Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2018-Q2

[Cecilia Romero, Head of Investor Relations]

Good morning and welcome to Sabadell results webcast. My name is Cecilia Romero. I'm head of Investor Relations. And today we will be presenting our second quarter results. As usual, we are here today with the management; our [Foreign Language] Mr. Jaime Guardiola; and our CFO Mr. Tomás Varela. Good morning Mr. Guardiola. The floor is yours.

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Good morning, everybody, and thank you for joining our results webcast. Our presentation today will follow a similar structure than other quarters. I will begin by going through the key highlights of the quarter providing details of our profitability and commercial activity as well as our commercial transformation progress. And then Tomás will discuss our asset quality and service yield results. You will then be able to ask any questions you may have.Where is the -- sorry. Well, I would like to begin my presentation by highlighting the 2 important previously outstanding issues that group has now addressed. The announcement of the agreement to sell a substantial part of our problematic assets exposure and TSB migration to its new IT platform [ Protel 4 ] U.K. Both events are very significant in terms of their strategic implications and in terms of their contribution to enhancing the future profitability of Banco Sabadell despite having produced one-off charges in this quarter P&L.The agreement to sell EUR 12.2 billion of NPAs to institutional investors that we have recently announced will allow us to completely transform the bank's risk profile, accelerating the pace of disposal of problematic assets ahead of our Sabadell 2020 business plan targets. These operations will substantially de-risk our balance sheet, reducing the potential uncertainty surrounding devaluation of problematic assets and the residual risk in our APS portfolios. Also, they will significantly improve profitability by reducing funding and carrying costs and the future need for provisions. We estimate savings including both other operating costs and cost of risk savings of approximately EUR 150 million per year versus our business plan target.Furthermore, it is important to note that the deals announced do not include the sale of Solvia, our real estate servicer, which will continue to manage the assets generating additional fee income that was previously eliminated from the group's consideration accounting. The agreement for the block sale of these assets at a price below their net balance sheet value has require the recognition of additional provisions in the second quarter of EUR 177 million before taxes, but will have a positive impact of around 10 basis points on the fully loaded core equity tier 1 ratio, thanks to the reduction of risk-weighted assets once the transaction are completed.The second milestone is the migration of TSB to the new IT platform. As you know, in April TSB moved from IT system rented from Lloyds Banking Group to a new IT system provided by SABIS. This migration away from Lloyds was critical for TSB and represents the final step of TSB becoming a truly independent bank. Despite the longer terms benefits that the migration will bring, problems were experienced by many customers in accessing different channels after the move to the new system. These issues affected a large number of TSB customers to whom we were unable to provide the level of service that they have come to expect from TSB.It is important to note that we have made significant progress in addressing these problems since migration, as I will explain in more detail later on in the presentation. The efforts to resolve the migration-related issues have had an impact on cost in terms of resources and a specialist deployed to address these problems and in terms of customer remediation.The full cost including foregone revenue and provision for future charges, as well as additional migration costs, amounts to EUR 226 million before tax and has been registered in the second quarter result. Later on, in the presentation, I will give you with some more detail on this.Year-to-date net profit was EUR 120 million -- EUR 120.6 million and excluding TSB one-offs items and extraordinary provisions related to institutional NPA sales, group net profit will have increased by 24.4% in the year, thanks to the strong commercial momentum of our business.Specifically, on this point, I would like to highlight that performing volumes ex-TSB have recorded a particularly strong growth of 3.9% and 4.6% in the quarter and year-on-year respectively. Overall, our core banking revenue ex-TSB increased by 3.6% with commissions ex-TSB growing by 9% year-on-year. Please note that I will be referring to comparisons on a like-for-like basis to consistency purposes throughout the presentation.Finally, our pro forma core equity tier 1 of the NPA sales -- of the NPA sales ended the quarter at 11.2% fully loaded and 12.2% phase in, mainly impacted by several one-off items including sovereign volatility, ALCO portfolio rebalancing, risk-weighted assets growth and SAREB equity impairment.Well, as I said earlier, we have just announced the sale of EUR 12.2 billion of problematic assets. This was carried out in 4 transactions; Challenger, Coliseum, [ Gallerna ] and [ McCallo ] which included the vast majority of non-performing assets in the asset protection scheme, non-APS foreclosed assets, as well as a number of write-offs. Also, we announced that the foreclosed assets sold will be transferred to one or more newly incorporated companies in which Sabadell will hold an equity stake of 20%.Therefore Sabadell will not consolidate any of these problematic exposures after the closing of the transactions. Through this portfolio sales, Sabadell will spin off 43% of its problematic exposure and the net NPA ratio will fall from 2.9% to 1.7%. And our NPA exposure will be EUR 8.3 billion, including approximately EUR 7.1 billion of NPLs and EUR 1.2 billion of foreclosed assets of