Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2017-Q4

[Cecilia Romero Reyes]

Good morning, everyone, and welcome once again to our results webcast. My name is Cecilia Romero. I'm Head of Investor Relations and today. We will be presenting our full year results. As usual, we have with us today our top management team: our Chairman, Mr. Josep Oliu; our CEO, Mr. Jaime Guardiola; and our CFO, Mr. Tomás Varela. Good morning. Mr. Oliu, the floor is yours.

[Josep Oliu Creus, Chairman of the Board]

Good morning. Thank you, Cecilia. Good morning, everyone. Welcome to this webcast. Our presentation today will follow a similar structure as usual. Let me now start going through some key highlights for the year, and then Jaime Guardiola will follow with the details on profitabilities achieved and commercial activity as well as digital progress. Then Tomas Varela will discuss solvency and asset quality as well as the TSB achievements before I conclude, giving you some overview and some priorities for the upcoming year.Now let me start with the 2017 highlights. We have had on the commercial side -- all the data that I will give you. by the way, will be comparisons on the -- that are in this page are comparisons like-for-like based on a constant forex and excluding the contribution of Sabadell United, Mediterraneo Vida, and TSB mortgage enhancement portfolio. As I say on the commercial performance side, we have had a particularly strong momentum on our core banking revenue that grew 5.5% year-to-year. On the other side, the performing loan volumes grew at 4.6% year-to-year, 1.2% excluding the TSB and this was driven by the strong activity of SMEs and the new mortgage production in Spain and the U.K. On-balance sheet customer funds had an evolution of -- a growth near 3% growth in the year and on the other side, the customer funds -- the total customer funds increased by 5% driven by an outstanding inflow of the mutual funds and the sight accounts.On the other side, the progress in asset quality during the year has been very significant and very strong. We reduced our non-performing assets by EUR 2.2 billion, exceeding our original target. Additionally and following the success of our hotel development strategy platform HI Partners, which we sold in the last quarter this year. We created a new business line focused on real estate development services called Solvia Desarrollos Inmobiliarios with assets under management that amount to a gross of EUR 1.3 billion, EUR 0.7 billion net of provisions. Including [ these ] assets, the non-performing assets decreased by EUR 3.5 billion in the year.Finally, the non-performing asset coverage ended the year far above our target at 49.8% excluding floors. Implementation of the IFRS9 on January 1 will imply another EUR 900 million in provisions against capital and will further increase this coverage to 54.7% pro forma, which is close to one of the highest coverage levels in the Spanish market. In terms of capital, the generation of capital of the year was very robust and we ended the year with a full loaded core Tier 1 ratio of 12.8%. After the impact of the change in the IFRS9 that I mentioned, that will affect capital by 78 basis points. So therefore, the final core Tier 1 after the IFRS implementation will stand at 12%. Also yesterday, the board of the bank approved the final dividend -- final cash dividend of EUR 0.05 per share, which will bring a total yearly dividend paid of [ EUR 7 ] per share. The total dividend payout of that means 49%, up from the 40% of last year.Finally, as a result, as will be mentioned and commented by Mr. Guardiola, our profit achieved EUR 801 million for this year, on line with our yearly targets. That represents a year-to-year growth of 16% and for the group it represents 34% of growth in the ex-TSB profits of the bank. And that's all, that's an introduction. Now, I think they will go through the details and I hand the floor to Jaime, who will review the key points regarding profitability, efficiency and the commercial activity of the bank.

