Good morning, and welcome to Sabadell's results presentation for the third quarter of 2026. Joining us today are our CEO, Marc Armengol, and our CFO, Sergio Palavecino. The presentation will follow a similar structure as in previous quarters. Marc will start by highlighting the key developments of the quarter and discussing the most relevant topics. Then Sergio will review financial results and the evolution of the balance sheet. Marc will conclude the presentation, and we will then open the line for questions. We appreciate that today is a particularly busy day with many banks reporting results. With that in mind, we started earlier, and we will aim to keep the call to around one hour. Marc, over to you.
Thank you, Lluc, and good morning, everyone. Let me start by saying that today is a very sad day in Spain following the train accident that happened yesterday. I just want to extend our deepest condolences to all those affected by this tragic train accident. Our thoughts are with the victims, their families, and all those impacted by the tragedy. Let me move on with the presentation. Let's start with the highlights from the quarter on slide four. Key message of the quarter, positive jaws keep widening, driven both by growing revenues and contained costs. Commercial momentum remains healthy. Year-to-date, performing loans grew by 4.4%, while customer funds were up by 2.6%. The positive evolution of commercial activity translates into revenue growth. Net interest income increased by 2% Q on Q, and fees increased by almost 4%.
Costs remained broadly flattish in the quarter as the early retirement program, which was executed during the first half of the year, has already started to generate savings. Asset quality remains favorable as well. The NPL ratio improved to 2.4%, and cost of risk remains stable at 40 basis points. Finally, we continue delivering an attractive shareholder remuneration. In addition to the ongoing execution of our share buyback program, today we are announcing a new interim cash dividend of EUR 0.07 per share to be distributed by year-end. Overall, our profitability keeps improving, and we remain fully on track to deliver our year-end return on tangible equity target of 14.5%. Moving to slide five, two relevant strategic initiatives have been announced during the quarter. First, we have renewed our partnership with Amundi, extending it through 2035.
Having Amundi as a partner has proven to be beneficial for our customers as it improves our value proposition, so securing a longer term for the agreement is positive news. On top of that, we have improved the economics of the business by agreeing on a higher distribution fee for Sabadell during the rest of the contract. As you can see on the right-hand side of the slide, we have also increased our focus on execution. As we announced in late July, we have simplified our organizational structure to enhance execution and accountability across the group. On one hand, we have increased our focus on transformation and AI with specific teams fully assigned to it. On the other hand, the new organizational structure increases our focus on higher value customer segments, affluent individuals, private banking, SME, and corporates.
All in all, we are accelerating our transformation and supporting our ambition to become the best relationship bank in Spain. Turning to the P&L in slide six, year-on-year trends keep improving. All the P&L lines performed well in the quarter. NII improved by 2% Q- on- Q, fees increased by 3.7%, costs remained stable, and provisions decreased by 13% in the quarter. As a result, net profit reached EUR 405 million, almost 13% above the recurrent second quarter figure. Recurrent RoTE improved to 14.2%, while the reported figure reached 15.5%. These results reinforce our confidence in delivering the profitability targets we set for 2026 and for 2027. On slide 7, we have commercial activity. Household lending origination continued to evolve positively during the quarter, despite the expected seasonality in Q3. Mortgage origination increased by 5% versus the second quarter, while consumer loans origination grew by 13%.
In SME and corporate banking, Q on Q comparisons were affected by summer seasonality. Overall, these figures confirmed that loan demand remains solid and that our commercial franchise maintains positive momentum. Most importantly, these levels of new lending allow us to continue growing the performing loan book, as we can see on the following slide eight. We remain on track to deliver our year-end guidance of mid-single-digit growth. While Q- on- Q evolution is impacted by expected seasonality, year-on-year comparison is also affected this time by unusual dynamics in the second half of the previous year. Let me remind you that in 2025, we recorded an exceptionally strong third quarter, followed by an unusually weak fourth quarter, and this was largely driven by the circumstances surrounding the takeover bid. Therefore, we believe that the year-to-date trend in 2026 provides a more accurate view of the underlying business momentum.
Overall, performing loans grew by 4.4% year- to- date, keeping us on track to deliver our mid-single-digit growth target for the year. Lending dynamics in Spain remain solid. Consumer lending increased by 9% year-to-date, while mortgages grew by 2.4%. Public sector also performed strongly, with growth close to 7%. The SME and corporate portfolio grew by 3% year-to-date. On the right-hand side of the slide, international businesses grew by more than 10% year-to-date at constant FX, supported by solid momentum across Miami, Mexico, and our foreign branch network. Moving now to customer funds on slide nine. On-balance sheet funds in Spain grew by close to 2% year-to-date. Considering the usual positive seasonality in Q4, we are on track to achieve our full-year growth guidance. Off-balance sheet funds also delivered solid growth, bringing total customer funds growth to 2.6% year-to-date and more than 5% year-on-year.
