Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2021-Q1

[Lluc Sas Franch]

Good morning, and thank you for joining us for Sabadell Results presentation for the first quarter of 2021. My name is Lluc Sas. I'm the Head of Shareholders and Investor Relations. And presenting today are our CEO, Cesar Gonzalez-Bueno; and CFO, Leopoldo Alvear. This quarter, we plan to spend around 30 minutes presenting our results. And then we will answer your questions for an additional 20, 30 minutes. In today's presentation, our CEO will start by going through the key developments of the quarter before providing some details on the most significant topics. Our CFO will then discuss financial results, asset quality, liquidity and capital, before our CEO concludes with some brief closing remarks. I will now hand over to Cesar Gonzalez-Bueno to kick off our presentation.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you, Lluc. It's a pleasure to be here with you today in my first quarterly results presentation with Sabadell. I am very satisfied to do it hand on hand with Leo Alvear. We believe it is important to kick off together this new exciting project.Before going into the details of the presentation, I would like to share with you some of my first impressions about the bank. As expected, my first objective was getting to know the bank, including its people, its numbers and a sample of its clients. And I also wanted to gain a good understanding of what we do well and what needs more focus. My preliminary conclusions are very simple. First, our people are good. They have the will and the skill. The latest evolution of the bank has left them with an eagerness to perform, to recover the shine we used to have when we were a good performer. I understand this might sound soft and unquantifiable, but the positive teams' attitude, it's making a big difference. We have gone through a lot of change at Sabadell and have increased the focus and accountability. I have found the team very welcoming to these substantial changes. Leo will talk today about the book, and the risk profile of the bank. As an appetizer, I can share that we have found no surprises and that after the decisive actions taken in Q4 last year, our balance sheet profile is in line with our peers. Furthermore, we believe it's a good platform for the development of our strategic plan.About the quality of the franchise in Spain, a few remarks. In retail, there is room for improvement, especially in costs. In SMEs, there is an opportunity to strengthen even further the advantage we have, leveraging on good and lasting client relationships while we keep managing credit risk properly. Corporate banking in Spain is a sound and profitable business. In our corporate foreign activities, nevertheless, we are implementing a more disciplined capital management. TSB, as we will see today, is improving and makes us optimistic for the future. But all of this will be covered in more detail during the strategy day in May. Today, we want to focus on Q1 results. So please, let's move on to the presentation. Moving on to Slide 4. We highlight the key developments during the first quarter. Firstly, we have significantly improved our governance. Secondly, we have a new organizational structure. It is aligned with what will be our future strategy. Thirdly, our franchise commercial performance in the quarter has been strong, both in Spain and in the U.K. Fourthly, TSB has contributed positively to the group. This is good news and a sign of TSB's turnaround. Finally, net profit stands at EUR 73 million, and we expect that it will benefit from NII tailwinds and cost savings from second quarter. I will now develop each of these 5 highlights in more detail. On Slide 5, we show how we have further strengthened our corporate governance to fully align with international best practices. We currently have a Nonexecutive Chairman, an Executive CEO and a Lead Independent Director. There has been a thorough review of the committees of the Board, their scope and functions as well as its members. In addition, sustainability is part of Banco Sabadell's purpose and business strategy, and we have placed it among our main objectives. Moving on to Slide 6. We have made significant changes to the bank's structure in order to align it with a new strategy. We have now divided Spain into 3 business units: retail banking, business banking and corporate banking. The retail banking has now a clear mandate, to improve its processes, its products and services. This is a priority going forward. In order to do so efficiently and in a focused manner, the retail banking unit is structured around products to enhance focus. It is led by Miguel Montes with the support of Jorge Rodríguez to whom all the products will report. Business banking is the unit, which contributes the most to the bank profitability. This is where Sabadell holds a leading position in the Spanish market. The aim is to do more and better of the same. This business unit is structured into segments ranging from self-employed to large enterprises and is led by Carlos Ventura. Carlos also has the overall responsibility of the branch network in Spain. This unity of command guarantees the continuity of the commercial momentum. The corporate banking unit in Spain is profitable and shows solid returns. This division is restructured into customer units specialized by sectors to serve large corporations. And it also has units for specialized products such as structured finance, DCM, treasury or brokerage, which serve both corporate clients, but also the middle market. Corporate banking will continue to be led by José Nieto. I think the new organization in Spain fosters accountability in each business unit, which comes together with their empowerment. It provides a greater focus on customer needs, speeding up the transformation of the bank. It is important to point out, despite the significant reorganization, the new structure minimizes change-related risks. It does so by preserving the unity of the branch network management. Also, we haven't impacted the teams in charge of the IT back end. We have also maintained the second and third lines of defense. And furthermore, the risk management teams have remained in their current structure while reinforcing their specialization. Moving on to commercial activity in Slide 7. I would like to highlight that the recent performance of the lending book has been very dynamic, growing by 3.4% and 5.9% on a quarterly and annual basis, respectively. This performance is especially driven by TSB, where mortgage lending is growing rapidly. In Spain, activity is now picking up from the subdued levels of January and February, which were caused by COVID-19 restrictions along with storm Filomena, the cyclone that affected Madrid and other geographies. Consequently, as you can see on the right-hand side of the slide, performing loan growth is mostly backloaded in the quarter, suggesting that we will see the benefit in NII over the coming quarters. In the following slides, we take a closer look at our commercial performance, starting with Spain in Slide 8. I would like to highlight that in March, we recorded the best monthly mortgage lending performance in Sabadell's history. On the other hand, there was a decline in consumer lending origination in the quarter, driven by lower demand along with a lower risk appetite at this time for this type of lending. Moving on to Slide 9. We can see that new production of protection insurance keeps growing, driven by the new flow of mortgages lending and by the recent partnerships with Sanitas in health care insurance. Regarding mutual funds, there was a large volume of net subscriptions in the quarter, supported by our partnership with Amundi. And in terms of assets under management, we've had the best first quarter in the last 4 years. In Slide #10, we can see that cards turnover fell on the quarter due to seasonality. In our case, turnaround is also being affected by a lower usage of our corporate cards, which have a higher weight in our mix than in the market. Payments at point-of-sale were also affected by seasonality in the quarter. Following the general trend of the market, our turnover through retailer payment services at point-of-sale is still affected by lower inflows of tourists in Spain. Having said that, as long as restrictions are lifted and the economy recovers, we should see a gradual improvement of these revenue streams. In Slide 11, regarding new lending to companies and self-employed, there has been a high-growth rate in the quarter, especially in the large enterprise and public sector. Furthermore, monthly origination has improved through the quarter, as you can see when observing the monthly evolution of new