Banco de Sabadell, S.A.

This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear.

The machine-assisted output provided is partly edited and is designed as a guide.:

00:03 Good morning, and welcome to Banco de Sabadell’s Third quarter twenty twenty one results audio webcast. As in previous occasions, the presentation will be run by our CEO, Cesar Gonzalez-Bueno; and our CFO, Leopoldo Alvear.

00:16 They will present them main highlights and details of the commercial and financial performance of the bank in the quarter. The presentation will be followed by a Q and A session.

We expect the presentation and Q and A session to last for one hour altogether. Thank you again for your attendance.

And let me now hand it over to Cesar Gonzalez-Bueno.

00:36 Thank you, Gerardo and good morning, everyone. Beginning with slide four I would like to start by going through the four key events of the quarter, which I will explore in more detail during my presentation.

Firstly, we continue to see good commercial momentum this quarter with positive evolution of our transformation strategic initiatives. I will elaborate on this as we review new lending activity and the evolution of the credit book.

01:02 Secondly, we have recently reached an agreement with the unions to reduce our workforce in Spain. This agreement together with other additional cost reduction measures will allow us to benefit from annual expected cost savings of hundred and thirty million euros per year.

01:20 I would also like to point out that TSB continues its good performance recording a standalone net profit of forty seven million pounds in the quarter, which means a very relevant turnaround when compared with last year year's performance. 01:38 Finally, the group net profit reached one hundred forty nine million euros in the third quarter and a total of three seventy million in the first nine months.

Meanwhile, our fully loaded core equity Tier one stands above twelve percent. As I said, I will now cover each topic in more detail.

02:00 Moving on to the evolution of business volumes, a group level in slide five, this quarter's loan evolution was stable, mostly supported by a very dynamic mortgage book at TSB. The good performance at TSB was offset by third quarter seasonality in Spain, also impacted by the reversion of the advance in Q2 of extra social security paychecks to pensioners.

02:26 Following our strategy of optimizing capital allocation and deleveraging our other international businesses, the performing loans of these international businesses decreased in the quarter. The reclassification of banks other than dollars performing loans to nonrecurring assets held for sale as a result of the disposal of our stake in the bank had a relevant contribution to the decrease.

02:51 Finally, on the right hand side of the slide, you can see that customer funds increased in the quarter and year on year. I would like to point out the contribution of our good commercial momentum in off balance sheet funds as net inflows remained strong during the quarter.

03:11 The following first slides show our commercial performance in Spain. Starting with mortgages in slide six, I would like to highlight that this quarter we recorded robust figures of new mortgage lending well above the level of the same period in twenty twenty and twenty nineteen, which was in fact pre-COVID.

03:33 However, new lending decreased on a quarterly basis impacted by the usual third quarter seasonality in Spain. August is a very slow month in Spain.

As you can see, on the year to year, date chart mortgage production in twenty twenty one is well above pre-COVID levels. 03:57 New lending in consumer loans slightly decreased in the quarter, mainly due to seasonality.

When compared to twenty nineteen pre-Covid figures, new production of consumer loans remains still subdued on the contrary to mortgage lending. Nevertheless, as we reported in our strategic plan, we expect volumes to gradually increase whilst the economic recovery consolidates.

04:23 Finally, our positive commercial momentum can also be observed in our market shares for new production, which are ahead of our market shares for existing stock both in the case of mortgages and consumer loans. Moving on to slide number seven, we can observe that new production of protection insurance in Q3 was lower than last quarter due to a lower production of life insurance linked to the origination of mortgages as explained before.

04:55 Nonetheless, as you can see on the year to date bar chart, the new production of insurance is well above pre-COVID levels driven by our good performance this year in mortgage origination and by healthcare insurance following our partnership with Sanitas. 05:12 This good performance has led to a significant increase in our market share in life insurance premiums, which has risen by seventy eight basis points year to date, now standing at nine point five percent.

Regarding mutual funds, the stock of assets under management maintains its upward trend and once again, shows positive growth in the quarter. This is mainly due to strong net inflows, but also supported by the financial market performance.

05:43 On the year to date chart on the lower right hand side, you can observe that Sabadell has outperformed the market by two percentage points in terms of mutual fund assets under management growth. Outperforming the market has driven our market share in mutual funds up by fourteen basis points year to date.

06:02 Moving on to slide eight, we can observe the evolution of our payment services business. Starting with cards, the turnover of our customer cards in the quarter reached almost five billion euros, consolidating a positive growth trend.

The figure on a year to date basis shows a positive evolution as well. 06:20 However, our market share has continued to decrease slightly affected by the profile of our customers.

Before COVID, our customers were card intensive users than the average and therefore, we have not benefited as much as others from the cash to card migration that has taken place during the pandemic. 06:42 Regarding retailer point of sale payments at the bottom of the slide, the turnover evolution is positive as well, both on a quarterly and on a year to date basis.

Despite the good performance of the turnover processed for our point of sale devices, the decrease in point of center over market share in twenty twenty one responded to our strategy of managing for profitability. 07:06 In some cases, this strategy has resulted in a reduction of exposure to single name clients with higher turnover volumes, but very low margins.

Furthermore, market share was also impacted by our biased exposure to hospitality, restaurants, and other tourist related factors more affected by the decrease of activity. 07:30 Let's now turn to Business Banking in Slide nine.

As you can observe in the slide, new lending in Q3 declined quarterly and year on year. On a year to date basis, new lending decreased in the first nine months of twenty twenty one when compared to twenty twenty, but as you can observe, non-ICO lending is increasing in the year.

