Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2020-Q3

[Cecilia Romero, Head of Investor Relations]

Good afternoon, and thank you for joining us for Sabadell's results presentation for the third quarter 2020. My name is Cecilia Romero, I'm the Head of Shareholder and Investor Relations. And presenting today are our CEO, Jaime Guardiola; and CFO, Tomás Varela.Today's presentation will follow a slightly different structure to last quarter. Our CEO will start by going through the key developments of the quarter and describe some of the new strategic initiatives that we're implementing. Additionally, he will provide details about commercial activity and business performance. Our CFO will then discuss financial results, our credit risk profile, asset quality, liquidity and capital, before our CEO concludes with some brief closing remarks.I will now hand over to Mr. Guardiola to kick off our presentation.

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

Good afternoon, Cecilia. Good afternoon, everyone. Thank you for joining us today. I would like to kick off our presentation by going through some of the key developments during the quarter in Slide 4.Firstly, our capital position is on track to outperform our guidance. Our CET1 ratio has improved by 22 basis points in the quarter to 12.9%, which is 355 basis points above our regulatory requirement. Our CET1 pro forma of fourth quarter regulatory tailwinds and the depository business disposal is at one of the highest levels in our history at 13.4%.Secondly, I would like to announce that we are undertaking an efficiency program in Spain, which will allow Sabadell to simplify its structure while reducing its cost base. At the same time, in the U.K., steady progress continues to be made in the restructuring plan put in place back in 2019, and we expect the restructuring to be completed one year ahead of schedule. The restructuring program in Spain, along with the incremental benefits obtained from the acceleration of our U.K. plan will allow us to increase our annual pre-provision profit by more than EUR 115 million, starting in 2021 before being fully realized in 2022.The initial restructuring charge in Spain will be incurred in the fourth quarter of this year, and it will have no upfront negative impact on capital as it will be fully funded using the capital gains realized with government bond sales from our amortized cost portfolio this October. I will go this in more detail later in the presentation.Thirdly, we still have large unrealized capital gains remaining in our hold-to-collect portfolio of around EUR 1.3 billion, following the October bond sale just discussed, which represents more than 100 basis points of CET1. In addition, I would like to highlight that with the acceleration of its restructuring, TSB is on track to return to underlying profitability and will break even in 2021.Furthermore, we have seen better-than-expected asset quality trends this quarter, which support our lower credit cost of risk guidance. Our NPL and NPA ratios have improved on a quarter-on-quarter basis, currently standing at 3.8% and 5%, respectively. This data indicates that default rates are increasing less rapidly than we initially expected. And in this context, we are improving our credit cost of risk guidance for year-end to between 85 and 90 basis points compared to 90 to 95 basis points previously. And finally, regarding commercial activity, loan volumes are recovering steadily, growing around 5% year-on-year at both ex-TSB and TSB level.On the next slide, Slide #5, we show our cost-reduction initiatives, both in Spain and in the U.K. The implementation of the Spanish efficiency plan and the small incremental benefit obtained from the acceleration of the U.K. plan will help us to improve our pre-provision profit by more than EUR 115 million. The plan will be launched in the fourth quarter of the year, with savings starting to materialize in 2021 and fully realized by the end of 2022.Please note that the new efficiency plan in Spain and the acceleration of the U.K. plan will not have any impact on our capital ratios as the restructuring costs will be fully funded with the sale of a small portion of our amortized cost portfolio. The positive impact of EUR 115 million already considers the loss of NII derived from the bond portfolio sales.Looking at those plans in more detail. In Spain, we are undertaking a 360-degree transformation program. As you know, COVID-19 has brought paradigm shifts and has accelerated changes that were already happening, such as changes in customer behavior, leading to increased automation and digitization as well as workforce shaping and new ways of working. Our plan has a dual approach. Firstly, it will include different initiatives and projects designed to foster the digitization of customer service and accelerate the deployment of a superior digital banking offering. These measures will support the reduction of nonsale interaction with customers in our branches by incentivizing the shift to self-service. They will also enable self-servicing for certain call center activities.Secondly, we will simplify our corporate center by reducing vertically and by centralizing functions and skills such as modeling, control and reporting, planning, et cetera. These measures will simplify our personnel structure and will allow a further reduction of outsourced services.Furthermore, in the U.K., we are speeding up the restructuring plan that we announced in 2019 with a view to fully implementing it one year ahead of schedule. Overall, the U.K. plan will mean the closure of 164 branches in 2021 and a net reduction of around 900 full-time employees. It is also worth noting that the restructuring costs needed to achieve the savings envisaged in our business plan has been revised downwards from GBP 180 million to GBP 170 million. So far, we have already incurred GBP 126 million of the total restructuring cost associated with our U.K. plan. After implementing this restructuring plans, TSB will return to underlying profit and break even in 2021 on a stand-alone basis and will be profit-making going forward, as mentioned earlier.In the next slide, Slide 6, you can see the evolution of our CET1 ratio in the quarter, which increased by 22 basis points to 12.9%. Including pro forma elements such as the change in the prudential treatment of software assets of the sale of our depository business, the CET1 ratio increases to 13.4%. As you probably know, the maximum production amortization period for software assets has recently been extended to 3 years, and this has increased its impact to 40 basis points expected in the fourth quarter of this year. Closing the disposal of the depository business will contribute 8 basis points, and this is expected to occur in the second quarter of 2021. This capital position already places us above the year-end guidance of 12.7% announced in our last results call.To finish this section of the presentation in Slide 7, we go through the key elements that have supported our decision to lower our year-end credit cost of risk guidance. Firstly, our structural analysis presented during our second quarter results call has been updated, and we can confirm that multipliers of pre-COVID PD remain very similar at 1.3x for the base case and 1.8x for the adverse scenario.Our revised group credit cost of risk guidance of 85 to 90 basis points implies a multiplier of 2.2x the pre-COVID level. Furthermore, IFRS 9 models has been reviewed considering our