Banco de Sabadell, S.A.

Jaime Guardiola - CEO Tomas Varela - CFO

Good morning everybody and thank you for joining us. We are here to discuss our first quarter results.

As we usually do I will begin the presentation by covering the first quarter highlights, then I will provide you with some details about our profitability and commercial activity before handing over the presentation to Tomas who will discuss solvency, asset quality and TSB results. Then both of us will respond to any questions that you might have.

So let's move onto the first quarter highlights. In terms of profitability and efficiency this quarter the group's core banking revenue which includes interest income plus net commissions increased by 1.9% demonstrating these trends of our franchise.

Overall our group NII grew by 1.6% quarter on quarter. This was a first increase in NII that we have seen since the first quarter to the last year.

The increase was driven by reduced funding cost and a stable lending yield. This increase by 2.9% quarter on quarter which service fees as the main driver.

The expected increase in TSB IT cost was partially offset by a decrease in cost in Spain during the quarter. Last portion of the trading income expected for the year has been materialized in the first quarter and we use this front load, this additional income to front load a significant part of this year's provision.

Overall we're on track to meet our trading and provision guidance. Taking all of this into account our profit for the quarter stood at 216 million putting us on track to achieve our guidance of 800 million in profit for the year and net profit for (inaudible) excuse me was €204 million, 7.1% increase year-on-year.

Regarding commercial activity at these data transformation, performing loans grew by 2.3% year-on-year for the group and 1.6% next year. Customer funds also exhibited strong growth both in site accounts and off balance sheet funds.

In addition we run deferral (inaudible) ratio with few initiatives such as (inaudible) and new versions (inaudible) and our continued focus on service quality also kept at the top of NPS rank in Spain for both SMEs and corporate and we improved our ranking to number two in retail banking for the first time. With regards to solvency and asset quality, our NPL ratio continued to decrease to 5.86% the lowest figure since the third quarter of 2011.

Non-performing assets decreased by more than €500 million in the quarter in-line with our guidance. Furthermore our NPA coverage ratio is creating market provisions already reached 48% matching our year-end guidance and lastly our capital remain strong with CET1 facing at 11.94%.

Moreover our capital position will be further strengthened by the sale of our retail bank subsidiary in the U.S. that we expect to close in the second half of 2017.

Finally some comments on TSB results. TSB posted solid results with strong quarter on quarter net interest income evolution supported by lower deposit cost and strong mortgage lending growth.

Lending grew by 12.6% year-on-year driven by record growth in core mortgage production and customer funds grew by 11% year-on-year as we continue to capture over 6% of the personal current account flow. Finally very important immigration plans remains on track and it is worth noting that we achieved the first milestone visible to clients with the launch of TSB new mobile app, the first service built on the new portal IT platform.

Summarizing we're committed to achieving our 2017 guidance and as you will see our first quarter results indicate that we're on the right track. Well I will now review the group's profitability and efficiency metrics.

Looking at the quarterly income statement I will like to highlight the strength of our core banks business as I said before which grew by 1.9% for the group quarter on quarter. NII increased by 1.6% in a challenging interest rate environment.

This was achieved once again thanks to our commitment to pricing discipline which continues to deliver one of the best in class customer spreads. Fees and commissions grew by 2.9% quarter on quarter with service fees as the main driver.

As I mentioned earlier you can also see that we materialize a large portion of the trading income budgeted for the year and a large portion of the year's provision. Our guidance for the group provisions for the year remains at €1.2 billion.

With regards to cost as I mentioned earlier it is important to note that in 2017 we will incur a one-off IT step up expense, TSB of £100 million and with the proportional part of this cost reflected in the first quarter. By the end of the year this expense should be partially offset by cost reductions in Spain.

Overall the group net profit is 216 million meaning that we're on track to achieve our 800 million net profit guidance for the year. We will now go into more detail and as usual we will provide you with a breakdown of Sabadell and TSB results.

Net interest income for the group grew by 1.6% this quarter, 1.4% excluding FX impacts which was the largest increase experience since the end of 2015. This performance was driven by healthy volume growth, our committing to pricing discipline and further reluctance in our cost of funding.