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

Good morning, everybody. I will start by reviewing our profitability and efficiency highlights for the quarter. The strong performance of our core banking business [ by way of ] increasing commissions continued to be the key driver of our profitability. Net interest income only fell 0.6% quarter-on-quarter on a like-for-like basis despite the challenging negative rate environment. At the same time, our customer spread was stable and remained robust at 2.8% thanks to our ability to defend prices. As I said before, commissions performed remarkably well once again, an increase by 5.8% and 6.6% at group and ex-TSB levels respectively driven by asset management fees. And on the cost -- in the cost side, the group core efficiency remained stable in the quarter. And finally, it's also important to note that the quarterly results were impacted by the usual annual payments to the Deposit Guarantee Fund and the Deposit Tax which in total amounted to EUR 124 million.Looking at the yearly income statement, it's important to note that during the year several changes were made to the consolidation scope of the group. As the Chairman has said before and as you know, the 2017 results are impacted by the sales of Sabadell United Bank and Mediterraneo Vida, the reinsurance of the portfolio of BanSabadell Vida and the early call of the TSB mortgage enhancement portfolio. Also, I would like to highlight that we use the capital gains originated through these successful transactions to reinforce the coverage of NPAs and to lower the cost of risk outlook. In conclusion, despite a smaller consolidation scope, the strong performance of our banking franchise has enabled us to achieve the net profit target of EUR 800 million, which represents a 16% year-on-year growth for the group excluding the impact of FX and 34% ex-TSB.Regarding this quarter results, I would like to remark that our core banking revenue grew by 1% quarter-on-quarter like-for-like thanks to the resilience of net interest income and the good performance of commissions. Also looking at the gross operating income, it's important to notice that in this quarter as I've said before, other operating results include the year-end payments to the Deposit Guarantee Fund and the deposit tax impacting the overall comparability of results quarter-on-quarter.We will now look at our P&L in more detail and as usual, we will provide you with an individual breakdown of Sabadell's and TSB results. Overall, net interest income like-for-like fell slightly quarter-on-quarter by 0.6% for the group and 0.9% ex-TSB impacted by higher average liquidity buffer. TSB contribution to NII performed well in the quarter and increased by 1.7% as a result of a positive volume mix evolution, the impact of base rates increases and the evolution of FX. For the year, group NII increased by 4.9% like-for-like, which was above our yearly target while ex-TSB NII increased by 2.9% on a like-to-like basis and finally TSB contribution was up 10.4% year-on-year like-for-like thanks to the growth of business volumes.As you can see in these slides, customer spread remained stable for the group at 2.80% and increased 1 basis point to 2.73 ex-TSB. This good performance in the quarter in a context of even lower interest rates was possible thanks to our ability to defend the pricing of customer loans and to achieve a slightly lower cost of customer funds. As a result of this, net interest margin as a percentage of total assets continues to be the highest among our competitors in Spain despite the fact that it fell by 3 basis points for the group and 4 basis points ex-TSB due to the lower contribution of the fixed income portfolio and the strong growth of cash balances over the quarter.This following slide shows more details of the dynamics of our cost of funds. As you can see on the left, contractual rates on the new production of Euro term deposits continue to be below the price of the stock. And in the right side, we have the evolution of wholesale funding costs, which fell in the quarter helped by extraordinary result of securitization transactions.In the next graph, you can see that going forward, there are a number of maturities outstanding at relatively high rates, which offer a potential opportunity to reduce wholesale funding costs in the future. In particular, there are more than EUR 5.7 billion in debt issues outstanding at an average cost [ about 2% ], which will be maturing over the next 3 years. Continuing with wholesale funding, I would like to mention that this [ quarter ], Sabadell has executed a number of capital market transactions including EUR 400 million additional Tier 1 issuance, which allow us to complete our AT1 capital bucket and a EUR 1 billion senior unsecured bond, which could potentially be eligible for MREL requirements. In addition, during this quarter, TSB executed its inaugural GBP 500 million covered bond issuance. This transaction which were placed at very attractive terms are a clear testimony to our ability to continue optimizing our wholesale funding costs and to prove that [ great ] markets are very supportive of our investment case. Overall, these transactions have allow us to further optimize our capital structure and to strengthen our liquidity position, credit metrics, and our investment case in light of future issuances.Now we move to commissions, which recorded a strong performance growing 5.7% quarter-on-quarter and by 7.4% year-on-year in constant FX. For Sabadell ex-TSB, the increase in total income from fees and commissions was even more remarkable as it increased 6.6% quarter-on-quarter and 10.3% year-on-year. This increase was seen across all categories with asset management fees performing particularly well in the quarter. Year-on-year, group service and asset management fees recorded an impressive growth of 11.5% and 8.6% respectively. For TSB, the reduction of year-on-year was due to an increase in payments of aggregator fees.In the next slide, you can see the analysis of course which shows that recurrent operating expenses for the group increased by 1.4% in the quarter driven by seasonality of staff expenses at TSB level. Group costs were up year-on-year mainly due to the expected one-off increase in TSB IT costs. And to [ penalize ] the analysis on the P&L in the following graph, you can see the core efficiency ratio, which has remained stable quarter-on-quarter both for the group and ex-TSB. Year-on-year, the ratio for the group has increased slightly due to the impact of the step-up in TSB IT costs but has decreased at ex-TSB level.Now, we will move to the commercial activity and digital transformation. The group performing loan book remained stable quarter-on-quarter with a strong performance in SMEs and increased by 4.6% year-on-year on a like-for-like basis, which was above our year-end target. We also show a positive evolution of customer funds, which increased by 0.7% for the group in constant FX and by 0.6% ex-TSB in the quarter mainly driven by strong growth in term deposits and mutual funds. Regarding liquidity, our position remained strong with a liquidity coverage ratio of 168% ex-TSB and 295% at TSB level.We also continued to increase our market share in Spain across products and maintain our position as leaders in NPS rankings for corporates and SMEs and we maintain our focus on implementing our commercial and digital transformation agenda. As a result, our digital customers increased by 10% year-on-year, reaching a total 4.4 million digital customers. With regard to our balance sheet, on the asset side, as we've mentioned, group performing loans remained stable quarter-on-quarter and increased slightly by [ 0.1% ] in constant FX for Sabadell ex-TSB. On the liability side, group on-balance sheet funds grew by 0.8% quarter-on-quarter in constant FX with a strong contribution from term funds that grew by 4.4% quarter-on-quarter in constant FX while off-balance sheets funds grew by 0.4% mainly backed by strong growth in mutual funds, which were up 1.7% in the quarter.The next slide shows the breakdown of performing loans ex-TSB, this quarter, we added in table below an additional line excluding the impact of the APS portfolio which is in run-off. As you can see, excluding these effects, total performing loans ex-TSB remained stable in the quarter. Looking at the breakdown, you can see that the SME segment presents the best performance with a quarterly increase of 2.5%. Also, the negative net mortgage lending gap closed even further this quarter as production volume continues to increase and it's now close to the total amount of [ attritions ]. This good performance in SMEs and mortgages was relatively offset by a weaker performance of the corporate segment, which decreased by 5.2% in the quarter.In these charts, we show the evolution of front book pricing. As you can see, we have continued to feel the downward pressure of prices of certain products. This front book decline was most noticeable in mortgages due to a lower contribution of fixed rate mortgage products in the quarter. However, we have succeeded to maintain prices in consumer loans and company's credit lines. Overall, as saw in the previous chart of customer spread, the negative effects on customer rates were offset by positive changes in the lending mix. In addition, it's also important to note that front book yields continue to stand above [ bad ] book levels in most products which will continue to support the evolution of our top line profitability.In terms of market share, we have continued to increase year-on-year our share across products for both companies and individuals. In the companies segment, I would like to highlight the increase in the market share of export documentary credit and point of sale turnover which had extraordinary increases in the year and the quarter. And also in the individual segment, we have continued to achieve market share increases across products including credit cards, life insurance, mutual funds and sight accounts. Regarding customer experience and service quality, once again, we hold the top position in the Net Promoter Score ranking for both large entities and SMEs and we are ranked second in personal banking and fourth in retail banking. We also continue to surpass the industry average in terms of quality service widening the gap between us and the sector. And when looking at the service quality score in the quarter [ non-cumulative ] Sabadell has reached 7.95% which was the highest score among our peers and the highest score ever achieved by Sabadell.Moving to commercial and digital transformation, you can see in the slide, our key performance indicators. We have continued to improve our key metrics as we deploy our transformation agenda including the number of digital and mobile customers, which increased by 10% year-on-year and the number of digital sales of unsecured loans, we show a remarkable year-on-year increase of 68%. In the following slide, you can see some examples of the initiatives that we have implemented this quarter to continue our transformation to increase efficiency and improve our customer experience. Regarding our distribution model, as a result of development of our new branch formats, we merged 58 branches in the quarter, bringing the total number of branches closed in the year to [ 252 ]. Also, we have reached our 2017 target of 750,000 active management customers enabling them to communicate with their relationship manager and operate without having to visit their branch. And we have continued to simplify our customer operational processes, we have released upgrades in our digital offering and we have increased the number of event-driven commercial impacts which currently account for 30% of the total contacts. This bring us to the end of this section and I will now hand over to Tomas who will discuss about solvency, asset quality and the TSB results.