newly revised macroeconomic scenario, which is in line with the latest scenarios from key regulators.Moreover, NPL trends have been strong in the quarter with lowest NPL inflows year-to-date. NPL inflows were down by 50% in the quarter and by more than 20% in the year. This better-than-expected asset quality trend support a lower credit cost of risk guidance for the year of 85 to 90 basis points when it previously was 90 to 95 basis points.Finally, we have prepared additional risk disclosure for our credit portfolio, which showcase its resilience. Tomás will discuss all this in detail later during the presentation.Moving now on to business performance. Looking at our performing loans by region in Slide 9. This quarter growth was mostly driven by a very dynamic mortgage book at TSB as a result of higher activity levels in the U.K. market. This was partially offset by third quarter seasonality in Spain and lending volumes in foreign branches, which were impacted by exchange rate movements. Volumes in Mexico decreased in the quarter, hampered by weaker economy activity and reduced the need for liquidity among corporates, but they were still up by more than 23% year-on-year. Overall, group performing loans grew by 0.3% in the quarter and by more than 5% year-on-year. This is a faster growth rate than that of the second quarter.Slide 10 shows customer balances, excluding TSB. On the left-hand side, you can see the breakdown of performing loans. Overall, performing loans decreased by 0.8% in the quarter and grew by 5.1% year-on-year. This quarter-on-quarter performance is explained by lower demand for the ICO-guaranteed loans and third quarter seasonality. On the -- on one -- on the main segments to support volumes in the quarter was SMEs despite a decreasing demand for the ICO-guaranteed loans. As occurs every year in the third quarter, negative seasonality had impacted -- had an impact on other lending to individual as the EUR 0.6 billion related to social security payments were reversed in the quarter.Mortgage loans showed a positive growth in the quarter year-on-year despite seasonality, supported by renewed levels of activity post lockdown. Our customer funds remained stable in the quarter as term funds continue to flow into current accounts. Mutual funds grew by 1% in the quarter, increasing for the first time since the second quarter of last year.Moving on to Slide 11. We can see that commercial activity in Spain has surpassed pre-COVID levels in both retailer payment services and credit cards. Moreover, credit card turnover in the third quarter is higher than it was last year. Our market share, which is shown at June 2020 has decreased slightly. This is mainly because the weight of corporate cards in Sabadell is double than the industry and their turnover has fallen significantly due to the lockdown. This effect will be reversed in the coming months.Regarding mutual funds, the market share is slightly lower in year-on-year terms, but it is important to highlight the increase of 8 basis points recorded so far this year. In this regard, we are taking advantage of our partnership with Amundi.Continuing with Slide 12, we can see how new lending to retail customers has continued to recover in the third quarter, while demand for the ICO-guaranteed loans has declined. Regarding new lending to companies after the huge increase in the second quarter, which was driven by the ICO-guaranteed program, we are now returning to business as usual levels.Looking at the right-hand side of the slide, we can see how credit facility drawdowns have remained steady compared to the second quarter after increasing at the end of the first quarter.Regarding new lending to individuals, new mortgage lending has increased by 55% compared to the previous quarter, and new consumer lending has increased by 102%. We have surpassed pre-COVID levels in both products.Turning now to TSB in Slide 13. On the asset side, net lending grew in the quarter across products. Mortgages grew by more than 3% which is the highest growth rate we have seen since migration. It was mainly driven by a surge in mortgage application supported by the temporary reduced rates of stamp duty land tax applied since July.Consumer lending has bounced back due to a rise in consumer spending after the easing of COVID-19 lockdown restrictions. This quarter, business banking loans kept growing but at slower pace, driven by demand for the U.K. government's Bounce Back Loan Scheme. Overall, year-on-year, net lending was up by more than 5%.On the liability side, customers' funds continue to increase across all products. The slower growth of deposits is the result of higher consumer spending levels after some of the lockdown restrictions were lifted. Furthermore, business banking deposits continue to benefit from a steady inflow of funds as companies make ongoing use of the U.K. government's BBLS.The figures, on the left-hand side of Slide 14, show the good performance of TSB's commercial activity in the third quarter. New mortgage lending volumes are the highest they have been since the second quarter of 2017. Meanwhile, new and secured lending volumes are the highest level since the first quarter of 2017. TSB also continues to make good progress in its strategic plan beyond restructuring acceleration.Regarding customer focus, TSB has launched new products to help deliver money confidence to customers and continues to make progress in digitization. Regarding operational excellence, the other key work stream of its strategic plan, TSB has taken on direct control of technology services through its partnership with IBM.In Slide 15, we provide details about the key COVID-related financial solutions that we have offered to our customers, both in Spain and in the U.K. Regarding statutory payment holidays in Spain, the outstanding principal of live payment holidays as at end of September was not material. Around 70% of customers with expire statutory payment holidays moved to the sector-specific program. The rest of the expired payment holidays has no significant impact on asset quality.On the other hand, the outstanding principal of live sector-specific payment holidays stood at EUR 2.5 billion and over 90% were secured loans. To date, the past due amount of this type of payment holidays is not material.In TSB, looking at live payment holidays, the outstanding principal as at 30th September amounted to GBP 1.4 billion, 97% of which were secured. This amount has decreased significantly quarter-on-quarter and represents just 4.6% of the overall mortgage book and 2.4% of total unsecured loans.In terms of expired payment holidays, the outstanding principal amounted to GBP 3.7 billion, and there was no uplift in NPLs coming from these loans. At the bottom of the slide, we can see the solutions provided to SMEs and corporates.In Spain, in terms of the ICO liquidity guaranteed line, so far, we have granted EUR 10.5 billion, and we have a further EUR 0.9 billion in the pipeline. Finally, circa 21,000 TSB customers have already benefited from bounce back loans amounting to GBP 524 million. These loans are 100% guaranteed by the government.To finish this section of the presentation in Slide 16, we showed the most important milestone achieved in the third quarter in relation to sustainability. I would like particular -- I would particularly like to highlight our inaugural green bond issuance and the launch of new financial solutions for customers linked to sustainability.And with that, I hand it over to Tomás.