In NII increased by 0.7% quarter on quarter while TSB increased by 4.3% or 3.3 percentage including the FX impact. Taking a look at margins as you can see in the graph on the left, net interest margins and customer spread performing well this quarter.

Net interest margin as a percentage of average total assets grew by two basic points to 1.84% for the group and also by two basic points to 1.71% ex-TSB. This was the first increase since the first quarter of the last year.

Meanwhile customers spread grew to 2.77% from 2.69% for the group and to 2.67% from 2.59% ex-TSB driven by decreased in cost of customer funds. In this sense the cost of deposits which you can see in the chart on the left it has decreased by 21 to 14 basis points while the front book has contributed to reprice, (inaudible) at five basic points.

And the same dynamics applied to our group's wholesale funding cost, with decline from 1.91% to 1.74% in the quarter driven mainly by the maturation of close to €71 billion in wholesale funding price at an average of 4.25% and the last portion of this expirer in mid-March so we will see the its effects in the next quarter and in addition we currently have €20.5 billion of TLTRO outstanding at a cost of negative 40 basis points of this 20.5 billion, 10.5 billion were borrowed at the end of March so most of the benefits of this financing should be seen also in the next quarter and moreover in January TSB borrowed €3.4 billion for a four year term for the Bank of England through the new term funding scheme. As you know this funding is priced at the base rate that now stands at 25 basis points.

A good example of the potential upside by (inaudible) wholesale funding is our latest covered bond. Our 10 years 1 billion covered bond original at the cost of 4.25% was refinanced this bond at the spread of 33 basis points over mid-swap.

This was one of the lowest yields in the Spanish market in 2017. While now we will move on to fees and commissions which also recorded very strong performance growing by 2.8% quarter on quarter and by 8.1% year-on-year at the constant exchange rate.

For salary, ex-TSB the increase in total income from fees and commission was 4.3% quarter on quarter and 10.4% year-over-year. This rule was driven by service fees mainly those related which sites accounts and securities services.

Provided to TSB fees and commissions decreased by 11% quarter on quarter as a result of higher aggregator fees related to the acquisition campaigns launched during the quarter. TSB obviously continues to focus on growing client base and once again this quarter it captured more than 6% of the markets current account rule.

Regarding cost, the total operating expense for the group increased by 1.7% in the quarter as expected. The 1.7% is the net result of the one-off of TSB IT is above expense which is partially offset by a 10.9% reduction to UK staff expense and a 2% overall reduction to salary ex-TSB operating expense.

And once finished this chapter representation we will now move onto the commercial activity and digital transformation. Regarding our balance sheet on the asset side performing loans increased by 1.3% quarter on quarter for the group and remain stable for the some of ex-TSB after adjustments for the 984 million corresponding to the asset protection scheme payment that we have received from the (inaudible) in this quarter.

On the liability side, site accounts grew by 5% and of balance sheet funds grew by 3.1% mainly backed by strong growth in mutual funds and managed accounts and funding with the ECB and Bank of England as mentioned earlier in the presentation also grew by €10.5 billion and €3.5 billion respectively. Looking at the breakdown of the performing loans, it is important to note that volumes ex-TSB remained stable in the quarter due to the usual seasonality.

Ex-TSB volume growth was driven by mostly by the positive performance of corporate segment and the TSB side loan volume grew in excess of 5% which drove performing loan close to 1.3% for the total group. In addition we maintain a strict pricing levels, in fact we saw increases from book yields in corporates, SMEs and consumer loans while we see more pressure on mortgage front book pricing.

Nevertheless during this quarter the quarter we revised, we revised our (inaudible) our mortgage rates. We will see the full benefit of this increase during the next quarter.

In terms of market share we have continued to grow year-on-year, our share across products for both companies and divisions we have seen this effect in the last few quarters despite conservative pricing and we have been able to achieve these by our focus on providing value added services and our commitment to providing the best customer experience in the industry. And in this sense we continued to exceed the industry average in the (inaudible) rating in probably improving our score to 7.87 during the quarter and as you can see in the table on the right hand side we ranked number one again in net promoter score for large companies and SMEs and as I said before we also improve our ranking from number three to number one to number two sorry in retail banking and retain our second place ranking in personal banking.

