Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2020-Q4

[Lluc Sas]

Good morning, and thank you for joining us for Sabadell's Results Presentation for the Fourth Quarter of 2020. My name is Lluc Sas. I am the Deputy Head of Shareholders and Investor Relations. And presenting today are our CEO, Jaime Guardiola; and CFO, Tomás Varela. This quarter, we plan to spend around 40 minutes presenting our results, and then we will answer your questions for an additional 20 minutes. Today's presentation will take the following structure. Our CEO will start by going through the key developments of the year before providing some details on the most significant topics. He will also give details about commercial activity and business performance. Our CFO will then discuss financial results, asset quality, liquidity and capital before our CEO concludes with some brief closing remarks, including the main achievements in 2020 and the priorities for 2021. I will now hand over to Jaime Guardiola to kick off our presentation.

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

Good morning, Lluc. Good morning, everyone. Thank you for joining us today. Before we begin our presentation this morning, I would like to take a moment to reflect on this, being my final results presentation as CEO of Sabadell. As you all know, in December, the Board approved the nomination of César González-Bueno as our new CEO. We also announced this morning that the Board has approved the appointment of a new CFO, Leopoldo Alvear. Consequently, today will also be Tomás' final results presentation. This change in leadership signifies a new chapter for the bank. I have every confidence that Sabadell will succeed under the new leadership team. In the coming months, we'll be working closely together to ensure a seamless transition period. Cesar will lead the development and execution of our new strategy, which will be presented to you in May, soon after the first quarter results presentation. Without further ado, I would like to kick off our presentation by going through the key developments during the year in Slide 4. Firstly, I feel it's important to highlight that this is the action we have taken to further improve our NPA quality and our conservative provisioning efforts in the quarter. This explains our full year net profit at breakeven, with extraordinary provisions amounting to EUR 1.2 billion and financial performance significantly impacted by the COVID-19 pandemic. Secondly, our franchise performance in the quarter has remained solid. Core banking revenue growth was strong again in the quarter while recurring cost decreased, both in the quarter and year-on-year. Thirdly, the efficiency plan in Spain has been implemented with great success. The restructuring costs finally amounted to EUR 314 million, implying gross annual cost savings of EUR 141 million going forward. We will fully benefit from these savings as from the second quarter of 2021. Fourthly, the credit cost of risk was 86 basis points at the end of the year, which is in the lower range of our guidance of 85, 90 basis points, even after migrating some loans to different stages. Next, this quarter, we have made significant progress in our balance sheet derisking by selling EUR 1.2 billion of vintage NPAs. That will leave our NPL ratio at 3.6%, with NPLs classified as more than 90 days past due and older than 3 years having a net asset value of just EUR 250 million. And finally, our capital position continued to show resilience. Our fully loaded CET1 ratio remained stable in the quarter of 12% even after [ floating ] some regulatory implementations previously expected in 2021. In phasing terms, our CET1 ratio ended the quarter at 12.6%, which is more than 350 basis points above our regulatory requirement, including our last issuance of Tier 2. And at the same time, we still have EUR 1.2 billion of unrealized capital gains remaining in our held to collect portfolio that are not included in the capital ratio. Now let me go into more detail about 3 specific topics: the resilience of revenues; the benefits of the efficiency plan in Spain; and the work carried out to offload vintage and legacy NPAs from our portfolio. Let me start by discussing the resilience of our banking revenues on Slide 5. We have some levers to improve our core banking revenues in the current low interest rate environment. In the first place, we expect new lending to be robust, accompanied by lower attrition rates. Also, TLTRO III conditions have recently been improved, allowing us to withdraw an extra EUR 5 billion at the next auction. Moreover, we will benefit from the 12-month extension of the favorable interest rate period, with a rate of minus 1% and as long as we meet our net lending targets, which we expect to do. These improved conditions will lead to higher NII levels, adding more than EUR 85 million in 2021 and EUR 80 million in 2022. On the fee side, if we compare ourselves with our peers, we still have room to increase the fees charged to non-loyal customers. Moreover, wholesale deposits may potentially be gradually repriced with negative interest rates. SME and corporate current accounts and deposits are gradually being charged a variable fee linked to the outstanding balance. So all these levers will improve our revenues and mitigate headwinds such as the ALCO bond sales, which will reduce our NII for by a EUR 75 million in 2021. In the future, we can eventually offset this impacting by reinvesting. Clearly, interest rates are still going to be a headwind in the coming quarters. In this regard, let me highlight that only EUR 22 billion of our loan book are sensitive to the decreases of the 12 months of lever and they reprice once a year. It is worth noting that more than 85% of new lending and 40% of the stock of our mortgage individuals are fixed rate. Moreover, lending to SMEs and corporates is also a mostly fixed rate. Another important factor is that only 3% of the ALCO portfolio will mature over the next 2 years. Therefore, it's not subject to further reinvestment risk. And finally, in the U.K., we have a 5-year caterpillar structural hedge, with a notional value of GBP 22 billion at TSB, which will reprice gradually over that time. Moving on to Slide #6, you can see the details of our efficiency plan in Spain, which we have successfully executed during this quarter. In the first quarter of 2021, we will have reduced our employees in Spain by 11%. Let me point out that these employees were not part of our sales force. They mainly work in the corporate centers and servicing activities. As you know, this efficiency plan focuses on the digitization of customer services and on the simplification of corporate centers. We believe that we have executed the plan successfully because we have completed it in a short period of time, just 5 months after starting negotiations, and also because it was negotiated process which ended with a high rate of voluntary uptake among the targeted employees with no impact on employee experience. All in all, this plan should allow us to generate gross annual savings of EUR 141 million, with 100% cost saving as from the second quarter this year, implying a payback of 2.2 years. To finish this first section of the presentation, in Slide 7, we go through the improvement of our risk profile after the vintage NPL disposals