[Tomás Varela Muiña, General Manager & CFO]

Thank you, Jaime. Now about solvency and asset quality, the first thing will be to highlight that with our NPL ratio has continued to fall reaching 5.14%. We've seen also a strong progress in NPA reduction during the quarter with a decrease of EUR 523 million. In the quarter, the completion of a creation of a new business line has occurred and the new business line is Solvia Desarrollos Inmobiliarios, which will manage EUR 1.3 billion in assets under management, that actually it represents an exposure of EUR 0.7 billion net of provisions. These assets are carved out from our real estate portfolio, but the assets are consolidated in the balance sheet. So the assets are there, the thing is that they are of a different nature than the other regular foreclosed assets shown in our portfolio. Including these carve-outs, the NPA has decreased in the quarter EUR 1.8 billion. As a result of the sales in the quarter, the net of new foreclosures and sales of foreclosed assets in the quarter plus these carve out for this new business line, the percentage of land in our foreclosed assets portfolio decreased to 34%.We've continued to sell foreclosed assets at a good pace -- at the regular pace in this quarter and again with a premium that's on average was 1.4% in the quarter and as a result of the business delivery and even after IFRS9 implementation in the 1st of January, [ 2018 ] pro forma our CET1 fully loaded ratio stands at 12%. And as a consequence of -- and also pro forma as a consequence of the impact of IFRS9 implementation, our NPA coverage increases to circa 55% without this percentage -- without including the coverage represented by the provisions for mortgage floors. Here is a snapshot of the impacts of IFRS9. On the left-hand side, we see the multiples that the implementation of IFRS9 represent over the pre-existing provisioning levels. So for stage 1, the multiple is 1.53, for stage 2, 1.9, for stage 3, 1.26. So the average is 1.31. The total provisions EUR 900 million, which represent [ 78 basis points ] at group level. As you know that as a consequence of IFRS9, the classification of NPLs needs to be reassessed and this has impact at group level, 18 basis points, 3 basis points ex-TSB. The reason for this difference is the most significant difference has been in TSB where the implementation has meant to reconsider NPL criteria and classifying as NPLs past due of more than 90 days instead of 180 as was the case so far.In terms of impact on the NPL coverage, in percent points has represented an increase ex-TSB of more than 10% -- 10 percentage points, around 10 percentage points actually and a little bit less at group level and for the whole NPA portfolio coverage, the impact is around an increase of 5 percentage points. As I said, the result is the fully loaded ratio is 12% and the whole resulting NPA coverage stands at circa 55%. As a result of this, the guidance for cost of risk in 2020 is 40 basis points with full normalization of the impacts on cost of risk of -- in our P&L resulting from the legacy portfolios.The evolution of capital is shown here, at the end of December, the phase-in CET1 was 13.4%. At the 1st of January, after the implementation of IFRS9, 12.6%. In terms of fully loaded, this is at the end of the year, 12.8% and at 1st of January as I have already mentioned 12%. The drivers behind the evolution are two-fold in terms of the evolution of RWAs and also the capital components as well. So in terms of RWAs, we've had savings from corporate transactions such as HI Partners and the sale of the shares of Iberiabank in the United States and also in terms of IRB, a lot of things have happened in the quarter, new model features have been authorized, approved and implemented and also at the end of the quarter or in the last quarter of the year is when the assessment of scores happen and in this quarter we've seen the impact of [ a positive ] facility improvement in asset quality due to improvement in the environment and this has impacted RWAs and this has been partially offset by an increase in deductions. On the lower right-hand side, we see that the board will or the board approves the proposal to the AGM of a final cash dividend of EUR 0.05, which added to the previous interim EUR 0.02 paid some months ago, means that total dividend for the year of or cash dividend for the year of EUR 0.07. The payout as a result increases to 49%.Here, we see the evolution of the NPL ratio as on the right-hand side, we see the evolution ex-TSB, it fell to 6.57% as a result of IFRS9 increases [ this 3 basis points to 6.6 ]. On the left-hand side, the impact at group level is affected by what I already explained that drove NPLs higher as the result of IFRS9 in TSB and then the ratio stands at 5.32%. We see also here the evolution of the coverage ratios that post IFRS9 stand at 57.7% at group level if we take into account and include the mortgage floors provisions.This explains a little bit more the creation of this new business line. Basically, it includes 84 real estate developments that encompass about 4,000 properties with 64 professionals with assets as I said that [indiscernible] from our portfolios and the whole platform and infrastructure has been created to this end and the rationale as we can see here is to further optimize and improve our developer service, focus on the development of the new business line that will generate new sources of sustainable income and diversify the current portfolio that this business already has of this kind of customers for which -- for whom we already are providing services.The evolution of the NPAs, the EUR 3.5 billion which include the [ EUR 1.2 billion ] of the new business, the EUR 3.5 billion as I said, decreased in the year and that's [ EUR 1.5 billion -- EUR 1.8 billion ]. In the