Moving onto digital and commercial transformation we have continued to make progress on both fronts. In terms of innovation this quarter we launched seven, eight products which will allow our customers to create or align using their mobile phone or tablet and thereby improving the user experience and increasing bank efficiency.

In terms of our commercial transformation initiatives we have continued to expand our remote management model. As you know remote management is our initiative to provide services to customers during extended hours through remote relationship managers achieving increase productivity and customer satisfaction.

During this quarter we have increased customers under remote management by 19% reaching a total of 273,000 customers. In terms of our digital offering initiative we have launched new and improved versions of our Sabadell app and wallet including new features such as the incorporation of the axis with Samsung footprint, ID, we already had ID for Apple devices and simplifying the person to person payment app enrolment process which has led to 50% increase in downloads quarter on quarter.

We have also continued to simplify customers in direction with (inaudible) by continuously working to improve the customer journey and in this sense this quarter we greatly simplified our mortgage process and as an effort we have reduced application processing time from over a month to just 14 days. And the last slide of this part of the presentation we have also continued to improve our value proposition.

Last year as the part of the (inaudible) mobile initiative we distributed 3500 tablets all over network along with banking services to be provided by our relationship managers outside the branch and in this quarter they have helped us to speed the sales process and improve the client experience and we have launched protection [ph] value added insurance propositions. We have designed (inaudible) proposal for our customers that includes a wide range of insurance protections, life, house, health, etcetera which is special discounts, continued support from (inaudible) and annual review of the customers overall protection plan.

Well with this I finish this part of the presentation and that I hand over to Tomas to explain the second part of the presentation.

Thank you, Jaime. With now into solvency and asset quality let me start with our strong capital position has remained stable at 12%, 11.94 this quarter as the result of the fact that we materialize part of our fixed income portfolio capital gains at the end of last year which together with an increasing RWAs has offset the quarter organic capital generation.

This will be further reinforced by the sale of our retail bank subsidiary in the U.S. which you will remember happened this quarter and the price was more than $1 billion which represents multiple of 1.95 times tangible book value and multiple of 24 times price to earnings which will provide a net capital gain of €447 million.

We have announced today that we will be on the market for our inaugural issuance of additional Tier 1 capital to significantly fill-up the 81 [ph] market and enable a transition to us a more optimal capital structure. These also is something that as you know improves rating metrics and further supports RMA position and we will be on transaction road show across the Europe the first week of May.

Our NPLs continued to decline, the ratios turn now at 5.86 for total group and 7.45 for Sabadell ex-TSB also the coverage increase to 53.1% on the quarter. The total NPAs were reduced by 506 million out of which 439 were NPLs and 67 million were foreclosed assets in the second quarter in a row that they are stuck up for close assets decrease even with the strong reduction in NPLs that usually provide acquisitions or for closures.

You will remember that we represented at the end of last year this slide or in February in our strategic update presentation. The NPL composition has further improved on the quarter and the percentage of what we call (inaudible) so suppose that really are non-performing loans were reduced and you will remember also the composition of this stock which represents an 87% of this is collateralized with mortgages whilst the rest reminder is non-collateralized and you can see also that the composition of these is basically made up of loans that were originated before 2011 which shows that the asset quality of the recent origination in our business stands at very good levels.

On the lower part of the slide the composition, the breakdown of our foreclosed assets stock by asset class has remained basically unaltered during the quarter. Here we have the coverages of NPLs and foreclosed assets.

They improved over the quarter and their total NPAs stock coverage got to a 50.6% at the end of the quarter which if we exclude coverage for the floors [ph] will be 48.4% if we take into the account the write-downs that occurred in the journey of this assets from loans to foreclose assets the coverage would be as can be seen in the right hand side of the slide 57.8%. Again a good quarter in terms of sales of our foreclosed assets in millions, we sold 357 million out of which 310 were retail sales that maintained a strong trend over the now many quarters in a row and compares well with the activity that we saw last year, less institutional sales this quarter but is noticeable on the left hand side of the slide that in terms of number of properties sold to individuals so at retail sales the increase in the number has been very significant.