[Tomás Varela Muiña, GM & CFO]

Thank you very much, Jaime. Good afternoon, everybody. Regarding our quarterly results in Slide 18, we reported a net result of EUR 57 million in the quarter. The preprovision income increased by more than 14% after having front-loaded a significant amount of TSB restructuring costs this quarter for a total amount of EUR 76 million.The closing of the real estate developer disposal represented a small net profit of around EUR 9 million in the quarter. And year-to-date, we have reported a total net result of EUR 203 million. In the following slides, I will go through the results in more detail.Moving on now to Slide 19. Group net interest income increased in the quarter by 2.5% and declined by 6.2% in the year. On the top right-hand side, we show that quarter-on-quarter NII was positively driven by the benefit of TLTRO III, higher volumes, a slight increase in ALCO contribution and the recovery of overdraft waivers and yields in the U.K.Factors which reduced NII mainly include lower overdraft fees in Spain, yields at ex-TSB level and the impact of foreign exchange. Overall, NII ex-TSB was up 0.6% in the quarter, while TSB's NII increased by 8.7%.Finally, in terms of sensitivity to interest rates, based on the balance sheet as of the end of this quarter, an additional increase of 10 basis points in all relevant rates would increase NII by EUR 33 million and a decrease of 10 basis points would lower it by EUR 25 million in the 12 months following the rate change.Turning to Slide 20. We show the evolution of front book yields in Spain. Mortgage front book yields reflected a higher contribution of fixed-rate mortgages but also falling long-term interest rates. As you can see on the left-hand side of the slide, while the relevant euro swap rate has decreased by 10 basis points on average this quarter, front book yield in mortgages declined by 4 basis points only. We can see a similar effect on loans to SMEs and corporates. And while the relevant swap rate decreases considerably, the front book yield for this segment increased in the quarter.Furthermore, it is also worth highlighting the increase in consumer loans from book yield, which is driven by higher pricing. So overall, we have managed to protect our front book yield despite a lower interest rate environment.Finally, it is also worth noting the change in credit mix with a higher proportion of mortgages this quarter, which explains part of the decrease in overall deals at ex-TSB level.In Slide 21, you can see that group NIM was mainly impacted by lower loan yields at ex-TSB level and higher assets derived from TLTRO III funding. Lower loan yield ex-TSB resulted from changes in credit mix, the cost of the ICO guarantee, lower overdraft fees in Spain and a lower contribution from Miami and Mexico derived from decreases in the relevant interest rates in these regions. All these factors were partially offset by a higher customer spread at TSB due to the recovery of overdraft fees and lower cost of customer funds.Moving on to Slide 22. As already mentioned earlier, during the presentation, in October, we sold a portfolio of Spanish bonds from our held-to-collect portfolio to fully fund our efficiency plan in Spain and the acceleration of TSB restructuring. The sale will result in enough capital gains to avoid any upfront negative impact on capital from the efficiency plan. The -- actually, the efficiency plan, which -- the effects that we've shown in the presentation, in terms of net impact on the preprovision profit, are mainly attributable to the efficiency in Spain. At the same time, Sabadell will retain hefty capital gains in its held-to-collect portfolio of around EUR 1.3 billion.This slide also gives you a snapshot of our fixed income portfolio for sale. On the left-hand side of the slide, we show pro forma yield maturity and duration. And on the right-hand side, the composition of our overall portfolio. As you can see, risk remains limited. More than half of the portfolio is composed of Spanish bonds. The rest is mostly Italy, all of it at the held-to-collect portfolio, agencies, covered bonds and other governments like U.K. and Mexico.Finally, the capital position sensitivity to bond spread volatility remains low as fair value OCI composition continues to be small with short duration. In addition, only 2% of our portfolio will mature over the next 2 years.In Slide 23, we show that group fees were up by 1% in the quarter, driven by the recovery of activity levels post lockdown, which in turn increase services fees in Spain by more than 4% in the quarter. TSB fees also grew significantly as lockdown restrictions were eased.Asset management fees were impacted by the closing of the Sabadell Asset Management business disposal, which had represented a reduction