during this quarter. Since 2013, when the stock of NPLs peaked at almost EUR 25 billion and our NPL ratio reached 19%, we have normalized our stock of NPLs and lower our NPL ratio to 3.6%. Past due NPLs stand at EUR 3 billion after a reduction of EUR 1.2 billion in the last year, which implies a decrease of around 30% year-on-year. Furthermore, and this is very important, there has been a huge improvement in the profile of these NPLs. It is worth noting that almost half of our current NPLs are classified as unlikely to pay. And that we just have a small exposure to NPLs over than 3 years. Moving to -- moving on to business performance. Looking at our performance loans by region in Slide 9. This quarter growth continued to be driven by a very dynamic mortgage book at TSB as a result of higher activity levels in the U.K. market. This was partially offset by a migration of the performing loans to different stages in Spain and by lending volumes in foreign branches. Volumes in Mexico decreased in the quarter, but they were still up by 13% year-on-year. Overall, group performing loans grew by 0.4% in the quarter and by more than 4% year-on-year. Slide 10 shows customer balances, excluding TSB. On the left-hand side, you can see that performing loans decreased slightly in the quarter due to a conservative migration of loans from Stage 2 to Stage 3 with a total value of EUR 700 million, but they grew by more than 4% year-on-year. Two of the main segments to support volumes were mortgages, which show a solid growth both in the quarter and year-on-year and SME lending, which increased in the quarter despite the lower demand for ICO-guaranteed loans. On the liability side, our customer funds grew by more than 1.5% in the quarter, driven by both on balance sheet and off-balance sheet funds. Mutual funds grew by more than 6% in the quarter, boosted by higher mark-to-market valuations.Moving on to Slide 11. In terms of commercial activity in Spain, we can see that performance in the fourth quarter was good, particularly when taking into account the COVID-19 restrictions that have been in place during the year. The total turnover of our retail payment services declined mainly due to a drop in payments by non-Spanish individuals because of the lower levels of international tourism. On the other hand, point-of-sale turnover originated by Spanish individuals remained flat year-on-year. In terms of market share, we recorded an increase of 21 basis points year-on-year. Credit card turnover remained at pre-COVID levels. Our market share decreased slightly due to our higher exposure to corporate cards, where turnover has fallen significantly due to the COVID restrictions. New insurance premiums show a strong recovery and ended the quarter close to the levels of the fourth quarter of 2019. Regarding mutual funds, we are taking advantage of our partnership with Amundi and have recorded the highest annual volume of assets under management this year. Our market share has increased by 4 basis points year-on-year. Moving to Slide 12. At the bottom left of the slide, we can see how the new mortgage lending has consolidated its recovery in the fourth quarter, reaching the highest levels of the year. At the same time, we have observed positive growth in new corporate -- new loans to corporates with a higher proportion of non-ICO-guaranteed loans. In fact, only around 25%of new SME loans recorded in the fourth quarter were ICO-guaranteed loans. As you know, most of this demand was concentrated in the second quarter of 2020. Throughout the year, new SMEs loans were up by 38% compared to 2019. Looking at the right-hand side of the slide, we can see how credit facility drawdowns and consumer loans have decreased slightly as expected. Turning now to TSB in the Slide 13. On the asset side, net lending grew in the quarter across products. Mortgages continued to perform very well, growing by 3%. This was mainly driven by the recovery of mortgage market activity. Unsecured lending growth was supported by digital improvement in our offering as well as by more competitive pricing. Business banking loans kept growing but at slower pace, driven by demand for the U.K. government bounce back loan scheme. Overall, year-on-year, net lending was up by more than 7%. On the liability side, customer funds continued to increase across all products, recording significant year-on-year growth of around 14%, which shows the trust that customers place in TSB. The figures on the left-hand side of Slide 14 further demonstrate the good performance of TSB's commercial activity. New mortgage lending volumes are the highest they have been in several years. Meanwhile, new unsecured lending also continues to perform well. Additionally, in 2020, TSB has also made substantial progress in other areas of its strategic plan. Regarding customer focus, TSB has continued to enhance its offering by launching new products and establishing new partnerships. A new brand proposition has also been launched, built around the slogan: Life Made More. TSB also has a focus on simplifying its operational model. This year, 93 branches were closed, and the workforce were reduced by 600 FTEs. The pace of digitization has accelerated during the year, with customers increasing their use of digital channels and digital sales consolidating as a solid growth trend. The modern multi-cloud and U.K.-based IT platform as TSB has been vital in accelerating the delivery of its strategy and extending digital service to customers. In Slide 15, we provide details about the key COVID-related financial solutions that we have offered to our customers, both in Spain and in the U.K. Statutory payment holidays in Spain are currently nonmaterial. We granted around EUR 1 billion of such repayment holidays. When those gradually expired, around 60% of the volume was migrated to the sector-specific program. The other 40% of expired statute repayment holidays have mostly resumed payments with no significant impact on asset quality. The outstanding principle of sector-specific payment holidays ended the quarter at EUR 2.4 billion with no material pass due exposures. In the U.K., TSB granted payment holidays amounting to more than GBP 5 billion. Currently, life exposures account for less than GBP 400 million, with no significant uplift in NPLs coming from expired payment holidays. At the bottom of the slide, we can see the solutions provided to SMEs and corporates. In Spain, in terms of the ICO-guaranteed loans, we have granted EUR 11.9 billion -- sorry, EUR 11.9 billion so far. And finally, in the U.K., TSB has granted around GBP 600 million in BBLs. These loans, as you know, 100% guaranteed by the government. Turning now to sustainability in Slide 16. Over the last few months, sustainability has continued to be a central topic at Banco de Sabadell. We have formally declared our support for recommendation of the task force on climate-related financial disclosures. In Spain, we have continued to launch products that are more sustainable. This includes our fixed rate green mortgages and our new credit cards made for materials that help to reduce our carbon footprint. Moreover, in 2020, we have granted over EUR 1.1 billion in finance for renewable energy projects. Lastly, TSB has announced its plan for net zero carbon emissions by 2030. And with that, I hand it over to Tomás.

