Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2018-Q4

[Cecilia Romero, Head of Investor Relations]

Good morning, and welcome to Sabadell results webcast. My name is Cecilia Romero, I'm Head of Investor Relations. And today, we will be presenting our fourth quarter and year-end results. As usual, we have with us today our management team. Our CEO, Mr. Jaime Guardiola, who will go through the yearly and quarterly highlights and will give you some of the details about profitability and efficiency, commercial activity as well as transformation and TSB. Then our CFO, Mr. Tomás Varela, who will go through solvency and asset quality. And finally, our Chairman, Mr. Josep Oliu, who will go through some of the closing remarks and the outlook for 2019. And with that, I'll hand the word to our CEO, Mr. Jaime Guardiola.

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Thank you, Cecilia, and good morning, everybody. Let me begin by highlighting that 2018 was an important year for Sabadell marked by credit growth and strong dynamics in commercial activity. Also during this year, Sabadell achieved 2 key milestones, which have produced substantial one-off charge but will significantly contribute to the future profitability of our business. The first milestone was the agreement to sell a large part of our NPAs to institutional investors. This will allow us to completely transform the bank's risk profile, accelerating our NPAs disposal rate while improving the bank's profitability by reducing funding costs and the future need for provisions.The second milestone is the migration of TSB to its new IT platform. Whilst the new -- the system's migration caused considerable frustration and difficulties, the new platform is already delivering real benefits. TSB is now a stronger bank operating on a more agile, responsive and modern platform, which is able to service more customers, offering them an enhanced experience and differentiating TSB from many of its competitors. In addition, our core banking business has continued to show a good performance in the quarter and the year, delivering robust volume growth. Both gross and performing loans grew by 1.8% and 6% year-on-year, respectively ex-TSB. This, together with our strong progress in fees, which added the year by up by 11.3% ex-TSB, have boosted our core banking revenues to 4.1% higher year-on-year ex-TSB. Overall, net profit was impacted in the year by TSB IT migration one-off items as well as extraordinary provisions for the institutional NPA sales, amounting to EUR 637 million. Excluding these one-offs, our group profit would have increased by 9.6% in the year. I think it's important to highlight that we don't expect any additional one-off costs related to TSB migration. And that looking ahead, we are seeing commercial activity at TSB gaining momentum from the beginning of 2019. In terms of asset quality, we have also continued to de-risk our balance sheet. At the end of December, NPAs reduction reached an impressive total of EUR 7.8 billion in the year. Our NPL ratio was down to 4.2%, and our net NPA ratio decreased to 1.8%. Regarding the institutional NPA sales, we can confirm that we expect EUR 153 million of annual savings. This scenario includes the sale of Solvia which was announced in December. Most of these savings have been accrued prior to the closing date of these transactions. Moreover, our fully loaded core equity Tier 1 ratio pro forma of the NPAs and Solvia sales and the impact of IFRS 16 ended by -- ended the quarter at 11.3%, which represents an increase of 10 basis points in the quarter. Fully loaded reported core equity Tier 1 ended the year at 11.1%, also increasing by 10 basis points in the quarter, while the total capital ratio increased by 70 basis points to 14.9%.I would also like to emphasize that in 2018, Sabadell has considerably lowered risk to capital from its equities portfolio and the last portion was transferred to the amortized cost portfolio in the year. And lastly, I'm pleased to announce that our board has approved a final dividend of EUR 0.01 per share, which brings the total yearly dividend to EUR 0.03 per share, in line with the last year dividend payout ratio of around 50% of profits. Now I will review our quarterly profitability and efficiency highlights.In terms of volumes, this year, we have reached a turning point in gross loans, which are growing year-on-year, both at group level and ex-TSB levels. Performing loans were up 3.2% year-on-year for the group and 6% ex-TSB, driven by a very strong performance of our corporate and SMEs business in Spain as well as in Mexico. In the quarter, volumes continue to grow and were up 0.7% ex-TSB while group volumes were stable impacted by the reduced activity at TSB. Overall, we saw a strong core banking revenue for the group, which was 1% in the quarter and 2.9% in the year. Our core banking results growth was even higher ex-TSB, increasing by 2.4% and 4.1%, respectively.Net interest income performed very well ex-TSB growing by 1.1% both in the quarter and the year. And the group level, NII was slightly down in the quarter but continue to grow 0.7% year-on-year. And finally, fees and commissions performed remarkably well, growing by 9.6% for the group and 11.3% ex-TSB year-on-year. Performance in the quarter was also very strong, driven by service commissions.Regarding our yearly results, our reported net profit in the year was EUR 328 million. This result includes one-off charge, which as I mentioned before, amounted to EUR 657 million. Excluding these, our net profit increased by 9.6% in the year, driven by a very strong performance of our banking business in Spain and Mexico and our international offices.Looking at the quarterly income statement, I would like to highlight that the net profit in the quarter was EUR 80 million. The quarter-on-quarter comparison has been impacted by the year-end payment of the Deposit Guarantee Fund and the deposit tax usually paid in December and recognized in other operating results. As expected, quarterly results were impacted by post migration one-offs of TSB close to EUR 48 million net. Nevertheless, as I mentioned before, core banking results evolved positively in the quarter.Moving on to the quarterly evolution of the net interest income. Ex-TSB NII increased by 1.1% compared to the previous quarter, driven by the strong volumes, the effect of the Euribor repricing and a slightly lower cost of