Banco de Sabadell, S.A.

Cecilia Romero - Head of Investor Relations Josep Oliu - Chairman Jaime Guardiola - CEO Tomás Varela - CFO

Good morning, everyone, and welcome once again to Sabadell’s results webcast. My name is Cecilia Romero, and I am the head of Investor Relations, and we are here today to present you our full-year results.

As usual, we are here with our management team, our Chairman, Mr. Josep Oliu; our Consejero Delegado Mr.

Jaime Guardiola; and our CFO, Mr. Tomás Varela.

Good morning Mr. Oliu.

The floor is yours.

Thank you, Cecilia. Good morning everybody.

Thank you for joining our webcast. Today we will be presenting our fourth quarter result and also an overview of the 2016 year.

The presentation will follow the similar structure as the previous quarters. I will start this presentation with general and broad highlights.

Jaime will follow with details about the profitability and the commercial activity of the bank during the quarter and the year, and finally Tomás will discuss solvency and asset quality as well as the TSB results during the year. Let me start with the highlights.

First of all, I wanted to stress you that we have had solid banking revenue growth. The Group's core banking business increased by 3.7% and 17.9% depending - ex-TSB 3.7% and the Group 17.9% respectively in 2016, which shows the strength and the consolidation of the market positioning of our business model.

Second of all, our Group net interest income grew by 22% year-to-year and was stable across the quarter in an unexpected environment of lower-for-longer interest rates, so that's also a positive. The NII grew 22% which is a remarkable figure.

Third of all, the recurrent costs were lower in the year, both in Spain and in the U.K. However, we acknowledged that there is significant room to lower costs in both places.

The Group’s net profit remained resilient with growth of 1.7% in this year despite several extraordinary provisions and impairments that we did during the year, which includes €100 million of the - corresponding to the disposal of the BCP share; €350 million additional provisions because of the application of the new collateral of Bank of Spain, Anejo IX. And finally at the end of the year, we also did some another extra €130 million of additional provisions corresponding or related to the mortgage floor event.

With all these additional provision and efforts on our mortgage floor front, we have enough provisions to absorb the potential impact of full retroactivity of the mortgage contracts that we currently have outstanding with floors. If we were to exclude these €130 million that we did at the end of the year, one-off - if we want we exclude these one-off provision related to the sentence that came about extending the period of contingency of the floors, our yearly group net profit for 2016 could have amounted to €800 million as for our guidance.

As far as the commercial activity, I only want to stress the growing performance of loans. Loans grew 4% at the Group and 1.7% in the Bank ex-TSB, which is news, definitely a good news.

On top of that, we continued to defend our pricing with total back book spreads increasing, as Jaime will explain to you. The evolution of the customer funds was also positive, the off balance-sheet funds, with strong growth in both sight accounts and off-balance sheet funds.

Overall the Group’s customer funds improved by 5.4% this year. In addition - and Jaime will show you - we also improved our market share.

We had market share gains in most of the products in the market. Our position vis-à-vis the clients also improved.

The net performing score that we see places us in the top ranking in corporates and SMEs and also in the top podium on the retail and the affluent clients, so that means also the recognition of the clients of the job done by the Banco Sabadell. Successful digital and commercial transformation which has led to continued efficiency gains.

That’s something else that we will give you some explanations, but that has been one of the main issues and will continue to be one of the main issues of the bank in the following years. Solvency and asset quality.

As far as solvency and asset quality, we have had decreased €7.4 billion during the Triple Plan, far above our revised target. In addition to that, the non-performing loans ratio declined further this year to 6.1% starting - well, you remember at the beginning of the Triple Plan where we stood at the 13.6%.

Clearly the use of the proactive real estate asset sales has proven to be a successful strategy for that. All in all our capital position remains strong with our fully loaded Core Tier-1 standing at 12%.

And this year, yesterday the board approved that we’ll propose to the general board meeting a complimentary dividend again in cash to complete the €0.05 share payout all in cash. As far as TSB results, I can tell you that we are quite pleased about the TSB performance this year, has reported very solid numbers, and in 2016 more people chose TSB as their bank in the Britain mostly and it has begun the most - the Britain’s most recommended bank by both, by the BDRC Continental and by KPMG.

That means also that it has a good recognized strategy vis-à-vis the contact with the clients. TSB credit has grown twice as fast as what it was initially planned and forecasted in the IPO, and it has reached the landmark of 5 million clients.

Lending in TSB year-to-year has increased by 11.4%, and at the same time the customer deposits grew by 13.6%, so these are quite sensitive figures. The management profit before tax also grew by 68% in ‘16 and then we'll give you also explanations about that.

Finally as you know, our biggest challenge which is the change in migration of the banking platform from the existing running on Lloyds towards a new platform with the Banco Sabadell, so this migration is along the lines. It's according to schedule.

On completion, we expect that to be launched towards the end of the year, and so far it's going according to our forecasts. And I don't want to say any more, and I would like to allow Jaime Guardiola, our CEO, to comment in detail the profitability and the commercial achievements of the bank during the year.