which 62% are finished buildings.Additionally, the total perimeter of assets included in the APS -- in APS will be reduced to EUR 3.7 billion including approximately EUR 2.1 billion of performing credit, and only EUR 0.9 billion of problematic exposure. This will represent an 85% decrease from the traditional size of EUR 24.6 billion. As said before, the overall impact on fully loaded core equity tier 1 of the additional provisions registered in the quarter and the reduction in weight assets is positive for a total of 10 basis points.As I explained earlier, after migration many customers experienced problems in accessing the accounts through different channels. Since then we have made significant progress in addressing these issues. By now TSB mobile app and web logins are and have been since early May at the level we would normally expect. The wait-times in TSB telephone channels have consistently been in the single-figure minutes on average on a daily basis since mid-June.Transaction times in our branches which were previously slower than expected are improving and customers are continuing to make and receive payments with normality. Work is continuing to minimize the level of future service interruptions, and TSB is also focused on ensuring that customers are compensated properly on dealing with customer complaints. I would like to emphasize that the migration itself was a very complex project of unprecedented size and scope in the industry. And from the standpoint of that integrity, the migration went as planned.In fact, the migration of all customer records took place as expected with more than 1.4 billion records of 5.2 million customers transferred to the new platform. The core banking product applications that operate behind the scenes have also been functioning correctly, ensuring the integrity of the data and the accurate settlement of transactions. It remains the case that even with the issues experienced in the weeks after the event, the new platform will deliver benefits for TSB and TSB customers in the future.TSB's new platform will be enabled to improve operational efficiency, provide operational independence and to develop a competitive value proposition, [indiscernible] the capability to create innovative products and services. Protel 4 U.K. also give a significant competitive advantage to TSB in terms of the time-to-market of new products features and enhancements.Finally, from the point of view of commercial activity, the problems experienced after the migration also had an impact. During the quarter nearly 26,000 customers switched their bank account away from TSB out of more than 5 million existing TSB customers. However, at the same time, over 20,000 customers opened a new bank account or switched their account to TSB during the quarter. Also, franchise lending continued to grow, increasing 1.6% quarter-on-quarter and deposit balances increased by 0.7% in the quarter.Moving to the next page, we can see as I mentioned earlier that group results were impacted by several extraordinary items in the quarter related to the incidents that emerged following the IT migration which amounted to EUR 203 million in costs. This amount includes the foregone income related to the temporary waiver of fees and charges, frauds and other costs and additional resource and advisory service costs. It also includes a provision of EUR 92 million for all future customer redress costs in relation to the migration and the associate remediation resource cost.During the second half of the year, we expect final cost related to TSB migration to include additional resource cost in run-off through the rest of the year and foregone income of approximately GBP 1.1 million per month to cover the costs of the higher interest on the TSB Classic Plus account. We expect 2019 to be a normalized year for TSB.Now I will move -- I will continue to reviewing our quarterly profitability and efficiency highlights. The key drivers of our profitability in the quarter included a positive evolution of performing loans which grew by 2.9% quarter-on-quarter at the group level and by 3.9% ex-TSB driven by a solid performance of SME segment and positive mortgage growth in Spain.Net interest income performed very well ex-TSB, growing by 1% quarter-on-quarter, underpinned by strong volumes and resilient SME yields despite the cost of strong liquidity levels and negative Euribor rates. At the group level, [ NNI ] decreased quarter-on-quarter impacted by the cost of TSB customer remedies.Fees and commissions grew by 9% and 6.3% ex-TSB for the group and -- and for the group respectively year-on-year. In the quarter, they increased by 2.5% and 6.5% for the group and ex-TSB respectively supported by a positive performance in service and asset management fees. Overall we saw a strong core banking revenue ex-TSB of 2.7% in the quarter and 3.6% in the year which is a testimony of our strong commercial firepower in Spain.Moving on to the income statement, it's important to note that net profit was impacted by several one-offs and seasonal items in the quarter. As I have explained before, the second quarter P&L includes EUR 177 million in provision related to the institutional NPA sales and one-off related to TSB migration for EUR 226 million which impacted other operating results, operating costs and provisions and impairments. Excluding these 2 one-off charges, group net profit actually increased by 24.4% in the year and 24.6% ex-TSB.Also, it's worth noting the payment of our contribution of EUR 50 million to the single resolution fund which is included in other operating results both at the group and ex-TSB level. This payment usually takes place in the second quarter and it impacts the comparability of quarter-on-quarter. Also, we have registered EUR 21 million of additional provision on our subordinated debt which impacted trading in the quarter. And finally, the change quarter-on-quarter of the trading income is affected by the fact that we materialize in the first quarter most of trading gains including our plan for the