lending. It is important to note that this growth has been observed despite the slowdown in the new ICO guaranteed loans. Moving on to Slide 12. Current macroeconomic expectations in the U.K. are improving as we are all observing. TSB's commercial activity keeps showing good momentum, and our franchise recorded its best-ever mortgage lending origination in Q1, beating the record achieved in the previous quarter. Looking at the unsecured lending portfolio, there has been a decline in the new production as a result of the bank's lower appetite for this kind of lending. Let's now move to Slide 13. TSB is profit-making due to an improvement of income and a reduction of costs together with a reduction of cost of risk. Restructuring is 1 year ahead of plan. And in the slide, you can see its main figures for the quarter. In Q1, around 70 branches have been closed and 352 FTEs have left the bank. The good commercial momentum along with the efficiency measures implemented and the improved macroeconomic outlook, make the future look more promising for our U.K. franchise.And finally, on Slide 14, coming back to the group. Let me highlight the main drivers of this quarter's result. As expected, in terms of core banking revenues and costs, these lines have shown a weaker performance this quarter. Leo will cover this later. However, we expect this trend to revert from Q2 onwards, driven by the NII tailwinds and the cost savings from the efficiency plan in Spain. On provisions, we have started to see a lower cost of risk, which is now at 69 basis points compared to 86 basis points last year. Overall, this quarter, we reached a net profit of EUR 73 million, with TSB contributing, although marginally, and our fully loaded CET1 ratio stood at 12%. And with that, I hand over to Leo.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Thank you, Cesar, and good morning, everyone. Let me start by saying that it's a pleasure to get back in touch with all of you. Those who already know me from a previous role and those whom I haven't had yet the pleasure. I'm very excited to have joined this project, for I believe it's a very solid franchise to which I think I can contribute with my previous experience in the sector. So far, I've only been 60 days in the job. As a matter of fact, 40 working days. I spent most of my time here in Barcelona, among other things, going through the bank's balance sheet. And I believe that as we will see later, there are no major issues. And therefore, the bank is aligned with market standards.As Cesar mentioned, I'm also personally encouraged by the strong financial performance of the bank in the first quarter. The capital position is stabilized at 12% CET1 ratio, showing a benchmark MDA buffer of above 360 basis points. TSB has become a positive earnings contributor to the group and is showing strong commercial momentum. And the profitability in Spain is set to accelerate in the coming quarters, on the back of a strong commercial activity and cost savings derived from the restructuring program, which has been successfully executed in Q1. In any case, I look forward to providing you with further details on the financial opportunity in our upcoming strategic day. Well, I'm already talking too much, as always. So let's focus on important issues today, which are regarding the quarter. Let me start by our quarterly results, where we have recorded a net profit of EUR 73 million at group level. As Cesar mentioned before, I believe it's important to high point that TSB is back to profitability. Let's now go through the different items of the P&L in more detail. So moving to Slide 17. Group net interest income decreased in the quarter by 2.4%. On the top right-hand side, you can see the bridge of the NII evolution in the quarter. The main positive impacts have been higher volumes as well as the appreciation of the sterling, while the factors that contributed to reducing NII have been lower interest rates, fewer calendar days in the quarter, a couple, or a lower ALCO portfolio contribution after Q4 disposals. And for comparison purposes, a positive one-off recorded and disclosed in the previous quarter. In any case, after last year's evolution on the sector, it's good news for me at least, that the customer spread has remained stable in the quarter. As a matter of fact, 1 basis point up. As for the group's net interest margin, a slight decline Q-on-Q, it's mostly explained by lower contribution of the ALCO portfolio. However, it's important to note that we expect this to be the lowest NII quarter for the year. Looking forward, there are some tailwinds that will more than offset the pressure coming from lower rates and shall, therefore, increase the NII in the coming quarters. Those will be, on the one hand, TLTRO III, as we drew an additional EUR 5 billion in the latest auction at the end of March. Higher loan volumes as the quarterly loan growth was backloaded, as Cesar mentioned before, and therefore, has not yet accrued interest in full. And finally, savings from wholesale funding maturities, mainly explained by an expenses sub-debt that will be called in May at TSB. Leaving the NII line to one side and moving on to fees. When comparing year-on-year, fees decreased by 2.2% or 2.4% on a quarter-on-quarter basis. Nevertheless, I believe it's interesting reviewing the different lines. On a year-on-year basis, office increased by asset management. In this line, it's important to remember that Q1 '20 numbers include EUR 60 million of fees related to Sabadell asset management before its disposal to Amundi. The good news, in my opinion, is that we have already recovered EUR 5 million of those EUR 16 million, driven by the good performance of assets under management in the quarter. Q-on-Q, all fees have been impacted by this low commercial activity in January and February. As per the asset management line, it's worth considering that Q4's figures were positively impacted by seasonality due to success fees based on performance of funds and insurance businesses. Those fees amounted to EUR 13 million in Q4. If we factor them in, then asset management would have been up Q-on-Q by EUR 8 million or over 10%. As you can also see at the bottom right, at the beginning of the quarter, fees were impacted by lower customer activity as they remain constrained by the lockdown measures put in place to tackle COVID-19 as well as by the severe weather and storms that hit the country. In any case, fees recovered in February, and in my opinion, outperformed in March. Primarily, in services as economic activity recovered over the quarter, but also in asset under management as a result of a strong net inflow in mutual funds that this has showed before and the buoyant capital markets.Moving on. Looking at the cost line. Total cost declined year-on-year by 1.2%. Basically due to the restructuring plan in TSB, which has led to a headcount reduction and, therefore, lower general expenses. The cost of the comparison is a little bit more complicated due to all the extraordinaries that were booked in Q4. On the one hand, disclosed nonrecurring costs related to the announced efficiency plan, EUR 332 million, but also some extraordinary cost savings reported last quarter, related to lower-than-expected personnel costs in Spain, explained by the renewal of the collective bargaining agreement, which amounted to EUR 23 million.As per the quarter, the main event has been the successful execution of the efficiency plan, which has entailed an 11% headcount reduction. Mostly completed at the end of March and carried out without affecting commercial activity, as it was explained before at the beginning of the presentation. Therefore, we shall start seeing the benefit of the gross cost savings, which we already disclosed were around EUR 140 million per year from second quarter onwards.In Slide 20, the group's credit cost of risk ended the quarter at 69 basis points, below the 86 basis points reported in 2020. On a Q-on-Q basis, total group credit provisions, excluding those taken to cover the NPL's disposals in Q4 were down by roughly EUR 50 million. This is a result, as we were expecting, of lower credit provisions ex TSB. It is also worth noting that TSB's Q-on-Q comparison is impacted by the release of provisions reported last quarter. Which came, as you might remember, as a result of the better macroeconomic outlook for the U.K. Looking at the top right-hand side, you can find the evolution of total provisions and costs, which amounted to EUR 354 million in the quarter. Starting from the left, we accounted for EUR 281 million of NPL credit provisions. EUR 12 million of provision charges and foreclosed assets, whereas costs related to the management of NPAs have been EUR 43 million. And finally, we