Jaime?

Thank you, Oliu. Good morning, everybody.

I will start by reviewing our income statement for the year and for the quarter. Looking at the yearly income statement, first of all, you should take into account that the group P&L for 2015 includes only six months of TSB results.

So if we focus on the Sabadell, ex-TSB P&L, we can see that core banking revenues NII plus commissions have increased yearly by 3.7% despite a challenging environment. Sabadell ex-TSB increased its NII at 4.6% and commissions grew 1.4% driven by insurance commercialization fees and also insurances.

Well, recurrent expenses ex-TSB were flat for the year. Provisions and impairments were reduced significantly in 2016, but this lower level of provisions and impairments comparing to 2015 has been also partially compensated by a lower level of trading income in the year and it's also important to note that 2015 results were positively impacted by €232 million in income generated from the TSB acquisition bad will that furthermore had a tax exception as you can remember.

Credit and real estate provisions is important to remarkable, so that credit and real estate provisions were lower in the second half of 2016, as they were mostly front-loaded in the first half of the year, as we announced in the midyear result presentation. Therefore and as a conclusion, despite the inclusion of several extraordinary charge that the Chairman has described, impairments of the stake in BCP, impact of Bank of Spain new provisioning rule, known as the Anejo IX and the extraordinary provisions for floor clauses, Sabadell ex-TSB net profit was 9.5 year lower than previous year and the total net profit for the Group was 1.7% higher than 2015.

Well, regarding this quarter, the last quarter of the year, as you can see in the table, our NII remained stable for both the Group and ex-TSB excluding FX impact. But to further understand and analyze the results, it's also important to note that our quarterly profit was impacted by different items.

First of all, a year-end payment to the deposit insurance fund is which like the last year is paid in December and it's recorded under other operating results. Second, Group costs included €42 million of non-recurring costs which were related to severance payments.

Third and very important, provisions and impairments included €130 million in relation to the mortgage floors as a consequence of the ruling by the European Court of Justice. And with this additional provision effort, we now have €410 million provisions enough to absorb the potential impact of full retroactivity of the mortgage contracts that we currently have outstanding with floors.

But I think that's a good moment to remind you that we are not directly affected by the ruling of the European Court of Justice and that we remain in our position to defend the legality and fairness of the clauses that are in our contracts and we are offering commercial solutions to our customers that are involved don’t have any worries about this subject. And finally the TSB expected loss reserve deployment which implied that this quarter TSB provisions of €28 million started that to be consolidated at the Group level.

Well, now we will go into a bit more detail of the different items of our P&L. And as usual, we will provide you with - we will break down of Sabadell and TSB results, so that you can follow both performance separately.

Well, with regards to the net interest income, and as I have previously mentioned, our quarterly group NII figure continued to stabilize, impacted in the positive side by our adequate pricing policy but in the negative side by the FX performance, the mortgage floors renegotiation and the lower-for-longer interest rates environment. Excluding the impact of FX, net interest income remained flat ex-TSB, while it grew 1.3% in the U.K.

As you can see in the graph on the left, net interest margins began showing signs of stabilization and remained flat in the quarter, and customer spread ex-TSB also remained stable in the quarter at 2.59% that was the same level that we had at the end of the last year, but it would have been positive if we haven't suffered the impact of our mortgage floor renegotiations. Nonetheless and in the of our customer spread continues to be the highest among our competitors in Spain and we had the best performance in medium and long-term view.

In terms of the cost of deposits and as you can see in the chart on the left, it has decreased 6.6 basis points. On the right side looking at the maturities schedule, you can see that we have still room to reduce little bit more our financial costs with the replacement of these maturing deposits.

The same dynamics apply also to our wholesale funding costs, which continued to decline in the quarter. And as you can see also in the chart on the right, the maturities concentrated in 2017 and high cost which offer a potential opportunity for further cost reduction.

In addition we currently have €10 billion of TLTRO outstanding and we could borrow up to €10.6 billion more at the cost of negative 40 basis points, and I remember you that next window of opportunity would be in March. And also in the same way, this January TSB borrowed £2 billion from Bank of England through the new term funding scheme, four years funding at base rates, as you know, currently is at 0.25%.

Well, now moving now to commissions. In Spain, we saw an increase of 0.5% quarter-on-quarter driven by good performance of asset management fees and insurances and this is more fee income growth in Spain was offset by a decline in TSB.

That was expected and it was in the budget of TSB for the year. Regarding rising costs, recurrent operating expenses for the Group decreased by the 1.9% in the quarter.

The 3.5% reduction in Spain was offset by a small increase in TSB as expected and already included in their budget. Nevertheless TSB costs were down in the year by 1.1%, and also in addition it is important to note, as I said before that there was a charge of €42 million in non-recurring costs in the quarter related to severance compensation for employees.

