Great. Thanks for coming to this last session of the day with Banco de Sabadell. I'm thrilled to welcome back César González-Bueno, CEO, and Sergio Palavecino, CFO of the group. Thanks for joining us one more year. As the CEO of Sabadell for the last year, thank you, César, for making it here again. As usual, we're gonna start with a polling question. What would trigger outperformance of Sabadell shares in 2026? Loan spread stabilizing, cost beating its 3% CAGR targets, cost of risks remain at 40 basis points or below, further distributions beyond the special dividend, M&A that maximizes shareholder value. Distributions have come out in previous sessions, so I think that's fair, even in institutions that had a more focus on private credit, things like that. Distribution remains a focus in the conference.
Shall we start, maybe a question on strategy? Obviously last year, the bid from BBVA focused a lot of the firm's attention, and I'm sure your attention as well. When you look back, how do you think this affected the bank, and what should we be looking forward now that the deal is behind us?
Thank you. Hello, everybody. I think the first impact that this offer and then subsequent hostile offer has brought to the bank is a sense of belonging and a sense of pride that has skyrocketed the pride of working at the bank. That carries weight because it puts much more focus on people trying to deliver appropriately. It has also strengthened the brand, and it has created sympathy across the brand. Last but not least, many of the clients who were shareholders at the same time that didn't tender have felt much closer to the bank during this whole period. Those are the positives.
In terms of negatives, of course, it had a certain impact during especially the last months of the tender because it was so relevant in the market, not only in the market, but for the people even in the street. I mean, even the taxi drivers spontaneously, without knowing that you were working at Sabadell, brought the subject up. It was quite incredible. Certainly in those circumstances, the ability to attract new customers on the retail side was weakened. It was still relevant, but it has recovered in shape. Because, of course, to join a bank that you think that has a probability of disappearing is not so attractive. On the SME world, I think both for them and for us, it has meant smaller growth.
We grew on the SME segment on the asset side at 2%-3% when we were expecting to grow faster. Does that mean that we lost clients? No, we didn't lose clients, but certainly it softened the growth there. What does it mean going forward? I think the transformation continued. I think we were basically 5 people from inside and 9 people from the outside, the investment banks and lawyers working very intensively on the deal. I think the rest of the bank was well informed but kept absolutely focused. It was only that the demand, the market demand was a little bit softer during a few months. What does it mean for the future?
Well, we should be in better condition because we came up, I think with a relatively good image and, with a lot of support from, clients and shareholders.
One of the things that obviously happened last year is TSB was sold to crystallize value. How would you characterize your appetite for M&A going forward? What type of opportunities could be of interest for you? Would you consider any further actions under the right circumstances? I know Mexico was discussed at some point in the past.
Okay. I think, let me start with the TSB transaction, because I think it was a great deal that, under those circumstances, we would have made even if the transaction had not gone through. I remember very well, a discussion in the board where we thought that, BBVA might give up, and we were in the middle of the transaction, and it was a firm decision that even if the offer went away, that we were going to continue under those circumstances and perform the transaction. The transaction has been very good. I think it has been also very good for Santander. It's one of those transactions. I don't like very much the expression of win-win. I find it a little bit,
Square
whatever. If there's one case, this is a very good example of that. Once that's said, do we have appetite for M&A? Yes. Is it going to happen? No. Well, how does that fit together? I think the complementarity of the banks that are below the three large ones, BBVA, CaixaBank, Santander, all could have synergies with each other from a cost perspective and even from an income perspective, and a lot of complementarity. Any transaction of any of them among themselves or with us would make economic sense, but it's not going to happen.
In public, I'm not going to go through the rationale for each and every one of them to continue their course alone, but it's obvious that they are in a good, they have good capital positions, they have a strategy, they have a governance, they have everything. There's no reason to question their independence at this point in time. From a voluntary point of view, and just for the synergies that it would bring and the value creation, I don't think that would be rational enough for them at this point in time to engage in any type of conversation. In the future, because discontinuities occur.
Mm-hmm.
Things that we don't expect all of a sudden happen. By definition, you don't know when and if.
Mm-hmm.
If a discontinuity occurs in the future, I think Sabadell will be in a very good position to be the consolidator of the industry, of the banking industry in Spain. As I repeat, not to be expected in the foreseeable future.
Yeah. Just maybe on TSB, can you update on the expected timing of the closing of the deal, if everything is going according to plan? When should we expect the special dividend? Also, there's maybe this one, this part is for Sergio. There's an impact on the ALCO from the deconsolidation. Maybe you can remind us what the impact is.
Thank you for keeping it difficult for him. That's very kind, and I appreciate it.