Cost of deposits in Spain increased by six basis points during the quarter in a context where three-month Euribor increased by 28 basis points. Therefore, our deposit beta decreased slightly and remains well contained. In slide 10, let's take a closer look at the dynamics of our customer spread. Loan yield reached 3.70%, growing by eight basis points in the quarter. This improvement is being driven by the repricing of variable rate exposures, as well as the rollover of short-term fixed rate loans at higher yields. We expect this trend to continue in the coming quarters. While loan yield increased by eight basis points in the quarter, costs of deposits increased by 6 basis points in the quarter. Looking forward, loan yield is expected to keep increasing more than costs of deposits. As a result, we will continue to see further customer margin expansion.
We expect customer margin to reach circa 290 basis points by year-end. Turning to shareholder remuneration on slide 11. Following the extraordinary dividend associated with the sale of TSB and the ongoing execution of the share buyback program, today we are announcing a new interim cash dividend of EUR 0.07 per share to be paid at the end of December. This reflects both our strong capital generation and our commitment to shareholder remuneration. Our remuneration commitment remains clear and predictable, based on a 60% payout, along with the distribution of excess capital above our CET1 threshold of 13%. On slide 12, let me share a few considerations on the entry of BPCE as a strategic shareholder.
BPCE is one of the largest banking groups in Europe and has acquired a 7% stake in Banco Sabadell with a long-term investment perspective, and as a result, they will hold a seat on our board of directors. We see BPCE as a stable shareholder that shares our strategic vision and confidence in the future of Sabadell. At the same time, it opens the door to potential cooperation opportunities in areas such as corporate and investment banking, equipment leasing, consumer finance, and cross-border business. With that, I conclude my part of the presentation and hand it over to Sergio.
Thank you, Marc, and good morning, everyone. Let's start with the P&L on slide 14. There were no extraordinary items affecting this quarter's results. Recurrent net profit for the first 9 months of the year stands at EUR 1.1 billion, having earned a net profit of EUR 405 million in the third quarter. Recovering RoTE stood at 14.2%, keeping us on track to deliver our 14.5% full-year target. Let me review the key P&L lines. Starting with NII, it continues the upward trajectory following the inflection point reached in the second quarter. On the top right-hand side of the page, you can observe the drivers that explain the quarterly evolution. First, customer NII improved by EUR 24 million, supported by higher average volumes and positive repricing. Then we had a positive EUR 3 million day count effect.
Finally, non-customer NII declined by EUR 9 million, as higher wholesale funding costs more than offset the positive ALCO contribution. We can also see in this slide that both customer spread and net interest margin have started to grow this quarter with an increase of 2 basis points each. Moving on to slide 16 and looking ahead to the fourth quarter. NII is expected to grow at mid-single digit range versus the fourth quarter of 2025. We now expect the ECB deposit facility rate to reach 2.75% by year-end, which is 25 basis points above our previous assumption. Loan yields will benefit from the positive repricing of variable rate lending, while deposit costs are expected to increase faster than previously anticipated, as the ECB is now expected to raise interest rate 25 basis points more during this year.
Higher interest rate environment will be a net positive for Sabadell's NII at the end of the day, as more loans than deposits will be repriced. However, in the quarter following the rate hike, deposit costs adjust more rapidly because of their shorter duration. Then, as time goes by, there are more loans than deposits being repriced. As a result, we can see that customer spread expansion has already started, but is progressing more gradually than previously anticipated. Looking forward, we now expect customer spread to reach around 290 basis points by year-end, and NII is expected to grow by around 1% in 2026 year-on-year, and this is marginally below our previous guidance. On the next slide, fees increased by 3.7% quarter-on-quarter, supported mainly by asset management.
The renewed Amundi agreement contributed around EUR 10 million in the quarter, while service fees and credit and contingent risk fees remained broadly stable despite the usual negative seasonality. Looking ahead, we expect fees to continue trending upwards, supported by a strong commercial momentum. The renewed Amundi agreement increases the quarterly run rate of asset management fees by around EUR 5 million, while success fees in asset management and insurance will provide additional support in the next quarter. All in all, commissions are expected to grow by around 4% year-on-year. Turning to cost, total recurring expenses remained well contained during the quarter. Year-on-year, total recurring cost increased by 3.8%, impacted by higher amortization and depreciation cost due to the reclassification of the payment business in the fourth quarter of 2025. When adjusting for this reclassification, total recurring cost increased by 2.7%.