[Tomás Varela Muiña, GM & CFO]

Thank you, Jaime, and good morning, everyone. Moving on to the financial results. I would like to start by going through our quarterly P&L, where we have recorded net losses of EUR 201 million, mainly as a result of around EUR 400 million worth of different extraordinary and seasonal impacts. Specifically, the negative impacts are: the extraordinary cost related to the restructuring plans, particularly in Spain, which amounted to EUR 314 million; extraordinary provisions of EUR 380 million associated with the aforementioned NPA disposals that were carried out in the quarter; EUR 115 million due to the migration of loans to Stage 2; along with EUR 62 million of provisions at TSB associated with charges relating to the treatment of some customers in arrears. I would like to highlight that in order to finance these efficiency plans and some NPA disposals, we sold government bonds from the held to collect portfolio, generating capital gains of EUR 599 million. Finally, we recognize the IDEC, which is actually the levy on deposits taxed by the regional authorities in Spain and the deposit guarantee fund annual payments that usually take place in the fourth quarter of every year. This amounted to EUR 146 million. Turning to the annual P&L. This year, we are practically at breakeven due to the negative impact of around EUR 700 million of one-offs. In addition to the items I just mentioned that have impacted the quarterly P&L, the annual results have also been impacted by credit provisions which amounted to around EUR 650 million and were related to the new environment generated by COVID-19. Finally, on the positive side, we have gained EUR 293 million on the sale of Sabadell Asset Management, which involves entering into a partnership with Amundi in order to work together and foster this business. We will now go through the different items of the P&L as we usually do. During the quarter, NII increased by 105 -- sorry, 1.5% and was mainly boosted by the good performance of loan volumes, particularly in the U.K. where we saw high volumes of new mortgages and the partial recovery of overdraft fees. At the same time, factors that reduced NII included lower yields and the ALCO portfolio contribution. In the year, NII fell by 6.2%, driven by the same factors and by the 2019 consumer loan securitization. In terms of front book yields, we defended prices in both loans and credit lines to SMEs and corporates. In contrast, there was still considerable pricing pressure in consumer loans and especially in mortgages. Noticeably and despite the low interest rate environment and tight competition, overall, we have managed to protect our front book yield. Regarding group NIM, this increased in the quarter due to a higher customer spread and a lower wholesale funding cost. Customer spread increased slightly in the quarter as a result of the lower cost of customer funds. Moving now on to our fixed income portfolio. As I mentioned before, this quarter, we sold Spanish and Portuguese government bonds from the held to collect portfolio in order to finance our restructuring plan in Spain and some of the institutional NPA disposals. This transaction has generated substantial capital gains of around EUR 600 million, and we still maintain hefty unrealized capital gains of EUR 1.2 billion after the sale. Moving on, looking at fee income. This quarter, fees have increased by 7%. This growth has been driven by both service and asset management fees. In this regard, service fees increased by 3% as a result of the good performance of syndicated loans. Nevertheless, it is worth highlighting that service fees related to customer activity and transactions remain constrained as a result of the lockdown measures and restrictions that were put in place to tackle COVID-19. On the other hand, asset and wealth management and insurance fees were the other drivers of growth benefiting from both fourth quarter and seasonality. Leaving now the revenue line to one side and moving on to costs. Total costs increased in the quarter as a result of the restructuring costs of the efficiency plan in Spain. Expenses related to the restructuring plans in both Spain and the U.K. also had an impact on total costs. Additionally, I would like to highlight the positive trend of the recurring cost base, which keeps decreasing quarter-on-quarter and year-on-year, driven by lower staff expenses at ex-TSB level due to COVID-19 and lower general expenses at TSB. In this context, recurring costs decreased by 3.4% quarter-on-quarter and by 2.4% on an annual basis. Moving on to credit provisions. I would like to highlight that credit cost of risk ended the year at 86 basis points, in line with the guidance of 85 to 90 basis points. On a quarterly basis, credit provisions increased by EUR 115 million as a result of the migration of loans to Stage 2. However, it is also worth noting that TSB's provisions decreased given the improved macroeconomic outlook once a no-deal Brexit had been rolled out. In addition, on an exceptional basis, this quarter, we recorded EUR 325 million of additional provisions related to the aforementioned NPL sales. By executing these disposals, we have offloaded the remaining NPLs that we had kept from the previous crisis. Finally, let me also highlight that COVID-19 provisions were around EUR 650 million in the year. Now in the following section of the presentation, we will look at the key balance sheet metrics. We start this section in Slide 28 of the presentation by giving an update on the breakdown of group performing loans and the exposure to sensitive sectors, as well as an update on the structural analysis that we presented in Q2. The portfolio mix and the exposure to sensitive sectors have remained relatively stable in the quarter. 