liquidity. In addition, TSB contribution to NII decreased in the quarter due to lower volumes as the bank intentionally managed operating capacity during the quarter. In the year and excluding the impact of customer remedies, NII increased by 2.6%. Overall, group NII remained stable in the quarter.This following slide shows the evolution of the group customer spread in the quarter, which remained broadly stable at 2.73%, supported by higher loan yields ex-TSB, which increased by 3 basis points as we continue to defend pricing, and also thanks to the positive Euribor repricing. In addition, the cost of deposits ex-TSB increased by 2 basis points due to the higher cost of foreign currency deposits. Group net interest margins remained broadly stable at 1.7%. And in TSB, customer spread and net interest margins were down 4 basis points and 2 basis points, respectively, in the quarter, impacted by highly competitive U.K. mortgage market and the effect of the Bank of England's August rate hike on the deposit costs.Now let's move to the evolution and breakdown of fees and commission, driven once again by the strong commercial activity. Compared with the previous quarter, commissions were up by 4.6% for the group and 5.2% ex-TSB. Fees were up in the quarter across all segments, including 3.7% growth in asset management, which was a very positive result considering the negative performance of financial markets. In the year, fees grew by 9.5% for the group, 10.1% for the group excluding TSB customer remedies, and by 11.3% ex-TSB.Regarding expenses. Our operating cost line was impacted by EUR 33 million of nonrecurring expenses in the quarter, of which EUR 28 million mainly corresponds to an increase in personnel compensation related to the restructuring of our Asset Transformation unit, following the sale of the very significant portion of our problematic assets and EUR 4.7 million which corresponded to post migration one-offs, net of savings from TSB -- from TSB to check with these [ balances ], which TSB board decided not to pay. Overall, total group costs were stable in the year.Well, let's us -- let's turn to commercial activity and transformation. As I highlighted before, the commercial performance of our banking business across the group continued to show encouraging dynamics, especially ex-TSB. Performing loans ex-TSB increased by 0.7% in the quarter, which resulted in a cumulative growth of 6% in the year, including 5% in Spain. This performance was driven by SMEs and corporates but also supported by the mortgage segment, which grew 0.9% in the year, reaching an important turning point. Customer funds also increased by over 4% year-on-year. We also continued to outperform in the most profitable segments, corporate and SMEs, growing at rates of over 14% and nearly 4%, respectively while simultaneously defending yields. TSB balance sheet was resilient with current accounts growing above 3% while lending remained stable in the year. This performance includes a slower commercial activity in the quarter, as we intentionally managed capacity during the first 2 months of the quarter. December, however, was a very positive month in terms of commercial dynamism.In Mexico, we continued to see sustained growth in customer lending with a 7.8% increase in performing loan volumes during the quarter while customer funds continued to grow, representing a threefold increase year-on-year.In this next slide, you can see a more detailed breakdown of the evolution of customer loans and funds. Let me highlight that on the liability side, we registered an increase in customer funds in the quarter, both at a group level -- at the group and at ex-TSB level, representing a year-on-year increase of 2.4% and 4.1%, respectively.Our balance sheet funds show negative evolution in the quarter, impacted by the performance of financial markets, which also result in a lower growth in the year despite the positive net inflows in mutual funds recorded during the period.Looking at performing loans by region, including the impact of FX. You can see that this quarter, growth was mostly driven by the strong performance of Spain, our foreign offices and Mexico. Spain and foreign offices grew by 0.5%, 5.1% in the year while Mexico grew by 4.4% quarter-on-quarter and 43.6% year-on-year.TSB volumes fell by 2.5%, 5% in the year. And overall, group performing loans were down slightly, impacted by lower activity at TSB in the quarter while they increased by 3% in the year.The following slide shows the breakdown of performing loans ex-TSB by customer segment. As you can see, the corporates and SMEs segments performed very well in the quarter growing by 1.7% and 0.9%, respectively, supported by strong working capital lending, which typically occurs at the year-end, and also by an increase in loans and credit lines. Mortgage to individuals were slightly impacted in the quarter by the Spanish mortgage tax uncertainty. Nevertheless, the segment grew 0.9% in the year.In terms of pricing, we have continued to defend yields across all segments without sacrificing volume growth. Looking at commercial activity in Spain, our performance continues to be very positive across segments. As I have mentioned before, we continue to show strong growth in new lending in both companies and individuals, and we'll have also achieved double-digit growth rates in other relevant commercial areas such as credit cards, point-of-sale, turnover and insurance. This positive performance is reflected once again in market shares increases. As you can see, since the start of the year, we have increased our market shares in both customer loans and customer funds. In addition, we have continued to improve our shares year-on-year across most products, both for companies and SMEs.Key to sustaining this excellent commercial performance is our continuous focus on customer experience and service quality. In this regard, once again, we continue to beat the industry average in terms of service quality, and we have widened the gap between ourselves and the rest of the sector. In addition, we maintained top position in Accenture NPS ranking for both SMEs and large enterprises. In the U.K., as I mentioned earlier, mortgage activity remained stable while current accounts saw positive growth in the year. Quarterly performance, however, suffered as the bank intentionally managed operating capacity, reflecting the conscious decision to reduce new originations in Q2 