Well, some slides now for explaining our commercial activity and digital transformation. First of all, a look to our balance sheet.

On the asset side, we had a strong quarter in terms of lending growth. You can see that performing loans grew in the quarter 1.7% and leaves for the year in 4% of growth.

It is the result of a strong activity in TSB for across the years and special strong activity in Sabadell in the ending quarter. On the liability side, you can see that balance liabilities grew 1.5% in the quarter and 5.4% to the year based on strong growth in sight accounts, and we had also strong growth in off-balance sheet fund with 2.3% quarter-on-quarter and 8.6% in the yearly basis and driven basically by our increase in mutual funds and also in third-party insurance products.

In terms of our lending growth and having a breakdown by segments, we show a strong growth in corporates 3.78% in the quarter, 3.79% also basically with working capital and our international business. Also a strong increase in SMEs with 1.16% and we suffer also a decrease in mortgages basically because payments and amortization of mortgages more than offset the new production, and we expect that in ‘17 in the next year we can change this trend.

In addition, we continue to protect well our pricing. In fact we saw increasing the total back book spreads for the year with a very good performance in mortgages and trying to defense our pricing in SMEs and corporates.

We also had a very good performance in market shares across different products and segments. You can see that both in companies and individuals, we have reached - increases across all the different products and services.

We remain maintaining a high level of quality of service, even increasing slightly the gap with the market. We remain being number one in the ranking for large companies and SMEs and reducing and improving positions in personal banking and retail banking, and overall with good increases in our NPS score for all the segments.

Finally three slides about our digital transformation. First of all, our two main KPIs.

We are reached the level of 86% of transactions executed through remote channels. 18% of our sales are done through digital channels.

We have multiplied by 2.5 along across of the plan, Triple Plan, the number of users of our mobile activity. Now a small follow-up of the main digital and commercial transformation initiatives.

As you remember, we explained that we have changed our distribution model and this quarter was the final deployment of the new model of Hub & Spoke in our branches. And these have reached a total of 863 branches involved, more than 40% of our network, and affected 2.9 million customers.

And second, we have continued with the deployment of the active management is the remote system to serve customers with extended hours and we are beginning to launch the mass market segments. Currently we have 159 remote account managers and 230,000 customers and we aspire in 2017 to reach the amount of 750,000 customers involved in this remote system of attention.

And finally we have finished the redesign of the organizational structure reducing the levels and making clearly agility and autonomy and reducing overhead. The last slide of this part of the presentation.

Different initiatives, the Bizum, that you remember is an instant payment by mobile among the main banks in Spain. Now we have reached level of 39,000 users.

It's a very aggressive launch the last quarter and what's more important we have reached our market share of 13.4% in terms of users and 20.2% in transactions and 17.5% in amount, clearly above the average level of market share in individuals that we have in Spain. The Simplebank process, we have dedicated this quarter to improve the level - the number of contracts for our deposits products reducing from seven to one.

And finally as you remember the first part of the year, we made the distribution of 3,500 tablets to our networks especially our SMEs network and we have obtained this quarter 5,000 enrollment of clients and over 22,000 documents signed during the quarter. And with this last slide of this part of the presentation, I hand over to Tomás for explaining about solvency, asset quality and also TSB.

Thank you, Jaime. Well, solvency and asset quality.

We start with capital position, which has remained strong this quarter, both fully-loaded and phase-in stand at 12%. The reason for the decrease from 12.1% last quarter is a combination of factors.

First, for the first time it’s been included there unrealized capital gains in the portfolio or the available for sale portfolio, which means an increase of 14 basis points, but at the same time we have the impact of growing lending which increases RWAs. Also the build of the investment in IT systems carry-forward through the quarter and also the build of the IT platform for the U.K.

for TSB, which will be delivered by the end of 2017. Migration will be delivered by the end of 2017.

The platform is building there and therefore this increase in intangibles draws a part of our capital ratio. And also we've seen the impact of the phase-in of the treatment of some DPAs [ph] in the quarter that meant 9 basis points.

The combination of all these factors are triggered this decrease of 12.1% to 12%. NPL have decreased.

NPL ratio have decreased to 6.14% in the quarter; 7.72% ex-TSB. This keeps a strong trend towards decrease of the ratio and also indeed the volumes in euros.

You can see here in the quarter we've seen a further reduction of €575 million in NPLs and €73 million in foreclosed assets. The combination is €648 million.

And this completes our full decrease of €7.4 billion throughout the Triple Plan well ahead of all the guidance that we had given through these three years, with coverage that we can see here 51.5% for NPLs and 47.6% for foreclosed assets. The combination is 49.6%.

It needs to be taken into account that the provisions for non-performing loans include €410 million set aside for the coverage of potential impacts due to the mortgage floors rulings, which as Jaime explained, still in our case haven't been ruled as not valid and we trust and are confident in our arguments for defending their validity but still we’ve aside given the circumstances we've seen over the last quarters, this €410 million. If we exclude this from NPLs, the coverage would be 47.3% for NPLs, 47.4% for dual problematic assets.