07:52 It is worth noting that despite lower new lending volumes our market share in business Banking Lending has a strong momentum and increased twenty eight basis points in the year. A lower business banking credit demand was somehow expected after the large increase in twenty twenty, which was driven by the development and deployment of ECO loans.

08:17 Looking ahead, we are optimistic about the future. In this slide, we have included some information regarding next generation EU funds.

So far, a limited amount has been deployed in twenty twenty one around twelve billion euros out of the first seventy billion euros tranche, which has been assigned to state. 08:37 However, an additional thirty one billion will be deployed in twenty twenty two.

Although it is soon to know, we are confident these large figures will be a key element to drive private investment and bank financing growth once the excess of liquidity derived from the ICO loans is absorbed. 08:57 Let's move now to slide ten.

TSB has displayed very good commercial momentum in mortgages consolidating the trend observed in recent quarters. New lending mortgage origination is still robust, although, it has declined slightly in Q3.

09:16 Nonetheless, new lending volumes at September are higher than the whole new production in twenty twenty and the applications pipeline is solid. TSP keeps gaining mortgage lending market share, and as you can see on the slide, the market share of new lending stands at two point nine percent.

This is above TSP’s stock market share, which keeps driving the stock market share up. 09:42 On the bottom of the slide, you can see that TSPs NII grew by five point six percent in the quarter.

Looking forward, we expect interest rate hikes and higher yield curves to offset pressure on the front book yield. Therefore, allowing volume growth to drive NII in the next quarters and furthermore through twenty twenty two.

10:10 Now, let's talk about transformation in slide eleven, which is on track with our expectations. Retail banking is undergoing a radical transformation that will bring significant cost reductions, but furthermore will transform our commercial model.

At the same time in business banking, where we have a strong franchise we are focused on reducing cost, but also in the self-employed segment and on boosting growth. 10:37 I will not go through the details of the main transformation initiatives, but as you can see, our transformation has good pace as defined in the strategic plan.

There are multiple initiatives being deployed, some of them already completed and some of them in the pipeline. 10:56 It is also worth noting that all these initiatives are being deployed without interfering with our commercial activity, which shows good momentum as discussed in previous slides.

11:09 Moving to slide twelve, you can see the two phases of the efficiency plan in Spain, which will have been executed in one year between Q1 twenty one and Q1 twenty two. The first phase was successfully executed while maintaining strong commercial momentum and we are already benefiting from annual savings in our cost base of one hundred and forty million euros per year.

11:33 A second phase has been launched this third quarter with similar characteristics in terms of timings and amounts. An agreement with the unions was reached last Friday, October fifteenth, by the way, unanimously with all the trade unions and will be fully executed by the first quarter of twenty twenty two.

Together, with other cost savings initiatives, a total of one hundred and thirty million euros annual is expected. 12:02 As you can see, the approach for Phase two is very similar to that of Phase one.

And that one, Phase one, has already been implemented successfully. The combination of both phases will have reduced our total personnel expense by more than twenty percent and we lead to the closure of around twenty five percent of the branch network in the total of our network.

12:27 Now, in slide number thirteen, you can see the financial details of the second phase of our efficiency plan, which allow this cost reduction of more than one hundred and thirty million. Please note that these plans will not accept and will not impact or affect our capital ratios, as the restructuring costs involved are fully funded with the sale of part of our health to collect portfolio.

12:55 The total restructuring charges will be three thirty one million matched by these held to collect portfolio capital gains. As mentioned before, these plans should allow us to generate annual savings of one hundred and thirty million, which with eighty five percent of the amount already saved in twenty twenty two and one hundred in twenty twenty three onwards.

13:22 On Slide fourteen, looking at TSB’s financials in greater detail, our British franchise once again, gave a remarkable performance across all P and L lines as you can see on this slide. Firstly, if we look at the evolution of core results, they were up by fifty three percent in the quarter.

The year to date core results show a very significant swing from a loss of twenty two million pounds in the first nine months of twenty twenty to a profit of hundred and thirty four million pounds in twenty twenty one. 13:56 Secondly, the improved microeconomic scenario in the UK related to a better unemployment outlook has allowed TSB to record relevant write-backs in the first three quarters of the year.

Therefore, total provisions and impairments have improved significantly in twenty twenty one. 14:14 And thirdly, the year to date net profits benefit also from a twenty million pound tax reduction in the second quarter as we explained in our Q2 results presentation.

Both the write-backs and the tax reduction are one offs in the first nine months of the year, but I would like to emphasize the string of TSBs core results. 14:36 All-in-all, the year to date net profit of TSB stands at ninety seven million pounds on a standalone basis, again a very relevant swing from last year.

14:46 Moving to slide fifteen I would like to mention that Sabadell has recently joined the United Nations Net Zero Banking Alliance. Sustainability is at the core of our future developments.

We have a strong focus on it and we are having a realistic and effective approach to define our roadmap. 15:09 We are currently working intensely to define our short and medium term targets, both qualitative and quantitative.

Our specific commitment in this field will be included in Sabadell’s sustainability report, which will be presented in our annual general meeting in twenty twenty two. 15:31 Finally, moving on to slide sixteen.

I would like to summarize a good financial performance that Leo will explain in more detail in a few minutes. Firstly, core banking revenue once again continued to rise this quarter supported by strong NII growth, mainly explained by the remuneration charts on corporate deposits in Spain coupled with strong growth in TSB.

15:56 Recurring costs, which exclude the restructuring charges we incurred in the quarter decreased both in the quarter and on a yearly basis. As a result, our good performance in both core banking revenues and costs, the evolution of our core results continue to be very positive.