booked EUR 18 million related to other provisions, mainly litigations. In the following section of the presentation, we will review the asset quality dynamics, the liquidity and the solvency. Let me start with asset quality. As I will explain with more detail, following the action taken in Q4 and Q1, including loan reclassifications, all vintage, NPA disposals or one-off provisions, we can conclude after a review that we have not found anything out of the ordinary in terms of asset quality standards. In other words, our view is that Sabadell is exposed to similar asset quality themes than those being faced by the Spanish financial institutions and, quite frankly, by most of the European banking system.So getting into details. Beginning with payment holidays, it's worth mentioning that circa 38% have already expired. And on average, they have expired over 4 months ago. EUR 2 billion are currently outstanding, mostly mortgages, as you can see, and they are due to perish in the coming quarters, especially, obviously, in Q2 because of the ending of the moratoria of mortgages. Very few consumer finance still existing. In terms of ICO government guaranteed loans, to date, we have granted EUR 12.5 billion, for which the state provides with a guarantee of over 75%. In Q1, we have granted more than EUR 650 million. And as it is shown on this slide, most of the maturities are well beyond 2023.Moving now to Slide 23. As explained earlier, we've carved out a review of the bank's balance sheet. And we would like to share with you some comparisons. Our NPL ratio at group level stands at 3.7%. Also, I believe it is important to mention that half of the current NPL portfolios are classified as unlikely to pay. Therefore, they have not yet failed to pay over 90 days. As you can see on the right-hand side, our NPL ratio in Spain is well in line with our peers, standing at 4.3%, while the Spanish sector as per Bank of Spain data is slightly above, at 4.5%. Finally, we have total provisions that cover 56.4% of our NPLS, while Stage 2 and 3 loans represent 11.1% of the book.In Slide 24, we have deep dived into the Pillar 3 reports. In order to try to show some more details of the profile of our nonperforming exposures, but also compare them with our peers' shape. We're showing data as of group exposures as this is the data that you can find in our Pillar 3 reports. And we're also showing data as of Sabadell ex TSB in order to compare more accurately with our Spanish peers. On the left-hand side, you can see the level of both provisions and guarantees behind our NPEs. At group level, if we had the amount of provisions plus the guarantees, 88% of the portfolio is covered. While on an ex TSB perimeter, this amounts to 86%. This is very much in line with our peers' data, which stands at 88%. Another analysis, which I find particularly interesting can be found looking at the vintage of the NPEs. This is looking at how long they have been past due. We can see on the right-hand side of the slide, based again on Pillar 3 statistics, that 74% of our stock ex TSB has a vintage of less than 2 years past due, which compares to only 59% of the sector. In other words, we have a portfolio which is similarly secured to the ones of our peers, taking into account past provisions and guarantees but younger, after all the old vintage NPL disposals executed in Q4, which, as you know, are always those with higher coverage.Moving on to Slide 25. In terms of foreclosed assets. I think the picture here is very clear. We have a much lower exposure versus our peers, approximately half, 1.1% versus 2.1%. 73% of our foreclosed assets have been repossessed in the last 4 years, and finally, but not less important, we have a better mix. 95% of our foreclosed assets are finished buildings compared with a 57% average for our peers.In Slide 26, we show both the gross and the net NPA ratio, which, as you can see, are very much in line with our peers. When talking about gross NPA ratio, ours stands at 5.3% ex TSB, which is slightly below, therefore, a little bit better than our peers' average at 5.4%. While our NPA ratio, net NPA ratio stands at 2.5%, slightly above our peers' average at 2.3%. In Slide 27, moving to analyze the net inflows of NPLs for the quarter. It's worth to review the evolution of the group ex TSB and TSB separately. At the end of the quarter, NPLs ex TSB classified as unlikely to pay, represented roughly 60% of the new NPL gross inflows. When we focus on the net inflows at the right-hand side of the slide, there has been a reduction of EUR 9 million of NPLs classified as past due and older than 90 days, while we have seen an increase in NPLs classified as unlikely to pay, mainly due to a single name. Therefore, in general terms, the underlying evolution that we are seeing this quarter has been most likely even a little bit better than what we were expecting on an organic basis. At TSB, there have been a few changes. Following the adoption of the revised IRB models for the secured portfolio, and subsequently, the change in default classification, there has been a one-off increase in the Stage 3 population of circa EUR 190 million related to interest-only marketers. In any case, it's important to highlight that these mortgages were previously classified in Stage 2. And therefore, its lifetime expected credit loss was already covered. Consequently, this change in classification has not impacted the P&L. This change, in any case, is aligned with U.K.'s best practice of migrating past term interest-only mortgages to Stage 3 when adopting the new definition of default.Turning now to Slide 28. The group once again ended the quarter with a strong liquidity position. This is reflected in an LCR well above 200%, EUR 50 billion of high-quality liquid assets or are loan-to-depo, which ended the quarter at 98%. The main events in the quarter have been an additional drawing of EUR 5 billion from the TLTRO in March, as we are fully confident that we will meet the TLTRO III net lending targets. Moving on to capital on the following slide. We show the evolution of the group's CET1 ratio in the first quarter. The fully loaded CET1 stands at 11.96%. This is having slightly decreased 6 basis points Q-on-Q. Organic capital generation is the main positive impact, adding 10 basis points to the ratio. Anyhow, it's worth mentioning that accrual of 27% of cash dividend payout has been deducted from capital as according to regulation. As you all know, dividends must be accrued at least at 3 years average. This has been an impact of minus 3 basis points for the quarter. And on top of this, we had other impacts such as the fair value adjustments from the fixed income portfolio as the yield curves steepened over the quarter. Or the RWA inflation, driven by the strong volume growth that we had, especially in the month of March, as Cesar explained before. After adding 42 basis points from the IFRS 9 transitional adjustment, the phasing ratio stands at 12.38%. All these elements, together with the Tier 2 bonds and the AT1s bring our capital -- our total fully loaded capital ratio to 16.6%. And finally, our MDA buffer stands at 366 basis points above our total capital requirement of 13%. Finally, regarding our MREL requirement, it is worth highlighting that we are already compliant with the new requirements that are based on both risk-weighted assets and leverage ratio exposure. Main events of the quarter have been the issuance of EUR 500 million of Tier 2 in January and another EUR 500 million of AT1 in March. And with this, let me hand it over to Cesar for the conclusion of our presentation today.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you, Leo. We'll come to the end of the presentation of the Q1 results. But before going into the Q&A, allow me just a couple of considerations. The Investor's Day will take place on the 28th of May. Nevertheless, many steps of the implementation of the new strategy have already been taken. The new organization of the bank and the new organizational governance and the new organizational structure are key pillars for the deployment of the transformation that we envision for the bank and the first steps of the journey. But quite a few other actions have been taken already. Just as an example, the new management objectives have shifted their emphasis from business volumes to profitability and return on capital. The review we have undertaken of the balance sheet and the overall situation of the bank give us confidence that the starting position, generally in line with the market, is an adequate platform on which we can develop our plans. We look forward to seeing you on the 28th. Please save the date. And with that, I will now hand it over to Lluc to kick off our Q&A.

