Macroeconomic environment
Key events in 2013
In 2013 the Spanish economy reached
a turning point and the first signs were seen
of stabilization in the labour market.
The financial industry continued to make
progress in restructuring and Spain confirmed
that it would exit from the international
assistance programme in January 2014.
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).
F1 Risk premium on 2–year government bonds (basis points). Source: Bloomberg
- Italy
- Spain
F2 Rates of interest on business loans up to €1 million (%). Source: BCE
- Germany
- Spain
- Italy
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.
F3 Business confidence (level). Source: Bloomberg
- Eurozone
- Germany
- France
- Italy
F4 urozone headline inflation (CPI y.o.y. change in %). Source: Eurostat
F5 ECB benchmark rate (%). Source: Bloomberg
F6 Euro exchange rate (USD/euro). Source: Bloomberg
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).
Banco Sabadell completed a successful
capital–raising, increasing its share capital by
€1,383 million in two separate share offerings.
This enabled it to strengthen its capital base
and allowed the position as one of Europe’s
most solidly capitalized banks.
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.
F7 Banco Sabadell share price movements
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.
Million | Million euro | euro | Million euro | euro | |
---|---|---|---|---|---|
Number of shares |
Net attributable profit |
Attributable earnings per share |
Shareholder’s equity |
Book value per share |
|
2011 | 1,391 | 232 | 0.174 | 6,276 | 4.51 |
20111 | 1,584 | 232 | 0.152 | 6,276 | 3.96 |
2012 | 2,960 | 82 | 0.028 | 9,120 | 3.08 |
20122 | 3,184 | 82 | 0.026 | 9,120 | 2.86 |
2013 | 4,011 | 248 | 0.062 | 10,227 | 2.55 |
20133 | 4,299 | 248 | 0.058 | 10,227 | 2.38 |
(1) Includes the dilution effect of 192.56 million additional shares resulting from issues of convertible bonds.
(2) Includes the dilution effect of 224.28 million additional shares resulting from issues of convertible bonds.
(3) Includes the dilution effect of 287.13 million additional shares resulting from issues of convertible bonds.
T1 Earnings per share and book value per share 2011–2013
Capital-raising issues carried out during the year 2013 included a successful €1,383 million capital increase in September. There were also issues of new capital to accommodate redemptions and voluntary conversions of Mandatory Convertible Subordinated Notes. Following the capital-raising operations described in the section on capital management and in the annual accounts, the number of Banco Sabadell ordinary shares at the end of 2013 reached a total of 4,011 million. Share ownership was distributed as follows (see Figure 8):
G8
Distribution of shareholders
31.12.2013
1 | Private shareholders | 61.5% |
2 | Institutional investors | 38.5% |
Financial report
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.
In the last five years Banco Sabadell
has achieved a huge leap in scale and scored
some milestone successes.
In a highly complex and challenging
operating environment, strong business growth
and a major effort to win new customers have
produced sizeable increases in our market shares.
All this without any loss in perceived
quality of service levels to customers.
Million euro | Plan Optima | Plan Crea | ||
---|---|---|---|---|
2007 | 2010 | 2013 | 2013/07 | |
Assets | 76,776 | 97,099 | 163,441 | x2,1 |
Loans1 | 63,165 | 73,058 | 124,615 | x2,0 |
Deposits2 | 34,717 | 49,374 | 94,497 | x2,7 |
Branches | 1,225 | 1,428 | 2,2473 | x1,8 |
Employees | 10,234 | 10,777 | 16,9004 | x1,6 |
Core capital | 6.0% | 8.2% | 12.0% | x2,0 |
LTD Ratio5 | 197% | 135% | 107% | x0,5 |
1 Gross loans and advances excluding repos.
2 On-balance sheet costumer funds.
3 Estimate for 2014.
4 Estimate for 2015.
5 LTD Ratio (loans as a proportion of deposits)
excluding provisions and credit intermediation.
T2
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.
F9 Number of customers (Mn.)
G10 Top-of-mind regognition. Source: Brand monitoring by Time Consultants.
Triple
Banco Sabadell has now launched its new three-year business plan, known as “Plan Triple”. The overall aim of the plan is for the Bank to leverage its improved capital position and market share to lead a recovery in lending in the short, medium and long term.
The focus of the new business plan is on increasing profitability as reflected in a target ROTE (return on equity less goodwill) of 12% for 2016. Within this general aim, the plan’s main action areas are a strengthened domestic business, a transformation of the balance sheet and a revamped production system.
Having taken a huge leap in scale, Banco Sabadell’s focus is now on consolidating its domestic business and increasing the profitability of its newly acquired businesses. To do this it has set out two strategies for different regions according to its market position in each one. In the Catalonia and Southeast (Valencia and Murcia) regions the Bank has now reached a suitable scale and its business focus will therefore be on profitability, cross-selling and closing the performance gap in the newly acquired businesses.
In the rest of the country the focus is on “filling our branches with customers” and increasing market share. Banco Sabadell also intends to continue improving customer relationships so as to become the customer’s banker of choice and to grow its market shares in mutual funds and insurance.
