Banco de Sabadell, S.A.

Cecilia Reyes - Head, IR Jaime Romojaro - CEO and Executive Director Tomás Muina - CFO and General Manager

Good morning and welcome to Sabadell's results webcast. I am Cecilia Romero, Head of Investor Relations, and today we will be presenting our third quarter results.

As usual, we have with us today our management, our CEO Mr. Jaime Guardiola and our CFO Mr.

Tomás Varela. And before we start, let me just remind you briefly of the format of the presentation.

We will be going through the presentation for 40 minutes, and then will have a Q&A session for around 20 minutes. You can submit your questions through the webcast platform.

And of course, after the call we will be available, my team and myself, to answer any questions that you may have. And with that let me just hand it over to our CEO Mr.

Jaime Guardiola. Good morning, Mr.

Guardiola.

Good morning. Good morning everybody and thank you for joining our webcast today.

And I will begin -- I'm sorry, sorry. Good morning, everybody and thank you for joining our webcast today.

We'll begin this presentation as we usually do with the highlights of our performance in the quarter. And we'll then discuss our profitability and commercial activity before handing over to Tomás who will discuss solvency, asset quality, and TSB results.

Then the both of us will answer any questions that you may have. So let me start with the highlights for the first 9 months.

And please note that I will refer, during the presentations, to comparisons in our like-for-like basis, and that is with constant FX and excluding the contribution of Sabadell United Bank, Mediterráneo Vida and the mortgage enhancement portfolio of TSB. Well, our core business continued to demonstrate remarkable strength during the first 9 months of the year.

Our core group revenue is up by 5.2% year-on-year on a like-for-like basis with increases in both NII and fees of 5% and 5.8% respectively. These trends of our revenue was supported by a growing performing loan book which increase by 5% during the year on a like-for-like basis and then driven monthly by positive net lending in the corporate and SMEs book and good momentum in new mortgage production.

Furthermore, as you already know during 2017, the group announced 2 transactions; the sale of Sabadell United Bank in Florida and the reinsurance of the insurance life risk portfolio of BanSabadell Vida. The group closed these transactions during the third quarter generating net capital gains of €625 million in the quarter.

This extraordinary capital gains have been used in the gross amount, €900 million, to increase our NPA coverage with the objective of achieving a normalized cost of risk level earlier than initially planned. Our NPA coverage has increased to 51.5% or 53% including floors after this additional profit sharing.

Also in this quarter, we have again, seen a significant reduction of our NPAs. Year-to-date, we have reduced our problematic assets by around €1.7 billion.

And in this quarter, real estate was sold at 2.6% premium on average. This confirms what we had already announced in the last quarter that there would be no further losses on real estate as sales.

And in this sense, we maintain our 60 basis points group cost of risk guidance for the next year. Also Sabadell has driven strong capital generation in the year with fully-loaded CET1 currently at 12.7%.

And there will be an impact of an additional 30 basis points by the year-end due to the sale of HI Partners and the sale of our 5% stake in Iberiabank, which was part of the total considerations received from the sale of Sabadell United Bank. Today, the board has also announced an interim cash dividend of €0.02 per share.

And finally, year-to-date, we continue to deliver strong results with a cumulative net profit of €654 million, which is well in line with our €800 million year-end target. We will now look at the key developments for this quarter in terms of profitability and efficiency.

The key driver of our profitability in the quarter has continued to be the strong performance of our core banking business. Net interest income continued to grow supported by positive volumes and the slight lower cost of customer funds.

Wholesale funding costs remain stable as there are no significant maturities in the second half of 2017. However, there's still room to lower wholesale funding costs further in the coming years.

Quarter-on-quarter fees and commissions fell marginally mainly due to the [indiscernible] seasonality, the third quarter seasonality. And finally, it's also important to note that the gross amount of net capital gains received from recent corporate transactions has been allocated to extraordinary provisions with the objective, as I said before, of normalizing the cost of risk earlier than initially planned.

