anything that is above 13%. That is more conservative than other players, for example, BBVA, despite the fact that we operate in a market that is much safer than the one in which they are. If at a point in time anyone decided, including our board, that this is a little bit conservative, there would be even more room for that, although that's not something to be expected in the short term. I think it is important to note that this 13% was established before we had any hint that this transaction would happen. It was done at the beginning of 2024, before April and before the conversations and then the hostile offer from BBVA. Within that, we have established in our policy that the cash dividend would be between 40% and 60%.
Lately, we have moved more to the higher band, which is the 60%. This allows us to do significant growth. Around mid-single digit, we are estimating 5% growth of our asset book. That's exactly where we landed, a little bit north of 5% during the year-on-year, ending in the first half of 2025. Beyond that, in principle, we will do share buybacks, which means that our EPS will continue to improve on the back of good results, but at the same time, a lower base of our shares. Absolutely. For this year, we've had guided to €1.3 billion distributions. I think the year is going well in capital, probably a bit ahead of expectations because we are able to achieve the targets by growing a bit in segments with lower risk asset density. We are also taking advantage of the good shape of the capital markets.
We just executed a new securitization this week. It was an auto-securitization with significant risk transfer. We budgeted for €500 million, but finally, we've been able to do €750 million, which is almost another 10 bps of CET1. On the capital generation, we finished the quarter with 13.6%, and we continue generating capital that we can use in cash dividends and share buybacks. Those are in the plan. I think as long as the market is not fully recognizing the value of our share, we intend to keep on using share buybacks.
Very clear. Now, one theme across Spanish banks, and we've had CaixaBank just before you, has been the fast and important uptick that we've seen in loan growth because that's really picked up. We seem to be out of the woods after a long deleveraging cycle. Can you talk a little bit more about what you're seeing both from your clients as well as from your competitors and to what extent market share gains, which you've been achieving, can be generated without compromising on price discipline? Maybe while we're there, we can also talk a little bit more about your expectations for growth in mortgages and SMEs where you have, of course, a lead franchise.
Very good. I think Spain was very leveraged, and it has gone through a tremendous deleveraging. We have repeated these numbers at NOXIA, and it's now at private level, both in individuals and in corporates. It's below Europe in terms of leverage. The government is not doing exactly the same thing, but that's less of our business. Therefore, what we are seeing is at the beginning, after COVID, everybody expected things to slow down. What we saw was a very heavy increase of sales. That meant a lot of working capital growth. That grew very rapidly, but the investments were not there because still the interest rates were high. When the interest rates started to lower, the volumes of sales more or less remained.
We didn't see the increase of working capital to be so exciting, but the investments that had been delayed with an environment of more stable and not as high interest rates started to deliver. We are seeing that growth of around 4% for Spain. It's 2% GDP plus 2% inflation, around 4%. We have projected to grow at around 5%, so slightly above mid-single digit, slightly above the market. You can't grow much faster than the market, even if you do, and I think we have leapfrogged in terms of operations, in terms of price segmentation, in terms of risk model, and in terms of commercial incentives and production. I think we have leapfrogged. We were coming from behind before year 2020, and since then, we have accelerated, and the transformation has been phenomenal. It's not finished.
You don't turn around the bank, which is north of $200 billion from one day to another. We're almost there. With these improvements of all our processes and activities, and very importantly, of the incentives of our people. At the beginning, in year 2020, the incentives of our people were just in income, top line. We have included [Ray Rock] first, and then P&Ls per region, per branch, per this, per that. Now we are moving to the next generation, which I think doesn't exist. Fortunately, we have done it without consultants, so very hard to copy, which is value generation. It is horse ranking and comparing the portfolios of the different types of commercial agents, especially in our SME area. That should lead us to go from a market share of approximately 8% to an 8.3% by the end of the period. Why are we not more ambitious?