67% of the portfolio is collateralized. The exposure to the most sensitive sector remains at circa 8%, while the proportion of ICO lending increased by 2 percentage points in the quarter. The bottom left chart shows that, actually, the level of debt to the assets of all the different segments of micro enterprises, SMES, corporate, et cetera, has remained pretty stable since May, month after month, which is a sign of how the financials of the SMEs and corporates are evolving and, therefore, how their credit worthiness is being kept up until now. Their structural analysis update shows a multiplier of pre-COVID PD levels, which remains at 1.3x in the base scenario and increases from 1.8 to 1.9x in the stress scenario. And it's worth mentioning here that if we look at the 86 basis points of cost of risk that we achieved, the multiplier to the last year corresponding level is around 1.9 million times, therefore, showing that we've provided conservatively for COVID-19. In Slide 29, you can see that our group NPL ratio was improved significantly this quarter to 3.6%, mainly driven by EUR 1 billion of NPL disposals and low levels of NPL inflows from 90 days past due loans in the quarter, which demonstrates the effectiveness of the support measures that have been put in place with COVID-19. Our NPL coverage ratio remained stable at 56%. Even after disposals of vintage NPLs, the Stage 3 coverage ratio stood at 39%. On the top right-hand side, we highlight the NPL exposure by stages, reflecting changes in the volume of loans classified in each different stage. Finally, we have a receivable exposure to foreclosed assets of less than EUR 1.4 billion, of which 95% are finished products and 76% are properties that have been repossessed in the last 4 years. Turning now to Slide 30, the group once again ended the quarter with a strong liquidity position, reflected in an LCR of 198% and EUR 48 billion of high-quality liquid assets. The loan-to-deposit ratio ended the quarter at 98%. Finally, as we showed last quarter, in terms of Central Bank funding, we currently have EUR 27 billion of outstanding TLTRO III. And as mentioned in the highlights section, we have an option to withdraw an additional EUR 5 billion as from March this year. In terms of TFS, we have GBP 3.1 billion outstanding, which will likely be rolled out into new TFSME facilities. Moving on to capital. On the following slide, we show the evolution of the group's CET1 ratio in the fourth quarter. Starting from the reported CET1 ratio at the end of the third quarter and following the graph to the right, we show the different drivers and capital impacts in the quarter. As the main positive impact, we have the new treatment of IT software, which added 48 -- sorry, 45 basis points to the ratio. Then as negative factors, we have -- firstly, some regulatory impacts expected in 2021 that were front loaded this quarter, which reduced the ratio by 27 basis points. This is mainly explained by 10 basis points from the final application of TRIM to the low default portfolio, 80 -- sorry, 8 basis points from the effect of the secured models update at TSB and 6 basis points from the early absorption of all the RWAs covered by the asset protection scheme. So let me highlight that we have completed the application of TRIM, and we have also absorbed and the remaining RWAs under the asset protection scheme before the maturity of the scheme in July 2021. Secondly, organic capital generation, which includes a quarterly pretax loss, higher intangible asset balances, other organic reductions -- or deductions and the variation of organic RWAS. All in all, organic capital generation subtracted 17 basis points from the ratio. And finally, IFRS 9 transitional reduction that had a negative impact of 38 basis points, which is related to the migration of some loans from Stages 1 and 2 to Stage 3, and also due to the reduction of the provisions that were faced in from the beginning. All these elements bring our CET1 ratio to 12.6% and our total capital ratio to 16.1%. Finally, our MDA buffer stands at 357 basis points above our requirement of 13%, including the Tier 2 bonds issued last month. Regarding our MREL requirements, it is worth highlighting that we are already compliant with the new requirements that are now based on both risk-weighted assets and leverage ratio exposure. In terms of risk-weighted assets, our requirement for 2022 is 23.8%, and we are already at 24.75%. And if we look at our requirement based on leverage ratio exposure, the requirement is 6.22% for 2022, while we are already at 9.25%. We are also well above the subordination requirement for both metrics. And with this, I will hand over to Jaime, who will conclude our presentation today. But first, let me just say that, so this is my last results presentation with Sabadell. I have many reasons to be grateful to my bosses, my colleagues in Sabadell and very, very, very especially to my teams. But I will find the right fora to do so. Here and now, I want to express my gratitude to all the persons, market participants that I have met over this almost 20 years, and with many of whom I have enjoyed a long-lasting professional but also candid and close personal relationship for which I am deeply grateful. Also for you, for your interest and support following us over all this time. I will see some of you shortly in the roadshow. Jaime? Thank you.