Looking at the quarterly income statement, I would like to highlight that despite the sale of United Bank and the reinsurance transaction, Sabadell, ex-TSB net profit increased by 6.9%, quarter-on-quarter, which demonstrates the strength of our banking businesses. At the group level, profit fell in quarter as TSB contribution was lower due to a nonrecurring gain from the LTRO of the mortgage enhancement portfolio, which was recognized in second quarter, and also due to the depreciation of the British pound during the quarter.

Overall, excluding the impact of these transactions the group's core banking revenue grew 1.6% quarter-on-quarter on a like-for-like basis. As I mentioned before, the net capital gains received during the quarter were allocated in their gross amount to extraordinary provisions.

And this consequently had a negative impact on the group's pretax profit and a neutral impact on net results. In this slide, you can see that year-to-date, we are on track to meet our year-end profit guidance with net profit for the group standing at €654 million versus our target of €800 million for the full year, which implies a 4.2% growth year-on-year excluding the impact of FX.

It's also worth noting that the -- that at ex-TSB level net profit is up by 22.9% in the year despite the small scope of consolidation. We'll now go into more detail as we usually do, providing you with a breakdown of Sabadell and TSB results.

NII for the group grew by 2.4% quarter-on-quarter and 5% year-on-year on a like-for-like basis. Ex-TSB NII increased by 2.2% quarter-on-quarter and by 3.2% year-on-year, also on a like-for-like basis.

This performance was driven by the positive evolution of loans and the business mix and a further reduction in our cost of customer funding. TSB's contribution to NII also performed well, increasing by 3% in the quarter, driven again by strong core mortgage volumes.

Like-for-like basis net interest margin and customer spread remained stable in the quarter despite an increasingly challenging interest rate environment. This was possible thanks to a persistently positive evolution of the volume mix, a slightly lower cost of customer funds and the optimization of some of the liquidity that had been deposited with ECB at a cost.

As I explained earlier, our cost of funding declined in the quarter by 3 basis points. This was partially due to a further reduction in contractual rates on term deposits with front and back books decreasing by 2 basis points quarter-on-quarter.

And this reduction was a consequence of the repricing in the quarter of a significant volume of term deposits, approximately, €5.4 billion. At the same time, wholesale funding remains stable as there were not significant maturities of new insurance in the quarter.

And going forward, there is significant room to continue optimizing our cost of wholesale funding, that you can perceive it in the chart. It is an amount of €5.8 billion maturing in the period 2018-2020 with cuts of more than 2% on average, which could be refinanced at the lower cost.

It is also important to note that there are no significant maturities remaining during 2017. We'll now move onto the group fees and commissions, which were slightly down at 1.2% quarter-on-quarter in constant FX mainly due to third quarter seasonality.

The decrease was not seen across all 3 categories. Group service fees were actually up during the quarter, and it was thanks to the increase in service fees at TSB.

TSB income from fees increased quarter-on-quarter due to lower marketing fees paid to aggregators in this quarter. Year-on-year fees and commissions continue to show a remarkable performance growing by 6.2% for the group and 9.2% ex-TSB both excluding the impact of FX.

Total group operating expenses were down 1.8% in the quarter mainly due to lower cost at TSB which decreased by 5% due to lower marketing and staff related costs. Group costs were up year-on-year mainly due to the expected one-off increase in TSB IT cost as we announced at the beginning of the year.

Well, we will move on commercial activity, onto commercial activity and digital transformation. The balance sheet momentum remains positive with the performing loan book growing 0.3% quarter-on-quarter despite this quarter seasonality and 5% year-on-year on a like-for-like basis.

We also show a positive evolution of balance sheet funds mainly driven by strong growth in mutual funds which increased 2.6% quarter-on-quarter and 13.6% year-on-year. And we continue to go through that our market share in Spain and we maintain our position as leaders in NPS rankings in corporates and SMEs.