The second key action area for Banco Sabadell has to do with balance sheet transformation: bringing down loan losses and selling off real estate assets. To reduce real estate losses the Bank has put in hand management programmes combining timely action (to reduce new loan defaults) with recovery (faster debt recoveries). To reduce its holdings of real estate assets the Bank will continue to leverage the expertise of its asset management division and the leadership of its property sales business, Solvia, while benefiting from an improving real estate market.
The third key action area under the Triple plan is to transform its production system so as to increase productivity, but without any loss in the quality of service for which the Bank has always been renowned. For example, a new instant banking system has been created which will initially be rolled out in key growth areas such as the Madrid region. Alongside these three action areas the new business plan sets additional objectives focused on preparing the ground for future expansion into foreign markets and on talent and human resources management.
The principal targets of the Triple plan, with it’s focused on increasing profitability, reducing troubled assets and driving up efficiency, are as follows:
Transformation
- Business
- Production
- Balance sheet
Returns (ROTE)
Internacionalization
- Prepare the ground for the group’s internationalization (organization, people, etc.)
- Enter new markets
Profitability
Consolidate domestic business
- Improve per-customer returns
- Increase customer numbers
- FLeverage international franchise to grow SME business
- Enhance value proposition in private banking
Normalize balance sheet
- Change management style and manage down loan defaults
- Reduce real estate exposure
Develop new drivers of productivity increases
- Instant Banking
- Transformation of production
Capital management
Core capital ratio rises to 12.0%
following €1,505 million in capital
increases over the year.
In 2013 Banco Sabadell continued to pursue the active capital management policy that it has been following for the last few years, with major implications for future growth. In the last three years the Bank has increased its capital by issuing securities that qualify as core capital. As a result its capital base has risen by more than €5,000 million and capital ratios have reached highly satisfactory levels, as 2013 year-end data confirm. Key actions taken in the course of 2013 to increase the Bank’s solvency included the following:
Exchanging mandatory convertible subordinated bonds, issues I/2009 and I/2010, for new convertible bond issues I/2013 and II/2013 with a value of €779.3 million (January 2013).
A €1,383 million increase in equity capital approved by the Board of Directors on 9 September. The increase was carried out in two separate share offerings.
EThe first offering, directed at institutional investors, amounted to €650 million and was carried out by the accelerated bookbuild procedure. A total of 396.3 million new shares were allotted for a price of €1.64 per share. The second offering, totalling €732.7 million, was a rights issue addressed to the Bank’s existing shareholders. In the second offering 666 million newly issued shares were offered at a nominal value of €0.125 each plus an issue premium of €0.975 on each new share, that is, a total issue price of €1.10 per share. Five preferential subscription rights were required in order to subscribe for a single new share.
The capital increase had the dual purpose of strengthening Banco Sabadell’s balance sheet to enable it to benefit from business opportunities in the context of a Spanish economy that was starting to recover, and boosting its capital strength to meet stricter regulatory capital requirements on the banking industry and bring its capital structure into line with a consolidated balance sheet that had grown as a result of the acquisitions made in the previous few years.
An exchange of Banco Gallego preferred securities and subordinated debt for subordinated notes mandatorily convertible to Banco Sabadell shares, in October 2013. The exchange offer was accepted in respect of 93.7% of the securities and generated a capital inflow of €121.7 million.
Gestión del balance
A healthy €10,123 million funding gap
and substantial increases in customer funds,
with mutual funds and demand
deposits growing at an accelerating pace.
Following the takeover of assets
from BMN–Penedès, Lloyds España and
Banco Gallego, Banco Sabadell’s
customer base now stands at 6.5 million.
Year-on-year comparisons of balance sheet figures were affected by the incorporation of accounts and balances relating to the Catalonia and Aragon branch banking business acquired from Banco Mare Nostrum (“BMN–Penedès” from 1 June 2013 onwards; Lloyds Bank International and Lloyds Investment España (“SabadellSolbank”) from 30 June onwards; and Banco Gallego, from 31 October onwards. At the end of 2013, the total assets of Banco Sabadell and its group amounted to €163,441.5 million, having increased by €1,894.4 million from where they stood at the end of 2012, an increase of 1.2% that was attributable in large measure to new business resulting from the above acquisitions.Of particular significance among the items on the consolidated balance sheet were gross loans and advances to customers (excluding assets acquired under repurchase agreements), which increased to a total of €124,614.9 million at the end of 2013, a rise of 4.2%.
Mortgage loans, the single largest component of gross lending, amounted to approximately 57% of total loans and advances at 31 December 2013 (see Figure 11).
Reclassifications of loan refinancings and the additions to the consolidated group were factors that caused the ratio of non-performing loans (NPLs) to total qualifying loans and advances to rise to 13.63% (11.13% with reclassifications excluded); this did not include former Banco CAM assets benefiting from the asset protection scheme. At the last quarter of 2013 a €64 million fall in NPLs and the fourth consecutive quarterly slowdown in additions to the inventory of troubled assets suggested that a turning point had been reached. 2013 sales of real estate assets were better than expected, increasing by 40% over the previous year to €3,120 million and exceeding forecasts by 20%. In all, 18,501 residential properties were sold during the year, 16% more than projected.