16:15 Provisions increased slightly in the quarter as we recorded some provisions related to the branch closures due to the new efficiency planning in Spain. All-in-all, the quarterly profit in the group stands at one hundred and forty nine million euros.

16:31 Finally, we have a comfortable solvency position with a fully loaded equity Tier one ratio of twelve point one and our return on tangible equity stands at three point ninety five close to four percent. 16:45 And with this, I will hand over to Leo, who will discuss our financial results.

Thank you.

16:52 Okay. Thank you, Cesar and good morning, everyone.

Moving on to the financial results, I would like to start by going through our quarterly and year to date P and L. Although we're going to look at this in more detail in next slides, I would like to highlight the fact that the evolution across all P and L lines has again been very solid this quarter.

17:11 We see NII and fees growing both this quarter and for the first nine months when compared to the same periods last year as guided. One of the key elements of the quarter, as Cesar has already pointed out, it's the agreement reached with the Labor Unions related to the second phase of the efficiency plan in Spain.

17:29 In this regard, the rollout of the efficiency plan entails three thirty one million euros in the quarter. Of which three zero one million were recorded in the cost line, while twenty six million as provisions and the remaining four million as gains on other assets.

The last two elements are related to branch closures. And in any case, we will see this in more detail in the following slides.

17:55 This efficiency plan has been as previously disclosed fully funded with ALCO bond sales from the held to collect portfolio as it can be seen in the trading income line. Therefore, both items had an extraordinary impact on the P and L in the quarter and were neutral on the bottom line.

Additionally, as those capital gains came from the held to collect portfolio, they were not previously recognized in our capital ratios and therefore allowed the efficiency plan to be capital neutral. 18:24 Excluding these restructuring charges, our core results, this is the most recurring part of our business increased by five percent and twelve point six percent in the quarter and in the year, respectively.

This has been underpinned by the solid NII and fee evolution as well as by the cost savings already achieved due to the first phase of the efficiency plan carried out in Q1. All in all, net profit in the quarter stood at one hundred and forty nine million euros were TSB played a significant role with its contribution of forty three million euros.

19:02 Let’s move now to the review of the different driver. Starting with NII in Slide nineteen.

It's worth mentioning that NII increased by two point nine percent on a quarterly basis. This healthy growth has been driven by the different levers, which are included on the right hand side of the slide.

19:21 Moving from left to right, we have a positive impact that has been an additional calendar day in the quarter. Also, the remuneration on corporate deposits have been a driver as we are currently charging a rate on current accounts over a base of twelve billion of corporate deposits.

19:38 The loan book has also hired a positive contribution for the NII of five million euros, which is explained by a negative seven million euros related to yields as a result of the downward in EURIBOR repricing, and a change in the mix of the loan origination storage mortgages, which was more than offset by four million euros related to FX and by eight million euros related to higher loan volumes, particularly at TSB. 20:07 Finally, it's worth mentioning the customer spread remained broadly stable in the quarter.

In the following slide, we show the track record of NII over the past three quarters. As you can see and as anticipated, NII has witnessed increasing growth quarter on quarter, building from the bottom levels seen in the first quarter of the year.

20:26 If we look at the expected evolution of Q4 twenty twenty one versus Q4 twenty, NII would be supported by several tailwinds such as the higher TLTRO III size, higher back book volumes, the remuneration in corporate deposits along with significantly improved loan volumes at TSB, as well as lower wholesale funding costs. 20:50 As per the headwinds, we have a lower average loan yield than last year and a lower ALCO contribution as a result of the bond sales to fund the efficiency plans carried out.

Adding all these elements together, the yearly performance makes us confident that we will achieve a positive growth rate this year. This is very much in line with our Investor Days guidance.

21:14 Turning now on to fees in slide twenty one. Group fees declined in the quarter by two percent driven by the usual summertime seasonality, which affected both service and credit and contingent risk fees.

The lower service fee income evolution is explained by the absence of fees from the depository business, which you might remember we sold in second Q twenty twenty one, as well as by the progressive increase of the share of wallet of our clients, which results in lower current countries fees, while higher is derived from insurance AUMs or payment activities. 21:47 On the other hand, asset management fees recorded a positive quarterly performance, on the back of a strong net inflows in mutual funds.

In any case as mentioned, the quarterly evolution is affected by seasonality and as we can see, when comparing third quarter twenty one with third quarter twenty twenty, fees are up ten point three percent, while on a year to date basis, they have grown north of seven percent. In other words, well above our guidance of mid-single digit growth for the year.

22:18 Moving on to costs. The key element of the quarter is the second phase of efficiency plan in Spain, but let's focus first, if you will, on the current evolution of group costs.

Therefore, leaving Q3’s extraordinary cost aside and also for comparison purposes, excluding the seventy one million euros restructuring costs booked at TSB in Q3 last year, we can see that the underlying cost base is improving since it’s decreasing by one percent and three percent on a quarterly and annual basis respectively. 22:49 This is explained that the fact that the savings from the execution of the first phase of efficiency plan in Spain, as well as a restructuring at TSB are yielding results.

These results can also be seen in the evolution of the cost as a percentage of the business volume, where we continue to reduce the weight of costs on our activity. 23:08 Let's now take a look at extraordinary costs charged in the quarter, as well as expected savings in the following slide, in slide twenty three.

As Cesar mentioned earlier, in order to fund the efficiency, plan this quarter, we have booked a total of three thirty one million euros of extraordinary charges in the P and L. 23:27 These amounts may be divided between three hundred and one million euros, which have been recorded in the cost lines and a further thirty million euros, of which twenty six are recognized in the provisions line and four, as gains on other assets.