In addition, we remain focused on continuing to implement our commercial and digital transformation. And as a result our digital customers increased by 10% year-on-year resulting in a total of 4.3 million digital customers.

With regards to our balance sheet, on the asset side, performing loans increased by 0.3% quarter-on-quarter for the group and decreased slightly by 0.3% -- 0.4% for Sabadell, ex-TSB. On the liability side, sight accounts grew by 2.4% quarter-on-quarter and off-balance sheet funds grew by 2.6% mainly backed by strong growth in mutual funds and managed account.

Total performing loans ex-TSB decreased by 0.4% in the quarter mostly due to third quarter seasonality. On the positive side, growth was driven by good performance of corporate segments across all products.

Also the negative net mortgage lending gap grows even further this quarter, and we still expect net mortgage volume growth to recover by the beginning 2018. Finally, the other category was impacted by the settlement of €500 million in pensions that were advanced to customers in June excluding this effect that impacted the whole industry, performing volumes were stable in spite of seasonality.

Well, regarding pricing, our total front book remained relatively stable mainly due to positive changes in the lending mix. In terms of market share we have continued to increase our year-on-year share across products for both companies and individuals.

In the company segment I would like to highlight increase in the market share of point of sale turnover, which is already above 15%. And in the individual segment a significant increase has been achieved in household sight accounts.

Both data points reflects the bank's success in achieving higher customer engagement and transactionality. Regarding customer experience and service quality, once again, we hold the top position in the Accenture Net Promoter Score ranking for both large enterprises and SMEs.

And we are top 2 in personal banking and top 4 in retail banking. And we also continue to surplus the industry average in terms of quality of service, increasing the gap with this sector.

Moving onto commercial and digital transformation, you can see our key performance indicators on this slide. Sabadell has increased the number of digital customers by 10% year-to-date and its mobile customers by 15% year-to-date.

Also over 275,000 clients are already benefiting from our active management services, which enables them to communicate with their relationship manager without having the visit to their local branch. Well as you can see in this slide, we have continued to implement multiple digital and commercial transformation initiatives in our key areas of focus; distribution model, simplification, digital offering and our data driven processes.

And we'd like to point out that the high index of customer satisfaction that our hub-and-spoke branches and active management distribution model have achieved in this third quarter. And lastly, in June, we announced the launch of InnoCells, which is Banco Sabadell's digital business hub.

And we can now announce our first strategic investment carried out through InnoCapital, in Bud, which is a British financial services platform that aggregates products and data with a strong focus on engagement of retail customers. And then bring us to the end of this part of the presentation.

And Tomás will now discuss asset quality and solvency TSB results with you.

Thank you Jaime. We turn into solvency and asset quality.

Here are the highlights, the sustained reduction of NPLs has taken the ratio to 5.4% at the end of the quarter. The extraordinary capital gains of the recent corporate transactions have taken -- that we have used for increasing our coverage -- has taken the coverage to 51.5% excluding floors.

And this, as we announced, will accelerate the cost of risk reduction going forward. Still, again, the progress in NPL reduction keeps strong.

We are ahead of the plan of the targets that we announced. And the competition of our foreclosed assets keeps improving as we will show later on.

We've sold foreclosed assets this quarter at a premium of 2.6% average in the quarter even before allocating the new coverage to the calculation of this net result of the sales. So good news.

And overall, we expect that going forward, we won't hold new losses from sales of these stocks or portfolio. We keep having the best capital position in the sector, our CET1 fully-loaded currently stands at 12.7%.

And out of the sale this quarter of our hotel platform HI Partners and our shares, our stake in Iberiabank coming from the sale of SUB earlier in the quarter, we will generate into the fourth quarter of 2017, 30 additional basis points. So if we calculate sort of our pro forma here we will be standing at 13% fully-loaded ratio.

And the board has approved an interim dividend of $0.02 per share. I have already said that we have these 12.7% percent fully-loaded and the additional 30 basis points into fourth quarter and also the dividend that's been approved.