We can see here how we've over-delivered on problematic exposures through the plan. We announced at the beginning of Triple that we expected to reduce the NPL portfolio by €7.7 billion.

We revised the guidance in €2015 to €8 billion and actually we've delivered €8.4 billion at the end of 2016 for the whole period. As per NPAs, the figures have been €4.4 billion in our presentation of Triple, revised guidance of more than $6.5 billion and actually we've delivered €7.4 billion.

We continue to see a recovery in the real estate market in Spain both for sales unit and prices. As for sales, we can see that we are - in 2016, we've seen the total number of sales, properties sold in Spanish market to be approaching the levels that we had seen in 2009/2010.

And in terms of prices, we can see in the lower right-hand side of the chart how the trends towards increasing prices keeps going on. There are special spots in Spain where these trends are especially doing so at these - for instance Barcelona, Madrid and coastal areas.

So we are seeing also increases in second-hand housing and second residence housing. As for our sales, we have something here, our foreclosed assets sold during 2016 compared with 2015.

In terms of the perimeter that shows how direct exposure to this portfolios that is including the 20% of the asset protection scheme, we see an increase of 40% year-on-year in sales in euros and also indeed 19% increase quarter-on-quarter in this last quarter of 2016 in euros, also 27% increases in terms of properties sold. And we also need to highlight here that these increases, we are seeing them both in the two companies of this that is retail sales and institutional sales.

We turn now into TSB's results. TSB continues to deliver successfully through its three strategic axis; current accounts, lending and excellence of service through digital brand and customer experience.

As for current accounts, TSB keeps on delivering in terms of its market share in new bank accounts. It's been in the year 6.4%, above the 6% target.

Customer deposits have grown £29.4 billion, that is 13.6% year-on-year. Lending remains strong, also grew to £29.4 billion and that is an 11.4% year-on-year, but actually there are other facts that show that the growth model of TSB has proven to be really be successful, so growth is being delivered at a much higher pace than what it has been anticipated.

This year TSB stand at £6.6 billion in new mortgages, that is 36.5% higher than in 2015. And also in terms of excellence of service, TSB has been rated Britain's most recommended high street bank and its net promoter score reached plus 23, well above the plus 16 in 2015 and minus 24 when the bank was launched back in 2013, and also it climbed 84 places in KPMG Nunwood’s 2016 U.K.

Customer Experience Excellence ranking, becoming the highest ranked high street bank. In terms of the income statement, the delivery has been noticeable.

In terms of management profit before taxes, it grew 68.1% to £177.7 million compared to £105.7 million in 2015. Also in terms of extraordinary profit, the growth achieved was 43.9%.

It’s worth noticing that margins keep performing strongly. The NII in the fourth quarter has remained pretty stable as a result of the good delivery in terms of the franchise.

NII low with markets under pressure due to the rate situation and this is offset by the run-off of the portfolios but TSB in any case is today well exposed positively, so loan to interest rate increases which give us in principal a good support for continue combined with growth in the lending and deposits in the balance sheet to continue a good performance in terms of NII and revenues. Worth noticing as well, the composition of growth in the balance sheet, so as I referred to, we can see here how the two portfolios; the Mortgage Enhancement and Whistletree decreased year-in-year 18.6% and 17.5%, whilst the core mortgages those depending on actually the business growth model of TSB have grown more than 20% in the year.

Also strong growth in deposits, 13.6% overall. And also worth noticing, the healthy average LTV that stands at 42% across the mortgage book and the strong capital position with CET1 at 18.4%.

TSB is doing extremely well in terms of the development of the migration project. The platform is almost fully operational as of today, and the user admittance tests are well underway.

We are actually about to extend the launch of our mobile banking app to our customers in the U.K. It will happen in the coming weeks.

For the moment, it's being used already, but an increasing number of users, so it's live and being used by an increased number of users and in the coming weeks will be issued openly to our customers, and on customers in the U.K. In spring we have the bulk of the testing pilot.

Some are Proteo for U.K. will be live already and we expect to deliver the full migration by the end of the year.

And with this, I end my part of the presentation and hand over to the Chairman.

Thank you, Tomás. Well, if we start looking a little bit into the future in this coming year, first I want to look backwards a little bit and see what Banco Sabadell was at the beginning of the Triple Plan three years ago in 2013.

2013, the bank had three challenges. First of all, we had an amount of problematic assets that had increased significantly after the financial crisis also with the acquisitions with incorporations in the bank of a much broader perimeter with five different banks and over 3 million new clients.

So the loans and the foreclosed assets were 21% of the balances were far too high. Second of all, this incorporation of banks in distress or having the stress had bought in also deterioration of the customers spread from the 2.93% that we had in the beginning of the financial crisis to 1.87% or 1.86%.