and Q3.In the fourth quarter, TSB saw the value of mortgage application, increase by 142% on Q3. And therefore, enters 2019 with a strong completion pipeline. On the liability side, current accounts decreased in the quarter but increased by over 3% in the year. In fact, more than 140,000 customers opened a new bank account or switched their account to TSB in the year, while nearly 80,000 customers switched out from TSB out of over 5 million customers in total. The reduction in savings and deposits both quarterly and the end of the year reflects pricing decisions taking early in the year to manage the deposits volume, so the year [ 2,000 ] ISA season given the bank's strong liquidity position, with the LCR of nearly 300%.TSB has made remarkable progress in each 3 priorities announced in September. Firstly, by putting things right for customers, resolving more than 90% of complaints received since migration. Now there are significantly fewer complaints moving closer to pre-migration level, and most of them are no longer related to migration issues. Secondly, enabling the bank to achieve nearly full functionality for customers. We have a customer-focused team and a strong banking system that customers are starting to see the benefits of, including our liability of mass products across channels and the launch of a leading business banking offer. Thus, TSB new IT system provides a current architecture involving significantly fewer platforms with improved and faster service for our customers. For example, current accounts can now be opened in branch half the time compared with the old system, and online current account openings have returned to underlying pre-migration levels, following the launch of our improved online application. Another example is that mortgage brokers can also submit application in half the time compared with the old system. And finally, the third priority looking for 2019. Debbie Crosbie was announced as the new CEO of the TSB, and she will join the business in the spring. Moreover, in December, TSB was named part of the Incentivized Switching Scheme for SMEs, and it's applying for a grant from the Capability and Innovation Fund.On this last point, I would like to highlight that TSB has a unique proposition to bring competition to SMEs banking in the U.K. TSB already supports 100,000 mortgages and charities across the U.K. And to help us to do more, we have already appointed a new team dedicated to business banking. We believe that no single bank or FinTech has the community presence and scale with a branch network that can rapidly reach a large part of the SMEs nationwide to ensure that the small businesses across the U.K. are provided with a tailored offering they need. In fact, branches and PCAs market shares are the key drivers for business current accounts reduction. And TSB has both of these factors. It has more than 7% of branches and has been constantly capturing more than 6% of the current account flow during the last few years. While there's more challenges, will need time to build their PCA and brand reach, TSB already has the right infrastructure and customer base to quickly become a key challenger in the SME space. At the same time, incumbents are already at their natural market share. Also, TSB will leverage on the group's experience in Spain where Sabadell is one of the largest players and the leader in customer satisfaction in the SME segment. If you will look at the market and what the remedies firm is seeking to achieve, TSB is [ strategically ] placed to bring more competition by delivering exclusive combination of local human expertise, combined with cutting-edge digital services to help small businesses owners to run their businesses. Moving on to the benefits for TSB of its new IT platform. Firstly, the new technology will improve operational efficiency and give back -- give the bank a competitive edge by unleashing its capacity to offer innovative products. Secondly, it will make TSB more competitive in terms of the time-to-market of new banking services. Thirdly, the new technology is fully adapt to open banking standards, meaning that TSB can deliver open banking and integration with FinTech start-ups. Also with the new platform, it would be faster and cheaper to deploy upgrades. In addition, it will enable TSB to provide better experience and a faster service to its customers. In fact, TSB mobile NPS score was in negative figures post-migration at 8 in last quarter and 27.4 by year-end. So it is obvious that customers are already noticing the benefits. TSB now operates on a more current and responsive and modern platform as the foundation for its future success, differentiating the bank from many of its competitors.Moving on to Mexico. Our commercial activity continues to deliver impressive results. Customer loans grew by 36% year-on-year, and customer funds grew by more than threefold as a result of our focus on deposit gathering to close the local funding gap. We have also continued to grow our new fully digital bank for individuals, which we launched at the beginning of the year, which has already acquired more than 10,000 customers.During the quarter, we have also continued our commercial and digital transformation. As you can see in this slide, we show some of the key metrics that we use to track our progress. For example, digital and mobile customers were up 6% and 17%, respectively, year-on-year. Digital sales of unsecured loans increased by 39% year-on-year, and commercial impact based on business intelligence has increased by 33% compared to the last year.To achieve these results, we are continuing to roll out new initiatives that leverage on technology to improve our digital offering and simplify customers' interaction with the bank as shown in this slide. At this time, we are completing investments in technology ventures. In this quarter, we have completed our first interaction with Amazon's Alexa voice service, and we have launched payments using facial recognition technology. We have also invested in Base 10 venture capital fund, which mainly targets Silicon Valley start-ups, and we have also invested in UnDosTres, a Mexican start-up, which is a digital platform that allows users to make online payments easily, instantly and securely.Well, with this, I finish this part of the presentation, and thank you very much for your attention. I will now hand over to Tomás who will discuss solvency and asset quality.