And here we can see the evolution of our CET1 phase-in that stands at the end of the quarter at 13.2%. And the increase in the quarter basically has been driven by the evolution of our RWAs where we've had savings from the sale of Sabadell United Bank and also due to the extraordinary provisions that we have built with the capital gains.

The ratio -- the NPL ratio, continues to decline, standing now at 5.4%, 6.9% ex-TSB. Here also we see the evolution of the coverage to 51.4% including floors 48.8% without floors, which represents a significant growth over the end of last quarter like-for-like.

And here we can appreciate the full evolution and sustained reduction of the ratio. In terms of the reduction in volumes of the NPA, we've achieved in the year, €1.7 billion, which is above our business plan for -- target.

The result is that the whole size of the portfolio of NPAs at the end of the third quarter is below €17 billion. The gross amount is below €17 billion, it stands at €16.9 billion.

Out of the reduction of this €1.7 billion, €509 million has been during third quarter, €355 billion is NPLs, €154 million is foreclosed assets which add to the NPLs. Here we can see the breakdown of our NPL stock and also the evolution of the foreclosed assets stock.

The composition of both keeps improving. We can see on the higher left hand side that, once again, the percentage of past due NPLs has reduced to 73% from 74% last quarter.

And on the higher right hand side we can see the composition in terms of collaterals, 65% is residential finished product, 27% is commercial real estate finished product only 8% is land. In the lower part of this slide we can see how evolves the composition of the foreclosed assets.

New entries keep having a very significant composition of fixed finished properties and 94%. In sales instead we see a significant percentage of land sales as we've seen -- seeing over the last quarters.

And this trend keeps going, which shows that there is appetite in the market for this asset class. And as a consequence of this the composition of the foreclosed assets -- stock keeps improving as we can see on the right hand side of the lower part of this slide where the percentage of land in the portfolio has reduced -- further to, down to 41% from 42% last quarter.

So in terms of land in the portfolios, in the foreclosed assets portfolio, is 41%, and in the nonperforming loans portfolio is just 8%. The sales of foreclosed assets in the quarter have been once again over €300 million to 2,771 properties.

So no institutional sales this quarter, so very granular, very diversified again. And as I said, we've achieved a 2.6% premium on average on these sales.

And as I said also this 2.6% is before allocating the additional coverage that we've done in the quarter. So it's even before -- so with the coverage that we had at the end of last quarter.

We've sold also the other platform to Blackstone Group for €630 million, where we expect a net capital gain of €55 million that will appear in the fourth quarter results. And this has a contribution to the CET1 fully-loaded ratio of 22 basis points as of December 2017.

Of this, here we have both the impact of the net capital gain but also the reduction in RWAs. As for the coverage evolution, we see here how we stand now at 51.5% excluding floors on the total NPA portfolio.

And we see that the evolution has been substantial in the third quarter increasing in 3% points the average coverage on the NPL portfolio from 45.8%. That was the like-for-like end of the second quarter to 48.8% and 6.4% points from 47.8% to 54.2% in foreclosed assets, which drives the total coverage to be 51.5% for NPAs in total which would be 52.8% including the floors coverage.

If anything, we see that the dilution in the quarter of the coverage with floors is slightly marginally higher than if we can see the coverage without floors. This is due to the fact that we are using the coverage for floors.

We are using it to settle with customers. And we still are expecting that the provision will be more than enough to cover for the full amount of claims that we will face.

In terms of TSB results, TSB performance being outstanding the positive balance sheet trends continues. The franchise customer lending has grown 2.2% in the quarter, quarter-on-quarter and 15.5% year-on-year.

NII also has increased 3.2% quarter-on-quarter and 10.5% year-on-year. Customer deposits also growing 4.5% both based -- year-on-year, based on savings and current accounts.