In the quarter, staff costs were broadly stable and already benefited from the savings generated by the early retirement plan. Other general expenses also remained stable, reflecting our continued cost discipline. Looking forward, we expect recurring costs to increase in the fourth quarter, mainly due to the usual seasonality. On a year-on-year basis, the reclassification of the payment business will provide a more favorable comparison. As a result of the better-than-anticipated evolution, we are again improving our cost guidance for the year and now expect total recurring cost growth at circa 2%. Moving on to the next slide, we show why the widening of jaws remained the key driver of our profitability improvement. During the third quarter, net interest income increased by 2% and fees by almost 4%, while recurring costs remained flattish. This translated into a further improvement in core banking results in line with our expectations.
This combination of growing revenues and disciplined cost management should lead to a further widening of jaws through year-end and into 2027, supporting our profitability targets of RoTE of 14.5% and 16% respectively. On the next slide, cost of risks remains stable at 40 basis points, while fully in line with our year-end target. Looking specifically at loan loss provision, the credit cost of risk was 32 basis points and remained contained, reflecting the resilience of the loan book and the favorable asset quality environment. Turning now to the bridge of the different components of the total provisions for the quarter shown on the top right-hand side. We booked EUR 105 million of loan loss provisions. Then we had EUR 3 million of provision write-backs on foreclosed assets supported by gains from real estate disposals.
In addition, we recorded EUR 23 million in NPA management cost and EUR 7 million in other provisions, mainly related to litigation, all in line with the expected run rate. Looking ahead, we expect asset quality to stay favorable and total cost of risk to remain broadly stable at approximately 40 basis points for the full year. Let me now move to the balance sheet covering asset quality, liquidity, and solvency. On slide 22, we see a continued improvement in the NPL ratio, while coverage levels remained broadly stable. The NPL ratio reached 2.4%, down 6 basis points quarter-on-quarter, and a 35 basis points reduction year-on-year. At the same time, the total coverage ratio remained broadly stable at around 70%. In total, gross NPA ratio stands well below 3%, while in net terms, as a percentage of total assets, it remained stable at 0.7%.
Moving to funding and liquidity, our position remains robust, supported by a diversified funding structure and sound liquidity buffers. The loan-to-deposit ratio stood at 93%, while liquidity ratios were broadly stable in the quarter. Credit ratings also remained unchanged during the quarter. All rating agencies have assigned a stable outlook, except for S&P, which maintains a positive one. Regarding the execution of our funding plan, this quarter, we tapped the market with a covered bond of EUR 750 million, which allows us to lock long-term funding. Following the sale of TSB, our MREL needs have been reduced. Going forward, we expect to normalize the excess AT1 buffer in 2027, while maintaining appropriate MREL management buffers and accessing the covered bond market opportunistically. We will continue using SRTs to optimize capital.
Now, let me walk you through the evolution of our capital ratio, which remained broadly stable during the quarter. Our CET1 ratio increased by one basis point to 13.12%, with 39 basis points of capital generation before dividend accrual. This includes 50 basis points from organic capital generation after deducting AT1 coupons. Fair value reserve adjustment in the fixed income portfolio deducted 13 basis points due to higher interest rates, and a positive 2 basis points impact from the evolution of risk-weighted assets. The dividend accrual then reduced CET1 by 38 basis points, including the new interim cash dividend of EUR 0.07 per share. To end my part of the presentation, I would like to highlight our shareholder value creation. This is reflected in a double-digit year-on-year growth in tangible book value per share, plus the dividends distributed over the last 12 months.
With that, I will hand back to Marc, who will conclude today's presentation.
Thank you very much, Sergio. To conclude today's presentation, let me just briefly recap why we remain confident in achieving our profitability targets for both 2026 and 2027. Key message here is that everything is moving on the right direction. Revenue growth continues to build. NII increased again this quarter and is expected to grow in the fourth quarter and looking forward. As Sergio mentioned, we are marginally lowering our NII guidance for 2026 to around 1% growth. While customer margins will continue to improve, we now expect them to exceed 290 basis points in early 2027, reflecting the higher-than-expected path for ECB rates. At the same time, loan volumes remain on track to deliver our full year guidance. Fees delivered another strong quarter, supported by the renewed agreement with Amundi. We now expect fees to grow by around 4% in 2026, while continuing to see growth going forward.