[Lluc Sas Franch]

Thank you, Cesar. We will now begin the Q&A session. [Operator Instructions] Operator, could you open the line for the first question, please?

[Operator]

The first question comes from the line from Britta Schmidt, Autonomous Research.

[Britta Schmidt]

I have got 3 quick questions, please. The first one is on restructuring costs. Are there still any pending restructuring costs on the TSB side that we need to include in the future? And you alluded to potential further cost restructuring. Could you describe to us any thoughts on how to fund future cost restructuring plans? What plans would you take regarding the capital management there? The second one is, could you elaborate a bit on where you are regarding the benchmark lending targets? Maybe you can give us some numbers there on where the portfolio stands versus the target? And then lastly, on capital, are there any further regulatory headwinds that we should bear in mind from here going forward?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Okay. If you -- let me just give a high view, and then I'll pass it on to Leo. On the restructuring cost of what is planned today for the U.K., there's a very limited amount pending. In further costs and further restructuring, I think, we'll give you a better view in the strategy day. And on regulatory headwinds, we don't see anything significant this year. And we are estimating around 15 basis points from EBA guidelines only for 2022. But please, Leo, if you can further comment.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. So starting with the TSB restructuring. Yes, we -- I think we disclosed last year that there were still pending GBP 30 million to be booked this year. We've covered 1/4 of that in the first quarter, just didn't show any more extraordinary. So it's included in the EUR 200 million of costs from TSB. And a reminder, this is 3/4 of this GBP 30 million will be booked in the coming 3 quarters. As per the benchmark, yes, we're well ahead. I think we are over EUR 1 billion on top of the benchmark. So we are very confident that we will address this issue with no problem. At year-end, moreover, looking at how volumes are evolving in the first few months of the quarter. Now that's basically the reason why we went and withdrew an additional EUR 5 billion in the March's auction. And finally, on capital headwinds. Well, it's a pleasure to say that we're not expecting any more this year. All of them were booked last year, including the TRIM and low default portfolio and new definition of default. So no surprises for this year. The only thing I have in the pipeline, if you wish, its EBA guidelines, which will come from 2022 onwards. And it's not material. We're talking about 15 basis points in 2022, which, yes, we will work to offset it with other actions.

[Operator]

Next question comes from the line of Ignacio Ulargui from Exane BNP Paribas.