[Tomás Varela Muiña, General Manager & CFO]

Thank you very much, Jaime. Moving on now to solvency and asset quality. I would like to highlight the strong progress once again in the de-risking of our business and our balance sheet. We continue to decrease the ratios. As we can see here, the NPL ratio stands now at the group level at 4.2%, and the net NPAs ratio at 1.8%. We've achieved this through a strong activity in the quarter, reducing once again more than EUR 300 million in NPAs, which in the total -- in the whole of the year, has been more than EUR 2 billion, EUR 2,048,000,000. On top of that, the very significant amount of the reduction due to the sales of the institutional portfolios. We've achieved this while keeping the level of our coverage still at a high level. It stands now at 52.1%. And in fact, we've seen in the quarter a decrease in the cost of risk in the -- charging the P&L for provisions. We can consider this broadly to be a good indicator of -- for the coming quarters. In terms of capital, it's -- the ratios have evolved positively, stronger, have grown stronger. We see here the CET1 is 11.1% -- 11.3% pro forma and the total capital, 14.9%. The total capital has increased in the quarter 70 basis points, and the CET1, 10 basis points. We expect the ratio to stand in terms of pro forma, even if reported due to the impact of the potentially the TRIM that we will face could marginally be temporary below 11%. The ratio pro forma will remain above the 11% level. We -- in this guidance, we are assuming a level of TRIM impact of 40 basis points. Also, moreover, the -- our liquidity ratios stand very comfortably in a very solid level, well above and comfortably above the regulatory requirements. The LCR stands at 168% for ex-TSB and almost 300% in TSB. This is ahead of the roll of TLTRO, which in any case, we expect to not have a significant impact on the ratios, so the LCR will keep being after the repayment of the TLTRO, well above -- comfortably above the requirements. And also, the repayment of the TLTRO due to other factors like, for instance, the issuance of MREL and also in the denominator there, positive impact of the sale of the [indiscernible] portfolios. In terms of the, as I said, net stable funding ratio, the payment -- the absorption of the repayment of the TLTRO will have a neutral impact.We continued to de-risk throughout the quarter. Our balance sheet, it made all sense for us after the huge sale of the institutional portfolios to keep selling noncore assets. This, we did with Solvia, which will add EUR 138 million in terms of capital gain. There is an additional potentially -- this is absolutely additional, depending and it's not counted for in the EUR 138 million that would come depending on the future performance of the franchise. The impact -- the positive impact of this is 15 basis points in terms of CET1, and we expect the closing in the second quarter of 2019. In terms of capital. As I said before, the reported is 11.1%. It increased in 10 basis points. And in terms of pro forma, it's 11.3%. The pro forma includes an impact of -- positive impact of 19 basis points due to the sales of our NPAs and the corresponding RWA savings also are positive due to the sale of Solvia. This positive is 15 basis points and a negative due to the new accounting rule, IFRS 16. This negative of 16 basis points. In the fourth quarter, we issued Tier 2. And therefore, our Tier 1 and Tier 2 capital buckets are completed. This, together with organic evolution of the CET1 made our total capital ratio increase by 20 -- sorry, 70 basis points. And the total capital now stands at 14.9%. The CET1 phase-in stands at 12.2%. Here, we can see, this quarter, we started to report our NPLs, taking into account. And also, actually our NPAs already without the volumes of the sold portfolios, which we account for in noncurrent assets available for sale in preparation for the closing of the deals in 2019. And we also present here the ratio, the NPL ratio in terms of both taking into account the share percentage, the loss share percentage of the asset protection scheme at 20% and at 100%. So we start now reporting these ratios in terms of -- on the basis of 100% volumes of the assets under the asset protection scheme, which doesn't imply any change in the protocol, so the asset protection scheme remains the same. And the only thing is that we are changing the reporting, the accounting behind it, but the reporting of the ratios, but without any additional change.So the -- in terms of the previous reporting standard, the ratio -- the group ratio stands now at circa 4%, which represents a reduction of 48 basis points in the quarter.We see the evolution of the volumes of the nonperforming assets in the quarter. The quarter is actually compared with the previous quarters, the total evolution in the year as well. In the quarter, as previously said, the reduction was of more than EUR 300 million, of which the NPL portfolio saw a reduction of EUR 491 million, whilst the foreclosed assets portfolio increased by EUR 186 million. This increase in foreclosed assets portfolio makes sense, given that after the sale of the institutional portfolios, the volume of the portfolio remained hugely lower than it was before. So now what we are seeing is the additions of the workout of the NPLs, where we acquired the collaterals and this increases the portfolio whilst we see the sales which are lower than they were because, of course, the basis of their portfolio is lower. This is the reason for this evolution. But anyway, it keeps presenting significant pace of reduction and highlighting the de-risking of our position. And in terms of total coverage ratios. We see here that in terms of the previous reporting standards, so comparatively with the previous reporting, the total coverage of the NPAs stands at 53%, in terms of the net NPAs to total assets at 1.6%. And in terms of NPAs plus foreclosed assets, the ratio is 5.3%.In terms of TSB, the profile of TSB hasn't seen relevant changes in the quarter. TSB remains to be one of the most capitalized banks in the U.K. with the CET1 ratio standing at 19.5% on a fully loaded basis. In terms of NPLs and LTV, the ratios have remained stable over the quarter. We see now a reduction of cost of risk in the year of 600 basis points, mainly driven by an improvement in the performance of the unsecured portfolio. And the ratios show that this -- there hasn't been a relevant change in our risk appetite or customers risk profile in TSB.And that will be all from me. So I hand over now to the Chairman.