year.We will now go into more detail, and as usual, we will provide you with a breakdown of Sabadell and TSB results. Firstly, net interest income ex-TSB increased quarter-on-quarter by 1% driven by strong volumes and resilient spreads. In addition, TSB contribution to NII decreased in the quarter impacted by EUR 30.5 million of foregone income in relation to post-IT migration customer remedies. Overall group NII decreased by 1.6% in the quarter in constant effects but increased by 1.9% when excluding TSB one-offs.Customer spread ex-TSB remain robust and stable at 2.72% despite the strong liquidity levels quarter-on-quarter and negative rates pressure. This was possible thanks to our ability to defend pricing and growth in the highest yielding geographies and customer segments.At TSB, spreads were down mainly due to the impact of post-migration one-offs and to an increasingly competitive U.K. mortgage market. Group net interest margin excluding the impact of TSB one-offs grew by 2 basis points in the quarter helped by a lower wholesale funding cost which fell by 4 basis points as you can see in the following page.Overall as I mentioned before, our customer profitability ex-TSB remain robust and stable but was impacted by TSB one-offs at a group level. Customer loan yields ex-TSB and for the group excluding TSB one-offs remain reasonably flat thanks to a positive volume mix evolution.This positive performance of our customer loan yield was possible in spite of the negative effect of Euribor repricing downwards by 6 basis points over the previous 12 months. On the cost side, the cost of customer funds ex-TSB and group ex-TSB one-offs increased by 1 basis points quarter-on-quarter due to the higher volume growth of foreign currency deposits in the quarter.Now we will move to -- on to fees and commissions, which is an important pillar of our path to profitability presented in our Sabadell 2020 strategic plan. Commissions recorded a strong performance, accelerating the pace from previous quarter and are on track to deliver the double-digit growth targeted for the full year. In fact fees and commissions grew by 6.3% year-on-year for the group; 7% for the group excluding TSB customer remedies; and by 9% ex-TSB. In the quarter, commissions were up by 2.5% for the group, 4.2% for the group excluding TSB customer remedies and 6.5% ex-TSB.Both asset management and service fees recorded a positive performance. For TSB, the quarter-on-quarter decrease was mainly due to TSB post-IT migration customer remedies which had a one-off of negative impact of EUR 5.5 million in commissions.In this slide, we take a closer look to -- at trading income and ForEx and the evolution of our fixed income portfolio in the quarter. The size of our fixed income portfolio was reduced from EUR 27.6 billion to EUR 24.7 billion in the quarter including a decrease in our exposure to Italian government bonds from EUR 9.7 billion to EUR 5.9 billion with no Italian exposure remaining in our fair value portfolio. This was achieved while recording a trading gain of EUR 28 million, we were partially offset by the increase in provisioning of our SAREB subordinated debt structure. We had a negative impact of trading of EUR 21 million.Finally, market volatility together with the sale of some of our fair value portfolio decreased our valuation adjustments in the fixed income portfolio to EUR 36 million in the quarter. We had a negative impact of approximately 30 basis points on fully loaded core equity tier 1.Regarding expenses, as I mentioned earlier, this quarter our operating cost line has been impacted by EUR 66 million of nonrecurring expenses of which EUR 35 million correspond to TSB post-migration issues cost -- post-migration issues cost, and EUR 23 million to additional IT migration costs. Excluding these nonrecurring items, group recurring costs were actually down by 2.6% in constant FX quarter-on-quarter due to lower payments as TSB completed the migration to its new technological platform. Ex-TSB costs were relatively stable in the quarter.Well, we will move now on to commercial activity and transformation. As I highlighted before, our banking business commercial performance across the group continues to show very encouraging signs. In Spain, we deliver strong commercial results, with performing loans increasing by 3.6% in the quarter, boosted by very positive dynamics in the SME segment, where we have grown our volumes by 2.4% in the quarter, while simultaneously defending yields.In addition, our mortgage portfolio growth was positive, something that have not occurred in the last few years. We also saw positive balance sheet momentum with funds growing by 1.2% in the quarter and mutual funds growing by 1.7%.In the U.K., as expected, TSB growth was slightly slower as the main focus was on migration. But it continues with positive balance sheet trend, recording 1.6% net franchise lending growth in the quarter.And in Mexico, we continue to see strong growth in customer lending and customer funds, with a double-digit increase of 15.9% in performing loans volumes during the quarter.The following slide shows a more detailed breakdown of the evolution of customer loans and funds that I just highlighted. On the asset side, performing loans volumes excluding the APS NPL run-off had a very positive performance and grew in the quarter by 2.9% for the group and 3.9% ex-TSB.Additionally, it's important to note the reduction in our fixed income portfolio of EUR 3 billion as explained earlier. On the liability side, we register strong liquidity inflows quarter-on-quarter both at the group and ex-TSB levels, driven mostly by sight accounts.Also, central bank deposits went down by EUR 600 million in the quarter. Balance sheets also had a positive evolution, which was mainly driven by mutual funds and third-party insurance products.Looking at the performing loans by region, including the impact of FX, in this slide, you can see that there was a positive performance across geographies in constant FX. In the quarter, Spain grew by 3.6%, 