On the other hand, we expect to achieve one hundred and thirty million euros of cost savings. 23:48 Around one hundred and twenty five million will come in the form of lower personnel and general costs, as well as lesser amortization charges while further five million will be seen through the provision lines.

In this regard, it's worth highlighting that already eighty five percent of this one hundred and thirty million euro savings will come already in twenty twenty two. 24:14 In slide twenty four, we take a look at the core results, which include NII, plus fees, minus recurring costs.

As you know, and I've said before, this in my opinion one of the most important ratios in banks because it shows the recurrent part of the business. As you can see this quarter, group core results have increased by five percent, while have increased by more than twenty one percent on a year-on-year basis.

24:40 The different elements that led to wider jaws in the quarter, are included in the right hand side of his slide, where you can see that both NII and cost savings contributed positively to the widening of the euros, more than offset the negative impact of the third quarter seasonality on fees. 24:58 and moving on to costs of risk.

The group's year to date cost of risk stood at fifty one basis points in September, forty seven basis points for the third quarter alone. The group total cost of risk which includes all the provisions in the quarter, reached seventy two basis points, sixty eight for Q3.

25:20 Now, focusing on Q3, Group provisions amounted to hundred ninety seven million euros with a consequent positive impact and coverage later ratios as we will see later on. On the other hand, TSB released again provisions in the quarter, given the very much improved microeconomic outlook in the UK.

The release is very similar to the one accounted in second quarter this year. 25:44 Now, taking a view at the breakdown of total provisions at the top right hand side, we booked a hundred and ninety seven million of loan loss provisions, forty one million euros for changes on foreclosed assets, which include the before mentioned twenty six million euros related to branch closures related to the efficiency plan, whereas costs related to management of NPAs were booked at forty two million euros, and ten million euros were recognized for other provisions.

26:11 These figures confirm our guidance to end the year with a credit cost of risk and total cost of risk at H1 levels. As always in the following section of the presentation, we will review the asset quality dynamics, the liquidity, and the solvency.

26:27 Starting with the loan portfolio, benefited from payment holidays in Spain. As of today, I thought of two point billion euros, this is slightly ahead of ninety percent of the total moratory granted have already expired.

Of those, thirteen percent are in stage three, which accounts for less than one percent of total mortgage and consumer book. 26:50 It is important to note that this percentage has remained stable Q on Q.

Moreover, eighty percent of these stage 3 loans are considered and likely to pay, meaning that they're not more than ninety days past due. 27:03 In terms of ECO, state guaranteed loans to date we have granted thirteen point five billion euros, out of which around nine billion euros have been drawn with the state guarantee, covering over seventy five percent on average.

27:17 Now that the deadline line for the request of potential extensions has expired, around forty percent of balance is strong have requested it, or in other words, sixty percent of the book will already pay principal in twenty twenty one. 27:32 In any case, it's important to note that the vast majority of the existing eco loans will mature beyond twenty twenty three.

27:39 Moving on to slide twenty eight. We can see the evolution of our problematic assets.

In this regard, NPLs remained flat in the quarter, and as a result, the NPL ratio remained stable at three point fifty nine percent, while the total coverage on NPLs increased two percentage points up to fifty eight percent. Regarding the full rate dynamics, the new inflows of NPLs are lower than the previous quarter, and in-line with expectations.

28:09 In addition, while our exposures across the stages have remained stable Q on Q, the stage 3 coverage has been reinforced and has increased by more than two percentage points, raising from thirty nine point six percent to forty one point nine percent. Finally, it is worth remembering that half of our current NPLs are classified as unlikely to pay.

28:31 In terms of foreclosed assets and total NPAs in Slide twenty nine you can see that the stock of foreclosed assets also remained stable in the quarter and stood below one point four billion euros. Coverage also remained steady at thirty seven percent.

28:46 Regarding total NPAs, the stock amounts to seven point four billion euros, which is very much in line with that of the last quarter, while, the coverage has improved by one percentage point, reaching fifty four percent. Finally, the gross NPA ratio stands at four point four percent, while in net terms it goes down to two percent due to the higher coverage.

Both ratios gross and net have improved on a year on year basis and have remained broadly stable Q on Q. 29:16 Moving now on to liquidity in the next slide.

The group once again ended the quarter with a very strong liquidity position reflected in an LCR of two twenty three percent and fifty four billion euros worth of high quality liquid assets. 29:30 Loan-to-depo ended the quarter at ninety seven percent.

And in terms of European Central Bank funding, we currently have thirty two billion euros of outstanding in TLTRO III, while in terms of TFSME, we currently have three billion pounds outstanding. 29:49 Moving on to Capital.

Our capital position, our CET1 fully loaded ratio, it stands at twelve point twelve percent have increased by twelve basis points in the quarter. While as in previous quarters, thirty percent dividend payout has been accrued and is deducted from the aforementioned ratio.

30:08 From a regulatory perspective, the CET1 ratios stood at twelve point four percent on a phase-in basis. Consequently, our MDA buffer now stands at three eighty eight basis points, above our requirement of eight point fifty two percent having increased by nine basis points in the quarter.

This buffer remains well above our target of three fifty basis points. 30:32 Now, to conclude my part of the presentation today on the following slide, we see our MREL requirements, with which we are very compliant based on both rich-weighted assets and leverage ratio exposure and also both on a full requirement, as well as in a minimum subordinated requirement perspective.