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

Thank you, Thomas. To end our presentation today, I would like to highlight our main achievements during 2020 and our key priorities for 2021.Firstly, despite the lockdown, we have consistently ensured most operational and service continuity without lowering our level of service. And of course, we have done that while taking care of our customers and employees. Secondly, we have continuously demonstrated an outstanding commercial dynamics. Even when a very severe lockdown was in place in second quarter, we originated more than EUR 7 billion of ICO-guaranteed loans in Spain and more than GBP 5 billion of payment holidays in the U.K. Thirdly, we have created long-term strategic partnership to enhance our offering and our customer experience through the alliance of Sabadell Asset Management with Amundi.Regarding costs in Spain, we have executed a highly successful efficiency plan which will reduce our cost structure going forward. And in the U.K., TSB has made substantial progress on its restructuring plan, which is expected to complete 1 year ahead of the schedule while increasing its commercial momentum. As a result, we expect TSB to breakeven in 2021 on a stand-alone basis. Additionally, this quarter, we offloaded practically all the vintage and legacy NPAs, which has further derisked our balance sheet and substantially improve the composition of our problematic stock. Finally, this year, we have integrated sustainability into Sabadell business model and strategy. With examples of this are the launch of the sustainable development goals bond framework and the inaugural issuance of EUR 500 million of green bonds.On the next slide, we show our 3 main strategies priorities going forward. This will be developed in our new strategic plan, which will be presented in May, soon after the first quarter results presentation. We will focus on our domestic market where we have a solid franchise. We will transform our retail banking business and generate efficiencies using the group's capital and resources. And thirdly, we will boost our leadership in Spain SME segment, consolidating our solid position in a highly profitable segment of the business. To sum up, based on these pillars, we will focus on creating value for Banco de Sabadell shareholders.And before we move to the Q&A section, let me share with you a couple of more personal comments. Picking up on the theme that I opened the meeting with and in a similar vein to what we just heard from Tomás, I would like to close this morning's presentation by saying that it has been a real privilege to lead Sabadell over the last 13 years. I would like to thank everyone in this room for your support and interest in Sabadell. I would also like to take this opportunity to thank all of those who have gone to such great lengths behind the scenes to make these results presentation as possible. On a more personal note, it has been a real pleasure to work with Tomás. I would like to thank him on behalf of everyone at Sabadell for his enormous contribution to the bank. I have every confidence that under the new leadership team, the bank will continue to go from strength to strength. Finally, I would like to thank everyone who has been following Sabadell since I first joined the bank. Thank you, you all.And with that, I will now hand it over to Lluc to kick off our Q&A.

[Lluc Sas]

Thank you, Jaime. [Operator Instructions] So operator, could you open the line for the first question, please?

[Operator]

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

[Ignacio Ulargui, Analyst]

All the best to Tomás and Jaime. I have 2 questions. One on NII, I mean, you have covered a bit the main headwinds and tailwinds. But what should we expect in terms of group NII into 2021? And how confident you are on meeting the TLTRO benchmark, given the trends that we see in lending, with large corporates down 1.8% quarter-on-quarter? And then second one is, if you could provide a bit of color on what has been the mitigation that has happened in between stages, particularly focusing on the Stage 3, what there has been this EUR 700 million migration in the quarter?

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

Tomás?

[Tomás Varela Muiña, GM & CFO]

Thank you, Ignacio. Well, as for NII, what we see for next year, and I will be relatively contained in terms of guidance since, as you know, the new strategy will be communicated in May, and therefore, there, you will see the -- whatever is disclosed in terms of the future. But what we see in terms of NII is pretty much disclosed in the slide in the presentation, actually. So it's true that there is a headwind, given the reduction of the ALCO portfolio. Also, it's more than offset by the additional benefits from the TLTRO. We've seen and we keep seeing, going forward, a strong volume performance and also the opportunities in terms of managing prices on deposits will contribute to a strong NII performance, which, in the first quarter, we'll see the headwind of the ALCO, but at the same time, the other factors also mitigating. In terms of migration to the -- of unlikely to pay to a Stage 3, we'll be -- this has been driven by actually the environment in terms of their expectations for all of us banks to be very proactive in trying to anticipate and being conservative on the classification of exposures in the COVID situation. So we did this, and we had also anticipated that we would do it in our previous result presentation and that we would complete the analysis over the fourth quarter, and this is what we did. It's a result of this thorough and individualized analysis, trying to follow the guidelines of not being automatic in anything on classifying on or not classifying exposures into stages, but being careful and also very conservative.

[Lluc Sas]

Okay. Thank you. Can we move on to next question, please?

[Operator]

And the next question comes from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

All the best in the next stages for the future. A couple of questions. The first one is just to clarify, touching on the EUR 115 million positive impact on pre-provision profit from the restructuring plan. I'm not sure if I got all the numbers correct today because there was -- the sound was great, but have you said that the cost savings will be around EUR 141 million and that you're expecting lower NII from the ALCO contribution of around EUR 76 million next year? That does mean that you've sold more ALCO than initially planning, and that's like downgrading the potential positive impact from pre-provision profit? Am I reading that correctly, please? And secondly, if you could discuss briefly, what are your feeling on the initial conversations regarding a potential divestment of TSB. Are you still confident that, that could free up substantial capital to continue to finance new efficiency savings in the rest of the group?

[Tomás Varela Muiña, GM & CFO]

Thank you, Carlos. You are right in the figures. So it's EUR 75 million NII -- the amount of NII that is being given up through the sales of the ALCO portfolio and EUR 115 million, the savings in the first year in [ BAT ]. Also, this EUR 75 million, actually, are the result of sales that we have done to cover for the additional charges due to the sale of the NPAs. Therefore, the amount actually of NII given up due to the coverage of covering the extraordinary cost, of the restructuring costs is some EUR 41 million. So we will see these savings in the P&L in 2021. Notice that we've already executed part of the savings in this year in the recurrent -- at the recurrent level, with a decrease of 2.4%. So when we've been referring to our savings of around 5% of the base costs, part of them have been already achieved this year and will be completed next year.As for the additional NII given up to the -- up to the EUR 75 million due to the sales that we've used to cover for the charges of the NPA sales, we will see also savings in cost of risk going forward from those assets and also in the costs related to manage those portfolios. So there will be also some savings there related to this -- the sale of these NPAs on top of the derisking that they need. As for the second question, Carlos, there is no change over there. But Jaime, please?

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

No, no. I would say the same that there is no changes in our position. And as we always explain, management and the Board will consider any strategic options that would create value for our shareholders.

[Lluc Sas]

Thank you, Carlos. And can we move on to the next question, please?