Because experience shows that you can do very well the operational, the risk, the pricing, everything, and then gain market share progressively and slowly. In a mature market, if you try to do it fast, that's a call for disaster. The proof that we are doing it is that we are improving, and we show that in our second quarter results. We're improving all the risk metrics. We're improving all the PDs. Even if comparing 2024 and 2025 to 2023, we're improving all the metrics while growing marginally more than the market. That is only on the back of this transformation that, as I said before, is not finished. Anything to add?
I think it was perfect.
I'm a fanatic about this subject, as you know.
Absolutely. Maybe the audience will have some questions then.
No, definitely. Let's try to leave some time for that. I want to ask you about NII because, of course, we talked about growth. When you got it to NII, you've talked about €4.9 billion for this year, which is higher than the levels we've seen in 2023, only modestly below what was a record year in 2024. In your plan target, you have €3.9 billion by 2027, and that's excluding TSB. I'm conscious we're not comparing apples with apples because that's implying about €300 million or so of growth on a like-for-like perimeter. Can you talk about the bridge and what's driving that delta and what makes you confident you can do it?
Sure, absolutely. Of course, in NII, we have had the remarkable tailwind of interest rate reduction. Interest rates have come down from 4% last year to 2% this year.
That is coming with some spread compression, customer spread compression. When we look at the last quarter, actually, we were able to completely offset that effect in NII of margin compression thanks to the expansion of volumes and the reduction in wholesale funding. Going forward, I think that trend is going to be important because we see a very active market in Spain, connected with the activity that we see in the economy and the growth in the GDP. I think César already touched on the different segments and volumes. As of the end of the last quarter, the loans in Spain were growing 6.1%. Customer funds were growing 7%. We think that growth, connected with the growth in the economy, is going to continue. The good news is that by the end of the year, the rate will be already stable.
That growth in activity, that growth in volumes will translate into higher NII. Maybe not in the next quarters that we think is going to be stable, but certainly from 2026 onwards. With that, we will be able to grow those €300 million, which is an 8%, so 4% each year, on the low part of the mid-single-digit area, connected with the growth in volumes. If you want to take a little bit of a step back and a little bit more of a strategic vision, I think we have grown from being a very high NII bank, but with a high risk, to improving much more the risk cost than what we lose in NII in relative terms. We are still catching up with our NII because we are growing faster, but we are treating our risk in a way that frees up even more capital. It's capital generation.
This is a tremendous transformation of the bank, and that is not fully completed. We are at the final of that transformation. That transformation requires some loss of volume because you lose the cues of the skewed curve in which you have a lot of risk in the queue. We've cut that off. You price much better. You lose some volume, but overall, it is very much value creation. From now on, all the rest being equal, we should be able to grow volumes and income at the same pace.
No, that's very clear. I think it's important because it links me to the next question, which seems to be to your point that you're not really compromising on credit quality or pursuing growth for the purpose of market share gains. You've guided in that regard to 40 basis points cost of risk for this year, again, excluding TSB, and basically remaining there through the plan period at these levels for 2027. TSB's credit book obviously has come with low LGDs because it was pure mortgages. How sustainable is this cost of risk guidance? Can you give a little bit more context? Then we'll open up for questions.
Very good. I'll give, if you don't mind, Sergi, the high view and you can go further in the numbers if you want. The thing is quite simple. If you look at our second quarter presentation, the probabilities of default in all products, in all products, if you compare 2024 and the first half of 2025, is clearly lower than 2023, not to mention 2022, 2021, and going backwards, which means that the quality of the portfolio is improving. We see that in the portfolio, and we see that in the cost of risk. That is a trend that is going to continue because it's not over. In some products, it will take longer because they have higher duration. In some products, it will be shorter because they have shorter duration, not interest rate risk duration. It's duration in terms of the term of the loan. That is unavoidable.
I think we have been conservative by keeping it stable, of course, provided that there's not a tremendous dramatic change in the environment. We have also included something that is quite relevant, which is growth fundamentally, and to focus our growth on SMEs and to focus our growth in consumer lending. Consumer lending, very relevant. We're growing at 20%, and we have been growing for the last few years after we fixed in 2021 the problem. We had to stop production because it was out of whack. Now it's a state of the art. It's growing and gaining market share also because we are very below our market share compared to our peers. We are gaining terrain. The core is SMEs. SMEs is a beautiful market. It's a beautiful market, first of all, because the barriers to entry are very, very high.