And at the same time, we had the feeling during the crisis - being affected by the real estate crisis in Spain that our concentration in the geography of Spain 95% of our banking business was there, was a weakness that we had to resolve. That's why we launched the Triple with the three ideas: the transformation, both of the balance sheet and also the business model in the digitalization period.

Second, profitability. We had to recover levels of profitability.

And third, try to find a way in which the bank would diversify its business model in more than one geography. And that was the origin of the - after the end of this Triple - at the end of this Triple considering that the end of ‘16 our loan and foreclosed assets distribution is still high, but it has improved.

From 21%, it has gone down to 12%. Customer spread from 1.86% has gone up to 2.68%, being one of the - being the one that has the best performance in the Spanish banking sector.

It is not the level it was in 2007 but close. And finally, this weakness of concentration in one geography, Spanish geography, now with the acquisition of TSB during this period, has gone from 5% to 32% of the activity of the bank being overseas, so that is I think the main achievements of this three years.

This has been recognized, reflecting interest rate requirements that had been lower. The rating agencies upgrades, Moody’s has put us back into the investment grade, Standard is in review.

Also what I mentioned to you at the beginning so that we are top ranked, means number one in the SMEs and large corporates being the most recognized bank as the best in the Spanish and the best recognized in the Spanish banking systems in this which was - which is our core business and traditional business of Banco Sabadell, but also with a very significant improvement in individuals, both in Britain and in affluence being in the - as I told you, in the podium. TSB also has been rated, as I also mentioned, most recommended high street bank, so that is also recognitions that these three years has been successful in many aspects.

And now looking forward at the two main geographies in which we are diversified now which is Spain and the U.K. How do I see the outlook for the economy where our business develops?

First Spain. I think that's Spain economy has been, over the last year, following a very positive path and our expectations are that it will continue to stand out in a positive light, especially in a relatively positive light with respect to all the other Eurozone countries.

Why is that so? Because we have seen during this last years in the Spanish macroeconomic fundamentals that many of the imbalances have been corrected severely both the deleveraging of the Spanish private economy has been substantial.

The behavior of the Spanish balance of payments has also been very positive. There have been reforms in the labor markets, therefore the increase in creation of jobs has been steady in the last years and we expect that to continue in the following months.

Second of all, we see much more favorable credit growth trends that we saw in the - having said that the deleverage has occurred, we are seeing now an increase in the activity and increase in the expectations and therefore a pull for the credit growth And at the same time further reductions of both non-performing loans and also the non-performing assets or the real estate and the issue of the exit of the real estate assets in a positive environment. Price increases in the real estate have been substantial in many areas, coastal areas, Barcelona, Madrid and will expect that to being developed also in the other areas.

So we have definitely positive expectations vis-à-vis the price increases in the real estate. Finally we had, at the beginning of this last year, certain uncertainties as we have now from the political instability in most of the - in many of the areas in the world, we had this problem of instability.

After the formation of Spanish government, we see relatively political stability. I say relatively political stability because government that is not stable completely and does not have a majority coalition but still for the behavior what we have been seeing in the past, we’ve seen that we foresee a relatively stable political situation especially and also in the benchmark of the European situation.

This has been also shown in figures. Spain growing and will continue to grow during 2016, and the unemployment rate is at lowest since 2009.

The Spanish economy is proving to be resilient to this very complex global environment in creating jobs which is the most important issue that the economy had. When we look at the United Kingdom, there the uncertainty comes from the Brexit situation, and the Brexit negotiations that will take place and that we don't know exactly what will be the process and what will be the outcome of it, so we still are in an environment with uncertainty because of the Brexit.

The U.K. government intends to seek the greatest possible access to the single market that is cleared but we don't know what will be the outcome of a dynamic resolution between the European - say, with the EU and U.K., so that stays as a factor of uncertainty.

What our view about that is, is that it will be a process that will be orderly. It’s a process that will be phased and orderly, will not be anything complicated.

Probably will last longer, will continue, therefore the uncertainty to be in the system for longer, but at the same time the institutional strength and the competitiveness of the economy of the U.K. economy makes us think that at the end the impact of the Brexit will not be as negative as it was anticipated at the beginning.

So far, we have not had any negative impact on the economy. We have not had any impact or any negative impact that we can foresee yet in the bank, but we have to remain - as you know, the bank is a retail bank and therefore it's not affected in many of those things because it depends only on the behavior of the internal economy.

What is happening in the internal economy in the United Kingdom? The performance of the economy has been better than initially was expected because the strength of the internal demand and the strength of the external demand, as you see in the graph that we are showing, it continues being strong.

Labor market also, labor market in the U.K. and unemployment is at the lowest level ever, so therefore so far - there is uncertainty but so far there is strength in the behavior of economy and we know that the Brexit will be something that will be clear.

And probably during this 2017, we will see little progress on the Brexit issues because of the different electoral challenges that will be in the Continental Europe, but at the same time by the end of the year we’ll see a little bit more about what can we expect about this new situation. I mean the reason - this was part of the reason when we set up for the future, we decide that 2017 would be a transition year and therefore that we would delay our three-year plan one-year basically because in 2017 we’ll do most of the same things that we did during that Triple and therefore there is nothing new, and there might be something new after 2017.