The technical one at least.
The technical one. Okay, no, the expectation of the closing is for end of April. The distribution of the extraordinary dividend of EUR 0.50 per share is expected at the end of May. We expect no surprises there. Everything is going well, and that's the way it should happen.
Yeah. Regarding the specificity of the TSB bonds, to be precise, in the ALCO book of the ex-TSB perimeter, because this is the remaining contribution of TSB in the ex-TSB perimeter. You are correctly absolutely right that, when we sell TSB, we sell the shares, but we also sell the MREL bonds. We will no longer have those revenues in the ALCO book. All that has been taken into account in the guidance that we have given. Actually, those revenues will be offset by less issuances in the wholesale capital market, as we will not have risk-weighted assets, the RWA coming from TSB. We will have lower MREL needs, so lower MREL needs will mean lower cost.
Actually, we were raising the MREL at group level and downstreaming it to TSB. Effectively, that was matched. There will be a time frame that we will need to adjust. During that period of time, we will also have the help of the contribution of the proceeds of the sale, which is close to GBP 5 billion and then GBP 2.5 billion, the special dividend. Net, GBP 2.5 billion cash that will yield at the interbank rate. Then all combined, both factors will be offsetting that lower contribution from the sale of the TSB bonds.
While we're on the NII.
Thank you.
I hope it was understood.
While we're on the NII subject.
Yeah.
The guidance is for over 1% NII growth for this year. Maybe you can remind us what are you looking for in terms of loan growth, deposit growth that is behind that?
Yeah, sure. Absolutely. Thank you. That the impact of the sale of the bonds has already been taken into account in this guidance of 1% growth. In the NII, as you all know, we have had the tailwinds of the volumes and the headwinds of rates during last year. Last year, the headwind of rates was stronger, and we've seen a declining trend of the NII over the last quarters. That headwind of rates is going to stop. Actually, the last downward repricing of rates already took place around December this quarter. Based on that, we expect the bottom of NII to be in the first quarter of this year.
From there on, once we no longer will have the headwind of rates, we will continue to have the tailwind of the volumes. From the second quarter, growth will resume, and we're expecting growth in the second quarter of the year of already mid-single digits when we look at the quarterly NII, well aligned with the volumes. Our volumes, our volume assumption is a loan growth of around 6%. The composition of this growth is mortgages between 3%-4%, a bit less than last year. SMEs, mid-single digit, a bit more than last year. Corporate, high single digit, also a bit more than last year.
Finally, consumer loans, we think it will grow in the high teens rate, similar to the previous year, which is a strong growth. In the deposit side, we are expecting a growth of between 3% and 4%, and the balance sheet products and a stronger growth as we saw last year. The combination of all these pieces mechanically get you to this growth from the second quarter based on the tailwinds of the volumes, and of course, subject to these assumptions on both volumes and rates. We were assuming stable rates. We were expecting the ECB to be at the 2% on hold for many years. That was our expectation when we built the plan.
We're seeing some movements in the market that maybe we can also discuss a little bit.
Yeah. Well, that's a good cue to the next question around the movements in the market we've seen around the Middle East. Obviously very uncertain moment. Nobody really has a strong view. I assume you don't have a good knowledge of what the outcome is ultimately gonna be. How do you think this is affecting the appetite for loan growth, for example, among your clients? How do you see the risk there or on the fee outlook for that matter? Any sectors you're particularly worried about in the portfolio?
Okay. I think we maintain the guidance that Sergi has just given, and we do it on the back of that the final result in terms of NII should be equal or even potentially improved because of this because of this drama. Let me ignore the drama part of the issue and just focus on the economic impact on the bank. If you think of the potential impact of this, it might have some impact on volumes and also it might have a delay in the materialization of those volumes. Is that certain? No, it's not certain, but it could happen. Would it be significant? We don't think it would be significant. What macroeconomists are saying right now is that it could have an impact.
Of course, it's unforeseen if it's going to last weeks, months, or whatever is going to happen. With the current assessment, people are expecting a reduction of GDP of 50 basis points from 2.5% to 2%. Will that impact volumes? It could impact volumes, and that would be a headwind. There's a tailwind, because if that happens, that means that at this margin, interest rates will be slightly higher than the ones we expected, and those two things would offset with a possibility even of having a positive impact on NII. On the risk side, we don't expect any impact. Our direct exposure to the region is absolutely negligible. I mean, it's you have to count several decimals to get to that after the comma, no.
In terms of indirect exposure to sectors that could be more affected like metallurgy.
Metals and mining.