But it's worth mentioning especially the performance in current accounts where over the last 12 months we've achieved consistently to be above the 6%, in this case, 6.4% market share on all customers switching banks or opening new accounts in the U.K. and -- which is our -- as you know, 6% is our long-term target.

Customers in the U.K. continue to recommend TSB.

The NPS, it's -- for the 9 months of the year has been 24. And in terms of our aim and commitment to improve our IT and digital profile of TSB we are delivering I would say outstanding features.

As for instance, in terms of the mobile app, TSB customers will be the first in Europe to use iris scanning security features for the access to their accounts. And TSB is set to become the first major bank in the U.K.

to have designed and built a new state-of-the-art banking platform. In terms of the performance in the income statement, I've already touched on revenues growth.

If we look at operating expenses we see a decrease of 1.3% in the quarter driven by lower personnel and market expenses. But we still see an increase year-on-year of 18.2% basically driven by the GBP 90 million in the 9 first months due to fees paid to Lloyds Banking Group as a consequence of the servicing of our IT.

The TSB has delivered GBP 97.7 million in the first 9 months of the year, which represents a decrease of 14% compared to last year. But there are several impacts in both years' P&L.

So it's worth mentioning that the most asset measure of management profit like-for-like making the comparison like-for-like, renders are 17.9% increase in net income delivered by TSB in the first 9 months of this year compared with the same period of last year. Also I already talked about volumes evolution, where we see the particular strong growth in loans.

But if we take into account the franchise customer lending excluding Whistletree that as you know is running off portfolio, the growth actually reaches at 18.8%. In the year, in this 9 months of the year, TSB advanced GBP 5.8 billion in new mortgages that represent a 17.6% growth over the same period of last year.

Deposits stand at above GBP 30 billion, which on a percentage growth of 1.1% quarter-on-quarter and 4.5% year-on-year basically as I already said driven by significant performance in current accounts, the lending book remains in the same levels of good quality with asset quality, LTV is 44.3% and CET1 ratio is 18.9%. In terms of the migration and a new banking platform, our customers are already enjoying, in the U.K., our mobile app.

Over 550,000 clients have already downloaded the app. We keep updating versions with new features.

We can mention, for instance, pay a credit card functionality that's been added, also account list view added. That makes it really easier to view all -- customers all their accounts.

And also as I already mentioned TSB is the first bank offering iris scanning technology for security for customers accessing their information in terms of the Proteo4UK delivery. And the platform is built, is fully built.

The payment systems schemes have been built and tested. Tested, they are ready to go, they are ready to go to live.

ATMs have been migrating. And a good proportion of them already migrated and working on Proteo.

Employee training is almost complete. The new platform will be rolled out to TSB employees in November, which -- where they will be banking with their bank, with TSB, for their current accounts, debit cards, credit cards and saving accounts, all the apps that can support their transactionality.

And a new mortgage broker platform will be rolled out by the end of the year providing a better and faster service for our brokers and customers. The platform will be unveiled in a showcase at the end of, or in the fourth quarter of 2017.

And the final phase of the roll-out of the platform to customers is being re-planned and into the first quarter of 2018. With this, I end my part of the presentation.

I think we go now into Q&A. And Cecilia, thank you.

Yes, thank you very much, Tomás. Thank you very much, Mr.

Guardiola.

We are going to launch now the round of questions. And the first question goes to Mr.

Guardiola. It is in relation to the current volatility that is taking place in Catalonia and the question is asking precisely what's the impact that this volatility has had in your business as well as in your deposit, and whether we are launching any commercial initiatives to retain these clients and deposits i.e.

for some more increase in deposits costs?

Well, obviously, during the first week of October after the events that took place in Catalonia. We received some kind of questions and concerns and thoughts from our clients and also shareholders.

And there were some kind of deposits outflow as a consequence of these. Once we took the decision of move our legal entity to the country where we have our second corporate headquarters, these outflows came to an end.