[Ignacio Ulargui, Analyst]

I just have 2 quick questions. One is if you could give us some more color on the loan growth in the quarter. I've seen there has been a lot of growth in the large public -- large corporates and public sector portfolios. Just to get a bit of a sense of how that would sort of like, if that's a strategy or a bit of an opportunistic take in the quarter? And secondly, very nitty-gritty question, but I mean, there was a very huge increase in equity method and dividends. I mean could you just elaborate a bit on what should we expect in the future and what was there in the quarter?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

On the first one on the corporate and public sector growth, I think we are very comfortable growing there in this period. It's a place where the numbers and when the asset quality can be much better tested and we were happy to grow on that side. And I pass on the equity method question on to Leo.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. If I can add on the evolution of the loan growth for the quarter, I think we are pretty satisfied to see that we've grown all over different sectors -- in segments, sorry. So mortgages are up slightly, but they're up Q-on-Q and certainly year-on-year. We have corporates -- large corporates being up 2.2% in the quarter. And 0.6% on a year-on-year basis, but also SMEs, which are growing 2.8% also in the quarter. So I think it's been pretty stable all across the book that we've seen good demand from our clients, and therefore, we've been able to grow the books. And finally, going into the equity method, this is a one-off, and it's due to an update valuation of some companies. That are accounted through equity method in our venture capital -- in banks of venture capital. This is according to IAS 28, which allows to value -- the interest of some subsidiaries at fair value through profit and loss. This has been obviously reviewed by our auditor. And no, we're not expecting any further impacts through the coming quarters.

[Operator]

Next question is from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, Director]

Welcome Cesar and Leopoldo. I just have one. On TSB. So previously, the bank was considering potential disposal of TSB, but now you seem to have changed your mind. I wanted to ask you what has changed in your view for the bank and whether you would again consider potential disposal if someone offers the right price?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I think the guidance that we are giving very clearly today is that we will not initiate in the near-term any corporate transaction neither on TSB nor Mexico. And the reason on -- specifically on TSB, is quite simple. I think I've had the pleasure and the luxury to be -- to sit in the Board of TSB for the last year, for a year. And the assessment of the quality of the franchise has made the Board to reconsider any potential disposal at this point in time. We are confident of the turnaround. We trust the management. We want to give continuity to the brands that are being developed there. And in reality, we feel confident that there is much more value to come from this franchise. As this was confirmed, the decision was made previously, but certainly, the results of the Q1 confirm that line. And this is a message also that we are not, at this point in time, looking for any interest in the franchise. We just want to support it and see it grow to its potential.

[Operator]

Next question comes from the line of Andrea Filtri from Mediobanca.

[Andrea Filtri, Research Analyst]

Two questions. One, if you could please elaborate a little bit around the [ nominal ] increasing our risk-weighted assets Q-on-Q despite loans being fairly flat. And the second, on the healthy growth in deposits, if we should expect any change in Deposit Guarantee Fund, the resolution fund contributions on the back of that?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I'll leave this one to Leo. But certainly, the growth in volumes, it's the main driver of the risk-weighted assets growth.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Yes. Andrea, I think the issue is that on an average standpoint, you're not seeing a huge growth because as we tried to explain before, most of the growth has taken place in the month of March. So it has been backloaded in the quarter. That's why we are kind of optimistic for the evolution of NII going forward because these volumes will have to, well, bring us interest in the coming quarters. But at the end of the month, we have seen an increase in, obviously, RWAs, which were linked to this increase in the volumes. And as per the deposit contribution for the Deposit Guarantee Fund and the [ IDE ], I think the numbers should be pretty stable with regards to last year numbers. So around -- no -- the Deposit Guarantee Fund will be around EUR 115 million, EUR 120 million. And the fund for Europe will be in the region of EUR 80 million to EUR 90 million.

[Operator]

Next question comes from the line of Mario Ropero from Bestinver Securities.

[Mario Ropero]

I wish you the best of luck to all you guys in the new stage. First question is, since you may need to get resources to fund future restructuring. One of the questions was, can you tell us how much unrealized gains you keep in the ALCO portfolio. What other levers you could use to fund restructuring?And then another question on state guaranteed loans, and apologies if you said that before. I missed this part. On the EUR 12.5 billion ICO loans, could you please tell us how much Stage 2 and Stage 3 loans you have there?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

The resources to fund might have a number of origins for the future. To the specific question of how much upside we have in the ALCO book, I would say, it's around EUR 1 billion, and I'll leave more concretion for Leo to provide.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. I mean on the ICO loans, we have very little in Stage 3 because, well, everything is performing yet. So I would say, around 2%, which compares -- I saw this morning an article that came from Bank of Spain, which were sharing some data for the market. And if I recall correctly, it was around 1% of Stage 3 loans booked in the ICO loans profile. While the Stage 2 is around 9%, if I recall correct, the data from Bank of Spain was around 8%. So we seem to be more or less in the back here.

[Operator]

It comes from the line of Carlos Peixoto from CaixaBank.

[Carlos Joaquim Peixoto, Analyst]

First question would be on provisions. I was wondering if you could shed some light on your outlook for cost of risk for the year. And besides positive risk, well, we have always these additional provisions related with proposed assets in NPA management costs. I was wondering whether the first few figure for these 2 lines could be perceived as a recurrent figure for coming quarters, particularly on the NPA's management costs? Then secondly, on fees, if you could give us a bit of color on what you expect -- on what you expect to see for the full year? That would be very helpful.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I'll leave the one-off provisions to Leo. On fees, I think we are planning quite a bit of stability. We are reviewing, nevertheless, some elements of the structure of the fees in retail, but we don't foresee any major changes.

[Leopoldo Alvear Trenor, Chief Financial Officer]

And in terms of provisions, I think -- well, we guided at the end of last year for a cost of risk which should be between 2019 and 2020. We are more or less there. The first quarter has been, well, slightly better than what we expected in terms of the evolution of asset quality. So far so good is what we can say. Of course, we need to wait and see what happens in second Q. As I said before, we have a big tranche of our moratoriums expiring this year, we and the rest of the sector. So things are looking good, but we need to see how this evolves in the coming quarters. So it's a little bit too soon, in my opinion to change the guidance. Give us some time. I think the banks will need a little bit of time to see how these loans evolve from second Q onwards, because it's close to 70%, 80% of the remainder, which is expiring this next quarter. So far, we've had good experience with what has expired. But well, we need to wait. I prefer to be a little bit more conservative here and see what we can see in the coming months. As per the provisions related to foreclosure and NPA management, I would model them to be more or less stable throughout the year, if you wish.