As per TSB here we have the highlights of the quarter that show a set of very successful achievements and facts that we will see a more detail as we go to the coming slides. TSB has kept a very successful performance in terms of business and commercial delivery basically focus on especially outstanding in terms of growth both in customers and assets.

Number of customers is now more than 5 million which represent a 2.9% growth year-over-year on and 0.7% growth quarter on quarter. We continuously and consistently maintain a share of 6% of old customers switching banks or opening new accounts in the UK that is 6000 customers average per week which is really outstanding and our customers deposits grew to 30 billion which represents an 11% growth year-on-year and 1% growth quarter on quarter.

Balance sheet growth remained strong, total lending is now at 31 billion which represents 12.6% year-on-year. If we look at exclusively the franchise annual fee [ph] customer lending growth it was at 15.2% because as you will remember our total lending includes a mortgage enhanced portfolio which is a run-off portfolio therefore the underlying growth is even higher and it will be 15.2% year-on-year and 5.6% quarter on quarter.

The net new lending, the new mortgage lending in the quarter was 2.2 billion which is a record number. Our average loan to value remains pretty low at 43% which is a reflect of the very good asset quality in our balance sheet.

Also in terms of digital capability and brand recognition and consideration we keep achieving very successful recognitions. Our NPS client to 24 points compared with 21 that we had last year this time last year, also we're recognized as the most recommended high street bank in the UK.

One of the top companies in the UK to work for and we have been also recognized as the best banking bank for 2017. In terms of the income state, NII grew 5.4% in the quarter basically supported by lower deposit costs and a strong mortgage lending growth.

If we look at only the numbers of the franchise, NII was up 6.3% in the quarter and 6.5% in the year for the same reason I said before in terms of mortgage enhancement portfolio which is in run-off and as anticipated and budgeted in the guidance our operating expenses grew more than 9% in the quarter driven basically by the contractual increase in our charging fees paid to Lloyds for the IT and operational support which meant a step up of 30 million in the quarter. This step up will be throughout the year significantly above the 100 million in 2017 which will be significantly more than offset after migration is completed due to the synergies that will be achieved in terms of IT and operational costs.

We will see also mortgage enhancement running off this year and of next year which will represent the disappearance of this source of revenues in 2018 more than offset by the very significant growth rates that we have in our core franchise and Whistletree portfolios. In terms of the balance sheet, as we've already seen, very strong and positive trends continue.

Our growth in mortgage lending was partially offset by again the mortgage enhancement portfolio. Also Whistletree portfolio which is in gradual run-off, but it's part of our core balance sheet and customer lending take this into account due to €7 billion, 5% quarter-on-quarter and 12% growth year-on-year.

Customers deposits due to safeguard $30 billion with an increase of 1% quarter-on-quarter and 11% at year-on-year. Probably we will see new lending in mortgages as its implant due to the workload in migration this year to soften a little bit to the last part of the year to again, start growing higher at the beginning of 2018.

Our capital position remains one of the strongest in the UK, standing at 18.681 – 18.1% at the end of the quarter. As for migration, the project is absolutely on-track with successful benchmarks having been achieved in this first quarter.

The mobile app full launch has been deployed and already, we've been able to provide a fast update. In terms of the build of the platform project for UK, the phase of the build has been completed.

The user acceptance test keep progressing at a good pace, 13,000 cases had been executed already. A very significant success has been the completion of the admittance to faster payment system according to what have been anticipated in the planning for this.

This is very complex project, a very complex transition and we were successful. It's a key step in the migration process.

Data transfer tests are progressing very successfully with enclosed collaboration and of course with a key control in this by LVG. We've also had the internal test at branches running total for UK that will be open for the network starting in May and approximately 650,000 hours of in-depth training for TSV for the TSV employers have been scheduled and are on-track in a very smooth transaction to ensure our various move transition.

The states migration strategy has been great and deployed and the implementation of new hardware and peripherals in the branches has been completed for a pilot of eight branches. All the key steps and benchmarks of the migration process are well on-track and progressing towards the target date.

With this, Cecilia, back to you.

Thank you very much, Mr. Varela, Mr.

Guardiola. Now we are going to open the floor to a round of questions.

And the first question goes to Mr. Guardiola.