30:50 Therefore, we do not expect to issue additional net amounts and we will just roll out over the existing debt. 30:58 And with this, I hand over to Cesar, who will conclude our presentation today.

31:02 Thank you, Leo. I have to say that I always enjoy hearing you talking about numbers.

You make it quite clear, although it's a lot of them, but that was great. So, to end the results presentation, I would like to highlight that we are on track to meet all of our strategic plan year end targets.

31:25 Our net interest income already shows positive growth of zero point seven percent as Leo covered in detail year on year, fully in line with our year on year end target of low single digit growth. 31:39 In fees and commissions, we are growing at seven percent year on year in line with our mid-single digit growth target for the year.

Credit cost of risk, stands at fifty one basis points, which is halfway between the eighty six basis points we had in twenty twenty and the thirty two basis points we had in twenty nineteen. 31:57 Finally, our fully loaded core equity Tier one improved slightly in the quarter and stands at twelve point one percent setting our MDA buffer at three eighty eight basis points.

And with that, I hand over to Gerardo for the Q and A. Thank you.

32:16 Thank you very much, Cesar. We will now begin the Q and A session.

As we have a limited amount of time we would like to ask you to make an effort to keep your questions to a maximum amount of two. Operator, could you please open the line for the first question.

32:41 Yes. Hello.

Good morning thank you for taking my questions. I will start focusing on TSB.

Two questions here, first NII, you can please comment on mortgage growth after the end of the stamp duty holidays you mentioned in the presentation that you have a pipeline number of applications attractive forms so you can give more outlook guidance on volume growth. And also, on pricing, I understand prices have fallen recently.

So, you can comment on the implications in terms of front book and back book dynamics what we are today and the impact on margins? And also separately, you can update on the sensitivity to pricing rates in the UK.

You can also update on the size and duration of the interest rate swaps. 33:36 And the second question is more less strategically, if you can update your views on TSB after the recent approach by Co-op Bank.

Thank you.

33:47 Leo, I'll give it a first shot if you agree and then you can please complete my answers. On NII, the pipeline remains strong.

I think we have seen very strong growth, but we forecast that the growth will continue. It's difficult to see if it's going to be at the same rate, phenomenal rate that we have seen in the past, but certainly, we still expect significant volume growth.

34:17 What we would like to share on the combination of pricing pressures and rates increase is that our estimates are that they will for twenty twenty two more or less compensate each other. It's difficult to know exactly, but our best estimate is that the NII will be driven from now on, on TSB at least in the near future, mainly by volume, and that's our analysis at this point in time.

34:52 From a strategic perspective, there is no change. There is no change in what we have been saying up to now.

And I think we have been quite consistent for the year. We are not considering any corporate transaction in the near future.

Let me try to give you the exact quote from the board. Let me see if I can find it because I think it might be a recurring question, and I think it's much better if we clarify it at once.

35:29 So, yes, indeed, we can confirm that we have received a letter from the Co-Operative Bank outlining a proposal that was both unsolicited and preliminary. The board of Banco de Sabadell has officially responded to Co-op in a letter saying that this is not a transaction that we wish to explore at this moment as we have previously expressed publicly.

And that's all we have to say about the strategy. I think it's very clear, and we hope that that's sufficient at this point.

Thank you. Thank you Francisco.

Leo, now if you want to add anything, Leo?

36:18 Yeah, if I may just for the not two questions. I will elaborate a little bit.

So, first one on the pipeline of mortgages what we've seen so far in October is that it's still very strong. So, we haven't seen a big impact or an input coming out of the stamp duty end.

So, it seems like the market remains fairly strong. As for the prices, I think Cesar mentioned, that, what we see is that any compression in prices which we have seen in the last few quarters or months will be most likely offset by the increase in rates.

TSB’s quite positively sensitive to rates. So, around ten basis points would increase NII by around thirty million euros in twenty four months that it takes a couple of years to fully fund, sorry to fully get the reappraisal.

37:11 And this is among other reasons because of the structural hedge where we have as you know, a caught a pillar four or five years, and that structure right now is around, has a yield of around zero point six percent while the current five year shop rate is well about that, now is at one point two percent now. 37:28 So, we are fairly confident that certainly positive sensitivity to rates will offset any compression in prices and on top of that is volume.

So, we believe that certainly NII should go up next year, given the current context.

37:45 Yes. Just to add a manual point in terms of because it's quite obvious.

We are very proud of the performance of TSB. We are very proud of their management.

We are very proud of the people who work there of how clients are reacting, and we are completely supportive for management and board over there.

38:10 Thank you.

38:11 Thanks, a lot. Could operator please move to the next question.

38:24 Hi. Good morning.

Thank you for taking my questions. I have two questions on the Spanish NII.

I mean, one related to the improvement in the cost of deposits and how you have been passing through the negative rates to co-operates? So, how much do you think that that could come in coming quarters?

What is the strategy there? And second question on NPAs, there has been a small increase in the quarter in the Spanish NPAs.

I mean, it doesn't seem to be like , but have you seen an indication of how credit qualities why is it deteriorating and whether you see sort of like anything that goes more negative than your expectations? Thank you.

39:14 Yeah. On deposits, negative remuneration, we are charging fees to corporates, SMEs, and self-employed related to excess liquidity in their current accounts above a certain level.

We have increased the volumes to around twelve billion. And we think that now we are reaching a level of stability and that we will move more or less around the figures that we have seen this quarter.

So, the significant increases we don't expect them anymore. We think that it's going to be more or less in line with what we have seen this quarter.

39:54 On the NPAs, do you want to take that one?