Yeah. For example, that might be more exposed. Our exposure is clearly below 1% of our books. So both the direct and indirect are small. What could have is the impact that it has on the future demand, but from a risk perspective, nothing. Let me complete a little bit of the argument before. Why interest rates could be positive? Because we don't think it will have an impact on the liability cost. When the change is small, it drives directly through the asset side, but we don't expect any change on the liability side. Two-thirds of our liabilities are transactional. Our current accounts with no remuneration, and for the rest, it wouldn't have an impact, but it would have a direct impact on the asset side.
Yeah. Another big topic in this conference has been AI and the broader sort of efficiency debate versus disruption debate. From a cost efficiency perspective, how do you see this play out? Conscious that you're guiding to the 3% sort of annual cost growth out to 2027. On that side, how do you see the efficiencies play out? On the disruption side, to people thinking this is a disruptive force, what would you say to that and potential for higher deposit competition, or should we be concerned around the asset quality angle? Maybe you can share your views on that.
Okay. Let's start with the simple part, which is how we built the projection around cost for 2026, 2027 at around the 3%. That is composed of with inflation for the significant part that is the human resources cost, so the cost of employment. Then on the high single digit for the depreciation based on accumulation of investments around technology and flat-ish around the general expenses yielding that 3%. When we look at the impact of AI, I think AI is going to be a phenomenal game changer, bigger than the internet, bigger than the web, bigger than the digitalization. I think it's going to be profound, and it's going to alter this industry and many others.
Once that's said, I think in the foreseeable future, in 2026, 2027, there will be the preparation for that revolution, but the impact, the direct impact in costs, which was your question, can be probably neutralized. The investments are going to increase, but they are not the highest ones because you can assimilate them at the investments in the front end, and they are in the initial phases. That will happen and they will increase, but it's not going to be significant in the overall scheme of things. At the same time, they are going to come with reductions in costs that we are already seeing. For example, the vendors are getting lesser, lower payments for the developments of computer development. So one thing with the other, it's difficult to know, relatively little impact on 2026, 2027.
Once that's said, the revolution that is coming is phenomenal. Let me give you just an example that gives a little bit of light to the thing, no? Right now, our recoveries for the amounts that are below EUR 300 are already done by an agent. It's very interesting. First the numbers. Their efficiency is the same as the one of people. Okay? They still have a lot of room to grow and to improve. Of course, it's easy to match a human because it's not the most qualified people that do the recoveries of below EUR 300. At the same time, when you listen, you understand that this is the start.
When you listen to a call, very often after two, three minutes, they say, "But am I talking, am I talking to a machine?" The client asks. Then the machine answers, "Yes, I am a machine." "Well, I would like to talk to someone." Say, "Well, I'm going to give you as good answers as that potential human," and then they continue. What does that mean? As these dialogues improve, we are not going to do it for the recovery of EUR 300. We will go up and up and up. Then it's going to go to the front end for claim resolution. It's going to go to the front end for transactionality that is now done on the phone. It's going to go to many places, and it will end up going to the commercial part also.
The last period, the last element to be conquered is twofold. On the retail side, it's going to be what we call today the push products, the products that really need handholding to be acquired, which is assets under management and insurance, and the SME world. The SME world is a different, it's a different world. That's why we have... I think we're very proud to have that at Sabadell as our crown jewel because it's the one that has the highest barriers to entry. It needs everything. It needs a variety of products, it needs handholding, it needs a good digitalization, a diversification in the supply that is tremendous, and that's the one that is going to be entered later. But all of the previous one, in terms of front-ending with a client, is going to be affected.
Furthermore, everything that is related to programming. We are even seeing now vendors that are claiming, and we have to see how far and how true this is, that are claiming that the changes that you need to do in your back end and in your systems due to regulatory changes, they are able to automate them. Just by giving them the change in regulation, that everything is executed, including the testing, to see if the programming was correct or was not correct. Brave new world, not that severe impact in 2026, 2027, because some things would be pluses and some things would be minus. It's going to change the thing dramatically. SMEs is a good place to be, as a protection for that.
The cost reduction is going to be very significant, and the customer experience is going to change.
We did a survey, opening survey yesterday, and I think the audience of the whole conference agrees that banks are net beneficiaries. What would you say to the people that are worried about asset quality further down the line? Is that something that comes up in the discussions today or that's just too far?
No. It's not in the discussions yet. One of the advantages of the US versus Europe is also a disadvantage. I think you're thinking there on the impact of employment and therefore the ability of people to face their bills and so forth. I think the US is going to be a much more flexible labor market. I think Europe is going to be less flexible. In that sense, we, the industry, will have to take the benefits, the economic benefits in a more progressive way than in the US. At the same time, I think the short-term disruption of the economy will be lesser.