[Operator]

It comes from the line of Francisco Riquel.

[Francisco Riquel, Head of Research]

So I mean it's a pleasure having you on board here. It's reassuring to hear from you that you found no surprises in the balance sheet. So I also appreciate the cleanup made by the end of last year. You have shown asset quality metrics where you rank well in all the legacy NPLs and NPAs that you have in the balance sheet. But I wonder if you can give us more color on the SME book. You have a large SME exposure, bigger than peers. So the ICO loans there, for example, they're only maturing in 3, 4 years from now. So what is -- what -- if you can share with us what you have already seen in that book? And any feedback that you can give us there? And then also a follow-up on this NPA management costs, which if I were to annualize because you mentioned that it's recurrent. The management cost will read 20% of the net real estate assets, which -- of the net book value, which looks too high for me. If you can please explain what's here.

[Leopoldo Alvear Trenor, Chief Financial Officer]

So shall I go for the SME front, if you wish? Well, the truth is that, Paco, I've spent some time looking at the books and basically comparing them with the market. I mean as you all know, I have some previous experience in the market in Spain. I haven't seen something which is definitely different to others, to be completely honest with you. So I was just trying to show factual data. I think we are in the pack. We are more or less where everybody is. And even if I go segment-by-segment and I look at SME exposures, are -- the breakdown of our book, it's relatively similar even when I look at the different stages to our peers. We have a part of the book, which is in Stage 3, it's probably even a little bit higher than our peers. Well, you can say that we are either more conservative or that we have a worse book, I don't know because I don't know the books of my peers. But we are more or less in line on that regard. When I look at the observed default rates of our books and moreover of our SMEs, they're not worse than the ones of our peers, they're actually even better. Is this -- how is this going to evolve with these ICO loans going forward? Well, I think what we -- what is clear is that the measures that have been implemented, both moratoria and ICO have been the right ones. I think that's -- that's the first thing to say. And this has been certainly -- has given us the opportunity to manage the situation appropriately for the banks. I think the fact that these loans are maturing from 2023 onwards, it's pretty good because it's going to give a lot of time to these SMEs and corporates to basically recover from these what we all hope it's going to be liquidity crisis, because we are already seeing that the vaccines are coming. We've seen that consumption is picking up in those countries where they are ahead in terms of the vaccination process. And the economy is really picking up faster than what we all thought on those geographies. So I would certainly expect that to happen here in -- Continental Europe. And if that is the fact, I think we will see that the evolution of those loans should be good. But again, as I said before, in the case of moratoria, it's too soon for me to give you -- I don't have -- unfortunately, I don't have a crystal ball. So I cannot give you the precise numbers of how this is going to evolve. So far, so good. I think the evolution is good. I think the macro is getting probably faster, better than what we thought. I mean the micro within the macro. So we are reasonably optimistic on that regard. But again, as I said, it's a little bit too soon to change guidelines or to give you, unfortunately, to be able to give you any more color on that. I'm sorry, I don't remember the second question.

[Lluc Sas Franch]

Regarding the NPA costs evolution -- future evolution...

[Leopoldo Alvear Trenor, Chief Financial Officer]

For the maintains?

[Lluc Sas Franch]

Managing NPAs?

[Leopoldo Alvear Trenor, Chief Financial Officer]

Yes. What I said, I think this should be running down. Obviously, it has been running down in the latest years. Because the NPA pool has been coming down. So we have our agreements with our services as I said, I would tend to believe that the numbers that we showed in Q1 would be more or less stable throughout the year and then perhaps going a little bit down in the coming years. But this is a very stable or a reasonably stable number.

[Operator]

It comes from the line of Stefan Nedialkov from Citi.

[Stefan Rosenov Nedialkov, Research Analyst]

It's Stefan from Citi. So just taking a step back, Cesar has been at ING. Obviously, much more of an asset-light platform business in Spain compared to a traditional bank. Leo was at Bankia, 2 very different business models. In the case of ING, obviously, not many branches, et cetera, et cetera. At Bankia, a lot of the capital generation was driven by delevering. So 2 very different approaches. How do you like plan to turn the business around at Sabadell? There are many routes you can take. I know the Investor Day is on the 28th of May. But any big picture comments as to the overall approach you are going to take here? And related to that question, what would make M&A attractive to you at the group level, not just Mexico, TSB, but just the group level? And how much time has to elapse at a minimum before you consider that M&A? If I may also look back to what Leo said on risk management that he went into the balance sheet and didn't see much difference versus peers. Leo, I believe you're right. If you look at the overall, however, when you split the book by corporate and retail, if I take Caixa, as an example, Sabadell's LGG parameter for corporates is quite a bit higher versus Caixa. And I don't know whether that's just the attitude towards risk management and risk underwriting in the previous X years before you came on board, but how are you going to turn that around? How are you going to improve the risk management in terms of seniority of exposures, collateralization? How are you going to reprice that book to increase profitability? Sorry for the many questions and many sub questions, but if you can just give us some color on the overall direction on the risk management and M&A, that will be really, really useful.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Well, I think, Stefan, many of the questions that you have been raising are intended to cover more on the strategic day than on the Q1. And I think we will address a number of those on the 28th. On M&A guidance, I think the only thing that we are ready to share at this point in time, is what we've expressed that we believe on -- and that's the mandate that we have from the bank, that we believe that our road map is as a stand-alone, that we believe that we have a sound starting point to do so. And that there are elements of improvement looking forward that, as I mentioned, we will cover in more detail. We've given some hints, but that we will cover it in more detail on the 28th. In terms of disposals, as I just mentioned, there's nothing at this point in time, neither on TSB, nor Mexico, which are the largest ones. In terms of strategic alliances, we will continue exploring different fronts. On minor activities and always with much more of an industrial focus. So are there partners that can deploy like in the renting business that we announced yesterday evening? Are there partners that can perform that industrial task with more scale, with more knowledge than we do ourselves? And that's basically -- Leo, you maybe want to add something?