3.8% in the year, while TSB fell by 1.1%, 0.1% in the year, mostly due to the negative effect of FX.TSB volumes actually increased by 0.7% quarter-on-quarter, 2.8% in the year when excluding the FX impact. And Mexico grew even more in the last quarter with performing volumes increasing by 14.4%, 41.4% year-on-year.Now looking at the performing loans ex-TSB by segments, we can see the very good performance of SMEs and corporate segments, which increased by 2.4% and 7.4% in the quarterly respectively. And also it's important, as I said before, the positive trend in mortgages with the segment showing a growth of 0.4% in the quarter.Regarding pricing, a lower front book in mortgages and the effect of negative rates on deals were offset by a positive evolution in the lending mix and the spread increases in SMEs and corporate segments across products.Consumer loans from book yields also regained stability in the quarter. It's also important to note that front book yields continued to stand above back book levels across most products and that will continue to grow in the highest yielding segments, which will continue to support the evolution of our profitability going forward.Looking at the commercial activity in Spain, our performance continues to be very positive. I would like to highlight our double-digit growth in new lending, in both companies and individuals. We have also been able to generate double-digit growth rates in our relevant commercial areas such as pension accounts, card turnover, point of sale turnover and new insurance premiums.This positive performance is reflected once again in our market shares. As you can see in this slide, since the beginning of 2018, we have increased our market shares in customer loans and asset under management. We have also grown across products for both companies and individuals.In the company segment, I would like to highlight the year-to-date increase in the market share of point of sale turnover and loans to SMEs. Growing in the SME segment is one of our key focus areas and I would like to point out that more than 50% of the Spanish SMEs work with Banco Sabadell. In the individual segment, year-to-date, credit card turnover, loans to households market share, performed very positively while mutual funds share remains stable.Regarding customers' experience and service quality, once again, we hold the top position in Accenture Net Promoter Score ranking for both SMEs and large companies, where we achieved our best score ever. And in personal banking, we were ranked second. We also continue to surpass the industry average in terms of quality of service, maintaining the gap between ourselves and the rest of the sector.In the U.K., as I mentioned earlier, it's important to note that TSB intentionally slowed down some of its sales capability to focus on migration. Nevertheless, net lending growth increased by 0.7% in the quarter, which was above the growth recorded last quarter.Additionally, quarterly growth increased by 1.6% for franchise mortgage lending, when excluding the runoff of Whistletree portfolio. Overall, TSB extended GBP 1.4 billion in new mortgage loans in the quarter. Mortgage portfolio loan to value also continued to be low at 45%.On the liability side, current accounts grew by 0.6% quarter-on-quarter, and 9.1% year-on-year. Saving deposits were down quarter-on-quarter, reflecting mostly pricing decisions taken early in 2018 to manage deposit volumes through the 2018 in the [indiscernible] saving account season, giving TSB a strong liquidity position. Overall, TSB LCR increased to 314% in the quarter.Moving on to Mexico, our commercial activity continues to deliver impressive results. Customer loans grew by 57% year-on-year, and customer funds grew by more than fourfold, as a result of our focus on deposit gathering to calibrate the local funding gap.We also continued to open new business centers in the country major cities, with 3 new openings in the second quarter, now reaching a total of 19 locations. And we have continued to grow our new 100 digital affluent banking system, which we launched in the beginning of 2018, and has already reached more than 2,000 customers with very positive satisfaction rates.We will now turn to commercial and digital transformation. Looking first at the key performance indicators, Sabadell has increased the number of its digital and mobile customers by 12% and 22% respectively year-on-year. Digital sales remain at high levels, and I would like to highlight the increasing sales through digital channels of unsecured loans in Spain which increased by 52% year-on-year.Lastly, approximately, 800,000 individuals are under remote management in Spain. 89% of transaction are executed through digital channels and commercial impacts based on business intelligence have increased by 43% year-on-year.And to end this section of the presentation, let me briefly explain some of the initiatives during the quarter related to our progress in commercial and digital transformation. First, we have continued to simplify customer's interaction with the bank, with a view to improving customer experience with the launch of immediate loans and dedicated mortgage service centers.In terms of the digital offering, we have continued to improve the user experience of our digital channels. In addition, last month, Solvia launched Solvia Price Index and Location Intelligence, 2 intelligent tools to help users to determine the price of real estate property and to assist people in their decision to buy, sell, or rent the house.And finally, we have continued to -- our strategic investments, so in the sales, our digital hub to bring Banco Sabadell a step closer to the early identification of disruptive technologies we are -- applicable in the financial environment. InnoCells has acquired Instant Credit, a multi-lender online platform for consumer finance, and it has also made an investment in Cardumen Capital, a venture capital fund focused on Israeli startups.I will now hand over to Tomás who will discuss solvency and asset quality.