Mr. Guardiola, some has been delivering a large acquisition every two years.

What is your current stand on M&A?

We are absolutely focusing what we are called in our presentation at the end of the year. The last year was the transition year.

It means that we are focusing - the transition year means that this is a year of deliveries and we are absolutely focusing first of all the TSV platform migration, we're also focusing the closing of the sale of our Southern United plan, our affiliate in retail bank in the U.S. We're absolutely focusing in continuing the process of reduction of our non-performing assets and continue to deliver the market a good experience in this sense and also to get more capabilities in terms of the transformation and that's what where we are focused, what we are thinking now with M&A.

Okay, thank you, that's very clear. The next couple of questions goes to Mr.

Varela. The first is around ramp [ph].

Were there any negative impact linked to write-downs instead of holdings for Sabadell?

Well, our coverage at the end of the quarter for our exposure to RFTs [ph], 30%.

Okay, thank you. Also regarding to coverage and provisions, do base coverage boost wasn't expected.

What drove you to do it?

Well, as we've usually done, basically that most of the capital gains that were achieved in the quarters, of driving income have been deployed to provisions for loading the amount of provision of respect for the year that which guidance remains the same.

Okay, thank you very much. And another question for you.

What do you intend to do with the game from the Sabadell united sale?

As we've announced, we are not going to be more precise, but we already announced when the veteran's sanction was finalized. This reinforces our capital and we will use this capital for our core strategy of reinforcing our core businesses and this together with the announcement of the launch has been on the market for 80-81, leaves us in a very comfortable capital position.

This is the aim of it. We are not planning to do anything with it, which is outside of our organic reach.

So if the question is addressed to thinking of if we are planning to use this for any non-organic business boost or whatever, this is not in our minds today as we are not thinking of it, the destination of this is to as I said, reinforce our capital position and if anything, it further reinforces our capacity to keep an increasing path in our policy of dividend distribution forcasted shareholders.

Thank you very much. And the next two questions are on the UK and TSV and the first one is for Mr.

Guardiola. One of your competitors has seen a slowdown in UK marketers.

Could you elaborate on your outlook for the UK market?

TSV has a market share in mortgages clearly below their natural market share in other items like for example [indiscernible]. In this sense, TSV is actually getting at which natural market share and that means that we have to beat strokes [ph] in this type of activity.

Probably toward the end of the year, we will see a slowdown growth in order to the operational accommodation of migration. That's what we expect.

But we remain very comfortable with the activity and the TSV mortgage stock has a lot of value at 42%. We are clearly as -- to let activity exposure below the sector.

We remind that we have the launch of the intermediary channel at the beginning of 2015 and it has allowed us to clearly reach, achieve a very strong activity and that's our view, that we have a large room to improve our market share. So we would see beyond this effect of the slow down because of the migration; would see that we will remain strong in this activity.

Okay, thank you. And now, turning to Mr.

Varela. Could you provide an update to your cost guidance, please, particularly for TSV?

Yes. Actually, we are in a quarter, to this question about guidance, the result of the quarter have confirmed that for us the guidance of the year, so we are performing to this guidance.

We are on-track to this and in terms of cost we said that this goes for everything in the P&L and even balance sheet. So in terms of cost we said that we would be bearing the step-up IT and operational costs due to the contract agreement with LVG which was there from the beginning and was anticipated.

This is more than £100 million in the year that as I explained in the percentage and will be more than offset by the synergies post migration, so already in 2008. For 2017 we have this more than £100 million and we are running according to this.

The underlying performance of DSV behind this is being good. So we are seeing decreases, we are seeing significant savings in cost as we go.

So the step up, it's only related to this in the quarter, has represented an increase of 9% quarter-on-quarter at $30 million of additional costs due to this; and we said also in our guidance at the beginning of the year that this increase in cost from DSV from this step up would be partially offset by savings in cost at ex-DSV level. We keep on-track to this target and therefore what we are seeing -- what we saw in DSV this quarter in the total increasing in cost for the group response only to this and it's well aligned with our guidance for the year.

Thank you very much. The audience has also asked about our NII outlook for 2017 that -- has that changed in anyway from the strategic update or could you remind us on what's your view on NII outlook.