Second of all, because in this year we saw, by the time that we were developing the plan there were very many uncertainties in the environment. There were uncertain things about the Brexit.

There were uncertainties about the result of the American elections. Now they had been cleared but we are still uncertain about what will be the outcome.

There were uncertainties politically in Europe, and also we had uncertainties about the path that the interest rates were going to follow according to many of those political results that have impact on the monetary policies and on the fiscal policies that will be implemented in the different relevant geographies where Sabadell is affected. Therefore at the same time during 2017, Sabadell has a big project which is the project of the TBS one-off IT migration.

I think that, as I told you at the beginning, goes along our plans but still it's something that once it has been put in motion changes completely the perspective that we will have and I think that that will be by the end of this year. Therefore what we have done is setting 2017 year in which our focus will be a year focus on management and focused on the successful completion of TSB IT platform migration.

That’s number one. Second of all, the commercial activity will continue protecting margins and increasing fees, therefore that according to what Mr.

Guardiola has said and has done during the last three years. It will be a year of cost containment and also revaluation of the costs in the view of future adaptation of the banking model, the new communications environment.

We'll continue our reduction in problematic assets, that's another year - this target - we target this year 2 billion yearly reduction. Now we are in the position in which we can choose which ones we are selling first because we are in an environment of increasing prices, and therefore that's what we will have a much more economic view about the profitability and the value of the assets that we now have in our portfolio.

We’ll leap again in our - we’ll continue leaping on our commercial transformation that was started and was explained by Mr. Guardiola.

And finally we have a year that is challenging in TSB, very challenging TSB for - and it has consequences in our results. But in TSB, we have next year one-off IT costs step because the contract of Reuters we saw, as you probably know from the very beginning, we always have said had a three year period with certain costs of providing servicing for the IT, but with a step-up this year, next year, means 2017 so we'll have to pay more for having or for receiving the service of Lloyds which will be overcome next year with the service of the new platform, but this year that is an extra cost - is one-off extra cost.

And at the same time for first time TSB provisions enter, they start to be consolidated at the Group level that were not so far. And the aim of this year will be that all these challenges and the negative effects that TSB has next year that will be only one year.

Effects will be neutralized at the Group level by a better performance of the Sabadell. At the overall what we expect is in 2017 that the net profit for the Group will grow by low double-digit, and therefore that - with respect to the profit to the P&L that we have reported right now.

Finally I only want to say one word about the plan that we have delayed until next year, the new business plan will be along lines similar to the ones that we have had the previous ones, so we are considering growth in the existing markets so our focus will be Spain and U.K. And also the initial - the Mexican that we have started a very small position, but that will be growth in the existing markets.

We are not talking anything else. Second of all, the balance sheet normalization, that will continue.

That will continue, and with the next plan we'll have to be - through the next plan we’ll have to achieve the final normalization of the balance sheet that means with very, very low NPL ratios and therefore achieving normalization of the cost of risk. Efficiency optimization.

That has to do also with the following one that we will have a very strong plan dealing with the transformation and adaptation of our model of retail banking and of corporate and SMEs model through the new environment of digital capabilities. I think that that is most important.

We will give you some ideas and we will have more details about that. Tomás and the team of Investor Relations will have a special day dedicated to communicating both the ‘17 and the outlook or the outlooks for the next years on February 7, and we would be delighted that we could join them there and have many things clarified then.

And nothing else. Thank you very much.

Now we are open to the questions that you have posed.

Thank you, Mr. Oliu.

So as the Chairman just mentioned, we are opening now the floor for a round of questions. And the first few questions, the next three questions in fact will go to Mr.

Varela. The first question says, why has your core tier-1 fall in this quarter?

Has it benefited from including the sovereign bond-related AFS capital gains?

Well, as I said, this impact comes from the combination of several things. The higher RWAs of €0.4 billion, which has driven basically by our lending activity; the increase of intangible assets related to investments in Group and also the platform in TSB has a negative impact of 30 basis points, and the effect of the ending of the phase-in calendar for tax loss carry-forwards has had a negative impact of 9 basis points.

And then at the inclusion for the first time of the unrealized capital gains coming from the available for portfolio improved this in ‘16. The balance is the loss of the 12.1% level to 12.0% actually level of CET1.

Thank you very much. And the next question is regarding provisions.

Could you please explain the movement in provisions in the fourth quarter? NPLs and foreclosed asset provisions.

Yes, we were announcing through the year that what was our expectation of net impact for that and coming into effect of the new Anejo IX. We said it would be around €350 million.

We started to build provisions during especially the first half of the year with it. So basically building provisions in the non-performing loan portfolio, so provisions for non-performing loans being conscious that the final outcome of the analysis of the impact of the new circular would more likely mean transfer or reclassification from the credit portfolio towards the foreclosed asset and this is what happened eventually when after all the governance of the process we ended up fixing, clarifying and fixing the final numbers.