On costs, visibility has improved further. The early retirement program is already generating savings, and cost growth remains well controlled. We will also benefit from a more favorable year-on-year comparison in the fourth quarter of 2026. As a result, we have improved our cost guidance and now expect recurrent costs to increase by around 2% in 2026. Asset quality remains robust, the NPL ratio continues to decline, and cost of risk remains stable at 40 basis points, fully in line with our expectations for the year. All in all, we remain on track to deliver our 2026 profitability target of 14.5% return on tangible equity and 16% for 2027. Finally, we are announcing a new interim cash dividend of EUR 0.07 per share, which will be paid in December. This is fully consistent with our commitment to shareholder remuneration.
With that, let me hand it back to Lluc for the Q&A session.
Thank you, Marc. As always, I would kindly ask you to limit your questions to a maximum of two, so that we can allow as many analysts as possible to participate. Operator, could we open the line for the first question, please?
First question is coming from Ignacio Ulargui from BNP Paribas. Please go ahead, pressing star six .
Thanks very much for the presentation and for taking my questions. I have two questions. The first one is on fees, and actually both are focused on revenues. The first one is on fees. Just wanted to understand what was the strategy behind or the strategy linked to the Amundi agreement improvement in terms of the contribution, and whether there is any commitment to increase the penetration of mutual funds within your client base, which to me is one of the biggest weaknesses compared to the sector or to other peers in the market. Linked to this, whether there are other products or JVs where you could improve further, so that you increase fee penetration as a percentage of total revenues. The second one is on deposits. If you could elaborate a bit on the expected trends in terms of deposit competition.
How should we think about deposit cost evolution and the mix dynamics in the quarter, which as far as I see, have been relatively stable. Just wanted to get a bit of your thoughts on how deposit costs will evolve from here. Thank you.
Thank you, Ignacio. On the Amundi agreement, I would say we have kept a strategy that has worked for us, and we feel happy with the, let's say, industrial model that it comes with. The rationale for that is we find partners, or we aim at finding partners that have the scale and the level of specialization to provide the best possible products for our customers. We saw an opportunity, both parties, to extend the agreement, because it was built on top of a relationship that had worked since we first signed this contract. So we are happy with the catalog, with the level of functionalities. We kind of used the opportunity to extend the duration of the contract and to improve the economic conditions to bring them to a more, let's say, market standard level.
We believe that Amundi gives us the opportunity to continue to increase our share of wallet on our customer base. As you were rightly saying, we believe that this is a big opportunity we have in the quarters and years to come, while we aim at focusing ourselves on higher value customers, and on relationship banking-based model. On the second part of the first question, which was other products, JVs, as you know, we have other partnerships. I'd say that the most relevant one is on insurance business with Zurich. I would say that on this contract, we see, again, the right kind of relationship model, and we are happy with our level of collaboration with Zurich. We will aim at improving any conditions in any part of our business. That's as much as I can say here.
On the deposit trends, composition, and evolution, I'll probably just open it, and then I'll hand it over to Sergio. We have a very stable deposit base that comes from the fact that we are a bank that has deep relationships with customers. The part of non-remunerated deposits that we see on our balance sheet come mainly from very, let's say, atomized customer base accounts. More than 85% of our retail deposits are transactional, meaning that they keep very low individual volumes on these accounts, on a lot of accounts, and we provide them service as the main bank. Something similar happens on the SME space, where we are proud to say that we have deep relationships, transactional relationships that come with this level of cheap funding, that in the context we are living in, will benefit us looking forward. With that, I'll hand it over to Sergio.
Yeah. Thank you, Marc. Not a lot more to add. As you said, the bulk of our deposits are connected with the relationship that we have with our customers, and we look forward to maintaining the primacy with those customers, so being their bank, so that ensures us to have all the transactionality. That is what is behind the stability that we have seen for a long time in our current accounts. When there is a change in rates like the one we have seen this year, where rates started to change in expectations, started to change in March, and then rates were increased by the ECB in the summer, and then again in September. Of course, this flows into the market. There are better offers for term deposits out there, and this is reflected in the cost of deposits, but on a very contained basis.
Actually, we have seen that we're looking at the evolution of deposit cost and Euribor three months, as we show in the presentation. The delta remains, I could say that, very stable. Within that connection is going to continue in the future as rates are expected to continue going up. We're now expecting ECB to hike one more time this year, and Euribor are already reflecting this. Then we are expecting deposit costs to keep on moving up, but within this sort of relation. The same for loan yield. We have seen an increase in 6 basis points in deposit costs and 8 basis points in the loan yield. Actually, going forward, we expect loan yield to continue outpacing the increase in the deposit cost.
And that is the basis for our expectation of customer margin to keep on progressing and reaching close to 290 basis points by year-end. Thank you.