[Tomás Varela Muiña, General Manager & CFO]

Thank you, Jaime. Yes, I turn now to solvency and asset quality and will start with the quarter highlights. The reduction in the quarter of total NPAs has been notable both in terms of the organic and non-organic activities. It's been EUR 7 billion which drove down the NPA ratio pro forma -- the net NPA ratio pro forma to 1.7%, below our guidance, our targets in our business plan for the end of the plan in 2020, already achieved now though, therefore the NPA ratio pro forma stands after the sales of the portfolios and the organic activity stands at 4.5% with a pro forma NPA coverage of 54.6%.As I said also, the organic NPA reduction in the quarter was outstanding with EUR 755 million reduction which included EUR 511 million in NPL reduction, EUR 439 million, well above the average of many quarters in a row before offer gross assets sales by Solvia. Those sales again were done at a premium. At the end of all these at the quarter, the pro forma fully-loaded CET ratio stands at 11.2%. That we will explain -- I will explain later the analysis of change between the end of March and the quarter, which have encompass several factors. But still sound capital position, well set in our forward-looking financial planning, and we will discuss this afterwards.Here is the analysis of change. We started the quarter at 12%, 6 basis points have been reduced by the addition of intangible -- the organic addition of intangible throughout the quarter, 11 basis points have been impacted by the impairment of our stake in SAREB both in terms of equity and net debt. This actually represents a crystallization of an embedded risk that we had in this exposure.The occurrence of this crystallization means that we've used this capital of course, but it means that the -- this exposure, of course, being the risk, the net exposure now is EUR 77 million and therefore the reason presented by it has been substantially, if not all, reduced; 32 basis points have been impacted by valuation adjustments in the ALCO portfolio throughout the quarter where we have explained that we reduced our exposure to Italy and we managed the portfolio also actively in terms of other exposures, the impact of the volatility that we've seen in the quarter, in the prices, of those assets has meant that the impact has represent the 32 basis points as I said.There are further 25 basis points that have been taken by the change in the criteria, the policy of recognition of NPLs in TSB from the standard there of 180 days past due to 90 days as aligned with the SSM expectations are they own group's expectation, this represents 25 basis points. And then other factors including organic growth have taken 12 basis points, therefore the resulting ratio previous to the impact of the sale of the portfolios gets down to 11.1%. The impact of the additional provisions that have been caused by the sale of portfolios is 15 basis points down.And pro-forma if we impact the release of the related RWAs, the RWA related to these portfolios, we get -- we obtain a gain of 25 basis points. That sets the pro forma ratio at the end of the quarter in 11.2% that in terms of phase-in is 12.2%. This is a level that situates us in the pack of the -- our peers in Spain and is a comfortable capital level for us our -- especially after having so substantially de-risked the balance sheet on our risk exposures and also by the same reason improved our profitability outlook throughout the rest of the business plan as compared with the figures that we presented. So, therefore, enhancing our capacity of organically generating capital through this improved profitability outlook.In terms of the evolution of the NPL ratio after -- we can see here how we -- how it looks like in the accounts, but also the pro forma after the impact of the sale of the portfolios, so it goes down to -- substantially to 4.71% and 4.5% when the portfolios are impacted. The evolution of stocks of NPLs for closed assets are the total NPAs here, reflect the activity that I just described in the quarter, so their reduction in -- the organic reduction of EUR 755 million total reduction in NPAs with the EUR 511 million reduction in NPLs and the EUR 244 million reduction in foreclosed assets. As a result of the -- more than EUR 400 million of sales as -- that as I said well above the average of the previous quarters, less the increase that the foreclosure of some of the collaterals linked to reduction in NPLs meant for the stock.The sale of portfolios meant reduction of EUR 6.2 billion, therefore we can see here in the light gray blocks how pro forma the stocks stand after the consideration of the impact of the sales -- the portfolio sales. So the total NPLs stand at less than EUR 7 billion. They already went down this level of EUR 7 billion only through the organic activity to EUR 6.9 billion. The portfolios here has an additional further reduction to EUR 6.6 billion -- EUR 6.7 billion actually. The bulk of the reduction looks -- shows up more importantly in foreclosed assets where the remaining amount after the sale is EUR 1.2 billion; 62% of this is finished products and of course represent here also the EUR 1.3 billion of land or assets -- not only land but assets under the split activity that we presented at the end of 2017 for Solvia developments.All in all, year-on-year, we've seen a reduction of EUR 9.5 billion as can be seen in the lower right-hand side chart which represents this substantial de-risking in our exposures that I just described.In terms of the evolution of the sales, the so to speak organic sales of foreclosed assets in the quarter, we can say here exactly what I've referred to before, so EUR 439 million in sales that compare with the previous quarters at EUR 283 million, EUR 342 million, EUR 325 million, so well above this average.So the underlying activity has been strong and the trends continue to be strong in terms of number of properties we can see in the left-hand side of the chart. Also in terms of number of properties the quarter was significantly better than the previous quarters. And also as I said we've continued to sell these properties at premium.Here is the breakdown of the coverage, so showing both the stocks, the gross stocks and the provisions level with a coverage in the different lines of the NPAs. Pro forma we can see that as seen before the coverage of NPLs remains at 56%. The EUR 1.2 billion of foreclosed assets are still to remain in the stock. Pro forma will have 46.6% coverage ratio. That I will remind everybody that this is -- basically 62% of it is finished product and then the resulting pro forma coverage for the NPAs is 54.6%.And the ratios of problematic assets over gross loans to customers plus foreclosed assets is pro forma at the end of the quarter 5.6%, and as I presented already earlier, 1.7% in terms of the net NPA exposure to the assets after the activity of the quarter. A remainder of the low-risk profile of TSB that keeps progressing the same as positive as it's been overall these quarters, so just to remind buy to let represents only 15% of the portfolio the mortgage lending has an average LTV of 45%.Interest-only concentration is 27% excluding Whistletree. This compares very positively with the average of the industry and the strong capital position with a CET1 ratio of 19.2%, a leverage ratio of 5.3% and high proportion of the funding which is embedded in TSB's culture in BCA's current accounts is higher than 35%.And with this, Jaime, I end the section of the presentation. Thank you. Back to Cecilia.