39:55 Yeah, on the NPAs, if I may, I think no the quarter has been reasonably good, as you can see the, I mean, given the context now, the net inflows have been even lower than in Q2. So, I think the underlying, the current cost of risk and their current asset quality is performing as it was in Q2 and as we have seen for the first nine months.

So, as matter of fact well better than what we budgeted. So, we're not seeing any change in trends.

I think as we've explained before, we believe that the peak on NPLs should be seen in twenty twenty two. 40:32 In any case, I think as I tried to explain before, already ninety percent of the moratory on retail clients have expired.

And have expired some while ago, because eighty percent of that was already expired in Q2. In other words, most of that book has already gone more than three months after the and therefore, and we haven't seen an increase in NPLs.

Stage three ratio in that book remains at thirteen percent. So, very much in line with Q2 numbers.

41:02 So, a lot of a stability there. And then so on that book, I think we've seen the worst in my opinion.

On the other book, which we are all expecting to see how it finally develops, which is the ECO guaranteed loans. Well, the fact that already about forty percent of the book is paying principal, and stage three ratios are very, very low of around three percent.

Well, it gives me some confidence that the outcome may be reasonable on this book. But I think for this book, we'll have to wait until the next year.

41:42 Nevertheless, in twenty twenty one already, sixty percent of the book will start to pay principal. So, I think by year-end, we should have a clearer of view, but again, we will still have to wait until probably second Q twenty two to have all the matters on the ground.

In any case, I think the message I’d like to convey is that the evolution of NPAs is fairly similar to the one that we were guiding in Q2. Nothing has changed and everything remains in the same trend.

42:18 Thanks a lot, Ignacio. Let's move on to the next question, please.

42:30 Hi, good morning. Thank you for taking my questions and the presentation.

I have just one on costs, after the Phase two of the adjustment program, I was wondering if you think there is more room to go with the headcount adjustments in Spain? And if, after the last agreement with the labor unions, you have any time restrictions before you can move with any additional restructuring?

Thank you.

42:54 Thank you very much for your question, Maksym. No, we don't have envisioned any further headcount reduction in the foreseeable future.

We have, as you have seen a major reduction of our headcount. By the way, around seventy five percent is administrative plus head office kind of staff, which means that our commercial capacity remains in place and will in principle allow us to continue our growth.

And yes, that’s basically to – we have undertaken a huge cost reduction in a period of twelve months and we'll stop at this time. Nevertheless, there are other sources of cost reduction that we will continue tapping of course.

43:52 Thank you. Let’s give access to the next caller, please.

44:02 Good morning. Here is Sophie for JPMorgan.

I have a question on your net interest income from the sale of the ALCO bond, what current interest income headwind should we expect in the fourth quarter and in twenty twenty two? And then the second question is also on net interest income, what kind of bond TLTRO headwind should we expect on net interest income in twenty twenty two and twenty twenty three assuming deals ?

Thank you.

44:39 Sure. So, basically, in order to fund the restructuring, we have sold three point eight billion euros of bonds, which were yielding between the yield of the bonds and the cost of liquidity or the negative cost of liquidity we wish.

Around eighteen million euros, eight zero million euros, all right. So, on a quarterly basis, we're talking about roughly twenty million euros contribution.

So, that impact we will see in Q4. 45:05 Nevertheless as I tried to explain before, I think we have enough tailwinds coming through the books in order to more than offset that.

So, basically, as I said before, we have more volumes, we have hired TLTRO compared to last year. We're going to have lower wholesale funding costs.

We've seen TSB that's going in the right direction, etcetera, etcetera, etcetera. 45:32 Now for next year, then the difference between twenty twenty two and twenty twenty one would be minus sixty, okay, because it's a total of minus eighty, but twenty will come this year.

And it's also very important to take into account that right now, we are short of bonds if you wish, know. If we compare the current outstanding portfolio of bonds with the ones that we had in September twenty twenty.

This is before we sold some bonds in order to fund the first efficiency plan that took place in Q1 twenty one, were around eight billion euros short. 46:11 At some point in time, we wish to regain those kind of volumes, not because we were comfortable with those volumes, with the volumes that we had before.

So, in other words, there is an opportunity to reinvest those bonds in twenty twenty two. You can make your numbers.

We don't know where the yields are going to be. My opinion probably long term yields will hike much faster than short-term, but and on top of the early half, the cost of liquidity know, which nowadays stands at fifty basis points.

46:41 So, eight billion euros for whatever the rates you can come up in your mind, taking into account that liquidity, only liquidity stands for fifty basis points. Well, that's something that we will reinvest next year.

Will we cover the full sixty million euros next year? I would most likely not, because we will not start buying bonds from day one if you wish from first January, but I would – we're budgeting right now.

My best guess here is that most of that impact will be offset by new bond portfolios if you wish.

47:16 So that's for the ALCO, hope it's clear, in any case very happy to give you some more detail. On the TLTRO, what we have right now is around hundred and fifty million euros this year, TLTRO three.

So, next year roughly speaking about half of that will go, if it is not, if the TLTRO as expected is not extended. And then the other half would be in twenty twenty three.

Thank you.

47:45 Thank you, Sophie. Let's move on to the next question, please.

47:55 Hi, good morning. The first question is related to provisions in Spain.

You mentioned that in the UK because of adjustment in macro models, you have released some provisions, my question is whether this is an exercise that is happening also in Spain? If so, when do you think that this could happen and the size of the impact if any?

And then the second question, I don't know if I missed this, but I don't think that you changed the guidance on fee income for twenty twenty one mid-single-digit, even though you are percent I think in the first nine months. So, unless you expect some headwinds in the fourth quarter, and my question is you think that you will be north of this or if not why not?