of EUR 11 million in the quarter. For the rest of the year, improved activity levels and dynamic corporate lending will continue to have a positive impact on fees.Moving on to Slide 24. Group total expenses were up in the quarter, impacted by the acceleration of the TSB restructuring plan. TSB restructuring costs amounted to EUR 71 million in the quarter and EUR 83 million year-to-date. Group recurrent expenses declined by 1.9% in the quarter, driven by both Spain and the U.K. In Spain, lower recurrent expenses were driven by lower personnel expenses, supported by a reduction of total employees, lower travel expenses and such things as a reduction in training expenses, given the shift to online training and others.In the U.K., lower recurrent expenses were supported by a decrease in general expenses mainly related to third-party advisory services and marketing. Overall, we expect total cost for the full year to decrease year-on-year, excluding the impact, of course, of the restructuring costs at ex-TSB level that we expect for the fourth quarter.In Slide 25, our credit provisions, excluding costs, amounted to EUR 206 million in the quarter. This was significantly down quarter-on-quarter, which was supported mainly by asset quality trends. IFRS 9 models were updated in Q2 with a new COVID-19 macro scenario, resulting in that moment, in a significant amount of provisions being front-loaded ahead of H2. Overall, credit cost of risk year-to-date was 88 basis points, where we expect it to remain by year-end.Now we start this section, credit risk profile in Slide 27 of the presentation by giving an update on the breakdown of group performing loans and the exposure to sensitive sectors as well as an update on the structural analysis that we presented in Q2. A reminder of the methodology of these structural analysis that we used has been included in the appendix -- and we keep using -- is included in the appendix of the presentation.The portfolio mix and the exposure to sensitive sectors have remained relatively stable. 67% of the portfolio is collateralized. The exposure to the most sensitive sector remains at circa 8%. The structural analysis update shows a multiply, which is presented in the lower right-hand side of the page is -- shows a multiplier of pre-COVID PD levels, which remains at 1.3x in the base scenario and increases from 1.7x to 1.8x in the stress scenario. While the multiplier implied by our guidance of 85 to 90 basis points over 2019's cost of risk is 2.2x.We will now present on Slide 28, the profile of some of the more relevant portfolios, starting actually here in a couple of slides, the profiles of these portfolios. We start here with corporates and SMEs ex-TSB, which is a very diversified portfolio in Spain. And going on to look at the portfolio, mostly made up of corporates in our international branches.The business in Spain is well diversified in terms of company sizes, sectors and segments. The exposure to micro enterprises represents just 16% of the total. This franchise is renowned and is composed by companies with a sounder than average financial footing, that have been our clients for an average of 10 years and which tend to have much higher volumes of international business than their peers in the Spanish landscape. This can be seen in the upper right-hand side table, which shows that in our portfolio, our international regular customers account for 6% of the total versus the 1% amongst all micro enterprises in Spain. More than 80% of exposure is guaranteed, and the loan-to-value of the mortgage collateral is 52%.Similarly, for the other size -- bigger size segments, our clients always present a more international profile than their peers’ average and enduring relationship as our clients. Both of these factors provide an intense level of transactionality that traditionally has worked in favor of our risk-selection abilities. These segments include small and medium-sized enterprises, large corporates, holdings and specialized lending companies, which encompass a wide range of financing solutions tailored to their complex and sophisticated needs.As we can see in the table on the middle right-hand side, the debt to assets levels have remained quite stable since May, when the bulk of ICO loans and other solutions were put in place. At this stage, they remain at moderate levels on average rather than putting a major strain on company's financials.Looking now at the table on the left-hand side, the top right columns show the output of the updated structural analysis, which support the summary that we have seen in Slide 27. The total in this base scenario remains at 1.4x. And in the stress scenario, it increases to 1.9x. The table on the lower right-hand side shows the observed default rates for these segments in 2019 