And therefore we've done the reclassification of the accesses that we had built in the credit portfolio towards the foreclosed assets. Also in this quarter, in December actually, we have an additional charge of €130 million to build this set aside part of the provisions for coverage of potential negative impacts that would come as a result of the floor rulings in Spain.

Thank you. And the next question, it’s related to the TLTRO II.

You mentioned during the presentation that you were accruing minus 40 basis points, so could you please explain what was the benefit on the year from TLTRO II?

The benefit for the year has been €20.6 million.

Thank you very much. And the next question goes to Mr.

Guardiola. This one is regarding TSB.

How much do you expect cost to fall once TSB starts operating on Sabadell’s infrastructure and no longer has to pay Lloyds the outsourcing fee?

Well, the project is well on track from all the point of views, technical issues, time, cost, synergies, expectations, and we will update the numbers in the webcast that is going to take place next February 7.

Thank you. And the next two questions go again to Mr.

Varela. Regarding your margin, please could you explain the 11 basis points fall in the SME spread in the fourth quarter?

Has there been a mixed change to keep the overall longer spreads stable?

Yes, the impact in SMEs is not unusual that we see some - certain changes especially in times like the ones we own due to the fact that the fact that mix can change as a result of how much the working capital financing weight in the particular quarter. This quarter the mix has change towards more working capital financing for our customers, and of course with such short-term tenures in working capital, the rates are lower.

So higher weight of new lending, which as you know is a high rotation but can have a significant weight in our exposure with - our customer with SMEs especially. Maybe this higher weight is what means this impact but the underlying is and remains stable.

Thank you very much. And then next question is regarding TSB provisions outlook.

What’s your expectation for cost of risk in 2017 and 2018?

TSB provisions have had and have and remain having a pretty stable behavior, and going forward what we see is our cost of risk around 30 basis points.

Thanks. And the next question is for our Chairman Mr.

Oliu. Any further update or interesting M&A with Banco Popular?

We are not considering now - and there has been changes in Banco Popular. We are not considering anything now.

Thank you. And the next question goes again to Mr.

Varela. Mr.

Varela, can you explain the non-recurring cost in the quarter, please?

Those non-recurring costs have to do basically with severance compensation for employees leavers, that in a high proportional self-funded in the first year after leaving in 2017.

Thank you. Mr.

Guardiola, loan growth is positive in the fourth quarter. Do you consider this the beginning of a new trending volumes?

Well, yes, we had a strong quarter in terms of growth in lending. Obviously we have had since the last two or three years strong lending activity, but it has not been seen in the volume in our balance sheet.

But we really think that we will have increase in volumes of our balance sheet next year and especially supported by SMEs and also consumer finance.

Thank you very much. Another question from the audience for you.

What's the outlook for fees in Spain? Do you expect to stretch your pressure on these from - for example some pending legal cases, or is this more noise than actually a threat?

Well, I think this is not a noise. It's more than noise.

I think that obviously customers’ demands for fees - for service prices for fees, that has to be based on the service that you are giving, the cost of service that you are giving, the opportunity the operational cost, the operational risk and I think that Sabadell is giving the services and the fees in this way. I think that the evolution of fees has more to do with if we are comfortable we are able to preserve and to maintain the level of increase in market shares in our activity.

And in the sense, we expect for the next year an increase in fees, and I think that Sabadell is very well positioned to take value of this enormous increase of number of customers that we have added in the last years and we in this sense we expect an increase in fees for the next year.

Thank you. The next couple of questions goes to Mr.

Varela. Could you update us on the TSB migration plan please?

Yes, the migration plan is well on track, is in many respects is could say even ahead of plan as a whole. As I said, we are already underway with the user acceptance test and with a platform that almost is live and it's almost fully completely operational, and very shortly we will make available our banking digital application for all our customers and we are about to enter already the phase where the heavy testing and further development and deployment of the different pieces of the platform already coming together.

It starts to yield visibility towards the last phase of the project. So our expectations are that we are in good shape for delivering the migration by the end of 2017.

Thank you. And on the topic of TSB again, what are your expectations on loan growth for both 2017 and 2018?

We haven't disclosed yet a particular guidance. We will give more detail in our with webcast presentation on February 7.

But anyway I think the presentation is - today's presentation is quite explicit in how successful the growth model of TSB has been so far and about the potential for growth that we are seeing and we are delivering actually. I don't see this anything that remaining strong, so this is what I can say today.

Thank you. And the next question goes to our Chairman.

Mr. Oliu, what's the overall opinion that Sabadell has on the mortgage floors?

The overall opinion is very broad but I will give you my response. The overall is that we think that the pressure has been put on the banks with respect to that regardless of how transparent that banks have been, therefore will they put all the banks in the same level-playing field?