Thank you.

48:45 Take them if you wish. So, on the first one, no, to be very clear.

I think you've heard this from me before. I think the situation in UK is very good.

Macro has gone very, very well and unemployment rate is very low. Well, away from the figures that we all felt twelve months ago, the real estate prices are going up.

49:14 I think we've seeing a right back situation in the UK across all banks. I do not think we're going to see that in Spain in the short period, not in Sabadell nor in other banks.

That's my personal opinion if wish you. 49:29 I nevertheless think that at least for Sabadell, I assume for the rest of the market, but certainly for Sabadell, cost of risk next year will be lower than cost of risk for twenty twenty one.

That's something as I said, we're budgeting, but that's something I count on. I think that's completely visible and that should be reasonable.

I'm not seeing yet. Okay.

49:57 As per fees and of guidance, well, no, I'm not saying that we're going to go down on fees versus the number that we have right now. The only thing I wanted to point out, is that we are well within the guidance or actually above the guidance, which is a good place to be.

So, hopefully, we will be in those rates at year-end.

50:19 Yes. But in general, I think we have not the intention of updating guidance in the near term on any of, I mean you have to take into account that the guidance was done during the second quarter.

There could be some deviations up and down here and there, but through the cycle, this is the guidance that we would like to give.

50:40 But that doesn't mean Mario that we think that fees are going to go down in Q4. Okay.

Thank you.

50:48 Thank you. Thank you, Mario.

Operator, could you give access to next call, please?

51:02 Hi Thank you for the question. A couple of questions for me.

One is on costs and a little bit of color if you could please add on the previous phase one of the headcount reduction? I was looking at the slide twenty two where you've presented the total cost base, excluding exceptional.

If I'm not reading something wrong, the total the reduction in the cost base between Q3 twenty twenty and now it's around million annualized, something like that. That is around half of the total cost savings started of the previous headcount reduction.

Could you explain a little bit what is the cost inflation I have said over those savings? Or is it that you are still delivering of that reduction and it's going to take a little bit longer to extract?

That will be the first one. 52:03 And the second one is about the rate sensitivity following up on Sophie’s before.

Could you please elaborate a little bit on the overall balance sheet sensitivity to say fifty basis point hike when it comes. So, of course, you could start to see the end of TLTRO III, we see higher rates, but some of those negative rates on corporates will also disappear.

I was wondering what's a real underlying sensitivity to that scenario? It's true that the cost of funding shouldn't move much up, but I was wondering if the higher yields will be broadly offset by all those natural hedges that you have from TLTRO III and the negative rates have got charging?

Thank you.

52:58 Shall I start with the second one if you wish. With sensitivities and hedges, well it's uncertain to know what's going to happen in the future.

Nevertheless, I think, as I said, I think in my opinion, I think the most likely scenario and I may wrong, but the most likely scenario that I foresee is that long term rates are going to hike sooner, way sooner than short-term rates. 53:23 So, we should be benefiting from that for example, if and when we replace the portfolios that we have sold, okay.

I don't think we're going to see any impact for example on the liability side of the balance sheet. I mean, in terms of funding nor on , nor on – as in corporates, because unfortunately, I do not see a hike in short-term rates in the short term in Continental Europe, while I am very positive on that in the UK, as I think the market is.

54:04 So, and I think the cost of funding on the liability side is very much driven by the short-term rates. So, if the biggest competitor to banks is for example the twelve month in Spain and that is way negative obviously in it today, but way below fifty probably minus fifty.

54:28 Until that changes and that gets into positive, as I said, unfortunately, I'm not saying that in short-term, I don't think we can have any kind of pressure on the cost of the deposits, for example because all banks are working on the other hand, with a loan to go well below one hundred percent. So, there's no eager for volumes.

Actually, we are growing volumes because liquidity is pumping up. 54:52 And that's the same for corporates.

I don't think in the short term in next year, for example, I don't foresee that the renumeration that banks are getting out of the corporates is going to change because I don't foresee that the for example to make it simple. It's going to move in any material way.

In my opinion, both things are very – should be very much linked. So, I don't think we're going to we're going to see any kind of that.

55:22 I think, I mean, in a nutshell, I think we could say that there are many, many moving parts, but that were positively moderately positively placed towards in positive interest rate movements.

55:36 Yeah, absolutely.

55:37 So, we are confident there.

55:40 Yeah, absolutely. And as per the first question, I didn't get it very well, Carlos.

I think you were talking about the differences between Q1 costs last year, sorry, third Q costs last year and third Q costs this year without the extraordinary. Well, we're seen that costs are coming down at two point four percent.

And well, I think it's in track with more or less more or less in track with what we guided. Thank you.

56:17 Thank you. Let's move on to the next question please.

56:33 Hello, Stefan.

56:45 Yes, good morning and two questions for me, first of all on capital. I mean, you're already in line with the full year guidance, and I think there's still about fifteen basis points of gains still to come through from the disposals in 4Q.

I just wondered if you could update us on any potential headwind going forward in terms of regulation into next year and what you think the sort of normal organic level of capital generation should be going forward? The second question was just more general around corporate lending and the pickup that you expect next year, I mean I guess, is there any more color you can provide on what's holding back corporate lending at this point?

Is there still a lack of willingness to invest on the corporate side that you seeing or is it purely the fact that the corporates are still a wash with liquidity following the drawdowns post-COVID? Thank.