To do SMEs, you need a lot of things. You need some complexity in terms of product range. You need proximity. You need to know your customers. You need digital. You need transactionality. You need export and import. You need a myriad of things which we have. One in two of the SMEs in Spain are our clients. We have changed our mentality. Before, we used in the SME world a little bit of the mentality the same as if they were corporates. You can't have a 60%, 70% share of wallet. We have changed that. The diversification in SMEs comes because you have many. One single SME, even if it fails, it doesn't put you down. Furthermore, now we have the PDs calculated upfront for all our SMEs. We can be proactive in our commercial approach because they are basically pre-approved.
We almost treat them as if they were consumer loans. It is at the touch of a button. This transformation is what gives us the confidence that that 40 basis points is conservative, despite the fact that we are changing the mix to, in principle, slightly riskier products on which we are managing the risk very effectively as we see the transformation of our back book.
Great.
Yeah.
I could simply add that those numbers are not bought by sort of aggressive macroeconomic assumptions, rather the contrary. We are assuming quite a conservative macroeconomic backdrop for 2027, where we have assumed that Spanish GDP growth will get back to some 1.5%. Actually, we see kind of potential upside to those numbers.
Very clear. I could go on for another 40 minutes of this because I'm actually finding it very entertaining. Let's try to give a chance to the audience also to ask a question. We have really time for one. If anybody has a question for either César or Sergio, please, one on the side there.
Thank you. One of the most robust arguments that BBVA has made about the logic of the consolidation of your two banks together is removing the duplication of IT costs because banking is a fixed cost business. On the assumption that you're right and the deal falls away, looking forward over the next, let's say, two to three years, should I anticipate that you would look to embark on some sort of consolidation ambition of your own?
I think there are two questions in that one. To the second, no. No consolidation, no Unicaja, no Bancaja, no nothing. It's not because they wouldn't make sense. They would make lots of sense, but there is no appetite. Let's be pragmatic here. Let's be rational. Synergies between all the banks that are below the three large ones would make sense, and there would be positive synergies from a cost perspective and positive synergies from an income perspective, because there's very little duplication in terms of geographies and very little duplication in terms of segments. The second question, it's not there. Not that it wouldn't make sense, but it's not going to happen. To the first question, I think that one of the things that we were questioned very hard on year 2021 is, Jesus, you're not a digital bank and you're not digitalized.
You're going to have to make tremendous investments. We have had a trajectory of cost management that has been, sorry to be a little bit proud, stellar. We have done that while we digitalized completely the bank. This is because you have to understand how IT works. Once you have a stable backend, which we do, the developments are mainly the frontend. The frontend, it's about human intelligence and cooperation within the bank. It's about doing the things right. We've run around a thousand projects. We have failed and stopped one. Usually, the rate of failure is 40%, 50%. This is management. This is having people working together from the beginning, starting from market research, understanding customer needs, and then getting everybody on board, including audit, including second line of defense.
Of course, everything, all the elements around the thing, and including IT and making them work together with the others. Then it's shipped, and the rest is a flat cost. The data centers are a bulk cost per byte. There's no advantage in the size. I can take you and visit one. Next to that one, you have Telefónica, and next to that, you have BBVA. You pay per byte. It doesn't make any difference. The lines of communication, the same. You could save on the IT people. That is true, but every time it's a lesser amount because of the efficiency in which we program. The proof that this is true is that the most effective and the most efficient are usually the smaller banks. Look at Bankinter. Look at other players like that.
Size, and furthermore, if you have it in Mexico and in Spain, the only thing that it adds is complexity because you have to overcome. There are no economies of scale there. You have these economies of complexity. I think the approach there is a little bit theoretical, to tell you the truth. We'll do fine, as guaranteed.
I wouldn't have expected any less from César González-Bueno and Sergio Palavecino for this session. Thank you very much. I hope you found it as insightful and entertaining as I did.
Thank you.