[Cecilia Romero, Head of Investor Relations]

Yes. Thank you, Tomás. I will start now with the questions that we've received from our audience through the webcast. And the first question is to you Tomás. Could you please give us an indication of the additional costs related to TSB expected for the second half of the year? And can you also comment if there was any -- there will be any additional costs for 2019?

[Tomás Varela Muiña, General Manager & CFO]

With [indiscernible] the provisions that TSB has posted at the end of the quarter, there are some items there that still will have a run-rate. Of course, the increase of interest rate from 3% to 5% for Classic Plus current accounts still is on and this represents EUR 1.2 million per month as compared with a business plan that has been presented. And in terms of costs, there are other items in terms of the cost to fixing the problems created after migration with advisors and third-party suppliers. Some of -- some items there still have run cost -- running cost. So the initial view on -- the departure view on the average running cost for those concepts is around EUR 7 million per month and the management has clear targets and goals to reduce these over the coming months as quickly as possible as we see progress in the stabilization of the situation.

[Cecilia Romero, Head of Investor Relations]

Thank you. And…

[Tomás Varela Muiña, General Manager & CFO]

Sorry, yes, about 2019, we don't see now any reason, so all this -- the cost related to solving the situation as we've stated already are considered to be absorbed within 2018, so we don't see any reason now to further costs unfolding into 2019 and therefore, nothing to mainly say now that our view on '19 should be changing related to -- in relation to this.

[Cecilia Romero, Head of Investor Relations]

And regarding the provision for customer redress, could you explain little bit farther what are the concepts involved? And also can you comment on the possibility of whether you expect a fine from the U.K. regulator?

[Tomás Varela Muiña, General Manager & CFO]

Yes, so the provision for the customer redress includes the -- our position on the thorough screening of the causes of complaints from TSB's customers and the associated costs related to any of the circumstances and also includes the expectations of costs related to handling the whole process. A huge priority has been put in solving this as soon as possible with clear committed principles of TSB towards TSB's customers in terms of solving and not letting them with something without being remediated and compensated operability. So this also includes this assessment of the associated cost to handling all these process and in terms of any potential fines, the process by which these fines are determined by the regulators is based on investigation. The investigation is in the very early status. TSB's convincement is that the quality assurance and the governance of the process was thorough and sound. This will be put forward in TSB's participation in the investigation, so is that very early stages to form an opinion on whether fines are likely or not and therefore at this stage no provision for this has been created.

[Cecilia Romero, Head of Investor Relations]

And also on TSB to you Tomás, Mr. Guardiola already discussed a little bit on the presentation, but our audience was also interested in maybe perhaps hearing again on the current status, maybe more detail of TSB services?

[Tomás Varela Muiña, General Manager & CFO]

Well, yes, as you say I think it was -- Jaime already referred to these, TSB's mobile app, online banking, telephone banking and branch service levels are now much improved after they chose cost after migration and have been so for some time. We continue to work to minimize level of potential future service interruptions. And we keep -- keeping our customers updated on the status through different channels. The mobile logins and web logins are at the level that we would expect and have been since -- have been so since early May. The wait-times in our telephone channel have consistently been in the single feature minute on average on a daily basis since mid-June. All branches are working as usual with transaction times much improved from the levels that were on for some time that were -- is lower than our expectations and what they used to be pre-migration and are improving. And the [ transactionality ] including cash flows in and out the bank are working and functioning normally with the usual transaction for customers happening under normality. So this is a more detailed description of the status of the service which already was described before.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And to you, Mr. Guardiola -- Jaime, our audience is also asking if you could little bit describe what has been the impact in clients and volumes and overall to TSB franchise coming from the events that unfolded after the migration.

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Okay. Well, as I said before in the presentation, from the point of view of the -- of number of customers, around 26,000 customers switched the account away from TSB during the second quarter, but at the same time 20,000 customers opened a new bank account or switched their account to TSB. Also in terms of volumes, as I said, mortgage and PCAs are slightly up in the quarter. But obviously this as a result of great efforts and in terms of commercial decisions as we have taken to convince customers that were affected by the problems of the infrastructure to remain with us, no, like for example waiving the overdrafts and credit cards fees and interest, especially during the weeks where we suffered the -- most of the problems in the infrastructure service. Also, there has been a very strong and incredible effort that has been done by our people in TSB, the TSB partners to serve the customers, to deal with the problems, to deal with the complaints. And my conclusion is that I think that we expect to retain most of our customers and to regain the confidence that they have with the service that was given by TSB. And we are really positive in terms of expectations because the platform is -- as I said a moment ago, is really improving very quickly. So I think that we will be able to reduce not much, very much. That's our expectation at this moment.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And now moving on to capital, Tomás, the audience is asking how comfortable are you with the 11% or 11.2% CET1 ratio?

[Tomás Varela Muiña, General Manager & CFO]

I think I also referred to this in a previous -- also throughout the presentation. We are comfortable. We are now -- we were above the average of our peers in Spain. We are now in the back. Those are comfortable levels for us. And we expect the ratio to remain stable broadly throughout the year. And even if there are over-and-unders because of course the [indiscernible] exercises are going on and we don't expect anything in particular, but this can always have an impact, but also there are positives and therefore we think the outlook for the ratio is broadly stable. And particularly as I said since we are at this stage after the huge de-risking that we've seen in our balance sheet in our exposure and this also boost an improvement in organic profitability for the remaining 2 years of the business plan. And therefore the capacity to organically generate capital has been also enhanced. Our position, as I said, is comfortable with these levels.