It remains to be seen if it's better to disrupt quickly and to find a new way, which is what usually the U.S. does, versus us. No, I, we are not, at this point in time, we are not worried with that. We think that the way Europe is structured will protect, will be a protection and a shield for the good or for the bad, but it's not going to raise issues with the current asset, that is out there.
Good. Question on capital generation. Is there more capital efficiencies to go? How much more capacity, and especially in the current sort of market environment, how much more capacity there is for SRTs? How do you expect the RWAs to evolve versus loan growth? I guess the commitment from the board is still to distribute all the capital above 13%.
Okay. I'll start with maybe the 13% and give you the rest.
Perfect
SRTs and so forth. The commitment of the board to distribute anything above 13% was at the beginning of 2024, before the first offer and subsequent hostile tender from BBVA. What the board said at that time is that we felt very comfortable with distributing above that level. Not that we could not operate below that level, but that we were comfortable distributing everything and that we were committing to distribute everything above that. That's exactly what we have done. We have not done anything different from that. Many people say, "Well, because of the hostile transaction, hostile offer, you have depleted the capital of the bank" or whatever. Nothing similar to that.
We have just become a capital generation machine from an ordinary perspective, and there was the opportunity to do a transaction around TSB that was very opportune, but that we will have done in any case, and that brought another element of extraordinary dividends. Going forward, I think we are a capital generation machine. All our elements have aligned much more instead of for revenue growth, we have aligned the bank for growth and at the same time capital generation. We think that's the maximum value creation for shareholders, and that's where we are aiming.
Yeah. Definitely. I think with the current levels of profitability, we are at the bank able to meet those distributions that we have announced, plus being able to finance the growth in the loan book and the investments that we need to do in technology and in the business to keep supporting this growth of the business. Maybe to recap a little bit, last year we generated 196 basis points of capital, and this was after the growth of 5% in the loan book, right? In our Capital Markets Day, we guided to an average of 175. Last year was a bit higher. We also had the implementation of Basel IV, which was a small positive, and it helped.
The average that we gave plus that extra coming from Basel IV. Going forward, we're guiding the market to this average of 175 basis points should translate into distributions that for the cumulative of 2026 and 2027, we're guiding to EUR 2.5 billion. This is on top of the extraordinary dividend of EUR 0.50 per share, which is another EUR 2.5 billion. I think it's quite an attractive number, EUR 2.5 billion of distributions for 2026 and 2027 recurrent. On average, it's a bit more than EUR 1.2 billion per year. If you make the number of our adjusted market capitalization is around EUR 12 billion when deducting the special dividend. Effectively is a double-digit return already.
This is supported by the level of profitability expected to reach 16% ROTE next year, and also the efficiencies that we can find in the capital. We've been using SRTs. We have four programs in place for consumer loans, for SMEs and corporates, for project loans, and for large exposures. We are currently working on two transactions. Overall, we have achieved a release of 50 basis points of CET1 on average, and we look forward to continuing using the SRTs. We don't think we're gonna increase a lot more the total capital release. We need to do more. We need to keep on doing in order to replace-
Roll out.
Exactly. The existing programs and their maturities. We see them as a strategic tool because should we find opportunities to grow more the loan book, then we can do more of SRTs to combine the growth. All in all, this growth of 6% in the loan book, we think it could be translated into a rather low- to mid-single-digit growth in risk-weighted assets.
Just one thing that's come up in the conference, the sort of private credit sort of anxiety, let's call it. Does that change the way you think about SRT? Are you worried about the demand not being there?
Yeah
Are you seeing still demand there?
Yeah. Yeah, we still see demand. I think our counterparties
As far as we know, have not been affected or different players than the ones affected by these events in the private credit. The feedback that we've got for the 2 transactions that we're working on is still positive.
Maybe a last one from me before I open up. César, you've decided to retire. Maybe you can share some sort of given your long-standing career some thoughts about the industry. What do you think is the most important challenges for the sector going forward? And if you could write a letter to the regulators, a departing letter, what would you say to the extent you can share all your thoughts about the regulators? And anything you think has been misunderstood about Sabadell during your tenure, some sort of overall reflection on a long career.
Wow. Mm-hmm.
Very deep.
Yeah. Okay. First, to the regulators, wow.
We had yesterday, by the way. Sorry to interrupt, the European Commissioner for Financial Services and the Savings and Investments Union, Maria Luís Albuquerque, she was very positive about the regulatory agenda, just for context.
About the?
The regulatory reform agenda and even banking union. Yeah.
She was positive, whatever that means, right? Yeah.