[Josep Oliu Creus, Chairman of the Board]

All right. Thank you, Tomás. Well, a few words to see my look about what has been '18 and what it looks ahead. I think that 2018 has been very important for 2 things. One thing is that we overcame the very relevant strategic events in which we reduced significantly the bank risk profile. Second, because the performance of the bank ex-TSB was satisfactory. These are the main issues that we have to see. The events namely the extraordinary events that produced de-risking are namely the sale of the large portion of our problematic exposures, okay. The NPAs sales will help the bank to reduce the cost of risk, volatility and operational costs while freeing up precious management time that will be instead invested in core business outlooks. As you know, TSB IT migration, different from other migrations that we have done before, represented a significant risk for the bank before, and it did not go initially as we all would have liked and hoped to be done. So we can -- but fortunately, and on the positive side, I can definitely say and very positively that the issues of the migration are absolutely resolved and belong to history. The stability of the platform, in fact, is proven not only by my words, but also by objective that are like the ones of FCA, major incident reports which banks are required to public every quarter. Already in the third quarter of last year, TSB recorded less than half the number of incidents compared with the other banks. So we are absolutely online, normalized, stabilized and looking ahead. On this note, it is also important to highlight that we do not expect any more one-offs related to the migration. That has all been reported and given up by the CEO, Mr. Guardiola. And at the same time, what has to be taken into account is that we have created a technology that TSB needs -- that TSB now has the first line in the market technology that can and at the same time, for the first time, it can operate in fully independent and competitive bank, leveraging on this competitive technology and platform.In addition, TSB has performed in line with expectations and is on track meet, I think the Sabadell, that side, they -- on the positive side, the performance of Sabadell ex-TSB was according to expectations. And finally, in this front-page, we also mentioned what is always a concern to you and it's about the capital. And Mr. Varela has already told you with regard to our capital position, the core Tier 1 at the end of this year is 11%. We expect that to continue being above 11% as Mr. Varela said, and I'll will come back to that later.With regard to this year's results, I also want to stress and outline the performance of the franchise of Spain and Mexico, which have not only achieved but in some cases, have even beaten the 2018 objectives in our plan. The strong performance places us in very good track to meet our ex-TSB 2020 targets. In this page, you can see the 2018 results with a year-end targets, starting with commercial dynamism. I think that performing loans growth of 305% (sic) [3.5%] is above expectations. The reported growth of NII is in line with the year-end targets, and the reported core banking revenue growth above 4% is slightly below target, while fees and commissions had an outstanding performance in the year going 11.30 -- 11.3%. Regarding the requirement costs of risk, Sabadell achieved the level of 65 basis points, which is reasonably close to the target of 68 basis points that we had for the year, along with the lines of what we saw in our 2020 plan. Going forward, and considering the savings related to the large NPA sales executed during this year, we remain very confident that we can achieve the cost of risk guidance of 44 -- 45 basis points in 2019 and the 40 basis points in 2020. I think that Sabadell's success in achieving this result ex-TSB is worth highlighting. And of course, the group's finally, the results -- as you know, the results were basically impacted by the TSB of -- by the TSB migration issues. This brings me to the asset quality issues, which