And I think that this is a wrong way to approach that, but that's the way that media have covered that. What we have defended is - and that we are quite comfortable about this and cautiousness tells us that it is true that is, that our floors were transparent.

The issue is not about the validity of the floors. According to the Supreme Court sentence that was issued two years ago, in 2013, the floors were considered valid as long as they wear transparent.

Therefore all the question about the floors is about transparency. The role of the Luxembourg court about the floors was only to qualify the sentence of the Spanish Supreme Court saying that whatever sentence of the Supreme Court limited the effects of the floors that we can see that not valid because of non-transparent had to be bound to 2013.

The Supreme Court of the - the European Court of Justice of Luxembourg said that not if they were not valid because they were not transparent, they should be not valid from the very beginning. Having said that, the position of Banco Sabadell is that our floors have been transparent.

There were instructions about the transparency that were very clearly stated and they were very clearly read that the public notary when the contracts were set and therefore we are defending that position. But having said that we also have approached the renegotiation relation with our clients.

We know that this is in the media and this is in the people, therefore we have attended the clients that wanted to renegotiate. We think that the contract like the one of mortgage can be negotiated and many of the clauses that we had have been renegotiated in the benefit of the parties.

Most of the cases have been renegotiated towards giving the clients access to fixed interest rate loans. They have been happy about that.

Most of the clients - some of the clients that came recognized that banks had been very transparent and did not dare to put any demand, not even to renegotiate, because they consider that in consciousness the bank and themselves clearly understood what the floors were and therefore they stand by that. Now the situation now is clear from the point of view that we continue with our negotiation, openness towards the client and those ones that have not negotiated the floors can go to the bank and we can find solutions for them that are better for them that are better for us.

So to speak, we are not - there was another issue about that. There was the obligation to pay.

You have to pay back. We are not obliged to pay back anything we have not been condemned by any demand that has been put, so we are not obliged to pay.

We can continue negotiating. Of course if there was some individual sentence that came that the court can see that that in that case the commercial aspect of that case was not sufficiently transparent that we would compensate the client.

But in general case we are not against it. We have appealed the sentence that wasn't that much so that we don't have any sentence.

On the economic point of view, we also feel that is over. We have done all the provisions that will be sufficient for the worst-case scenario that all the outstanding clauses would be compensated.

We do not think that we will arrive to that scenario at all. But still from the economic point of view, this is something that for us it's overcome.

Thank you very much. Mr.

Varela, another question that has come through today is, why is your foreclosed assets coverage lower than for some of your peers?

Well, actually our coverage, our foreclosed assets coverage is treated by us as we are thorough in assessing the necessary coverage and provisional level, of course continuously applying our policies, our accounting policies that are applicable. And we show it in a way, so for comparison, I think it's worth explaining that we show them when we foreclose assets, we write off the provision that initially was attached as for the collateral, so the asset in the original loan.

So the loan disappears, also any provision attached to the asset that we are foreclosing disappears because we write it off. Always in our resource presentations, we show the gross amount, the gross accounting value of the assets and the level of provisions, and therefore the coverage is the ratio between provisions and the gross asset value of the asset.

So when we foreclose, as I said, both the gross asset value and the provisions are originally coming from the loan are written off. Therefore if we need to be compared with some of our competitors, we should take into account those provisions that we've written off.

If we would do so, the level of coverage that we would get to be fully comparable with the method that in some cases haven't shown by our competitors would be 55%. So this would be our comparable level of coverage or foreclosed assets, 55%.

Thank you very much for that explanation. And now Mr.

Guardiola we received a question regarding Mexico and activity in Mexico, if you could give us an update.

Well, Mexico is performing better than our expectations. As you remember, we began in Mexico in last quarter of 2014 launching SOFOM, a financial vehicle for lending dedicated basically to structured finance and corporates.

And in January 2016, just one year ago, we launched the bank. And the bank was addressed basically to middle market companies, and things are running very well.

In fact, we opened six branches and we have planned to open six more this year. We have made some delay in the launching of the project for individuals because we are focusing with this middle market companies project and that is running very well.

And the most important is that being Mexico, as you said as it is setup from the scratch is now contributing positively to the P&L of Banco Sabadell. So we are very confident in our Mexico’s operations.

Thank you. And the next question goes to our Chairman.

Mr. Oliu, you have announced a final dividend also in cash of €0.03 which is a payout of 38%.

Is this now going to be the plan going forward?

Yes, indeed. Our plan is to go forward with cash dividend, and that is also - with regard to the payout between 40% and 50%, probably progressively going towards 50%, that's because we feel comfortable with our core tier-1 12% and the sustainability over time and at the same time about the general strength of the balance sheet.

So that's why we have decided this year to go back to a full cash dividend and will continue with this policy.

Thank you. So it appears that there are no more questions and this brings our webcast to an end.

We want to thank you very much for joining us today. And at the Investor Relations Department, we remind you that we continue to be available throughout the day to answer your questions.

Have a good day.