Okay. Could we move to the next question, please?
Next question is coming from Maksym 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 from me, please. One is on the cost. Inflation expectations have increased, yet you are outperforming your target. Can you please discuss, in general terms, the levers you have to keep the cost growth contained beyond 2026? The second one is just a clarification on your expectations for customer margin of 290 basis points. Is it the fourth quarter or December? Thank you.
Thank you, Maksym. On costs, the evolution we are seeing in the year has to do with the early retirement program that we announced, and we executed in Q1 and in Q2. We are now starting to see the benefits of that, along, I would say, with a cost discipline that we have. We look very carefully at every single EUR we spend in the bank, and we will continue to do that in a healthy way. I would say that this is pretty much the answer to question one.
For question two, I'll hand it over to Sergio.
Sure. Thank you, Marc. It's for the quarter, and I think this number actually shows more a direction of travel than a very hard number. We're saying that close to 290, it's been 286 in the third quarter, so it will get closer to 290.
Thank you, Maksym.
Thank you.
Let's move to the next question, please.
Next question is coming from Francisco Riquel from Alantra. Please go ahead pressing star six.
Yes. Good morning. Thank you for taking my questions. The first one is on NII. Sergio, you mentioned that the short-term impact when the ECB hikes rates is slightly negative, but it should be a net positive at the end of the day. I want to ask you about the EUR 3.9 billion NII target for 2027. The run rate of Q4 2026, plus 4% volume growth should get you there. What could prevent you from revising the 2027 NII target? If you believe that the 2.9 customer spread, do you think that it could improve further in 2027, or you are concerned with deposit mix or deposit competition? Anything that could give us color on the direction to get or beat your NII target for 2027.
My second question is, I want to ask you about how much of the NPA management costs of EUR 23 million-EUR 24 million per quarter that you are booking in your total cost of risk belong to the Intrum JV. I understand this JV is due in 2027. What shall we expect going forward here? Thank you.
Thank you, Francisco. Indeed, the moving parts of the NII come from the evolution of volumes and margins. Volumes are progressing in line with our expectation. Year to date, it's been a 4.4% increase, so very comfortable to end the year between 5%-6%, so clearly in the mid-single-digit range growth that we anticipated. Deposit growth is also progressing well. It's more than 4%, so even a little bit ahead of our expectation. Regarding the impact of interest rate movement, as you correctly got me, we have different liabilities and some deposits that are linked to €STR, which is the daily rate. When ECB hike rates, then we have a higher cost initially. This difference is close to EUR 15 billion.
Over time, given that we have something like 60% of the loan book that reprice and only 40% of the deposit book that reprice is more than EUR 20 billion of more loans than deposits that get repriced over time. So we are expecting customer margin to go up in the fourth quarter, but also into 2027. Despite, as we are saying, the increase in NII has been somewhat a little bit delayed, we think the full potential remains there, and we are confident that we can reach the EUR 3.9 billion NII in 2027. On the deposit mix, given the higher level of rates, we are assuming that the non-remunerated part is going to remain stable.
Before, we thought that it could grow, but in a higher interest rate environment with more attractive offers, we think that rather that's going to be stable, and the growth is going to come in deposits from the non-remunerated part, from term deposits, from online, from the different offers that we have. That's being embedded in our sort of model, and that is that change is offset by the higher interest rate. Yes, we think that the full potential of the EUR 3.9 billion in 2027 is still very achievable. Regarding the NPA cost that we book, EUR 23 million, roughly half of that is the cost of agencies. Within those agencies, Intrum is the most important of them. We had a contract with Intrum that has been running for quite a while now, and it will end at the end of 2027.
In any case, we will continue using agencies. We are happy to see that the foreclosed asset book is clearly trending down. That, of course, is going to be a tailwind. Then in due time, we shall look into this. As usual, we will do our best to optimize the management cost.
Perfect. Let us move to the next question, please.
Next question is coming from Ignacio Cerezo from UBS. Please go ahead pressing star six.
Yeah. Hi, good morning, and thank you for taking my questions. The first one is on the comment around 60% of the lending book being floating. When we think about lending pass-through, as rates actually keep increasing, do you think you are going to be able to pass through 60% of the rate increases onto your lending book, or there is any reason from a mix point of view or competition point of view implying that that number that passed through will end up being smaller? The second question is on the corporate lending book in Spain. That seems to be kind of stable actually year-on-year. If you can share with us actually, why is that? Why is that not growing given that normally actually does better than other bank?
What can you do if you want actually to accelerate the lending growth on SMEs and corporates? Thank you.