is one of the areas in which we have made a tremendous progress. As a matter of fact, we've decided to increase the speed and go ahead with big sales of portfolios well above what we had communicated before in order to increase the level of de-risking of the bank. This has been important. We have reduced NPAs by EUR 7.8 billion in 2018, well ahead what was our 3-year accumulated reduction target of EUR 6 billion. The group's NPLs ratio was significantly reduced also during this year towards -- also towards our target of 2020. And furthermore, we completed the de-risking with an NPA coverage of circa 53%, which also is much higher than our 50% target. It's also important to highlight that in our net NPA ratio ended the year below to -- our 2020 target of 2%. It ended below our target of 2020, it was 1.8% (sic) [1.6%]Definitely, in 2018, we have completely -- by completely transforming our balance sheet, we have turned a page in an important chapter in the bank, and we're managing and working, facing coming years afresh and away from the heritage. In terms of our business outlook and how I see it going ahead, I just mentioned that first, Sabadell ex-TSB is on track to meet this 2020 financial targets with an event -- with even better asset quality profile. Core banking trends are in line with our original business plan targets and we expect the potential increase in funding and MREL costs and the delay in the interest rate hikes that might be there to be offset by the higher volumes and by higher commercial activity. Some upside in fees also and slightly lower operating costs. Lower risks in capital from ALCO portfolio will also mean that we will be realizing a lower level of trading. However, this will be offset by savings related to the NPA sales, which will result in lower provisions and higher operating income. Also, I have to stress that we'll be focused in the next coming years to progress in our digital transformation as planned. Capital -- as regard to capital, and I'll come back to that. In terms of group capital, we expect, as I said, that our fully loaded pro forma ratio to remain around 11% over the next 3 quarters. Organic capital generation should bring the ratio above this level by the year-end. Additionally, we are considering whatever is necessary to sale -- to sell coming from noncore assets. For instance, as we have already identified the sale of Solvia Desarrollos Inmobiliarios and other things to be considered like residual foreclosed assets that would contribute additional capital inflows for the year. Additionally, I would like to highlight that without that and according to our current dividend policy of maintaining the dividend about 40% -- between 40% and 50% dividend payout in cash, this is consistent with maintaining our pro forma or fully loaded set above 11% through '19 and also about our -- about achieving around 12% during 2021. In terms of TSB, the bank will be contributing, and that's our big missing achievement. TSB will be contributing much less than we initially expected in the next year's results, which we are obviously dissatisfied about it, but that's the way it is. We are currently considering different initiatives to improve the efficiency, the profitability in the bank, and we'll get back to you while the new CEO of TSB is onboard later this year to present the details of our new mid-term plan for the bank with you, including several initiatives in cost reduction and towards a better efficiency and profitability for the bank. That will be the focus of the plan, boosting profitability by optimizing costs. There's a long way to go there, and regaining commercial momentum, which has already been started in the last quarter last year and this year. This regain of momentum will not only include the mortgages, but also the plan for diversifying its revenue by launching our SME strategy. Well, this is all I wanted to tell you, and that is also the end of our result presentation today. We are happy to answer, Cecilia, and you will coordinate that, the answering of the questions that you may have.