[Cecilia Romero, Head of Investor Relations]

And also regarding capital, what are the reasons for TSB retail IRB models adjustment? And could we expect further changes?

[Tomás Varela Muiña, General Manager & CFO]

This is something -- is a difference in the standards used for recognition of non-performing loans. TSB was using the standard there which is 180 days and group has always worked on 90 days and also the SSM expectations are 90 days. So, therefore, this is not that it has had an impact on NPLs recognition in change. It means that the models include this change of earlier recognition of NPLs and therefore this represents an impact on the RWAs outcome of the models after incorporating this change. Going forward, of course, TSB models are subject to the approval reviews -- continued approval reviews of the PRA in the U.K. and the SSM, our group regulator. But at this stage -- and we are throughout this process -- but at this stage, we don't see any reason for this meaning further changes in the models.

[Cecilia Romero, Head of Investor Relations]

And now Mr. Guardiola, we're moving on to commercial activity in Spain. And top line trends look good this quarter. Do you think this will continue?

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Yes, we expect this continue. I think there is a combination of very good performers of the Spanish economy at the same time strong firepower, commercial firepower of Banco Sabadell that we have shown during the last years. And that's why this quarter our business in Spain has shown astounding performance, both in volumes, also in commissions and fees. And we expect this trend to continue throughout the year. In fact, we have said in the presentation that this acceleration in the -- in fees and commission is in the track of our expectations for the year. There was a double-digit growth for fees. And so we are absolutely confident to meet our targets for 2018 in terms of volumes, in terms of revenues, and also throughout the strategic plan 2020.

[Cecilia Romero, Head of Investor Relations]

And also, Mr. Guardiola, in regards to yields, while we can -- we managed to keep yields more or less stable during the quarter, we saw some pressure in mortgages. The audience is wondering whether you see this continuing or your overall outlook on competition?

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Yes. As I said, there has been a strong competition in the first half of the year, especially given the positive current economic environment in Spain, and this especially clear in mortgages. At the same time, the Euribor rates bottom. So looking forward, we expect some stability in price competition and therefore yields to remain broadly at the current levels.

[Cecilia Romero, Head of Investor Relations]

And also for you, Mr. Guardiola, the audience is asking now on regards to potential or whether you will consider selling Solvia?

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Well, as I said also in the presentation, Solvia is not included in the perimeter of our NPA sales is the difference with other transactions we have seen in the Spain -- Spanish market. But it's very important to note, I think that we have said permanently in our presentation that Solvia is a special real estate servicer, but it has -- not only serves the portfolio of the bank, they have other customers. So we consider that Solvia has for saying, let's say, an industrial value. And we are very proud of the job to -- had in Solvia. So as we have said obviously during the last time, the option of selling Solvia is an option that we may -- we would -- may consider. Probably it's not -- they have nothing concrete in the table, but is an option that could be done.

[Cecilia Romero, Head of Investor Relations]

Mr. Varela, on -- coming back to the U.K. and our audience was asking if -- do you predict any cost inflation as a result for farther investment in the IT and the IT platform during the second half?

[Tomás Varela Muiña, General Manager & CFO]

No, the platform after the problems that we've experienced are solved, the TSB's management are really convinced of the power of the platform to create and improve service to our customers and benefits for our customers and also its power to drive cost efficiency. And as I said before, the costs associated to fixing the problems that we've experienced are in these figures that we've provided in terms of the provision created and the guidance for the second half. Include the absorption of the total cost in 2018 of fixing the situation. And nothing at this stage makes me think that out of this fixing of the situation there will be additional cost for the future. So basically I don't have reasons to believe now that the story that we presented for the performance of the platform and the cost efficiency from 2019 on should be modified.

[Cecilia Romero, Head of Investor Relations]

And talking about capital again and we have been asked what's the sensitivity of your capital to changes in the risk premium? And why is the dilution that we should expect in NII for Q3 after rebalancing our ALCO portfolio including reducing its size? And whether you think we can mitigate this lower contribution somehow?

[Tomás Varela Muiña, General Manager & CFO]

The sensitivity of our capital ratio to our 100 basis points increase derived from the fair value OCI portfolio is circa 25 basis points for the Spanish risk for the Spanish exposures, for all the yield curves in our portfolio, it is 20 basis points. We don't have now any exposure to Italy in this portfolio. Our remaining exposure to Italy is in the amortized cost portfolio. And therefore for the total exposure, as I said, the sensitivity is 20 basis points. We don't expect any dilution in the NII coming from this since in any potential decrease on the contribution of the portfolio to the management of this process that we have performed throughout the quarter, we see potentially more than offset by the strength of the core banking business that we've seen and also the performance of the rest of the balance sheet. So we don't expect effect on NII coming from this.

[Cecilia Romero, Head of Investor Relations]

And on NII guidance, the audience is asking if you could update us what you expect for NII for the end of 2018?