57:44 I'll take the second one and leave, as it is a tradition in these situations, I leave the easy one about the capital to Leo. I think, as we have expressed, I think during the presentation, you're absolutely spot on.

I think corporates now are washed with liquidity in preparation for a much harder COVID than the one that we have experienced. 58:16 In this quarter, we have had as every quarter, the seasonality of low activity, especially due to August, which in Spain, it's very hot here, and the activity goes down significantly.

And furthermore, the new generation fund has not started is being deployed, but has had no impact yet. First, because the amounts that are there are still small, but furthermore, the initial elements of the amounts they initially deployed have much less multiplying effect in terms of lending volume.

58:56 This is key to our business and we are expecting, I mean, we are satisfied in the sense that we have seen an increase in our market share during the year in this area, despite that the activity and the volumes are low for the reasons that we have mentioned. We think that those elements are going to reverse next year, and we expect a positive trend for all the previous reasons.

59:25 We think that the liquidity will start being reduced because of the lesser activity of this second part of the year because of the ECO loans, they will start to be absorbed. We expect the European funds to start although it is somewhat back loaded towards the end of the period that we still expect the twenty two where that would have an impact and all of that and we are ready for that.

We expect an increase of the activity in SMEs. And hopefully even an increase, further increase of our market share.

60:05 Okay. And as per the easy one on capital, I think, well the good news is that so far, we've been able to fund an increase of five point five billion euros in loan volume so far this year, actually, seven billion if we exclude the asset production scheme payment, which for a capital purposes is important.

And despite that growth of seven billion euros in terms of capital, we have been able to increase our capital ratio, slightly by ten basis points. 60:34 In other words, we are certainly being able to fund our growth on the balance sheet with organic capital generation, which I think it's fairly good.

As per the headwinds, no, we don't have big headwinds ahead of us, not that we can foresee. So, the only one that comes to mind in – comes my mind it's, I think we've guided this before minus fifteen basis points coming from EBA guidelines, and this will – this shall take place in twenty twenty two.

And of course, it's in my opinion a very manageable impact. 61:18 On top of that, the second one is Basel IV, but the latest trends on this topic seems to imply that this is going to be delayed.

And more important than delay itself in my opinion, because I think well, this has just started now and has to be discussed in the trial process, with parliament and council and this may take a while, but it's pretty clear that the date is going to be twenty twenty five, but more importantly as I said, there are some quite a lot of clearance on several topics. 61:59 So, for example, issue is not going to be an issue for European Banks good.

I think that's something we all counted on, but it's clear now. Second, there's not going to be any change on the SME waiting.

So, again, good solution. It's again what we all counted on, but it's good.

62:20 And third and more important for Spanish Banks in my opinion and specifically for us, it’s the operational risk impact now, which is as the ILM is set at one point zero. So, I think if this is all good news, and on top of that it's delayed.

So, for the coming two three years, well, I'm sure something will come up. But right now, we don't foresee any material regulatory impact aside from the EBA guidance of minus fifteen basis points, next year.

Thanks.

62:52 Thank you. We're already today one hour territory.

So, if we have Stefan available as he missed the previous call, we can give access to Stefan and if not, we'll leave it here.

63:09 Yeah. Thank you so much guys.

I managed to successfully disconnect myself before, unfortunately. Just a quick clarification there on the Basel IV, are you in a position to give us some guidance here, especially when it comes to operational risk?

I assume that's going to the biggest driver of the Basel IV impact. And a quick second question on the COVID overlay reserve, are you thinking that next year of the risk will be lower than this year because of underlying development or because you plan to release the COVID reserve in twenty twenty two?

Thank you.

63:54 Sure. Thank you, Stefan.

So, on the first one, it's difficult to give you a guidance right now because we have to put the numbers through, but in any case, I would say the Basel IV impact is in the lower part of the range that we were thinking about. And I think we, when we talked about Basel IV before, in my opinion, well there are several numbers out there for the European banking average, which I think I've seen a few reports coming from Basel, which talk about two hundred, two hundred and fifty basis points impact for the industry.

64:27 I think that that impact is going to be way lower in Spain, because the biggest impact in Spain is going to be operational risk, I think from a credit risk standpoint this should not be an issue because we've already gone through several thresholds in Spain. So, I think that's covered in general terms.

So, the big issue is operational risk and by setting the ILM at one point zero, I think we are talking about the lower range of the curve, but in any case, there's negotiation around these because you need to – that's the ratio, that's fine, but then you have to take into account what are you including as per the operational risks that you've had in the previous years? 65:09 The fact that Basel IV is delayed a couple of years, I think it's good also in terms of the events that you have to take into account in that operational risk, because there are two years away further down the line.

So, I think in general terms it’s good news. I'm sorry, I cannot give you guidance right now.

As I said, way, way lower than the average for the industry. I think at some point, I've said that I thought first was going to be less than one hundred basis points.

But that was before. I saw all this package, so we need to go through with it.

Okay. 65:47 And as per the cost of risk for next year, I think it's – I'm thinking about a reduction in cost of risk because of the underlying.

I think the macro is going in a very good direction. And what we've seen out of the balances of companies is that things are improving and are improving reasonably given the context fast.

So, I think this should drive for lesser requirements next year. No that's what I'm seeing.

I'm not seeing as I tried to explain before, write-backs, if you wish. Thank you, Stefan.

66:24 Thank you. And thank you all for your questions.

Thank you Cesar and Leo for your answers. We now wrap up the Q and A session and as always the full IR team is available for any further questions that you might have.

Once again, thank you all for your participation and for joining us today.

66:41 Thank you very much.

66:42 Thank you. Bye, bye.