quarter, the NPL portfolio reduced EUR 405 million. The foreclosed assets ex the impact of the creation of the new business line was reduced [ 118 ]. The regular slide about the disclosure of the NPL portfolio and the evolution of the foreclosed assets portfolio, we can see on the higher left-hand side that we keep improving not only reducing the NPL portfolio but also improving its composition, the proportion of past due non-performing loans has been reduced again from 73% last quarter to 71% this quarter. The composition in terms of collateral of this 71% is 68% is residential finish product, 25% commercial and only 7% is land and on the lower part of the slide, we see also the initial composition of the portfolio, on the left 53% finished properties, 41% land, and 6% under construction and quickly we again can clearly see that as a result of the new foreclosures including just a small piece of land, this 7% and instead sales including a large proportion and increasing -- we've seen an increasing -- an increased proportion of sales of land over the several quarters in a row now with this [ circa 40% ], it means that the composition of land in the resulting portfolio keeps being reduced. So here in the slide is worth clarifying that the proportion of land in the sales pie doesn't show the impact of the EUR 1.3 billion and instead on the right-hand side, the pie showing the proportion of the different assets classes already includes the impact of the reduction of the EUR 1.3 billion.We see the evolution of sales here, again see EUR 342 million of sales in the quarter of foreclosed assets represented by [ 3457 ] properties. So in line with what we've seen over the last quarters, we see the usual seasonality here in the year and again, as I already mentioned, the net result of the sales of the quarter was a premium 1.4%. What we are showing here again is more detail on the evolution of the gross value of the portfolio and also the provisions and the resulting coverages in this case showing the impact of IFRS9 and so we've already seen these, but what we can perceive here is that in the year we've reduced [ EUR 390 million on top of the reduction of NPLs EUR 390 million ], the portfolio of foreclosed assets. The impact of the IFRS9 means that NPLs coverage stands at almost 58% if we include the mortgage floors provisions and in total 56% for the total NPAs portfolio.The net exposure after IFRS9, the net exposure to NPAs as per IFRS9 and the carve out of the assets to the new business line stands at right -- just EUR 7 billion, which represents 3.2% of total assets and if we take into account for assessing the global coverage ratio, so the severity that we've actually accounted for in our portfolio is taking into account the initial write-downs when we foreclose assets, this would be the at end of the year 63.5% as we can see on the right-hand side of the slide.If we now turn to the highlights of TSB results, again a strong performance in pounds. Customer lending remained stable in the quarter and increased 11.9% year-on-year. Customer deposits grew 0.8% in the quarter and 3.9% year-on-year. Again, we've been able to keep beating the long-term 6% target of market share in the total of customers in the U.K. banking system that switch accounts or open a new account, so again in the year we've beaten this market share target, it stood in 2017 at 6.2%. The franchise NII increased 1.7% in the quarter and 11.8% year-on-year. Customers continue strongly recommending TSB which increased this ratio even more farther than the previous level to plus 25 during 2017. We are about to deliver the final steps of migration. In November, we unveiled publicly the new platform to the media, our employees and analysts in the U.K. And we've recently announced an initial tranche of GBP 30 million in an investment fund that can go up to GBP 100 million to support Britain's small businesses investing directly in the equity.In terms of the income statement, beyond what I have already mentioned, it's worth highlighting that again the increase in NII represented by the franchise and Whistletree portfolios. Operating expenses grew 2.7% in the quarter and 16.7% in the year basically driven by the already known and expected increase in the contractual outsourcing fees paid to Lloyds Banking Group, and management profit increased in the year 2.1% driven by the strong performance in business, in volumes, in the balance sheet performance and also taking into account the impact of the mortgage enhancement in early call. This was partly offset by the increase in the outsourcing fees as already mentioned for the servicing of the platform by Lloyds Banking Group.In terms of balance sheet also worth mentioning that we are already above the [ GBP 30 billion ] both in lending and deposits. This year again we've increased our new lending. We've reached GBP 7 billion in the year with an increase of 6.2% from last year's levels. And the lending again keeps being of remarkably good quality, the average LTV is 44%. And together with this, alongside this, we keep taking special care of solvency and liquidity. Liquidity continues to be very robust and the capital position is one of the strongest in the U.K. with a CET1 ratio of 20%.The platform, as I said, the progress has been very significant. Many of its features are already working. A good proportion of ATMs is already functioning on the new platform. Mortgage Pro is live, so brokers in the U.K. are using the new platform for serving our customers' needs in the U.K. Also, more than 1,000 TSB employees are using already that platform in the beta projects and we are preparing for being migration-ready around the end of the quarter and finding the right spot, the right weekend to fully landing the final migration event. And with this, I think I hand over to Chairman.