Thank you, Ignacio. I am going to take the second one, and I am going to leave the first one for Sergio. We are seeing on SME growth, I would say increased competition. We are growing, I would say, on a healthy way on the mid, long-term loan book. On the working capital book, we are facing a little bit more of a challenge. I would say this quarter comes with the impact of seasonality. We see a strong pipeline for the remainder of the year, and we believe that we will find ways to continue to grow on this loan book.
Thank you, Marc, and thank you, Ignacio. Regarding the 60%, when we say floating, we mean anything that could reprice in the next 12 months, and this includes both the floating rate loans, but also any fixed rate loan that matures in the year. Of course, this has a lot of moving parts, but the direction of travel is very clear that we are going to be repricing the loan book upwards. We have different indexes. A very common one is Euribor 12 months, and the Euribor 12 months gives a high degree of progressivity because it is a portion of the book that reprice every month. Actually, we see the biggest intensity of this repricing taking place during the first half of 2027, more concrete in the second quarter of 2027.
Thank you, Ignacio. Shall we move on to the next question, please?
Next question is coming from Pablo de la Torre from RBC Capital Markets. Please go ahead pressing star six.
Thank you for taking my question. My first one was a bit of a follow-up on deposits. I think the percentage of fixed-term deposits has come down by one percentage point in the quarter, but I see that percentage of remunerated balances has already started to increase by more than that. You just mentioned that you expect these deposits to drive most of the growth going forward. My question is, where do you see the deposit spread and the customer margin, more specifically stabilizing in 2027, assuming your ECB 2.75 rate? Also just to clarify, for the quarter, one of your peers has noted a one-off public sector deposit inflow in Q3. I was just wondering if that is also a dynamic that you saw in the quarter that is driving the deposit cost higher than you might have expected otherwise.
The second question was on distributions. At the end of last year, you said that EUR 2.5 billion remuneration target for this year and next. It has been a few quarters since you have explicitly reiterated this target, but I guess everything keeps on track. I was just wondering what your latest thoughts were here in terms of the split of that EUR 2.5 billion, as well as any thoughts you might have on how that split might change beyond 2027. Thank you.
Thank you. Regarding the deposits, when we mean remunerated, they include both potentially current accounts with a remuneration and term deposits, as you have correctly spot on, because that is part of our offer, which is a very complete and comprehensive one. Indeed, that is the component of deposits that where we expect growth going forward given the current level of rates above 3% in Euribor three months, so with attractive rates. That's the assumption that we have embedded in our model, and with this, the growth in the loan yield will outpace this growth, and we will see customer margin getting close to 290 basis points in the fourth quarter. Then into 2027, we also expect customer margin to keep on increasing, and getting around 300 basis points. For 2027, we see tailwinds for NII, both in customer margin and in volumes.
And those assumptions are the ones that are supporting our expectation that NII will reach the EUR 3.9 billion mark in 2027. Regarding distributions, maybe let me get started, Marc, and then you can continue. I think so far so good. We are announcing today another interim dividend. The first one was in the form of share buyback. This one, I could say that we get back to normal, and we are paying EUR 0.07 cash. To me, that is going to be the normality, and that connects with the expectation that we mentioned last year of paying more than EUR 0.20 per share cash on a regular basis. Then on top of that, the policy remains fully unchanged. So excess capital above 13% will be distributed at due time.
I think it's a bit early to discuss further distribution, but we will have more clarity at year-end, and hopefully we'll be able to update you on total distributions.
Yeah, I think that's it. I'll just add to that, we are now feeling confident on the level of profitability that was underneath this idea of distributing the EUR 2.5 billion, and nothing has changed in terms of policy and in terms of what we are seeing looking forward.
Thank you, Pablo. Let's take the next question, please.
Next question is coming from Carlos Peixoto from CaixaBank. Please go ahead pressing star six.
Hello, good morning. Carlos Peixoto from CaixaBank here. Just a couple of questions from my side as well. Sorry if I have missed some of these comments before, but the first one would actually be, just to understand a bit the drivers behind the small downgrade we saw in both NII growth guidance for this year and also for fee income, or was it the shape of the yield curve, the pace of rate hikes? Just to understand a bit the drivers there. The second question will be more a generic one, which is basically how you see the changes or these rulings regarding type of fraud, and what type of expectations you have in terms of what this could mean in terms of litigation charges going forward for the bank. Thank you.
Thank you. You want to take the first one, Sergio?