[Operator]

And the next question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, Vice President]

Here is Max from JB Capital. Good luck to you guys in the new endeavors. I have one question on capital and one on asset quality. The first one on capital. Now that you have front loaded some of the regulatory impacts that you've been expecting for 2021, is there anything left that can negatively impact your capital this year? And the second is on the asset quality. How do you see your cost of risk evolving in 2021? You mentioned that the disposals of NPAs should help getting lower cost of risk? And when do you expect NPLs to peak?

[Tomás Varela Muiña, GM & CFO]

Yes. Thank you, Max. As for the first one, there are -- so for 2021, what we see is a path around -- a stable path around the levels of 12%. So little, small variations can come from how, eventually, RWA inflation behaves in the year in comparison with the organic generation. And we see there the potential range of variation being lower than 10 basis points. So 10 basis points around the level of this 12%, and for the rest, stability. We don't expect for 2021, specific regulatory headwinds or challenges. The next one, the next known one is the EVA guidelines. This could be in 2022, 2021, depends. Some of us see it in 2022, some in 2021. The impact that we see coming from this is like the range lower than 15 basis points, and an organic generation will cover this. And the second one was, sorry?

[Maksym Mishyn, Vice President]

On asset quality and...

[Tomás Varela Muiña, GM & CFO]

Okay, asset quality. If you look at the 86 basis points that we posted, I said that it's been like 1.9x last year's, the equivalent of last year's. For 2021, with the current scenario as challenging as it may be, we don't see -- we see the level going down, as we've been saying in the last quarters, more or less there. No changes. We see it towards back to the level of last year, but above it. So a little bit less -- a little bit lower than halfway from this year to last year's, right? I hope this is helpful.

[Lluc Sas]

Okay. Thank you, Max. Operator, next question, please.

[Operator]

The next question comes from the line of Mario Ropero from the Bestinver Securities.

[Mario Ropero, Senior Banking Analyst]

Again, also the best of luck for you, too. My first question is on the average margin of the company loan book. There has been a bit of pressure over some quarters recently from 2.2% to 2%. Do you think that the 2% is sustainable? Are you expecting some pickup in there? How do you see this item? And then the second one is just a clarification on an NII item of EUR 7 million in the quarter, a positive one-off, if you could clarify, please, what this is?

[Tomás Varela Muiña, GM & CFO]

Sorry, Mario. Thank you very much. As for the first one, we see it's stable. We are not seeing a huge competitive pressure. We think this can be stable. And for the -- actually, the -- one of the drivers for NII this year, with -- together with volumes, is some spread stability as we see it now, okay? As for the second one, this is a one-off that had to do with some in-yield or interest coming from tax matters from the past, which has been sectorial, and we've recovered this quarter. That's a one-off. It's not recurring.

[Lluc Sas]

Thank you, Mario. Operator, next question, please.

[Operator]

And the next question comes from the line of Britta Schmidt from Autonomous.

[Britta Schmidt, Non]

Well, firstly, best wishes from me as well to you both. Regarding my questions, on the EUR 700 million reclassification into unlikely to pay, it seems like a rather large classification in just one quarter. Can you give us a little bit more background as to what exactly you've looked at and which portfolio has this impacted? Am I right in assuming that it's mainly commercial real estate and large corporates? And maybe you can also tell us what the loan that the performing loan growth would have been without the reclassification in corporate? And then secondly, the question on the NPL sales, it looks like the provision of EUR 325 million is rather large in relation to the NPLs that were sold. Would you explain such a large discount on the disposals, please?

[Tomás Varela Muiña, GM & CFO]

Thank you very much, Britta. As for the first one, the reclassification, so basically, it was more corporate than the other segments. There was a little bit of all segments there. But basically, it was corporate. Based on a conservative approach and demanding approach on, looking forward, taking into account cash flow prospects with haircuts due to sectorial impacts, using these 2 classifier's unlikely to pay and taking into account also the sector exposures and, therefore, affected more corporates. But no short-term signs of difficulties to pay, right?As for the second one, well, you will remember that last year, we suggested at the year-end results presentation that we would sell portfolios because we found it more efficient, so those portfolios who could have kept going on and recovering, working out the usual way. It's more efficient in terms of -- because of a number of things, but the regulatory treatment and also the -- of course, the -- how selling these portfolios has a positive impact on the perception of derisking of the balance sheet and of a number of reasons, right? Last year, of course, the haircut that we expected would have been lower, and that's what we suggested. This year, the haircut has been higher because, after all, we are in a COVID environment, and therefore, there are more, so to speak, cautiousness around these things. And therefore, the kind of the market was in a different level, we still felt that it was good to sell them and with it. That's the reason that explained those haircuts. Last year, or pre-COVID, the level of haircuts that we had anticipated was more or less half the level of -- or 60% the level that we've seen this year.

[Lluc Sas]

Thank you, Britta. Next question, please.

[Operator]

And the next question comes from the line of Andrea Filtri from Mediobanca.

[Andrea Filtri, Research Analyst]

Yes. So first of all, thank you for all of our interaction in the past 12 years, and all the best. As to my questions, did I understand correctly that there could be further repricing of fees in 2021? And a cost of risk clarification. Tomás, you said before, indicating your kind of guidance for cost of risk for 2021 as midway between last year and the previous year. Did you mean in between 2019 and 2020 reported cost of risk? Or can you just clarify specifically which years you were talking about?