[Josep Oliu Creus, Chairman of the Board]

Thank you, Tomas. Well with respect to the overview of this year, I think that first, we have to -- and looking forward a little bit, we have to see that the Spanish economy has shown significant dynamism for the third consecutive year. As you know, the growth is over 3%, that is for 3 years in a row that has been set and the prospects looking forward don't seem to be weakening. This remarkable performance is backed by favorable financial conditions, by a very substantial improvement of the financial situation of the private agents and also by the positive evolution of the main Spanish market, which is the eurozone. All this translated into a continuous decline of the unemployment rate, as you can see in this chart and that we are looking forward it will continue doing so. On the side of the inflation, inflation is moderate and therefore and looking at the Euribor interest rates, these have been lowering for the last months and for the last years. We have the view that this given the strength of the economy in the Europe zone, this has probably reached the bottom and that we expect slow, but continuous in the future looking forward improvements from our point of view, improvements, that means small increases in the interest rates.The limited -- in the U.K. on its side, what we have seen is a very limited impact of the economic consequences through the process of Brexit. Yes, the British pound weakened, weakened during the year after the Brexit vote, pushing up inflation. However, since then the euro-pound exchange rate shows signs of stability. The British economy also is benefiting from the positive momentum of the global economy and of the European economy. The agreement between the British government and the U.K. to go and pass to the phase 2 of negotiations was perceived by the market participant -- was perceived as an encouraging sign.Now in this context, our '17, how we value them is that we have achieved all our targets. Our net interest rate has been good despite an environment of low interest rates. Commission growth has been outstanding. We still have -- looking forward a good road to go on the possibility of commission growth. That means that is one of our -- looking forward sources of increased profitability. The performing loan growth has been around 5%, that also looking forward seems to be at the same perhaps in the future. Net profit [ 108 ] and that this when we will present our plan, our main concern and our main focus and the following next year will be to increase that and to raise that to new levels. Asset quality reduction has been important. We have the Solvia business units as a service that out of which we have carved out Solvia real estate development. This is a state-of-the-art #1 [ actor ] in the world of servicing real estate in Spain and thanks to that, we've been able to sell with almost no institutional [ investment ] sales, a reduction of EUR 2.2 billion this year plus the EUR 1.3 billion which I will talk shortly, plus EUR 1.3 billion, of that EUR 0.7 billion new business unit of the development of the real estate. The NPL is aligned with our forecast, we want it to achieve the 5% that we can see the normalization ratio, we are [ almost there ] and the NPA coverages, Mr. Varela has pointed out to you has reached a very substantial and safe position after the IFRS. That gives us opportunities and opens our possibilities for the future and at the same time, the core Tier 1 is in the strong position in the 12%. Efficiency remains as one of the main -- compares very well with the rest of the banks in Spain, this 50%. During this year, aside [ from the reaching ] the targets substantially, we have been very successful executing several corporate transactions. First of all, was the sale of Sabadell United Bank at the beginning. This was considered at the point that was not a strategic asset to continue developing. The strategy for Sabadell United had to need to go through acquisitions, we decided that at this point, we were not in this position of hitting in a competitive way the market. So we sold to Iberiabank. That was a very good deal, was in a good moment and that was a deal of over $1 billion. Second of all, we also decided to reinsure the portfolio of life insurance in [ our Sabadell venture with Zurich ] that was also taking care of the opportunity the fact that interest rates were low. So we took the value of that. Finally, in the fourth quarter we sold the stake of Iberiabank that we were given in payment for the sale of Sabadell United and also was the successful sale after the implementation of a specific strategy for recovery on HI Partners which was a strategy of developing a business unit of hotels and reinvesting and making that business unit able to be sold with creating value for us and therefore helping and improving the [ return ] that we would have gotten -- would have been selling the hotels without the development of this business line, so that is a successful strategy that we follow. [ Without that, they ] will have been repossessed and that we are now repeating and that we were repeating in the development strategy for this portfolio of EUR 700 million of ongoing developments and our management.The market has recognized, it has been recognized a good performance in '17. Finally, we are [ covered ] investment grade by all the agencies. We are top-ranked by SMEs and large corporate as customer recognition, the NPS and we will continue to be the bank in Spain specialist in SMEs, that's our focus and that is our another of the drivers for value looking forward. TSB was an award-winner in the Bank Technology Awards as the most well seen by the public, by the British public and the NPS reached 25 points plus at the end of the year. So that also encourages the fact that the strategy of TSB of being very close to the customers is being successful and creating value. The share price performance among Spanish bank in '17 was okay.Now, we are launching a new strategic plan from a solid starting point. Now, this new strategic plan will be presented to you at the end of this month. What are the main lines of this strategic plan? I will not go in depth with it because that's why we will have a specific session on the 23rd of February, but as a matter of only a teaser to see what our purpose for the plan is, our main purpose and focus is about enhancing profitability. We still have not reached the [ ROE and the ROTE ] that we think that is according to the state-of-the-arts of banking today in Europe and even the actual system of regulation, we have not achieved that, we plan to achieve that during this 3-year strategic plan and we see the horizon that is well clear in order to achieve our targets. I think that this enhancing profitability will be continuing what has been the fact in the last 4 years is a very positive core business evolution. That means that [ slides ] into improving organically market share and therefore creating value for future both in deposits and in loans. We have to strengthen our franchise, our franchise has been strengthened very much, the recognition and the fact by which our franchise is appreciated in all sorts of levels both publicity level and as well as the recognition of the quality service of the company is well-recognized, so we will continue in that line.The SME is, as I was telling you, it will be the driver for our growth. SMEs is a [ old specialty and the old focus ] of Sabadell. Sabadell in the last years has improved its profile to include a lot of deposit, deposit gathering and deposit generating banks in its profile, but now we are ready in these following 3 years to continue and expand further our business is enemies in all the Spanish geography and that is we think given the environment that we are looking forward, it will be one of the elements that will contribute value to the franchise. We'll be working as always, but we will continue working on being and having superior efficiency in the Spanish benchmark banks. The NPAs coverage is good, that is a good starting point that opens possibilities for us in developing a continuous and probably accelerating slightly the -- or even accelerating the recovery of value through the NPAs. The international growth momentum in the U.K. is good and will continue being good for TSB and we also have, despite the fact our Mexican subsidiary is very small, has very good momentum. So international growth momentum will help our internationalization units positively, but at the same time, the fact that the international momentum continues to be good and is good -- the 3 -- by the first time in the 3 worlds, the developed worlds, the U.K. -- the European world, the U.S. world and also the emerging markets world that also gives a good momentum for growth and for banks and for the Spanish economy as I told you.We have state-of-the-art technology, we'll continue investing to be state-of-the-art technology. Our [ modern bank is not a bank ] that relies on being a state-of-the-art of technology [ but giving a plus ] that distinguishes ourselves from the rest, that is what -- which is the personal approach and the way that we can anticipate the customer needs that is our basis and we will develop that during this plan. And, of course, we are geared towards the rate increases that will be happening. So all together, we think that we can reach this 13% is our target that we will develop in the presentation of the plan and of course, this, we will achieve this 13% by enhancing business growth, of course, by efficiency and by the fact of NPA normalization, that will give an evolution of normalized cost of risk for the next 3 years. Okay. I think that the main basis for the plan are the brand customer experience, you know as the technological capabilities, having a good organization prepared with the skilled people and consolidating our internationalization process in the markets that we have. So that's all. This presentation to you, to the investors and analysts, will be the 23rd of February at 9:30 at the Landmark Hotel in London. [ Until then ], we expect to have you there. Thank you. Cecilia, that's for you.