[Tomás Varela Muiña, General Manager & CFO]

I am not changing substantially the guidance that we already gave on NII at this stage. Okay.

[Cecilia Romero, Head of Investor Relations]

Now moving on Mr. Guardiola to TSB, to the U.K., are you still willing to consider bidding for some of the portfolios of RBS, given the difficult integration and the problems we have experienced in TSB?

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Well, we remain committed to our mission to make banking better for small businesses. We have large and all the experience in Spain, though in that, in fact, is what explains more what Banco Sabadell is. So -- and now we have -- obviously we have suffered a lot of bumps to arrive to this moment. We have -- but we have the platform -- the perfect platform to serve small businesses in U.K. So we will continue with our application to apply and before the RBS remedies.

[Cecilia Romero, Head of Investor Relations]

Tomás, the audience is asking what's your best estimate about TSB cost-base seeing in 2018 and what about 2019?

[Tomás Varela Muiña, General Manager & CFO]

I think I have already covered in previous answer, so the cost estimates for 2018 would be basically the -- what we saw in the business plan for the year plus the impact of the cost related to fixing the situation that was experienced post-migration. And through 2019, the evolution that we should see given that those costs are one-offs, shouldn't significantly change from what we saw in the business plan with the impact -- the full impact of the expected synergies.

[Cecilia Romero, Head of Investor Relations]

And also regarding guidance on net profit, we are asked what's your estimate for the end of the year?

[Tomás Varela Muiña, General Manager & CFO]

For 2018 as we've seen the core banking business performance is being strong, we -- in terms of NII, we are faring a bit better than expected in terms of volumes definitely in Spain. And in terms of fees and commissions, while we have been behind in the first quarter, the catch-up I think has been notable in the second quarter, so we expect that in the second half of the year we will achieve double-digit growth. And as I said, with volumes trading above expectations, I think it's clear that the underlying core banking business performance in the year is being good. So except for the impact of the situation in TSB and the impact of the sale of the portfolio is that on the other hand have represented this huge de-risking, all the other things are in line what the guidance that we gave for 2018. Therefore, we could expect that the net income for the year should be with what we had anticipated with the adjustments of what we've seen in terms of both TSB situation and the impact of the sales of the portfolios.

[Cecilia Romero, Head of Investor Relations]

And going back again to the U.K. we've been asked around the redress -- the customer redress for our provision that was made on the quarter and the audience is interested to know what makes you comfortable that the size is the right one and how do you went about to calculating or deciding how much these would be?

[Tomás Varela Muiña, General Manager & CFO]

If anything in the assessment of the provisions and the outlook for the additional cost in the second quarter, TSB's management have wanted to make sure that there is no lack of cautiousness and [ prudency ]. And in terms of the redress provision itself, it's been based on the -- as I said the screening of the root causes of the customers' complaints, understanding the impacts on the customers, complying with the principles that TSB announced for its customers. So not falling shy of any of the principles announced and it means that the quantification of the cost has been -- may taking into account this and all the, as I said, screening of the different causes for complaints of our customers. Therefore, as I said, since I see that there is no aim to -- and there is no appetite for falling in lack of cautiousness and prudency, I think these figures are good enough.

[Cecilia Romero, Head of Investor Relations]

Mr. Guardiola, we have received a lot of questions on dividend policy and whether would you consider changing your dividend policy?

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Well, obviously the decision -- the dividend policy's decision has to be taken by the Board of Director, but we are not considering to change our payout policy.

[Cecilia Romero, Head of Investor Relations]

And we have one final question and it's whether do you confirm the targets for 2020?

[Jaime Guardiola Romojaro, MD, CEO & Executive Director]

Yes, we confirmed the targets for our plan 2020, obviously supported in the outstanding performance in Spain. Also the redress of the situation of TSB; also the de-risking, the high de-risking that we have had in our balance sheet; so I think that we have a lot of reasons to expect to reach the targets that we have in our plan.

[Tomás Varela Muiña, General Manager & CFO]

Maybe…

[Cecilia Romero, Head of Investor Relations]

Yes.

[Tomás Varela Muiña, General Manager & CFO]

Maybe -- so, no, even maybe mentioning that in terms of the NPA performance…

[Cecilia Romero, Head of Investor Relations]

Yes.

[Tomás Varela Muiña, General Manager & CFO]

We already achieved better levels than those embedded in our guidance for 2020 because our net NPA exposure is now 1.7% pro forma whilst we had guided…

[Cecilia Romero, Head of Investor Relations]

2%.

[Tomás Varela Muiña, General Manager & CFO]

2% at the level of NPAs is pro forma now below EUR 9 billion towards which we had guided at the end of 2020. So in this we are already here and the -- our aim and our potential is to keep reducing strongly organically the exposure, so in this regard, this should be much better in terms of the business as you said and I think it's worth reminding the market that we are now already better in this regard than what we had set for the plan.

[Cecilia Romero, Head of Investor Relations]

Well, thank you very much, Mr. Varela, Mr. Guardiola. This brings our webcast to an end. At the Investor Relation department, we obviously remain available to help you with any questions that you may have, and other than that, just have a good day. Thank you.