and the average over the last 3 years.The multiplier observe at the peak of the last financial crisis in the year 2012 in relation to the previous year 2011 is also provided to serve as a benchmark. The observed default rate for micro enterprises is around 3.6%, and it ranges from 1.2% to 1.8% in the rest. This all demonstrates the resilient performance of these portfolios. The 2012 multipliers of between 1.3x and 1.6x are below the multipliers shown as the output of the structural analysis in this same slide and in the summary of the previous slide.In Slide 29, we present the other portfolios. Mortgages in Spain amounted to EUR 32.8 billion with an average LTV of 68% and an affordability of 24%. The new lending metrics also show a high asset quality. As only 4% of new mortgages have an LTV above 80%, only 16% show affordability of over 40% and only 1% are above both of these levels. Over the last few years, the observed default rates for these mortgages have remained at around 0.8% to 0.9%. And in 2012, at the peak of the last financial crisis, which was characterized by much higher household indebtedness levels and much higher mortgage LTVs than those that exist at present, the multiplier with respect to the previous year was 1.7x.The retail and self-employed portfolio is relatively small at EUR 3 billion. The average length of this customers' banking relationship with us is 8 years. 46% of them are in sectors of activities where the COVID impact has been nonexistent or very low, such as pharmacies, which represent 21% of the total; or medical practices, tax advisers and the like. The observed default rate is 4.3%, and the 2012 multiplier was 1.6x. For consumer lending, which amounts to EUR 3.2 billion, the observe default rate is 4.8% and the 2012 multiplier was 1.5x.And finally, as we have been reporting in our presentations before, TSB's mortgage portfolio of GBP 28.7 billion is better than the average portfolio in the U.K. with an LTV of 45%, a loan-to-income multiple of 3.3x with buy-to-let and interest-only products or mortgages accounting for 12% of the total.Now in the following sections of the presentation, we will look at asset quality. In Slide 34, you can see that our group NPL ratio has improved this quarter to 3.81% from 3.95%, driven by a lower level of inflows as well as an increase in recoveries, thanks to our active management of NPLs. In fact, this quarter, we saw the lowest level of inflows in the last year. This demonstrates the effectiveness of the support measures put in place due to COVID-19. And also, some of these support measures such as the statutory payment holiday have now been discontinued. We have seen a decrease during the quarter of inflows into NPLs.Foreclosed asset exposure was around EUR 1.5 billion. Our NPL coverage ratio remained stable at 56%, which in terms of a stage 3 coverage is 40%. And finally, I would like to highlight that more than 62% of Sabadell's NPLs are secured loans.Turning now to Slide 35. The group once again ended the quarter with a strong liquidity position, reflected in an LCR of 2006% (sic) [ 206% ] and close to EUR 48 billion worth of high-quality liquid assets. The loan-to-deposit ratio ended at the quarter at 98%.Finally, as we showed last quarter, in terms of Central Bank funding, we currently have EUR 27 billion of outstanding TLTRO III which were withdrawn in the auction held at the end of last June. Half of that amount was rolled over from TLTRO II and the other half was new funding.In terms of TFS, we have GBP 3.1 billion outstanding which will likely be rolled out in new -- into the new TFSME facilities.On the following Slide #36, we include the details of our current reported capital base in relation to requirements. Our reported total capital ratio stood at 16.5% at the end of the quarter. 355 basis points above our requirement of 13%. Our fully loaded CET1 stood at 12%, which was 9 basis points higher than -- higher in the quarter. In addition, our leverage ratio stood at 5.2% at the end of the quarter.To conclude this part of the presentation, we show in Slide 37 that we have completed our funding plan this year, having issued a total amount of EUR 2.3 billion to date.In regard to MREL, we are fully compliant. Our eligible MREL securities as a percentage of total liabilities and own funds stand at 8.9%, which is above the 8.3% requirement. We have also met our subordination requirement of 5.2% as our current position stands at 6.5%.And finally, I would like to highlight that through the application of Article 104a, we could potentially increase by 85 basis points our current CET1 buffer over P2R by issuing circa EUR 325 million of AT1 and circa EUR 325 million of Tier 2.And with this, I will hand over back to Jaime, who will conclude our presentation today.

