Dear shareholder,
At the end of 2013, our 132nd year of trading, Banco Sabadell could show a set of results that reflected a recovery in margins and a return to profitable growth, a strengthened balance sheet supported by one of the best capital ratios in the Spanish financial industry, and proven financial solidity. 2013 was also the last year of our ‘CREA’ Plan, launched in 2011 with business transformation and productivity as its main themes. Strong growth in business volumes and customer numbers were key developments during a complex 3-year period which saw substantial growth in market shares in line with the group’s increase in scale, in a challenging economic and financial environment.
The gradual return of the financial markets to normality and the easing of capital market fragmentation in the eurozone from mid-2012 onwards continued all through 2013, punctuated by limited, short-term bouts of market instability such as those caused by the Cyprus bail-out or political tensions in Italy and Portugal. The eurozone began to free itself from the sovereign debt crisis as the headwinds facing the region abated and became less systemic. Ireland and Spain recently announced the cessation of their international assistance programmes, while agreements on a European banking union provided further support for market normalization.
This improvement in the financial markets was reflected in better funding conditions for the countries on the European periphery as country risk premiums dropped and inflows of foreign capital to the periphery recovered; it was also good for economic stability.
The global economy grew at a moderate rate in 2013, with growth in the developed countries gathering pace as the year progressed. The eurozone economy showed signs of reaching a turning point in the second half of the year: Spain, in particular, achieved positive growth in the third quarter for the first time in more than two years, while its labour market appeared to be stabilizing. Activity was also supported by the country’s strong export performance as financing conditions became more benign and the European Commission allowed some relaxation of fiscal discipline. Moreover, structural reforms and rapid progress in correcting the imbalances that had built up during the previous boom helped to bring about an improvement in how Spain was seen in other countries and prepared the ground for faster, more balanced economic growth.
The restructuring of the banking system in Spain resulted in a consolidation of the industry and made banks more solvent. Banco Sabadell extended its geographical reach and increased its share of the Spanish market, having during the past year completed the acquisition of Banco Mare Nostrum’s branches and business in Catalonia and Aragón, and the business of Banco Gallego and Lloyds España; these acquisitions have strengthened our position in some of Spain’s most promising regions. Banco Sabadell ended the year with total assets of €163,441.5 million and a core capital ratio of 12%. In 2013 Banco Sabadell increased its capital base by more than €1,500 million. In September it carried out a €1,383 million capital-raising in two separate share offerings. The first of these, a €650 million accelerated bookbuild offering, was aimed at institutional investors. The second was a €733 million rights issue for existing shareholders.
In October 2013 a capital management exercise was carried out in which the holders of Banco Gallego preferred and subordinated debt securities were invited to exchange their securities for subordinated notes mandatorily convertible to Banco Sabadell shares. The exercise resulted in a further capital increase of €122 million.
These transactions enabled Banco Sabadell to strengthen its capital position and to place itself alongside Europe’s best-capitalized banks, meet the stricter capital requirements being imposed on the banking industry and bring its capital structure into line with the increased size of its consolidated balance sheet following the acquisitions of the last few years.
The Bank’s funding policy was focused on attracting deposits and other customer accounts and thus reducing its reliance on the wholesale market; this ensured that in 2013 it was once again able to generate a substantial funding gap — €10,123 million — and significantly increase its liquidity position.
Actively managed interest spreads and the contributions of the newly-acquired businesses brought our net interest income to a year-end total of €1,814.7 million. This was a 2.9% fall compared with 2012 — a result, mainly, of the negative effects of a falling yield curve in the first half of the year. An improved performance in the second half, however, confirmed the shift to an upward trend.
Higher net profits from the fixed-income portfolio, coupled with a firm grip on costs that reduced like-for-like personnel and general expenses by 13.2% and 11.4% respectively, helped our profit before provisions to rise by 59.9% on the figure for 2012 to reach a total of €2,062.3 million.
Banco Sabadell posted a net profit for 2013 of €247.8 million, three times the figure for 2012. This confirms our ability to maintain solid progress and to generate consistently positive results after impairment charges and other provisions amounting to €1,763.6 million. Provision coverage of credit and real estate exposures, at 13.6%, was above the average for the industry as a whole.
A high rate of new customer acquisition with customer enrolments averaging 8,900 a week, rising market shares, and good progress in restoring health to the new businesses added to the group; these were the dominant themes of an extremely busy year which saw customers increasing to a total of 6.5 million while top-quality service being maintained at all times.
Gross loans and advances to customers (excluding repos) increased strongly in 2013, rising by more than 4.2% on the previous year to a total of €124,614.9 million. Specific provision coverage for assets classified as doubtful due to loan arrears was 50.1%, and here too there were signs of a change: non-performing loans dropped by €64 million in the fourth quarter and there was a slowing in the pace of balance sheet asset writedowns.
The year 2013 saw the successful completion of the integration of Banco Mare Nostrum’s Catalonia and Aragón branch network and business, making Banco Sabadell the fourth largest bank in Catalonia with 12% of bank branches in the region. The merger and systems integration of the business acquired from Lloyds España and Banco Gallego are due to be completed in the first quarter of 2014. The integration of Lloyds will strengthen Banco Sabadell’s franchise among Spain’s non-resident community, while the addition of Banco Gallego will bring the group’s share of bank branches in the Galicia region up to 7%. In the US, Banco Sabadell continued to grow its capacity to serve customers in the State of Florida and Latin America, having completed the acquisition and integration of Lloyds’ private banking business in Miami and, in December, entered into an agreement to acquire JGB Bank. The JGB agreement is expected to complete in the course of 2014.
This Annual Report contains detailed information on how our business performed in 2013 and the acquisitions we made in the course of the year. The data it provides clearly show how our margins have improved in the current economic climate and the group’s success in getting profits back onto a rising path after the huge efforts it has made to rebuild its financial strength. The report testifies to a fortified, well-structured balance sheet, a strong capital underpinning and a high level of provisioning against balance sheet exposures.
Our achievements in 2013 are manifold, so the group has marked out a new position for itself on the Spanish financial services map, despite the complex environment in which it has been operating as a result of the economic situation in our country. That this has been possible is thanks to the professionalism and hard work of all the people who make up the Banco Sabadell group and the expertise they have shown in weathering the crisis of the last few years.
Banco Sabadell enters 2014 with a new business plan focused on improving profitability. The plan’s basic aims are to consolidate our domestic business by extracting value from our customer base and leveraging our newly-acquired scale to gain margin, restructure our balance sheet, and transform our production system to win further increases in productivity, but without any loss in quality of service, key to maintaining our competitive edge. Our challenge now is to continue the task of making our business more efficient, more profitable and more evenly distributed throughout Spain, while preparing the ground for the next stage of our international expansion.
Josep Oliu Creus
Chairman