Now the NII also is striking well, so the guidance remains at one increase, an increase of 1% in the year for at level of total group.

Thank you very much. And back to the sale of United Bank; what would your fully loaded CET1 ratio be pro forma of the sale.

Yes, so we announced that and it remains the same at the time of the completion or [indiscernible] the deal that dismants an increase of 95 basis points in our capital ratio, fully loaded. Therefore our pro forma resulting from the 11.94 that too 8% at the end of the quarter will be to 13% safety fully [ph].

Thank you very much. And also regarding guidance and now the question goes to Mr.

Varela. Was your €800 million profit guidance -- did this include the sale?

Obviously not. The guidance we probably -- we updated the guidance -- that we did in February without including the agreement to sell some in our bank.

So we expect to close in -- and that's actually during the second half of the year but obviously it was not included in the guidance that we gave to the market in February.

Thank you. Now the next few questions goes to Mr.

Varela. Tomás, can we expect decrease in the fixed income book in the coming quarters?

What's the level that you're targeting?

No. We've invested in the portfolio but of the proceeds of the TLTRO to achieving a highly matched profile of this portfolio and then ensuring the benefit of the spread between the TLTRO and the fixed income portfolio which also is relevant and important to keep a good portfolio of highly liquid assets for liquidity soundness and liquidity ratios compliance.

So what we did was matching these -- the portfolio with TLTRO, keeping out liquidity position, sound and therefore -- and as I said this is highly matched, so we are not expecting to see decreases in our portfolio going forward.

Okay, thank you very much. And regarding the IFRS9, could you give us an estimate on impact or after impact?

We haven't provided yet an estimation, we said that the way we look at IFRS9 for the moment we think that the provisioning framework going forward will be stable and with low volatility in terms of impacts of the P&L; this is important when you devise a good set of models, sounds that reflects well there; portfolio dynamics and the caliberation is good even though IFRS9 introduces changes that have more to do with the macro and the macro scenarios and their transitions towards taking into account lifelong expected losses and so on what we're seeing is that we shouldn't expect high volatility from the provisioning charges behavior in the future going forward and as for the first adoption, the one of January of 2018, we don't have a final number yet but we expect in terms of impact on capital it could be in the range of 50 to 60 basis points; this is approach guidance but it's more or less the rates in what we see now.

Thank you. And would you be all -- would you also be able to remind our audience when does the asset protection scheme ends?

And whether you expect to remain with any exposure upto this date?

It then seems 2021. In less than five years we've seen the portfolio nearly halfing.

So we are not -- and the asset protections give the portfolio asset protection scheme -- a part of this decrease has been business as usual, so known problematic assets, [indiscernible] and repaying and the rest has been dealt with through the protocol with the difference and we expect the same kind of dynamics. We could have some remaining portfolio which not necessarily would be a problematic portfolio and in any case if there would remain some problematic assets in the portfolio, the protocol includes provisions to run an appraisal and settle with the deposit guarantee fund, the fair value of this asset if this was the case.

Thank you. And regarding the 81 issuance plan, how much do you intend to raise and what should the expected cost be?

We don't have a clause amount. We said that we expect to feel a significant part of the bucket.

Usually we've seen transactions -- such big kind of transactions to range between €500 million to €700 million, this kind of volume but we haven't actually fixed a specific amount that we want to achieve or a target; should we consider a benchmark size transaction in this space and therefore it will depend on market -- in the market situation.

Thank you. And regarding capital, what was the main driver behind the small drop in CET1?

The CET1 decreased by 6 basis points. We saw 13 basis points increase as a contribution of net profit, 6 basis points decrease due to a materialization of evaluation adjustments.

7 basis points due to the increase of risk weighted assets and 6 basis points due to the facing calendar on some of the technicalities of capital calculation.

And finally on the portfolio gain; what was the actual portfolio contribution to NII in the first part of 2017? And what's the average actual portfolio yield?

The contribution has been a 13% and the average portfolio yield is around 2%.

Thank you very much. So it appears as there is no more questions, and this brings our webcast to an end.

We would like to thank our management team for presenting today and we will like to also remind you that we'd remain available in investor relation department to answer any questions. Have a good day.