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

Thank you, Tomás. To end our presentation today, I would like to highlight that we have made strong progress on our key priorities ahead. Firstly, we have launched a new efficiency plan in Spain that will deliver more than EUR 115 million additional preprovisions income annually. The cost of the program has been fully funded through government bond sales and will have no negative upfront impact on capital. Post transaction, we will still retain hefty gains in our ALCO portfolio, hold-to-collect portfolio of circa EUR 1.3 billion.Secondly, our commercial activity has continued to recover in the quarter with activity approaching our pre-COVID levels in Spain and above pre-COVID level in the U.K. Group performing loans are growing at around 5% year-on-year.Thirdly, in the U.K., TSB has made substantial progress on its restructuring plan. In fact, the plan is expected to be completed one year ahead of schedule. With this, we expect TSB to break even in 2021 on a stand-alone basis. Additionally, it is worth noting that TSB has also continued to accelerate its digital transformation.Finally, we have preserved the strength of our balance sheet and capital position by focusing on risk management. The asset quality trends observed this quarter support a lower year-end credit cost of risk guidance, which we have revised down to 85 or 90 basis points. We have also strengthened our capital position substantially this year, and therefore, we are improving our year-end CET1 guidance to circa 13%, previously, 12.7%.And with that, I will now hand over to Cecilia to kick off our Q&A.

[Cecilia Romero, Head of Investor Relations]

Thank you very much, Jaime. We are now going to open the floor for a round of questions. Operator, please first question.

[Operator]

First question is coming from the line of Carlos Peixoto from CaixaBank.

[Carlos Joaquim Peixoto, Analyst]

A couple of questions here from my side. The first one would actually be on capital. You mentioned some of the positive items that we have in store for the fourth quarter. Going a bit beyond that, are there any TRIM or any regulatory impact we should be on the lookout for in 2021?Second question would be on the cost side. You mentioned the EUR 115 million expected improvement in preprovisioning profit. My question here would be, how would this split between lower cost than Spain, lower cost than TSB and the effect that you mentioned in one of the slides, which would be the lower income from the bond portfolio. So if you could detail us that? And also, whether all restructuring charges have already been booked? Or if we should expect some additional restructuring charges, I'm thinking particularly in Spain?

[Tomás Varela Muiña, GM & CFO]

Thank you, Carlos. Capital. Yes. So you referred to us giving already our view on the fourth quarter, yes, you are asking about potential headwinds in 2021. Nothing material in 2021. As we've been saying in the past, we've been reviewed for all the portfolios in TRIM. The only one standing was a small one, a low default one, for which we have a high pro forma density close to 70%. So we don't expect visible impact there. So nothing else than that.In terms of costs, yes, we've disclosed EUR 115 million net positive impact in preprovision profit as the result of the restructuring projects. Most of this has to do with Spain. We are referring here to TSB. The part of TSB is already taken into account in the consensus. This doesn't include all the savings in TSB as a result of the restructuring, so -- and these are in the consensus. So we are only including here a small part from the acceleration in 2021. So most of this amount has to do with Spain.The calendar of this is 75% will be already seen in 2021 and 100% of it will be seen in 2022 already. In terms of the restructuring charges, will be booked in full in the fourth quarter and will be offset by the capital gains that have already been realized out of the ALCO portfolio. We are -- at this stage, we are not giving more details on the breakdown of this net impact, but we will -- as we progress on that -- in that, we will providing these details to all of you. And there is nothing else that we are expecting this year. This -- overall, this is a first step on a series of cost-efficiency programs that we envisage that will come after this one.

[Operator]

Next question is coming from the line of Britta Schmidt from Autonomous.

[Britta Schmidt, Non]

I've got a couple of questions, please. Coming back to the costs, what sort of cost inflation should we assume for Spain going forward? And maybe you can update us where we are on the wage bargaining process in Spain right now. Then I've got a question on the cost of risk. How should we think about the benefit to the annualized cost of risk in basis points from the guaranteed loans, primarily the ICO loans, is this a benefit of, say, 20, 30 basis points? I'm just trying to figure out how we should frame the cost of risk going into next year and also the comparison with the drop in NIM that the ICO loans have led to? And then the last question would be on TSB. Is it operationally prepared for potential negative rates? And are there any potential pricing measures that you could still undertake to manage the NII better?