[Cecilia Romero Reyes]

Thank you very much, Mr. Oliu. Now we're going to open the floor to a round of questions and the first question that has arrived is for Mr. Guardiola. Mr. Guardiola, the analyst basically had been asking is if we could please give some guidance in terms of core banking revenue evolution for 2018 ex-TSB?

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

Well this year or last year, 2017, core banking revenues ex-TSB grew by 5.2% and for 2018, you should expect this strong growth to continue.

[Cecilia Romero Reyes]

Thank you very much, and the next question goes to our Chairman, Mr. Oliu, basically, they are asking, if you could update us on your strategy to reduce NPAs, in particular, we have received questions regarding whether you are considering any block sales and mentioning [ income ] APS and the assets in the new Solvia Desarrollos Inmobiliarios business line.

[Josep Oliu Creus, Chairman of the Board]

Yes, the fact that we have almost 55% coverage in our portfolio of NPAs gives us -- it opens us the opportunities and possibilities and that's one of the elements. The other of the elements that we are considering is that we are living a good momentum with good prospects for the next 3 years in the real estate market. All in all, we have taken up [ instead ] with one part of our portfolio which is the EUR 700 million, so we started a new business unit for Solvia developments which is EUR 300 million, EUR 300 million of assets. This is ongoing business, there's over 20 new developments that are going on where more than 25% has been already pre-sold so that is an idea of [indiscernible]. We also have qualified people there. Qualified people there are the best people in the sector of real estate developments. So these are the ones that, together with the assets create a new business unit. There is prospects for generating value, substantial value out of the EUR 700 million by developing that in the following or in the next 3 years. That's also a business that we want to give it -- the idea that it is an ongoing business and a sustainable business. Therefore, the moment in which we will divest that can be by divesting it at the first point, later on, or even later on after some sales have been -- after some developments [ and sales have been done ], can be solved only with the prospect of -- or could be following and developing the whole thing ourselves. We have the opportunity for doing that, but in this case, and this is an example for that, we will evaluate the prospects of value, looking forward which is one of the elements to be looked. Now for this the Solvia developments, it is just quite high and then we will challenge this with the risk that we continue having on these performing businesses. That's for one thing. You also asked for these other -- so to speak block of our NPAs which is the APS, the portfolio -- the portfolio subject to the APS, right? The portfolio subject to the APS, you know, here we are very -- with the idea [ of accelerating the sale of that], of course, we are not alone there and we are facing and I think that everybody will be facing the FGD or FDG that agrees with us -- that is the rest of everyone to have a strong and a faster disposal and derisking of this APS for all of us. So there we are following that line. We expect during the plan that will be over, of course, and with respect to the rest of the block sale, we'll keep open our sites, the Solvia sells retails, but sometimes we put together some block sales, so we'll continue doing the same thing.

[Cecilia Romero Reyes]

Thank you very much and the next question goes to Mr. Varela regarding some of the regulatory topics and talked about in the sector right now. We are asked what will be the impact, if any, of the BASEL IV, the EBA NPL guidelines and they are asking us, well, if you can give us an update on TRIM.