Sure. Carlos, yes, I think we have already discussed around the NII dynamics and the reasons behind this small downgrade for 2026, although we think the full potential remains for 2027. This is connected with the increase in rates that we have seen that has been definitely faster than expected. What we are saying is that higher interest rate, at the end of the day, is a net positive because we have more assets repricing than liabilities, given the assumption that the non-remunerated current accounts portion, and of course, the equity will not reprice. But in the very short term following the rate increase, we have more liabilities that reprice. Because of that reason, the first quarter following the rate hike is a bit adverse. The second quarter is kind of neutral, and from the third quarter is a net positive. That is the reason behind.
Thank you.
I am going to take the one on fraud and cybersecurity. I assume that you are talking about the PSD2 transposition that got on the press recently. We do not see any impact coming from that. We do see fraud levels, fraud attempts continue to increase in a sustained manner for quite some time. We have the measures in place to make sure that we protect ourselves and we protect our customers, and we are not seeing an impact so far on these attempts becoming more successful. The potential change that this thing that happened in Poland, I think it was, will have on our end. We are complying with the current regulation, and we do not expect that this will mean any change to us.
Right. Operator, could we have the next question, please?
Next question is coming from Borja Ramírez from Citi. Please go ahead pressing star six.
Hello, good morning. Thank you very much for taking my questions. I have 2 questions, please. Firstly, thank you for providing indications on 2027 NII. I would like to ask if you could maybe provide a bit more color on how you see deposit growth in 2027, and maybe also the mix between sight and term deposits. My second question would be on your views on M&A. The shares have outperformed the peers in recent months, and now the valuation gap versus peers has now closed. I would like to ask if this maybe allows Sabadell to be in a stronger position with regards to potential consolidation, and maybe if you could kindly provide your thoughts on consolidation. Thank you.
Thank you very much, Borja. I'm going to take the second one, and then I'll hand it to Sergio for the first one. We remain focused on our organic plans, so we don't see any change on the M&A space.
Thank you, both Marc and Borja. Regarding deposit growth assumptions for 2027, at this moment in time, our view is a continuation of the trends that we have seen. We continue to see a very resilient growth in the Spanish economy, with economic growth between 2%-3% and inflation that brings nominal GDP growth in the mid-single digit range. With this, we continue to expect loans to grow in the mid-single digit range, and deposit between low to mid-single digits. This is, at the end of the day, around 4%, as we are seeing. Then a stronger growth in the off-balance sheet products.
This is for the amount and for the mix, as we have already discussed before in the current rate environment, we think that the bulk of the growth is going to be in remunerated products, either term deposits or some type of remunerated accounts for some specific segments, while the non-remunerated portion, which is linked to the transactionality, the money that people leaves for the daily business and payments, and also companies. That part is going to remain stable. That is the assumption that we're running, and it's connected with what we're seeing, and also the experience in the past.
Let's go to the next question, please.
Next question is coming from Marta Sánchez Romero, from JP Morgan. Please go ahead pressing star six.
Hi, Marta. Try to press star six, or try unmute yourself. No, we cannot hear you, so probably we should jump to the next question, please.
Next question is coming from Britta Schmidt from Autonomous Research. Please go ahead pressing star six.
Yeah. Hi, good morning. Two quick questions from me, please. On the wholesale funding cost, which increased quite a bit this quarter, can you remind us how much of that is swapped and what rates it swapped towards? Maybe also give some color on your expectation for new issuance spreads next year and the funding plan for senior. The second question will be coming back to the NII and the customer spread, what ECB rate or Euro rate do you assume for 2027? You are talking about around 300 basis points customer spread for next year versus the 290 basis points in Q4, which does not assume a lot of expansion. Should we assume that your deposit beta is going to be higher than what we have seen in previous rate rises? Thank you.
Yeah. Thank you, Britta. Regarding the first question, the cost of wholesale funding, that, yes, it went up in the quarter, and there are two drivers for that. The first one is the one that you already pointed out, that the majority of that is swapped to Euribor three months, and therefore it reprices quite quickly, both when rates go up and when rates go down, of course. The second one is that we printed our first transaction from our Mexican subsidiary at the end of May. That was only a EUR 200 million transaction, which is rather small, but because it has Mexican rate, the rate is disproportionally high compared to the European rate. Those are the reasons behind. Regarding the assumptions for rates, we are considering another rate hike in 2027, ECB finishing with terminal rate of 3%, and Euribor at around 3.3.
The around 300 basis points that I mentioned was an average for 2027, which again, means a tailwind both in customer margin and also volumes that we will keep on supporting the growth in NII. We keep on expecting NII to grow on each and every quarter. This includes the fourth quarter, but also into 2027.
Okay. Let's move to the next question, please.
Next question is coming from Andrea Filtri from Mediobanca. Please go ahead pressing star six.