[Cecilia Romero, Head of Investor Relations]

Thank you, Mr. Oliu. So let's quickly go into the round of questions, Mr. Guardiola. We have been asked by some of the analysts a little bit more detailed guidance in the outlook for 2019 on NII. So what's your group NII outlook for 2019?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Okay. Both on -- sorry, our view is that the -- for evolution of NIIs that the level of NII that we have obtained in the fourth quarter of 2018 should be sustainable on average during 2019 based on the good performance of the growth and also the stabilization -- the stable prices -- pricing. So I think that we can consider that the -- as a good guideline, the level of NII we have obtained in the last quarter of 2018.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And also they've been asking about fees, whether you think the level that we're seeing is sustainable, what do you expect for 2019? And how do you think you can achieve that plan?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Well, as you know, the evolution of fees has been one of the most strength points of our performance last year. And we are very optimistic about that with this sort of been the level in the next year in 2019, sorry. Probably, the figure is going to be high single-digit based mainly on different elements. First of all, is that part of the price increases we carried out in 2018 were implemented in the second part of the year, so the rise is not completely accrued in 2018 and we will see it totally accrued in 2019. The second is that we have a plan to increase customer loyalty that helps to increase the level of fees, so I think that these -- there are some initiatives that are going to be implemented this year and that will foster fees further. And finally, the -- as I said my in presentation, the high level of commercial activity and the increase of number of customers also helps to this positive vision of fees for 2019.

[Cecilia Romero, Head of Investor Relations]

And I will just finish with one another question that we received for you as well regarding TSB one-offs. The question here was if you could please explain why are you confident, why do you expect that there will be no more one-offs related to TSB post-migration issues going forward in 2019?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

The fact is that in December, the level of one-off has been negligible. So I think that it's clear to see that this trend is going to continue looking forward. So all the fixes of the platform have been already applied and the platform, as what we have said, is now stable and the good level of the industry and clearly materializing benefits from our customers. The redress provisions in the other -- is the other -- the source of one-offs. As I said, 90% of the complaints have already been resolved. So I think that the last data that we have confirms that we have this expectation of no more one-off costs of TSB for this year, 2019.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And the next question goes to Mr. Varela and it's regarding provisions ex-TSB. The question here is why is the level of provisions at ex-TSB so low in the fourth quarter, and whether you consider it as recurring rate of provisions ex-TSB for 2019?

[Tomás Varela Muiña, General Manager & CFO]

Yes. On the one hand, in the second quarter, there were provisions coming from single names that were entries in the quarter. So that -- this increased at that moment, the level of provisions. We've seen lower -- we've seen a significant decrease of NPL entries in the fourth quarter. And yes, I think this is a good indicator of the recurrent level going forward for 2019.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And also for you Tomás, regarding trading. Obviously, we've seen a very low level of trading this quarter, and analysts are asking if you consider these lower trading gains in the fourth quarter to be -- that can be extrapolated into 2019. And what are your expectations for trading?

[Tomás Varela Muiña, General Manager & CFO]

Yes. In the -- on the one hand, in the year, our target was achieved already by half year more or less or the third quarter, and -- but we've seen some marginal negatives in the quarter, also in the third quarter, so therefore it was half year when we achieved the target. And those came basically from different contributions of sales of some noncore assets in a format that made it -- made them go through trading income. So not actually to losses in the trading portfolios. On the other hand, our exposure -- the exposure of our portfolio to volatility that can affect our capital ratios and position is much lower now, so the portfolio is derisked in terms of potential impacts on capital. And therefore, the level of trading income that we expect going forward is lower. We expect for 2019 between EUR 80 million and EUR 100 million of trading income. And therefore, we can consider the fourth quarter to be a good benchmark for the outlook or the guidance into the trading income of 2019.

[Cecilia Romero, Head of Investor Relations]

And Tomás, the next question is also for you. It's a very recurrent topic obviously, MREL. And the analysts are asking if you could comment on your MREL performance?

[Tomás Varela Muiña, General Manager & CFO]

We received in -- which is our requirement of 22.7% on our December 2016 balance sheet. And we are on track to meet the requirement by -- before January 1, 2020. However, if the new BRRD 2 framework is approved in this quarter or the first half of this year, the requirement would change. So there would be a high requirement for more subordination. But at the same time, the periods would be longer, and it would drive us into 2024. If this is the case, we could meet the requirement, issuing no more than EUR 5 billion to EUR 6 billion over the next 3 to 4 years. And basically, we would use a senior nonpreferred.

[Cecilia Romero, Head of Investor Relations]

And we're going to finish this round of questions with 2 questions for our chairman on the outlook and your vision on the economic outlook for Spain first. So Mr. Oliu, I mean, could you explain what's your Spanish macro outlook, what do you think the impact of this outlook could be on business?