[Tomás Varela Muiña, General Manager & CFO]

Okay, thank you, Cecilia. On BASEL IV, the reality is that we don't expect a relevant impact, the most requiring aspects of it have resulted to be market risk and CVA. This for us are not very relevant or significant and what's more significant for us is credit risk and for credit risk, the impact of the requirements is offset by positive impact from the foundation [indiscernible] portfolios. So we really don't expect noticeable impact out of BASEL IV. In terms of the ECB and EBA guidelines around provisions, also the criteria included in the guidelines has been long already followed. So unsecured NPLs were already being amortized much quicker than this what's in in the guidelines is set and also for secured, the collaterals are gradually executed during the first 3 years and on the other hand, our provisions have raised even that we have the collaterals and they would be taken to a net value close to [ 0 very quickly ] and of course within much quicker than the 7 years. So nothing neither from this front and regarding TRIM, TRIM is a very demanding process in terms of rigor and requirements of resource, there's also simpler in dealing with it, there are site inspections, there are follow up measures, fixtures arise, we need to complete the fixtures, but what we've seen and as a result of our experience so far, no noticeable or significant impacts have been incurred and neither we expect that significant impact on RWAs will occur for the moment. We don't have visibility that something will arise on this front and we need to take into account that RWAs in Spain, in general, for banks in Spain are very conservative and the RWAs density is high in the sector in the space. So nothing really significant coming from the regulatory side that we should have visibility on.

[Cecilia Romero Reyes]

Thank you, Tomas, and another one for you, now that we are talking about regulatory pressures and well just discuss the NPA strategy, what are the demands of the ECB on the NPA reduction?

[Tomás Varela Muiña, General Manager & CFO]

Well, on NPA reduction, I would say -- so recently there has been a more open debate about the acceleration of the SSM or the ECB priorities on NPA reduction. Actually in the ongoing dialog with us, nothing very significant and relevant has changed. So the debates and the discussions keep ongoing since it was since already 2 years ago when the ECB made it more explicit their guidelines and what they expect from banks, they have already pointed out this as a priority in the exercise of their responsibilities. So nothing, we keep updating the plans, and there are discussions about in general about how important it is for them, the ambition that we banks set for the reduction of the portfolios. But there is nothing which represents a change or a necessary change on the pace at which we have been handling or managing the reduction of the portfolios. Of course, we are aware of the opportunities of this priority, it's true that the priorities of the SSM have become more publicly apparent and explicit about this -- recently over the last [ 10 months ], but this is a variable that goes together with the fact that we've seen more -- a market that is more active on this. So as the Chairman has already mentioned, we are aware of this and we keep being vigilant to any opportunities that may arise and can make sense for us, but that's all. There is nothing that comes from the ECB in terms of directions or changes or required changes for the moment on our approach.

[Cecilia Romero Reyes]

Thank you very much, Mr. Varela. And now the next question goes to Mr. Oliu. What is the EPS and CET1 sensitivity to 10% GBP devaluation? And what circumstances you will consider selling TSB?

[Josep Oliu Creus, Chairman of the Board]

The TSB we consider today as a core business for Sabadell. So we are not considering the sale of it. Now about sensitivity, we have hedged since the beginning -- we have hedged -- our forex strategy is to hedge the pound, euro, so that we immunize the capital so that whatever the evolution of the rate of exchange is, so we keep constant capital. In addition to that, we have for this year -- for the following 3 years, we also have hedged the profits. So the response to your question is [ 0 ].

[Cecilia Romero Reyes]

Thank you very much. And Mr. Guardiola, could you please comment on the current competitive and pricing dynamics in the U.K?

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

Yes, well we are still seeing some pressure in mortgage pricing. Now on unsecured lending, last year there was an important pricing competition, but we consider that probably now this -- there is some kind of stabilization in this segment, but in any case despite the spread compression in mortgages, the lower cost of funding will allow us to maintain our net interest margin and keep increasing our NII. So in this sense that we are optimistic about our decision.

[Cecilia Romero Reyes]

Thank you. And another question for Mr. Varela. Regarding the NII, can we expect a recovery of the bond portfolio contribution going forward or is this expected to continue to drop?

[Tomás Varela Muiña, General Manager & CFO]

As you know, we adapt very quickly to the market circumstances. We keep following the evolution of the situation. For the moment, for the short, medium time in the year, so for sure for the first quarter, we are now not expecting significant changes in the bond portfolio. So we expect a stable contribution to NII out of this portfolio.

[Cecilia Romero Reyes]

Thank you very much. And the next question to goes to Mr. Guardiola. Could you explain the growth in term deposits in the quarter I mean and the subsequent increase in the cost of front book deposit cost?

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

Well, we have achieved higher inflows of deposits with longer maturity and that's part of the reason of that and that has been the -- then taking advantage of the very low interest rates in the front book.

[Cecilia Romero Reyes]

Thank you very much. And the next one is for Tomas. We are getting a lot of questions regarding our interest rate sensitivity and they are asking if you could explain what is this and some of the assumptions behind your estimate?

[Tomás Varela Muiña, General Manager & CFO]

I will use one of [ the examples ] to show the sensitivity. So with an increase -- a parallel increase of 100 basis points in the yield curves, we will have an increase in our NII after 12 months. At group level, around EUR 550 million pretax if the deposits pass-through [ of the change in the rates is of 50% ] if the pass-through would be an 85%, then the increase would be around EUR 350 million.

[Cecilia Romero Reyes]

Thank you, the next question Tomas is regarding IFRS9. We have reported [ a lot here IFRS9 and ] we initially guided and maybe than others, do you deploy surplus capital or do you simply revise your calculations and more broadly, what's the outlook for NPA coverage and cost of risk?