Thank you for taking my questions. The first is on the concept of trade-offs. At what level of interest rates do you expect signs of asset quality deterioration or negative impact to customer margins? Clearly not what you have already guided for, so I wanted to understand how much higher rates need to go to see these trends. The second, just a clarification on your agreement with BPCE. What are the conditions which limit the BPCE investment in Sabadell to 9.9%? Thank you.
Thank you, Andrea. I am going to take the second one, if I got it right. We did a joint public announcement. With BPCE, with a commitment not to exceed 9.9%. So that should be enough, and everything was shared publicly. On the interest rates level, I am just going to quickly start and then hand it over to Sergio if needed. But as the interest rates go up, we risk seeing two things. One is lack of growth. We are not seeing any of that so far. We see strong pipelines still coming through, and we see, when we talk to customers, good levels of activity, projects, and forward-looking projects being very active. The second risk we have is that the interest gets so high that the loans cannot be paid back.
We believe that the levels of indebtedness and leverage on the Spanish economy, both for domestic economies and for companies, are very low. Therefore, we do not see this coming anytime soon either. We believe that the range of interest rates we are talking about is still on the healthy part of the equation.
Indeed. To customer margin, that I think was also within your question, very difficult to answer such a hypothetical question. I could say that from the very recent experience that we had, and rates were in 2023, ECB went up to 4%, and now we think terminal rate is going to be around 3%, so that is below. Of course, a bit above the 2% sort of normal, but it might be the new normal. I think we are not expecting major behavioral changes in such a loan range.
Okay. In the interest of time, we will try to join back Marta. Marta, I do not know if you can try to unmute yourself.
Hi, can you hear me now?
Yes. We can. Perfect.
Thanks. Thank you very much. Thank you for letting me in. My first question is on fees. If my math is not wrong, the guidance of close to 4% would imply a 10% year-on-year growth in fees for Q4 standalone. Given that markets are a bit volatile, and I understand that you've got that seasonality, success fees, et cetera, but what makes you confident that you can reach that level of growth in Q4? My second question is on lending competition and customer spreads. You clearly are suggesting now your customer spread is expanding, that you've got room on the lending side. But at the same time, as Nacho was saying, you're losing market share in the corporate and SME space. What can you do? Would you be willing to sacrifice some of that pricing to resume growth in the space?
There's no elasticity, so it's not about pricing. Can you give us a sense of where you stand in terms of risk appetite, pricing competition, et cetera? Thank you.
Thank you, Marta. I'm going to take the second one real quick, and then you can probably come to the first one, Sergio Palavecino. The levels of growth on SME and corporate, again, if we move to the year to date that we were seeing on the presentation, is 3%. We continue to grow, and as I said before, we see strong pipelines. We do not compete on price. We compete on staying close to our customers and understanding well their projects, and we continue to see traction coming from that part of the business.
Yeah. Regarding the guidance on fees, as you currently point out, the 4% then is quite specific for the fourth quarter and quite straightforward, the mathematics. Those mathematics that you're pointing out are supported by growth in all three components of our fee business. The risk-related ones, given the pipeline that we're seeing, we're confident that we'll see a growth in the fourth quarter. In the services, all services related, payments in particular, and also the advisory and structuring that we do in that portion, we also see growth in that component in the fourth quarter. Then in the off-balance sheet products, insurance is expected to perform well. The mutual funds typically record the success fees in the fourth quarter. We are counting in some of them. In the last year, we had EUR 12 million of success fees.
We're not within, might be a bit below this year because of volatility, but we're including a portion of those in the guidance. Yes. Thank you, Marta.
Operator, could we please take the last question, please?
Last question is coming from Hugo Cruz from KBW. Please go ahead pressing star six.
Hi. Thank you for the time. Just two questions. First on BPCE, you've talked about in your slide about potentially agreements on various products. Do you have a deadline to assess those cooperation agreements, i.e., could we see, for example, a product factory on consumer finance? Second, on the loan growth in international, it's been very strong. Where do you expect that loan growth to trend towards? Is there a percentage of loan book from international that would be your target? Basically, just trying to understand when that growth might normalize. Thank you.
Thank you, Hugo. On the BPCE relationship, we do not have a committed timeline for it. We will start talking soon, and we will let you know as soon as we have something specific. On the international loan growth, we expect the growth to continue to remain strong, double digit, by year-end. That's pretty much what we have in mind. Thank you.
Okay, that concludes our presentation for today. The investor relations team remains at your disposal, and we'll be happy to answer any outstanding questions or to discuss any follow-ups you may have. Thank you, Marc, Sergio, and thank you all for participating. Have a good day.