[Josep Oliu Creus, Chairman of the Board]

Yes. Well, our outlook for Spain, I think that Spanish economy shows an important dynamism, and especially with respect to the European EU countries that in -- at least in 2018, our forecast for the ending of the year will be around 2.5% of GDP growth, so that's quite an achievement. And our outlook for next year for the 2018 will be slightly lower that we had, but above -- definitely and solidly above 2%, so our forecast is 2.2%, 2.3% for the GDP growth. Inflation is under control, it's under the 2%, both last year, this year, next year, so we are not expecting to have any problem on this side. And on the other side, the leverage of the private sector has gone down significantly, levels that are below the Euro area average and much below what it was before when it was before the -- in the 20s -- in the 2000. So it's well below. It's around 60%. That's in a good situation. The other thing that I wanted to tell you that, of course, that what will this growth be driven by? It will be driven by -- domestic demand will continue to be strong, and that is because household expenditure and residential investments are growing, supported by the employment creation and by the favorable financial conditions. The unemployment rate is continuously going down from those top levels of 2011. We expect that to go down another 1.5 points -- percentage points down during this 2019. So there is an employment creation. And that we also expect it continuing forward in the upcoming 2, 3 years. So -- and that keeps the domestic demand strong. The business investment has also remained substantially dynamic in a setting in which rising capacity utilization and the expectations for expanding activity, higher profits, the restructure of business balance sheets and the persistence of favorable financing conditions, all that together, have and will continue supporting the credit demand on the business side. So on that side, we are reasonably optimistic, although there are headwinds. Where are these headwinds coming from? Outside, so the dynamics of growth will be -- of GDP might be slightly lower because of the external headwinds. Also, we -- but at the same time, in this context, we expect the net lending, which is what affects us in the domestic area, the net lending in 2019 will increase above 2%. 2.1% is our forecast. It's above 2%. This growth will be driven, as I said, by corporates and SMEs. That will be growing by 3.9%. While the households, we expect to be -- to remain stable with a growth of 0.5% possibly. So you also question about -- now if this -- yes, if we take that into our activity, I think that we already have experienced positive growth in the loans, excluding the APS exposure. That was 1.8% in our domestic performing loan book. And our domestic performing loan book grew 5% year-to-year, so that is already being taken or being incorporated in our path of growth -- of domestic growth. This year, on the mortgages side, as I said, we expect stable or small growth for the next year in the market. But for the first time in few years, we reached the turning point in our bag of mortgages and that is something that lending being, for the first time, offsetting amortizations and prepayments. So that's also to be taken into account. The second question that you ask me?

[Cecilia Romero, Head of Investor Relations]

Before we move to the second question, Tomás, there is one more for Tomás, that is coming in repeatedly. And the analysts would like you to explain why are the taxes so low this quarter.

[Tomás Varela Muiña, General Manager & CFO]

Yes, there are some reasons as always, and this happened also in other quarters. All revenues coming from the contribution of the equity method come already with tax deducted at this level in the P&L, and therefore they'll flow downwards to the bottom line. Then also, it comes -- there are effects coming from the different tax rates in other countries, different from Spain, that differ from the 30% corporate tax in -- corporation tax in Spain. Then also, the impact of this year's TSB losses. And of course, this affects more when the bottom line, the net income is lower as it happens this year. So those are the reasons that are affecting the average tax rate.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And Mr. Oliu, this is the last question for you. Obviously, the audience have been watching very closely the developments in the U.K. And they would like to understand, how probable do you think that this is a scenario for hard Brexit is and how do you think a hard Brexit could impact TSB? And if you can comment a little bit on the preparations that we have done for such a scenario.

[Josep Oliu Creus, Chairman of the Board]

It is not our base case scenario, our base case scenario continues to be that there is not a cleavage and that will be a deal. And that is we -- and we attribute a very low profitability to the cleavage despite the fact that it has a positive profitability. And since then, we have to take into consideration. We have protocols in place. We have teams that meet and that have already for the last month being prepared contingency plans. For that effect, basically our branch which is not significant. With respect to TSB, it is less important, first of all, because TSB is purely a domestic retail bank with no business dealing outside of the U.K. Therefore the impact of an odd Brexit deal scenario maybe -- may have in TSB, the pure impact of what that scenario would be in the real economy of the U.K. TSB has a very low risk profile, underweight in London buy-to-let -- underweight in London in buy-to-let and in SMEs that could be most affected by no deal Brexit. So our investment in U.K. has a certain endogenous component. The operational efficiencies that can be delivered no matter what happens to the external environment. And that therefore -- that those is not to be very worry, except for the worry that could improve -- that could imply the worse performance of the U.K. But on the other side, and that's important also, TSB, we have -- the TSB capital is fully -- the excess capital is fully hedged, so we do not have volatility with respect to the exchange rate with the -- for our ratio of capital so that we should be -- it's clear enough, no impact on capital from the -- whatever happens to the currency of the pound vis-à-vis the euro.

[Cecilia Romero, Head of Investor Relations]

Thank you very much, Mar. Oliu, Mr. Varela, Mr. Guardiola. This concludes our presentation today. We want to thank you also very, very much for joining our webcast today. And obviously, as always, Investor Relations is available for any question that you may have. And now please have a great day.