[Tomás Varela Muiña, GM & CFO]

Thank you, Britta. Cost inflation. So I think cost inflation should be broadly in parallel to the interest rates evolution. So there shouldn't be significant inflationary forces, underlying forces in a so depressed rate environment. Anyway, with this environment, as we had already communicated in the market, we expected this year in 2020, total costs to decrease by close to 1%. So this is how we were treating inflation. So we were managing to keep down inflation and actually erode and achieve efficiency gains.Going forward, our view before that -- before this cost-efficiency program was to keep the same way in 2021. So actually, all in all, we see costs at group level next year down in around 5%.In terms -- and as for inflation, as I said, from that level on, what we expect is at least until we get a new efficiency program on, what we expect is to have the ability as we were having this year to keep inflation actually under control.In terms of cost of risk, I don't have the calculation here in terms of the impact of the ICO loan, so the guaranteed loans in terms of cost of risk. But I can give my view in terms of overall cost of risk for next year. With the macro environment that we see today, our view is that the cost of risk, as we were saying before, should be decreasing. We had said we saw it halfway between the level of this year 2020 and the recurrent pre-COVID levels. It will depend on how this situation that this has been increasingly worsening on the health front, how this develops. But even if we see some lockdown this fall and winter, we still see it below the level this year. And of course, depending on what the scenarios are, it could change. But as we see now, even with the worsening that we are seeing so far, we see it decreasing.In terms of TSB. TSB, so all banks in the U.K. have been asked to provide operational views on what this potential scenario could be. All banks are equally prepared operationally for that. For some banks, even it can be more complicated due to the operational IT platforms. Actually, in our case, in TSB, we should say that the highly integrated platform that TSB has should help in this. In any case, the way that, yes, you would be approaching this is reviewing balance sheet volumes, customer margins and optimizing the liquidity position in terms of mitigating any potential adverse effects, if it were there. Also, the use of the TFSME will be a tailwind. And so far, even all the hints, it's not clear that necessarily, the Bank of England would go, in my opinion, personal opinion, would go there, taking into account also all the operational and legal impacts that this could have.

[Operator]

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

[Ignacio Ulargui, Analyst]

I have just 2 questions. One, how do you see lending yield going from here? We have seen like 41 basis point decline. If I compare 1Q to 3Q at a group level, how do you see the mix impacting? And whether we have seen the bottom already? Or there is anything else that we need to be aware in terms of impact?And secondly, on Slide 29, I just wanted to make sure I understand it correctly. When you say that the average portfolio longevity is 8 years, does this implies that the portfolio was not there -- I mean the average of the portfolio was not there in the previous crisis. Just to understand a bit, sort of like how should we see the resilience of the portfolio in terms of cost of risk in the SME book?

[Tomás Varela Muiña, GM & CFO]

Thank you, Ignacio. Lending, we see lending yields recovering. We see changes in the business mix. Of course, ICO loans this quarter have had a bearing on that, both due to the yields and to the cost of the guarantee, but the shift in terms of business mix with recovery of the non-ICO lending, also the recovery in terms of overdraft charges, all this will support the yield, and we see it recovering. There is nothing else in particular that should -- we should take into account, probably further support of -- further recovery in terms of overdraft in Spain, but nothing else in particular. We see, for this fourth quarter, core revenues in Spain are behaving similar to what we've seen in the third, a little bit upwards. And so I think this is the main aspect that we should consider here.In terms of what you asked about Slide 29. Yes, the average is 8 years because the -- as a whole, this kind of portfolio has much quicker rotation than this. But we are providing the multiplier of observed default rates. So providing observed default rates is very valuable because this is the performance over a long period of time, and it shows how the portfolio actually performs. And what we are providing here is the multiplier in 2012. So of course, we had a portfolio there. The only thing is that the average time this portfolio having customer of us is 8 years. Sometimes because they switch and they create a company, and they go from self-employed, in this case, to establish a company, and therefore, they become a micro enterprise. Sometimes they end or they -- and sometimes they retire. This is the kind of life. But we had a portfolio back in 2012, and we are showing how, at that moment, this portfolio performed by providing this multiplier.

[Operator]

Next question is coming from the line of Andrea Filtri from Mediobanca.

[Andrea Filtri, Research Analyst]

You anticipated the TSB restructuring costs. Can you elaborate more why you will achieve the same cost savings in the same time frame? And when do you think TSB will be a marketable asset. And at what conditions would you evaluate a sale? Also, what are your views on domestic consolidation and on the bad bank project proposed by [ President Enria ]?

[Tomás Varela Muiña, GM & CFO]

Thank you, Andrea. We anticipated the cost, yes. So this will give us some additional edge in 2021. We are saying that in 2021, the underlying profitability will be positive already. All in all, breakeven because there will be still some restructuring costs there, which means that we expect to be visibly positive already in 2022. Then, of course, I think this has consequences for the perception of the value of TSB from which we don't have any doubt. But in the market, this will become clear. The market -- my interpretation, our interpretation is that the market is expecting to see how eventually TSB delivers the savings and delivers franchise -- shows that the franchise is profitable.In terms of the second one, I think, Jaime?