She was optimistic something may actually happen.
Yes.
Okay.
I think she's a very qualified person and highly respected in the industry, and in that sense, I take that very positively. I think the overwhelming level of regulation that came as a result of the 2007 crisis has made extremely difficult for a period of time for banks to create value. I'm not judging if it was necessary, not necessary or whatever, but the capital requirements, the regulatory requirements, you have heard ad nauseam that we all bankers thought they might have been a little bit excessive. Now the regulator is trying to simplify and has made a commitment to simplify. It's not easy. Once you've done it's very difficult to go backwards, but at least there is a commitment not to go forward.
What does have meant for the industry? For the industry, it has meant a very strong value destruction together with the crisis itself for a long period of time. From a certain point, and we see the banks progressing very well, once you have assimilated all of that, and that is a sunk cost, it's also a tremendous barrier to entry.
Mm-hmm.
It's also a tremendous barrier to entry, because if you ask anyone, would you put your money into creating a bank, probably it wouldn't be so exciting. There are other industries. Once you have the capital and it's already there, well, it's an industry that has done well recently. What were the other questions?
Just your reflection overall, any misunderstanding, while you've been CEO of Sabadell?
No, I think we are very appreciative of the understanding, the mutual understanding that we have had with analysts and investors and even with our retail investors. I think it has been very fluid. I think the market has been trusting the transformation that we have been realizing. There's only a small nuance. Maybe our cost of capital is still maybe a little bit on the high end, but what can we say? Why is this? Because I think the transformation that we have done from a risk perspective, this is a completely different bank. It has many of the virtues that it had before, so very client-oriented, very good staff people, a number of respect in the market, a very high appreciation from its SME customers and so on.
Many, many virtues, but now it has a very strong credit discipline that should probably rank us a little bit lower in terms of cost of capital. I think also the metric of ROTE, return on tangible equity, which is in a certain way a proxy for capital generation, the way you calculate the return on tangible equity is not equal among all banks. I think it's not that we are not well understood, but we would like a little bit more the capital generation to be looked at directly, you know? That's basically it, no? That's basically it in terms of. Overall, we are fully satisfied. I think criticizing the market, it's never a good idea because it's first you have to get your act together.
You're allowed now to criticize whatever you want.
No. That's my honest thinking. I've learned a lot, and I'm very thankful for these last five years. I've learned a lot from you guys, I have to say.
Thank you. I'm gonna open it up for questions. I've got more questions, conscious there's not a lot of time left. Does anybody have any questions? It's been a quiet crowd, so I wouldn't take it personally if there's. Okay, maybe I've got a final question. It's more actually related to the changes. Obviously, Marc Armengol has been appointed new CEO. Also, Carlos Ventura is being appointed executive board member. Maybe you can clarify how the responsibilities are gonna be divided and how the two roles work together going forward in terms of decision making day to day to how's that.
I would reword the question. Okay. There's one CEO, which is Marc Armengol, and there's a member of the management team, which is Carlos Ventura, which has been upgraded to the board. On the board, there's already the CRO as executive, and I think that bringing Carlos Ventura to the board brings the richness of the board getting closer to the customer. He's the head of business in Spain, a person with a lot of experience and a tremendous reputation in the market. I think having firsthand about the customer journeys and understanding all of that from a board perspective, it's very good. There's no division of these are your tasks, and these are my tasks. Marc is the CEO, and he has a management team.
That management team that I know very well and I have enjoyed very much during these five years is a phenomenal management team in which decisions are taken in a very natural way. It's beyond consensus. Things are discussed very openly. I think that way of working is one of the reasons why we were successful during the hostile takeover because the way we make decisions is very effective in the sense that it's all around the table, a lot everybody chipping in and it doesn't need consensus. Usually the right decision if there are no hidden agendas in there comes out by itself. This might sound very qualitative and there's no placeholder in the model for these kind of things.
In the medium term and in the long term, they have a big impact. That's the team that Marc is getting. Marc is a phenomenal guy. The work that he has done overall in his career. I've known him for the last five years. The first four as head of ops and IT, which gives him a very good angle for the future and for the transformation that is coming. The last one as CEO of TSB. I think he's extremely well qualified for the task at hand.
Right. I think if there's no more questions, I think we've overviewed the main issues. Well, at least to say thanks again for coming and, if we don't see, speak again because you're staying until May. That's correct?
I'm finalizing on the sixth of May at the general assembly. I will do the final presentation of results of the Q1, but I won't do the road show, so goodbye.
Great. Thank you very much for all your sort of support and your communication and with the markets and with us. Thanks very much.
Thank you very much.