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. Well, the first thing I'd like to add is that I really liked the comparison that you made at the beginning, Stefan, of the background of Cesar and myself. That's one of the things I liked when Cesar called me at the beginning of the year in order to join this project. I think we fit very well. I think Cesar has a lot of knowledge of how to digitalize and how to run a bank with a lower amount of footprint. And I bring some knowledge on the table of capital allocation and efficiency in capital allocation, which is something that we've been very focused in Bankia. On top of that, or getting into your question regarding the risk. Well, as I said, when I look at overall numbers, we are pretty similar to the market. I haven't specifically looked at given targets such as Caixa's as you were mentioning. But -- and we will address this with more detail at the strategic plan, as Cesar was explaining. But the one thing that I think is very different or is different at least to the average of our Spanish peers, it's our potential in terms of revenues. This bank earned a pre-provision profit of EUR 1.85 billion last year. When you look at metrics of NII fees, even of gross margin with total assets, probably this bank is #1 or in some things, #2 in Spain. In other words, we have much more power in order to take into -- or to take care of potential -- of a potential higher cost -- potentially higher cost of risk, which is -- which would be, in any case, derived from the fact that we have higher margins in the upper part of the P&L. So when I compare, for example, with my past experience, I was just telling Cesar, when we were coming down. I am very excited about the path and the speed at which the income in this franchise can grow compared to experiences that I had with a very mortgage book-weighted, which is much more difficult to evolve because it takes a long, long time.

[Operator]

Next question comes from the line of Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

And of course, congratulations and best of luck with the new roles. I'm going to follow-up on some of the discussion before, but trying to get a little bit more color from you. So 2, 3 questions from me quickly. If I'm doing the numbers right. You have some estimates there, but you have something like 4% of the total loan is still on moratoria as of December or is your share of the unsecured share of ICO loans. Against that, the bank has provided very little provision -- of cost of risk at the buffer. So obviously, I know the rationale why asset quality is going to be stronger this year. But could you give us a little bit of color on what is the expected default ratio that you are embedding in your guidance in the retail moratoria and the ICO loans, so we can cross check that? Because right now, if you keep like 90% of your payment holiday loans are performing, the models, the provision in models can give you the cost of risk you want, obviously. Because it's not factoring in the potential NPL formation. So could you please elaborate a little bit on that? I think where it lost, and that's why the market is not pricing in the cost of risk that we've seen across the sector so that will be super helpful. And then on TSB, it's another quick follow-up. In my opinion, the divestment in TSB was instrumental for the turnaround of Sabadell refocusing on Spain. Unlocking some capital potentially depending on the price to finance more restructuring. So I understand the prospects for the U.K. banking sector are improving. That should improve price and valuation. But maybe Sabadell could get a better trade if they redeploy that capital or refocus on Spain. So I don't really understand very well why you decide to postpone it. So it is because you didn't have an acceptable bid. Could you touch on that, if it's possible? And lastly, a very quick one on capital. What's your strategy on capital? Do you think this discussion in the bank that Sabadell could need a slightly higher capital ratio to reassure investors and the market on a higher valuation, carrying a high capital ratio, north of 12% to reassure on the exposure to SMEs and the asset quality concern that would be waiting on the stock? Thank you, and sorry for the long questions.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes. If I may, I'll take the TSB one and leave the other 2 for Leo.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Of course, you always take the easy ones.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Of course, that -- get used to it Leo.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Yes. I know, I know.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

So on the TSB one, we see a potential of improvement in the franchise that is strong. And therefore, it's, of course, a judgment call, but our judgment call is that this is the right decision, that this is the right decision, and that's why we, together with the Board, have taken a clear view that in the near term, we are not going to start any process around TSB. I hope that the results will show that we made the right decision. And with that, I pass the easy ones to Leo.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Okay. So getting into the easy ones, especially one about the potential cost of risk, Carlos. I'm afraid I'm going to disappoint in the answer. I think it's too soon to try to give more guidance to the market. I think these banks tried to explain a little bit more in detail how we thought our customers risk was going to perform last year. We showed our strategic models. But they're very complicated as all models, and they are based on a number of assumptions. So it's -- I think it's very difficult to agree on a certain view there. In my opinion, and I'm sorry, because I know the answer is going to disappoint you. But I think we need to wait a little bit. We need to wait to see how these Q2 evolves. I think this is going to give us a good measurement of how asset quality is going to perform in the coming quarters, just one quarter away. I know we are -- with all banks and investors have been waiting for this for a year. And we -- the banks have always said the same, okay? So far, so good, things are much better. I remember when I was rebudgeting last year in May. The assumptions that we are considering are nowhere where we are today. And I'm talking about my previous role, but it doesn't matter. You can go across any given bank. So things are evolving much better than what we thought, let's wait -- just 1 quarter away. Let's wait a little bit and see how things comes -- come in, in the coming quarters. Let's wait until delivery. I would -- I want to deliver. I want to see what we can deliver. And in terms of capital, I think we are comfortable with this 12%. And moreover, with the buffer, with MDA buffer, which is what I really look at. We are -- we have an MDA buffer, which is very close to 370, which is very much in line with our peers or even above some of our peers, which probably have exposures. Well, to other markets, which comes in as good or bad, depending on the risk approach that you take to those exposures. So in general terms, I believe, with the 360, 370, 350 management buffer, we are comfortable on running this market with the level of NPAs that we have and the kind of revenue that we can make and that I tried to point out before.