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

Yes. Well, regarding your second question about -- oh, are you speaking about TSB marketable assets? Okay. That's for you.

[Tomás Varela Muiña, GM & CFO]

Yes. And so I think I answered that 2 in 1, right? Andrea, I hope this is true. Of course, we won't disclose our views on whether to sell or not, TSB, but as always -- as we always have said, we -- when we have optionality, we always take into account the best option in terms of value and we've been absolutely true to this statement in the past, and we will continue to do so in the future. In terms of consolidation on the bad bank project. We -- honestly, we don't have a sound view or...

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

Okay. No, no. Just regarding consolidation, for example, today, we have just presented which are the options that we are envisaging in our organic plan. And as we have always explained, we are definitively open to whatever option creates the most value for our shareholders. And regarding the bad bank that was presented in an article in Financial Times, I think one of the -- these days of this week. We don't have, at this moment, judgment enough build to answer the question.

[Operator]

Next question is coming from the line of Sofie Peterzens from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Yes. Here is Sofie from JPMorgan. So I recognized you don't want to give the impact on the restructuring costs you're going to take in the fourth quarter. But how should we think about the impact of net interest income from the bond sale, is -- can you give any details on how large the bond sale was and kind of the average yields that it had on your net interest income?And the second question would be on dividends. I recognized you're not accruing any dividends for 2020. Should we assume that you definitely are not going to pay any dividends for 2020? Or are you kind of -- how do you think about dividends in general? So that would be my questions.

[Tomás Varela Muiña, GM & CFO]

Thank you very much. About the first one, I'm sorry, but we are not providing the details, as we said, until we close different aspects of the whole thing. But what I can tell is that the impact in NII, which we have deducted from the net, the net positive is an impact that is -- can be mitigated with a relatively easy -- in a relatively easy manner over the coming year. There may be options for that. Other than, of course, all the other factors of NII were driven next year by volume growth and the other things, but it's nothing that. At this moment, we won't be disclosing the different parts of the total -- sorry for that, but we will be doing so in the coming times. As for dividends?

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

Okay. Regarding the question about dividends, we are, as you said, we are not accruing dividends, but our position is that when the SSM recommendation is lifted, we will resume dividend payments.

[Operator]

Next question is coming from the line of Jernej Omahen from Goldman Sachs.

[Jernej Omahen]

I've 2 questions, please. So the first one is on the cost of risk. And if I understood you correctly, there's 2 comments that you made. One, you expect it to decrease year-on-year. And two, that you expect it to be somewhere halfway between 2020 and the pre-COVID levels. And I was just wondering if you can sketch out for us from where you stand today, how bad would things need to get? Or what would the incremental deterioration need to be for the credit cost in 2021 to exceed the number of this year, of 2020? So that's my question number one.And my question number two is not necessarily a question on the dividend, but the question of how you see the SSM treating different banks when it comes to dividend distributions. As the rules stand today, they're the same for everybody. So as soon as you meet your capital requirements, you're allowed to distribute. Do you see that changing? Do you see a situation where your supervisor takes a view on individual institutions as to who can distribute and how much moving away from this rules-based approach?

[Tomás Varela Muiña, GM & CFO]

Yes. Thank you, Jernej. About the first one, about cost of risk. So I guess, as I've said several times before, it's -- in this situation, in this crisis, with all the different factors, it's not about sensitivity to the degree of the macro scenario. At this level of the macro impact in one year has been the highest that can be remembered maybe. It's not about this. I think it's about how different parts of it move to the government programs, the -- what the health situation implies in terms of how the constraints and restrictions work and play out. So a way -- so I think trying to answer your question, I think for that to happen, a strong lockdown should be in place for the most part of 2021 for the cost of risk exceeding the level of 2020, I think. I think this is the kind of scenario where I think we should -- or we definitely might be in a different situation because of the impact on a significant number of sectors on a continuous basis. So the length of the impact on the revenues. If a lockdown would extend for a significant part of 2021, I think then we could get to a situation in which cost of risk might exceed 2020. And about...

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

Well, yes, regarding the second question, I don't want to speculate about what is going to be the position of the SSM regarding different treatment about the dividends. What I have to remark is what I've said that when the SSM recommendation is lifted, we will resume dividend payments.

[Cecilia Romero, Head of Investor Relations]

Thank you very much, Jaime and Tomás. Thank you. Unfortunately, we don't have any more time for additional questions today. But thank you so much for taking the time to join us. My team and I, as always, remain available to help you with any questions that you have for the afternoon. And just have a great day and stay safe. Thank you.