The return of the financial markets to normality and the gradual easing of capital market fragmentation in the eurozone continued throughout 2013 despite certain occurrences (e.g. the Cyprus bail-out and political tensions in Italy and Portugal) that triggered bouts of market instability (see Figure 1).

Spain confirmed that the European aid programme for its financial sector would end in January 2014 and Ireland became the first bail-out country to exit from a comprehensive aid package, without additional support.

Despite these developments, bank credit markets remained weak and fragmented, with different countries showing wide variations in interest rates on loans to small and medium-sized businesses (see Figure 2).

Europe took a step further towards integration with new advances being made in the establishment of a European banking union. In particular, the European Central Bank (ECB) was given the role of acting as single banking supervisor for the eurozone from late 2014 onwards.

The global economy showed modest growth in 2013, with the economies of the developed world gathering pace as the year progressed (see Figure 3). In the second half of the year the eurozone reached a turning point which was felt both in the core countries and on the periphery. In the third quarter the Spanish economy achieved positive growth, for the first time in more than two years.

In emerging markets, growth was below the average for the past decade as current growth models became obsolete and major structural challenges emerged. China's new government introduced a reform plan to change the growth model and to make it more sustainable in the long term.

Inflation fell in all the main developed economies with the exception of Japan. This was especially true in the eurozone, with inflation in some peripheral countries close to zero or even negative by the end of the year (see Figure 4).

The monetary policy pursued by the main central banks in 2013 continued to be accommodative, although some divergences appeared. In the US, for example, the Federal Reserve moved towards a change in the direction of its monetary policy by announcing that it would shortly be reducing its asset purchases. The European Central Bank reduced its benchmark interest rate to an unprecedented 0.25% and committed itself to keeping benchmark rates low for a long period of time (see Figure 5).

n the long-term debt markets, US and German bond yields ended 2013 higher than they had been at the beginning of the year. On the European periphery, Spanish and Italian public debt improved gradually throughout the year. In the currency markets the euro strengthened against the dollar, while the yen weakened against all the major international currencies. Equity markets again ended the year with gains in the US, the eurozone and Japan (see Figure 6).

In 2013 Banco Sabadell’s share price was dragged down by the weak economic environment and fears over the state of Spain’s financial system, especially in the first half of the year. Despite the challenging conditions facing the sector, however, the Bank’s capital-raising exercise in September was very well received by the market. In the latter part of the year the continuing improvement in sentiment with regard to Spain, Banco Sabadell’s successful capital-raising and the announcement of new rules on deferred tax assets provided support to a share performance that was above that of its domestic market peers.

With the share price standing at €1.896 at the close of the year Banco Sabadell’s market capitalization at 31 December was €7,605.8 million, making it Spain’s fourth largest privately-owned banking group by market value.

Dividend payments to shareholders in 2013 comprised an interim dividend of €0.01 per share for the year 2012 and a complementary remuneration to the dividend of to €0.02 per share, paid in the form of shares from the Bank’s holding of treasury shares. In addition, the Bank will ask the Annual General Meeting to approve the payment of a dividend for the year 2013 of €0.01 per share plus an additional dividend of €0.02 per share, payable in shares of an equivalent value from the Bank’s holding of treasury shares.

In 2013 Banco Sabadell completed the last year of its 3-year “CREA” plan, launched in 2011 with the aim of bringing about a transformation in business and productivity. Large increases in business volumes and customer numbers were major achievements in a very complex and busy 3-year period during which the group was able to substantially increase market shares as a result of expansion through acquisitions and intensive efforts to boost its sales and marketing capabilities.

During the economic downturn that lasted from 2007 to 2013, we made a huge leap forward that is key to understanding what we achieved in 2013 and our prospects in coming years.

Some outstanding milestones were also reached, such as the growth in our customer base from 2.1 to 6.5 million. Banco Sabadell is one of Spain’s leading franchises and one of the most widely recognized, according to top-of-mind recall measures.

All these efficiently conducted integration processes were brought to completion without any decline in perceived quality-of-service levels, quality of service being one of the competitive factors most relied on by the Bank in its relationships with customers.

Provisions as a proportion of total loan and real estate exposure increased in 2013 and reached a year-end figure of 13.61%, one of the highest ratios in the Spanish banking industry.

In 2013 Banco Sabadell’s fixed-income portfolio declined by 7.6% compared with the previous year to reach a year-end total of €21,743 million (including €15,600 million in Spanish government debt). The Bank’s total liabilities at the close of 2013 were €153,036 million, showing a slight increase of 0.5% for the year but with a considerable change in composition.

Over the last few years, as the growth in on-balance sheet customer funds outpaced increases in lending, a positive funding gap was generated, while the loan-to-deposit (LTD) ratio declined. This can be seen in the charts below:

Comparable results for the group for the years 2013, Banco Sabadell’s 132nd year of trading, and 2012 are as follows:

• Net interest income amounted to €1,814.7 million in 2013, 2.9% less than in 2012. The contribution from Banco CAM from June 2012 onwards and the acquisitions of new businesses in 2013 (BMN-Penedès, Sabadell Solbank and Banco Gallego), combined with judicious management of interest spreads, improved net profit from the fixed-income portfolio and other factors broadly offset the effects of the downward shift in the yield curve and narrowing interest spreads in the first half of the year. In the second half of the year interest spreads began to improve, mainly due to the lower cost of deposits and the diminishing effect of the yield curve on loan repricing.

• A strong sales performance by branches and the new businesses added to the group drove a steady increase in net fee and commission income which grew by 20.8% compared with the previous year.

• Net income from trading remained at a high level, totalling €1,479.2 million. Net foreign exchange gains, at €67.9 million, showed an increase of 13.3% on the year before.

• Contributions to the bank deposit guarantee fund in 2013, a component of other operating income, totalled €135.4 million.

These factors resulted in a gross income of €3,976.8 million, an increase of 34.4% on the figure for 2012.

• Operating expenses (personnel and general administrative) amounted to €1,686.1 million. Recurring operating expenses in 2013, on a like-for-like basis, were 12.5% lower than in the previous year. The main costs excluded from this are exceptional acquisition-related restructuring costs.

The 34.4% increase in gross income in 2013, coupled with policies to hold down costs, produced a significantly improved cost:income ratio of 48.68% in 2013 (down from 51.10% in 2012), excluding a one-off capital gain on the sale of the held-to-maturity portfolio.

All this enabled Banco Sabadell to end the year with a net profit before provisions of €2,062.3 million, an increase of 59.9% on the figure for 2012.

• Provisions for loan losses and other impairments (primarily in real estate and financial assets) amounted to €1,763.6 million after a review had been conducted of classifications of refinanced loans related to new acquisitions.

• Profits on asset disposals amounted to €43.9 million in 2013. This included a net gain of €25.6 million in December from the disposal of Banco Sabadell’s stake in the Dominican Republic banking group, Centro Financiero BHD.

• The “negative goodwill” item of the 2013 income statement includes a €30.3 million gain associated primarily with the acquisition of Banco Gallego. The accounts for 2012 included a €933.3 million negative goodwill on the consolidation of Banco CAM.

After deducting corporate income tax and the profit attributable to non-controlling interests, the net profit attributable to the group at 2013 year-end was €247.8 million, that is, 202.6% higher than the figure for 2012.