This move, I think, that we reassure -- our clients that there is no matter with what the political developments are, we will continue to be regulated by the ECB and the deposits protected by the Spanish Grantifone. And in this sense, since there we have seen net inflows developing with absolutely -- we have seen the net inflows and the behavior of our customers have recovered the normality.

And in the sense regarding to the second part of the questions, as I said, we during the presentation during the last quarter we received large inflows of liquidity. And this excess of liquidity, as I said, was deposited in the ECB with the cost.

It means that we are -- we feel very, very comfortable in terms of liquidity. And I think that it's not necessary to make any aggressive policy in terms of costs for the deposits.

Obviously, what we have to do and we are doing is to manage our customers in order to make the full recovery of these funds. In this sense, I think, the quality of the branches and managers of Banco Sabadell and the good quality service level that we have and our very impressive market share in terms of transactionality helps us to make this -- all this recovery.

And we feel very comfortable. And obviously, I want to remark that our solvency position as we have explained in this presentation, it's -- the combination of capital and recovery makes us with the best position in terms of solvency of all the industry and in this sense we are not suffering any concern about this issue.

And the second question again, Mr. Guardiola, is in relation to the volatility that we are living in Catalonia.

And the question is, from the analyst, is specifically on whether we're expecting this situation to impact NPA reduction or as well the loan growth, and what's your take on that?

Well, we have seen the third quarter is a very slight deceleration of the Spanish economy. And this has been has been stronger in Catalonia.

and it's too early to evaluate what's happening with the economy in the last quarter of the year. Probably, the all the procedures is going -- is coming to an end, and probably the final solution mix will reduce the level of uncertainty that there is in the economy.

And I think that we can maintain our forecast of our guidance in terms of NPA reduction. As you know we have done a very good performance during the first quarter.

So this forecast that we launch and the guidance that we launch to the market is very close to be done. And also in terms of all the effects to the economy.

It's too early, and probably I'm sure that at the end of the year we can make a more precise statement about what's happening and which are the consequences. But my feeling is that we are very close to a final scenario, and this can reduce the certainty in the sense the economic items will be more comfortable in order to continue the activity without problems.

And in this sense we have suffered shock that has been very concentrated in the first -- in the first week of October. Second and third weeks has been better in terms of economic performance and activity that we can see in our sales and activity.

And in this sense I think that we can expect that the situation once the uncertainty is going to be reduced we will see a more comfortable situation. And in that case the final presentation of the year, we can make more precise statement of what we have in the effects of this shock -- we can evaluate if this is -- which has been a very one-off shock or there is more consequences.

And the next question goes to Mr. Varela.

Mr. Varela, the audience is asking if we could provide more data points regarding the liquidity position?

Our liquidity position at the end of the quarter was very robust and increased considerably at year-on-year. Our LCR stood at 141% increasing from increasing from ex-TSB, increasing from 119 1 year ago.

And for TSB, it was 237%. As of today our LCR has -- in the range of about 130% after the evolution of the month of October.

We have also at the end of the quarter higher liquid assets portfolio of €28 billion, which is up €5 billion in the year.

And the next question is in relation to our issuance plan. And precisely is asking what are our plans for the rest of the year in terms of issuances?

Well, we keep, as always, monitoring the market very thoroughly and very quickly, so -- very timely. So we are always ready to quickly tackle the market if we consider there is an opportunity or there are the conditions that we consider optimal for doing so.

We are committed to fill our AT1 and AT2 capital markets. And we will be ready to issue senior nonpreferred debt as soon as we have more clarity about our MREL requirements.

But we don't have specific plans, just our tactical approach to as I said follow the market, identify opportunities, and we are, as you know, very quick in reacting when the opportunities arise.

The next question, again to you Mr. Varela, is asking what are the one-off gains that we should expect in the P&L for the fourth quarter of this year.

And it's also asking if we could breakdown, please, the 30 basis point impact from the deals that we just announced and took place in Q4, and into CET1 and risk-weighted assets?