[Tomás Varela Muiña, GM & CFO]

Thank you very much, Andrea. Yes, what I meant was we've finally ended up this year with 86 basis points. I said that this -- the multiple to the level of 2019 in terms of NPL provisions has been around 1.9x. So it means in 2019, that was half of this around a little bit more, but around 0.5% -- half the 86 basis points, where we see the cost of risk for 2021. It's a little bit below halfway this level, so more or less 60% down the level of this year to last year's, right? This is more or less where we see it. It's consistent with what we've been saying in the last quarters.

[Lluc Sas]

Okay. Let's move on to next question.

[Operator]

And the next question comes from the line of Stefan Nedialkov from Citi.

[Stefan Rosenov Nedialkov, Research Analyst]

It's Stefan Nedialkov from Citi. Best of luck to both of you going forward. Two questions on my side. The first one is actually a follow-up to Carlos' question on the EUR 115 million of pre-provision profit savings that you expected as of last year. So is it fair to assume that this has now gone down to around EUR 65 million from EUR 115 million, which is EUR 141 million of cost saves minus EUR 75 million of the ALCO NII headwinds? So EUR 141 million minus EUR 75 million equals EUR 66 million, which is down from EUR 115 million versus last year? And my second question is on potential NII levers. You mentioned that you have been charging deposit fees on SME and corporate deposits. Can you give us a feel for what the scope of the charging right now? What percent of your deposits are being charged those depositories, and what's the level of the depository? Is close to the ECB repo rate?

[Tomás Varela Muiña, GM & CFO]

Thank you, Stefan. Well, I will try to clarify the question around the pre-provision. So this year -- so you need to -- first of all, you need to try to compare with the recurrent level this year. So if you look at the recurrent level this year, the increase in pre-provision for 2021 as compared with this will be in the range that you had come up with before the -- today's presentation at the beginning. So you will find this -- around this EUR 100 million if you compare the recurrent level this year with 2021. So the fact that we are disclosing the savings with the NII that we've given up for all the total sales of the asset protection scheme that amounts to EUR 75 million, this actually is offset by other things. And there are also savings below the level of the pre-provision profit related to this extra EUR 30 million that we've given up as a result of the sales that we've done to cover the charges for the NPL sales, right?But there are other things that offset this slight decrease at the level of pre-provision profit. So if you look at the recurrent level, again, in 2021, we'll see an increase around this level that you started mentioning, right? As for the second one, we are not disclosing the exact levels of pricing that we are imposing on deposit. You will forgive me for that, right?

[Lluc Sas]

Okay. Operator, could we -- could you connect the next caller, please?

[Operator]

And the next question comes from the line of Marta Sánchez Romero from Bank of America.

[Marta Sánchez Romero, Director and Analyst]

Just a follow-up on the NPL sales. Could you be a little bit more explicit on the loss given default? Because I'm trying to compare that with the current Stage 3 coverage, 41%, which seems low. Regarding to this, according to your Pillar 3, you had EUR 1.4 billion of gross NPLs older than 5 years back in June. What's the balance today after your disposals? And a last question, if I may. Could you please provide an update on the status of the potential sale of TSB? And is this still an option that you're exploring?

[Tomás Varela Muiña, GM & CFO]

Thank you, Marta. So the LGD of the sales, the EUR 1.2 billion sales that we've realized this quarter is around -- or the gross value is around 72%. If you are trying to tie this with a disclosure with down of EUR 360 million of NPLs older than 3 years, here, the coverage is around 60%. So the -- if you try to compare the two, which doesn't necessarily mean that this is going to be the case, but because, as I said, the assets that we sold this time around were much older than those, or than this EUR 360 million of net asset value. But if you try to compare this, you would come up with a 10% of the gross value that basically would be less than 30% of the net value, so around -- close to around or bit lower than EUR 100 million. We don't have plans at this moment to sell these assets or to sell portfolios with these assets. But the important thing here is that this is the exposure that we have of NPLs older. So they past due NPLs older than 3 years, and this is very important because it means that the portfolio is absolutely current. In terms of the second one, Jaime?

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

Okay. And regarding your second question, as I said before, they are no change in our position. And as we have always explained, management and the Board will consider any strategic options that will create value for the shareholders.

[Lluc Sas]

Okay. Let's move on to next question, please.

[Operator]

And the next question comes from the line of Carlos Peixoto from CaixaBank.

[Carlos Joaquim Peixoto, Analyst]

First of all, thank you very much, Jaime and Tomás for all the years, and good luck for the future. Now according to -- 2 questions. My question is -- my first question would actually be on the Stage 2 loans migration. So can you explain a bit what happened with Stage 3? So we're wondering here what segments and what type of situation and what were the drivers for the reclassifications on Stage 2 that we saw in the quarter as well. Second question would actually be a bit on your expectations for the evolution of fee income throughout 2021. And finally, just a third question, if I may, on costs, which would be -- basically, the press has reported on the possibility of Sabadell carrying out an additional restructuring plan this year. Could you share some color on whether that will be the case? Or what can we expect there in 2021?