[Tomás Varela Muiña, General Manager & CFO]

Actually, bigger impact, we've had some bigger impact. We already had anticipated that we were considering some bigger impacts with [ used, it's true that we are puncture point ] was our CET1 fully loaded with a comfortable level of room to absorb the impact of conservative treatment of IFRS9. We've developed very sound, rigorous and conservative models, which is taking the optionality that is embedded in how you can use and set your models for IFRS9, [ but possess ] in the most conservative way, there are things like -- there are many technicalities but there are things like, for instance, the weight that you give to different macro scenarios within as far as we know the bank that have given more weight to other scenarios and also they are as I said other things that can express their models towards a more conservative site. So the result of this is comparatively higher impacts of IFRS9 than other competitors have had and still after this, our CET1 fully loaded stands at the top range of the top level -- the top edge of the range of the ratios in the Spanish sector. The change or the additional impact of IFRS9 that we've had since our initial guidance that we had given 60 basis points. Actually, we need to understand that the final 78 basis points is against an amount of valuation that has decreased. So the difference in the amount of provisions that have been set is not that different is -- it's a little bit noise, actually around EUR 150 million. So this is more or less the consideration of how what bigger means, how much bigger it’s been since the first initial guidance that we gave that afterwards we already gave the heads up that it could be bigger and eventually what we've done. So in terms of how much bigger is [ EUR 150 million ] that in terms of measuring it against our valuations in the last quarter has been lower in terms of the ratio [ these difference ]. So in terms of guidance of cost of risk going forward, so I already mentioned that we expect 40 basis points for 2020 and more or less the pace that we expect until then is 60 in 2018 and 50 in 2019, but we will keep of course providing guidance to you over the next quarters.

[Cecilia Romero Reyes]

Thank you and on the same topic, in terms of IFRS9 impact of [ 78 basis points on capital ] do you expect to take the hit in one go or differently?

[Tomás Varela Muiña, General Manager & CFO]

No, something that I probably didn't mention in the last answer is around IFRS9 is, of course, this level of -- that gives us additional flexibility for our already very proactive approach to how to manage the portfolio so it gives us more alternatives and around the phase-outs, we are not going to renounce to the optionality in terms of how to handle and [ diffuse out ] of the ratio provided by the regulation but anyway we will keep reporting the CET1 fully-loaded as we've done so far and we need to also take into account that the phase-out is in terms of the regulatory ratio, the CET1 ratio, the capital, therefore not accounting, so in terms of accounting, it goes all in one go. So it's the full impact is accounted against net equity and reducing, therefore, the book value --the tangible book value.

[Cecilia Romero Reyes]

Thank you, Tomas. The next 2 question goes to Mr. Guardiola. The first one is if you could please update us on the progression of the IT platform at TSB and when it's finally going to be rollout?

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

Well, as we have said and Tomas has remarked, the [ property ] is ready in fact, it's running for all the new business and all the employees with the mortgage intermediaries, all the digital offer, all of these elements of the platform are ready and we will be ready for the migration, fact of migration at the end of the first quarter and then what we'll have to do is to find a weekend and a slot to take place the migration and if there is some different [ partner ] has to be coordinated and this is our plan.

[Cecilia Romero Reyes]

And in terms of how much of this [ slowdown ] on TSB lending this quarter was due to the changes in the systems, how much is this due to the U.K. structural issues and also they are asking in, if you could please let us know, how much you are expecting TSB lending to grow in 2018?

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

Well, in fact, we already advanced in our strategic update at the beginning of the year, that the volumes of TSB were going to slow down at the end of the year because of the migration, so what we have seen is actually that, but of the year, TSB volumes have been very solid in the year with an increase of 11.8% year-on-year thanks to the strong growth of the franchise, the franchise customer lending. That partially has been offset because of the -- run-off of the Whistletree portfolio and for the next year, we are going to recover the risk or the fact that we have at the beginning of the '17 year and in this end, we except lending growth of low double digit for this 2018.

[Cecilia Romero Reyes]

Thank you and we have one last question for you, Mr. Oliu. Do you consider M&A in the new strategic plan?

[Josep Oliu Creus, Chairman of the Board]

Well, not really. Our business plan for 2020, it's been built on one focus and that focus is on, if you want 2 focuses, one focus is profitability and the other one is value for shareholders. And that will be our focus and the element that will, that will base our activities. Our feeling is the following, in Spain, we have achieved a competitive position. We have elements to develop further in order to bring all these competitive power that we have in Spain into value and that is what we will do in this plan. Okay and this is the strategy of NPA, the commercial strategy, the planned acknowledgment et cetera, so that is what we do in Spain. In the U.K. we will have added a lot of value to the franchise after the migrations that just now Mr. Guardialo mentioned. After the migration, we will have, we still have a lot of work to do in order to extract all the potential internally on the development of the TSB franchise by looking at its efficiency and by looking at it's potential in the growth in the -- not only in small customers as it is now with the approach that it is doing now which is very successful, but also in SMEs, that is our challenge for the next 3 years and in next year, [ it's a small team ] but we have also another challenging insight which is focus there is same as the TSB, so create value on our franchise and the value for our franchise in the next following 3 years will be the ability and the challenge of achieving a capacity to raise domestic currency deposits in the Mexican market and we will develop a strategy in order to do that. Having said that, that is our focus and that is the thing that we are looking forward. Since this is our focus and it is our -- the main aim is to create value for shareholders in the next 3 years, anything that could be considered on the [ NMA ] would have to be something that we are not looking there for -- for anything that is acquisitions, as we have done in the past with paying premiums. So anything that we can look at is, is anything there could be in a very clear way helping to our focus of creating value for our shareholders.

[Cecilia Romero Reyes]

Thank you very much. That was our last question. So this brings our webcast to an end. Thank you very much for joining our webcast today. At the Investor Relations department, we continue to be available during the day to answer any questions you may have. Have a good day.