[Operator]

Next question comes from the line of Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, Executive Director & Equity Research Analyst]

Welcome to you both. So I have a couple of questions actually on the U.K. We've seen 2 quarters already running where the loan yield seems to be ticking down from high levels. So I want to understand how much of that is related to the mix, unsecured kind of undergrowing mortgages? Or how much of that might be related to the pricing of conditions of the mortgage book in the U.K.? And the second one is on the swap you have in the country. If you can give us the size, the contribution, how would you expect that to contribute in coming quarters?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I'm sorry, Ignacio. Can you restate again your question? I didn't fully understand the one of the volumes of the U.K.?

[Ignacio Cerezo Olmos, Executive Director & Equity Research Analyst]

Yes. The loan yield in the U.K. seems to have come down a little bit in the last couple of quarters. So I would like to understand how much of that is related to mix changes. Mortgage is growing faster than the unsecured or how much of that is related to the pricing conditions in the U.K. becoming a little bit more competitive? And the second one would be on the structural hedge, the swap you have in the U.K. to protect the insensitive deposits, if you can give us the size of the swap, the contribution to the NII and how would you expect that to evolve in coming quarters?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes. Thank you. Now it's much more clearer. I think the mix of mortgages versus other riskier type of assets is one of the things that makes the yield go down, not too significantly. So it's not too high, but it's basically that this very high-growth of mortgages compared to a much more stable or even declining in some areas of other products. The mix is what makes -- what carries most of the weight. Of course, the markets are competitive. It's markets that are growing very healthily, and there's a lot of fight for the market share. But the price of the mortgages has not been severely impacted. It's more the mix. In terms of the second question...

[Leopoldo Alvear Trenor, Chief Financial Officer]

Well, the second question is, again, a little bit similar. We're going to -- we have been seeing a little bit of an impact on this hedge. And we may be seeing a little bit going forward. But in any case, the customer spread has been -- has remained pretty stable Q-on-Q, around 2.5%. So while we are reducing the yields, we are trying to reduce also the cost of funds. So hopefully, going forward, it should improve.

[Operator]

Next question comes from the line of Sofie Peterzens from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Here is Sofie from JPMorgan. So my first question would be to both as CEO and CFO. You mentioned that you kind of went through the loan book and you haven't found any negative surprises there, which is very encouraging. But when you have gone through the bank -- are there any other kind of forces, either positive or negative that you have found within Sabadell? And if you could just share your thoughts here. And then my second question would be around ICO loans. The government is basically saying that around EUR 3 billion of ICO loans could be restructured. Is this going to have any impact on Sabadell? And if so, what would the time frame be of a potential impact?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I'm very sorry, I look around and the faces, is that because of the voice sound, we were not very -- we were not able to clearly understand the question. I'm sorry to ask you to repeat it.

[Sofie Caroline Elisabet Peterzens, Analyst]

Oh, sorry. So sorry...

[Leopoldo Alvear Trenor, Chief Financial Officer]

I think I got it, Cesar. Please, Sofie, if you -- if I haven't got it, you remind me, okay? I think the first one was whether -- well, regarding the fact that we have gone through the books, and we haven't found any negative surprises. As I said before, we were trying to be factual. I've tried to explain you what we have seen and the conclusion is that we haven't seen anything different from what other Spanish peers have. So in my opinion, but of course, I'm bias here, I'm part of the bank. Our asset quality is similar to our peers. And no, we haven't found anything differently. There's no idiosyncratic issues at Sabadell in my personal view.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes. The other -- the elements are maybe of less interest in this type of setting, but it's also very important. Can you hear me?

[Leopoldo Alvear Trenor, Chief Financial Officer]

Yes.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Okay. Sorry for that. So the other elements, I understand that are less relevant in this type of setting. I can assure you that for management, they are absolutely crucial, which is to see the vibrancy, the enthusiasm, the caliber of the solutions, et cetera. And in that sense, we found an organization that has, and I mentioned it at the beginning and the opening, the eagerness to perform. That is unquantifiable, but let me tell you that it makes a tremendous difference in the ability to shape the future of the bank. We found flexibility. We found commitment. We found caliber in the people. We found that the SME franchise has elements that are clearly distinguishable from other competitors. The talks with clients are really -- and they are very difficult to translate into numbers, but they really make a difference in the perception that we think this bank has. And that's why a clear element is that when the transaction didn't go through, it's surprising to see the support from clients that didn't want to see Sabadell disappear as a competitor because the long lasting relationships, on average, more than 11 years, the close relationship of our relationship managers, it's not a surprise. It's a very positive surprise, I would say.

[Operator]

Last question comes from the line of Fernando Gil from Barclays.

[Fernando Gil de Santivañes d´Ornellas, Research Analyst]

Welcome, everybody, to their new roles. Wishing you all the luck. So 2 quick questions from my side. First one is, is there a time limitation where -- or a time limitation where you can do additional cost restructuring in Spain and in the U.K.? This is one. I mean do the agreements signed with unions, I mean, have a time frame where you kind of do additional cost restructuring? This is one. The second one is, if you can drive us through the P&L financials of the deal announced yesterday with LAD -- ALD, sorry. How much NII impact will we see from 2022 going forward?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

There is no limitation from a regulatory or from agreements with trade unions on further decisions of further restructuring. On the LAD (sic) [ ALD ], the net income in last year, in 2020 was around EUR 7 million. So it's not going to be significant going forward any change. The rationale of the transaction has not been for the 10 basis points that we are going to get from the combination of the reduction of EUR 320 billion in risk-weighted assets together with the value that brings also a surplus. So we've not done it for this 10 basis points. The rationale has been really to have a better partner, to be able to offer better solutions to our customers. And certainly, to move out of our book, assets that are less in line with the type of assets that we want to hold at the bank.

[Lluc Sas Franch]

Okay. Thank you, Cesar and Leo. That concludes our Q&A session today. As always, the Investor Relations team is at your disposal, and we'll be happy to take any further questions you may have. Thank you, everyone, for participating and for joining us today. Have a great day.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Thank you all.