[Tomás Varela Muiña, GM & CFO]

Thank you, Carlos. Again, migration to a Stage 3, we had a net increase of EUR 3.8 billion of migration to a Stage 2 in the quarter, and this entailed EUR 115 million of provisions. TSB will have a net reduction of EUR 1.3 billion of stage two, which implied a reduction of EUR 22 million in provisions. The kind of criteria we use for this was related to the evolution of payment holidays that had -- in TSB, for instance, had in the second and third quarter, basically the second, a significant increase due to the volume of customers that applied and achieved payment holidays and, therefore, being very cautious about what this meant and using some other indicators in terms of the credit worthiness that wasn't necessarily, meaning that they would have difficulties that has been proven afterwards. They were classified as Stage 2. Then they've been -- this has been reduced as all those customers have resumed -- or the bulk of those customers have resumed payments normally.In terms of ex-TSB, the increase has been in the fourth quarter. The criteria used has been -- also, again, as I described earlier regarding how we've come up with reclassification to unlikely to pay, also for a Stage 2, we've taken into account some short-term indicators in terms of stress and liquidity, sectorial views on how -- looking forward, how the hit could be in terms of haircuts on revenues and also trying to undertake a view on how the cash flows of these different customers would behave. In terms of individuals, we've taken into account their situation in terms of employment or unemployment or the situation, if they had a furlough, for instance, and in which sector they work or they received the furlough or their payroll from this kind of thing, very analytical, very data-driven criteria to be used. And I already said that for Stage 3, it was mainly forward-looking cash flows. You've seen sector views, haircuts, expectations, very conservative.In terms of the 2 first questions -- oh sorry, no, the second and the third, we see positive trends for fees as we saw for NII in the year. We need to remember that we had a third quarter in 2020 that was very good, a significant rebound, driven both by ex-TSB and TSB very significantly because in the U.K., the pressure on revenues was very significant in the second quarter. We've seen a fourth quarter here, even in a situation where, again, the restrictions and partial lockdowns have been in place, in which we've been seeing, both also in ex-TSB and TSB, a good behavior, a powerful behavior of revenues. So we still see activity, and we see this also going forward. As we've highlighted in the second slide, I think, in the presentation, one of the levers we have is to keep going through the policies of customer loyalty and charging fees and commissions for where we don't have customer loyalty. And therefore, this has been a path that we followed already in the past and where we still have potential. So based on all that, we see potential for growth.In terms of cost and the possibility of another exercise or restructuring exercise, this is -- this will be part of the strategy -- strategic plan release that we will hold in May. And you well know how I'm in a place to not disclose anything at this stage.

[Lluc Sas]

Okay. Can we move on to next question, please?

[Operator]

And the next question comes from the line of Ignacio Cerezo from UBS.

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

I join my colleagues in thanking you for all these years. I'm wishing you good luck for the future. A couple of quick questions from me. The first one is on NII. Most banks seem to be quite confident on meeting the TLTRO target. If I have a look at the numbers between September and December, there seems to be like 1% decline on the stock that looks eligible. So what do you expect, especially considering there's a bit of legacy ICO in the quarter? And what makes you confident on that? And then the second question is on cost of risk. It's obviously a difficult one to go beyond '21, but then do you feel the decline in '21 should be followed by no decline in '22? Or are we basically talking about kind of a spread in the cost of risk actually over a longer period of time, given that they support the schemes when the government are still in place?

[Tomás Varela Muiña, GM & CFO]

Thank you, Ignacio. Once again, and as for the first one, yes, we are confident that we will meet the requirement. It's true that you've pointed out to some variations that we've seen in the quarter, but those are actually one-offs that for the requirement, we are flat actually. And so therefore, we don't have, at this stage, significant headwinds. So we are confident. As for the second one, cost of risk, we see a sustained path downwards. So actually, IFRS 9 should, as you know, account for -- so when there is a significant and abrupt change in the environment, IFRS 9 should actually absorb upfront almost all the effects of such a change, right? So what we are seeing is, in 2020, even if we haven't seen a significant [ BAT ] behavior in terms of NPL inflows with -- actually, we actually posted twice as much provisions as we had last year. This means what we all banks in general have done is building under IFRS 9 and is the right thing is building a buffer for the future NPLs if they happen.So that's why we say that the peak in provisions is in 2020. The peak in the NPL ratio, I think, is in 2021, a bit above where we are. And then cost of risk will behave, in our view, going down, as I described earlier. And will continue to go down in 2022 to -- back to a more normal pace. So actually, the guidance I gave for 2021 is not back to normal, not back to pre-COVID, so allowing for additional effects from COVID with the current scenario, what we are seeing, with the levels of with -- including the challenge of the third wave and the current lockdowns that we are seeing. This is our view.

[Lluc Sas]

Okay. Thank you, Ignacio. We still have time for one additional question. Operator, please?

[Operator]

And the last question comes from the line of Fernando Gil from Barclays.

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

Best of the luck in the future for you guys, and thank you so much for these years. My question is on TSB. If you can provide some color for cost of risk going forward and volume growth that you expect for this 2021.

[Tomás Varela Muiña, GM & CFO]

Thank you, Fernando. What -- the quarter in TSB, as for growth has been, as you've seen in the presentation, outstanding. It's been very good. The market -- interestingly, the market as we had -- the performance has been very good in terms of volumes and also better than in previous quarters in terms of spreads. So this is going to be a driver for business activity and NII. And in terms of volumes, we think -- and in terms of cost of risk, sorry, in terms of cost of risk, we see the same path that I've guided to it in terms of the whole group. So -- and probably actually a little bit better. The peak in provision has been in '20 -- clearly, in 2020, and the decrease in TSB are -- would be quicker towards the pre-COVID with this scenario. So I think this is -- especially after what happened this quarter in terms of one of the uncertainties there was, of course, the Brexit outcome. As you have seen in the presentation, the change in the scenario, given that eventually, there was an agreement, meant a decrease in needs for provisions and, therefore, this will be also there for 2021. And if you look at other factors such as, for instance, how the macroeconomists are thinking about the U.K. in 2021 and also how the reaction in the market and in the housing prices, for instance, has been lately, I think the outlook there is relatively -- with all the uncertainties, is relatively positive.

[Lluc Sas]

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