We are not expecting any particular -- or necessarily any particular capital gain in the fourth quarter. The 38 basis points that we are seeing coming from the 2 transactions I mentioned in the presentation.

Out or the 30 basis points, 22 come from HI Partners and 8 from the sale of the Iberiabank stake. The vast majority of those 30 basis points are due to the RWA reduction, but these 2 things have been dealt.

And the next question says, how do we intend to manage the likely growing cash balances given that there will be more wholesale issuances but the lack of growth, loan growth? Should we expect more bond buying?

We don't expect other -- any increase, as I just mentioned necessarily in wholesale funding. We expect rather a change in the mix, because we will replace the maturities for the coming years with MREL eligible issuance.

We don't have material -- maturities of the wholesale funding this year, and neither we are thinking the -- in increasing our fixed income portfolio. We see it more along the lines of stability in the fourth quarter.

Actually, we had in terms of how to place the growing cash balances. In reality, we had had huge inflow of liquidity this year, which we were placing to -- back to the ECB, and that was costing us.

So there are many things that we can handle not to go into needing to do anything with this in particular.

And also in light of your guidance of no additional real estate impairments needed, can you break down the different drivers behind those 50 to 60 basis point domestic cost of risk guidance for next year i.e. into new inflows run-off of NPLs and new regulation?

Do you see any additional reductions to that cost of risk figure?

Well, as with this credit in the past actually this guidance is the result of us taking into account the expected inflow of -- new NPL inflows. So it could vary depending on whether this inflows reduce.

But we -- there are no other -- I would say that the relevant driver of this is more than how the inflows behave, more than the portfolio itself. IFRS 9 will actually increase the coverage of the current portfolio.

And in terms of the impact of new regulation we don't see that there is any materiality for the moment in taking into account new regulation. Actually, what we will be doing in our IFRS 9 calculation is to include our view on how to build into the models for stage 3 the NPLs stock.

What we've seen that the ECB has issued for new inflows but not for the portfolio we are building the same philosophy into IFRS 9 for their stock. So I think the main driver will be going forward how the new NPL inflows behave.

And regulation I think it's not going to be material or significant at all.

Next question is quarter-after-quarter you've been transferring bonds from available for sale to held to maturity, are you preparing for tapering? How much do you intend to switch going forward?

We don't have any intention of switching a lot going forward. In the first part of the year the composition of the portfolio has been quite stable in this quarter with transfer of €2 billion.

It's part of also our approach of reducing sensitivity of the portfolio and therefore risk. We've done other things to reduce sensitivity during this quarter and the durations of the portfolio for the -- available for sale are just around 1.5 something like this and held to maturity provides also this hedging.

Therefore, for tapering I think we are well prepared, and therefore I don't see significant changes in their composition during the fourth quarter.

And on IFRS 9, do you have any impact update -- and also is there any risk from the new ECB NPA prudential guideline? And could you also discuss what's the potential impact that you think -- that you see for Basel IV?

As I just said in a previous answer, on IFRS 9, we are working with including in our models the consideration of their impact on a stage 3 under portfolio of the vintage of the different -- the mix of vintages of the portfolio. And therefore, using the philosophy that the ECB have released, and therefore -- the photo that they've released in relation to new inflows.

But we are using this philosophy for the portfolio. So it could be that the guidance that was given in the past of 50 to 60 basis points could be higher.

We are considering analyzing the models, and how would this -- the philosophy work here for this. But other than this, we don't see any other additional impact.

And in terms of BASEL IV the only thing that we expect is to see what's the final decision as for the out of floors, but nothing else than this.

And moving on to TSB, regarding the IT migration, could you give us a little bit of background why has it been postponed and what is the impact on the P&L?

Well, actually the rationale behind the re-planning of the final event has to do with design -- the 2-year, more or less, length of the project saying that we would drive the project to have the platform ready by the end of 2017, and this was the goal that we've achieved. We are about to close the delivery of this goal that included the possibility, or not the possibility.

But the final stage design on how to land it. What we've done is beginning to have the platform ready to go by the end of November, by the end of this year, that actually will be life for TSB's employees, and will have gradual deployment, a roll-out to other parts of it including by the end of the year, the availability and use of the mortgage and the intermediaries.

Their mortgage platform for new mortgages for intermediaries, which is a substantial part of our business. And what we've done is to re-plan and design the final landing of the full migration of the back book data.

This is the rationale, so -- and therefore the answer to the part of the question that has to do with why. Then the impact of this in terms of P&L is that the synergies of the first year will be delayed one quarter more or less, and then we may face additional costs due to the arrangements that we need to do in this first quarter that will fall into 2018 of around GBP 30 million.

And regarding mortgaged floors, could you please give some color on the litigation risk on mortgage floors versus the provisions that we have already accounted for?

As I mentioned in the presentation, actually we've been using the provision and the track record of the behavior that we see reconfirms to us our view that the provision will be more than enough to cover for the final amount of claims. So this is our position today.

And the next question is for Mr. Guardiola, can you give us more color in terms of the price competition in the U.K.

in terms of mortgages volumes?

Well, mortgage pricing in the U.K. remained stable and the whole activity of mortgage is very healthy you know with ROEs in the high teens.

And well, we and all the banks we are dealing to too were dealing for this rate prices. Also the transfer of rates could be progressive logically.

And as you know we have explained in our presentations we have a slowdown some segments in light of immigration -- because of immigration. But overall, the market is stronger than we anticipated.

And Tomás, could you give us an update on TSB NII sensitivity to an increase in interest rates?

Okay, after 12 months a parallel shift of 100 basis points in the upwards. So an increase in the yield curve would lead to a TSB NII increase by 15% if we consider that the deposit pass-through to our customers is around 50%.

And regarding NPA coverage of 51.5% or 52.8%, looks slightly below the pro forma numbers that you gave last quarter which were 52% and 54%. Could you give us a comment why is there a difference?

Well, you know from previous quarters that when you reach a coverage then the turnover of the portfolios, the usage of the provisions due to the turnovers of inflows and outflows usually represent dilution of the coverage that keeps being replaced by new provisions. What we have seen therefore has to do with this.

We've done a number of institutional transactions in the quarter that has grown into this, because these transactions usually have more of these kind of effect than the rest of the management of the portfolios. And as I already said, in terms of -- this is a bit more -- proportionally, a bit higher in terms of the part of the coverage that's represented by the floor, with the floors provision and the floors coverage.

And I already said that this is due to the fact that we keep using the provision for settling with customers. And this space keeps going well.

But still this pace of usage is confirming to us due to how it behaves -- the shape of the curves that we see is confirming to us that we expect more than -- so that the coverage that the -- that the provision is more than enough to cover the final impact of the claims.

Mr. Guardiola, this quarter we have seen exceptionally low inflows into the foreclosed assets stock.

Do you expect this trend to continue going forward?

Well, the third quarter of the year is traditionally the month with -- where we have -- one where the recovery activity is practically 0, in August. And in this sense, I think that this quarter should not be taken as a reference.

I think that we are continuing activity of recovery with all normality in the last quarter of the year.

And our last question also goes to you Mr. Guardiola.

Given the recent activity in the U.K., are you expecting further consolidation? And how do you think you are positioned on this context?

Well, as we are saying, permanently, we are absolutely focused now in the immigration and the organic growth. Both of them issues are running very well.

And we will have -- we have the intention to apply to the RBS remedies, both of the SME side, because it's an objective that we have two relating SMEs for the next strategical plan. But there's not M&A in the pipeline.

Thank you very much, and that was the last question, and this bring our webcast to an end. From the Investor Relations department we want to thank you very much for joining our webcast today.

Of course, we remain available to answer any other questions that you may have, and have a great day.