G11
Loans and advances to customers
31.12.2013
1 | Receivable on demand and other accounts |
8% |
2 | Mortgage loans and credit | 57% |
3 | Other secured loans and credit |
2% |
4 | Trade credit | 5% |
5 | Other loans | 22% |
6 | Other credit lines | 4% |
7 | Finance leases | 2% |
Loan loss provisions were further
increased to cover credit exposures in the
loan portfolio and there were signs
of a turning point in NPLs.
Million euro | |||
---|---|---|---|
2013 | 2012 | % 13/12 | |
Total assets | 163,441 | 161,547 | 1.2% |
Gross loans and advances to customers ex repos |
124,615 | 119,638 | 4.2% |
Fixed-income investments | 21,743 | 23,536 | (7.6%) |
T3
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.
Million euro | |||
---|---|---|---|
2013 | 2012 | % 13/12 | |
Total liabilities | 153,036 | 152,286 | 0.5% |
On-balance sheet customer funds | 94,497 | 80,179 | 17.9% |
Other on-balance sheet fixed-term funds1 | 57,635 | 53,095 | 8.6% |
Demand deposits | 36,862 | 27,085 | 36.1% |
Capital markets | 21,167 | 25,326 | (16.4%) |
ECB | 8,800 | 23,650 | (62.8%) |
Off-balance sheet funds | 25,370 | 20,659 | 22.8% |
Mutual funds | 11,019 | 8,585 | 28.4% |
Pension funds | 4,356 | 3,709 | 17.4% |
nsurance sold | 8,067 | 7,313 | 10.3% |
1 This heading includes time deposits and other liabilities sold by the branch network: preferred securities, mandatory convertible bonds, straight bonds, commercial paper and others. It does not include repos.
T4
On-balance sheet customer funds showed a sizeable 17.9% increase; an especially strong performance by demand deposits was driven by an upturn in payment transactions by customers and by a growing tendency to choose the Bank as principal banker, leading to a deepening of customer relationships.
The growth in customer numbers and business volumes shown in the table below was reflected in significant increases in market shares, including a 23.98% share in export finance.
Basis points | |
---|---|
Individual customers | |
Direct salary payments | + 99 |
Credit to households | + 118 |
Transaction activity | + 145 |
Basis points | |
---|---|
Business customers | |
POS payments | + 276 |
Trade credit | + 201 |
Subsidized credit | + 826 |
G12
Customer deposits*
31.12.2013
1 | Current aacounts | 27% |
2 | Savings accounts | 11% |
3 | Term deposits | 61% |
4 | Repurchase agreements | 1% |
* Without adjustments due to accruals
and hedging derivatives.
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:
F13 Funding surplus (€Mn.)
F14 LTD Ratio (adjusted)
Liquidity management
and funding
The group’s funding policy continued
to focus on attracting deposits
and other customer funds through the
branch network and reducing dependence
on the wholesale market.
Since the onset of the financial crisis in 2007 Banco Sabadell’s funding policy has focused on attracting deposits and other customer funds through its branches, reducing the total amount of funds raised on the wholesale markets and increasing the Bank’s liquidity position.
The primary source of the group’s funding is its customer deposit base (mainly current accounts and time deposits taken through the branch network). This is supplemented by funds raised on the interbank and capital markets where the Bank has a number of short- and long-term funding programmes in place, giving it a suitable diversity of funding sources and products, maturities and investors.
The Bank’s funding arrangements are well-balanced, with 19.7% sourced from the wholesale market. In 2013 mortgage covered bonds accounted for the largest share of this funding (62%). The timetable of maturing debt is appropriate, with a total of €4,397 million of debt securities maturing in 2014. The Bank’s borrowings from the ECB were substantially reduced from €23,650 million in 2012 to €8,800 million at the end of 2013 thanks to efficient liquidity management.
As far as its wholesale market funding activities are concerned Banco Sabadell, like the rest of the banking sector, saw its ratings being downgraded by the major rating agencies in response to lower sovereign credit ratings for Spain. In 2013 the three agencies that rated Banco Sabadell’s credit quality were Standard & Poor’s, Moody’s and DBRS. All the agencies have highlighted the improvement in Banco Sabadell’s solvency position since the capital increases carried out in September.
F15
Funding sources
1 | Preference shares | 0.1% |
2 | Deposits | 69.3% |
3 | Retail investment products | 1.2% |
4 | Repos | 4.7% |
5 | ICO finance | 5.0% |
6 | Wholesale market | 19.7% |
F16
Wholesale market funding
1 | Mortgage covered bonds | 62.0% |
2 | Senior debt | 3.5% |
3 | Preference share & subordinated debt |
3.6% |
4 | Euro and Institutional CP | 6.6% |
5 | Asset-backed securities | 16.4% |
6 | Guaranteed debt | 7.9% |
Profit performance in 2013
Banco Sabadell’s net profit, at €247.8 million,
is a threefold increase on 2012.
The year–end figure for net interest income
showed a rising trend, reflecting a fall in
the cost of deposits and active management
of interest spreads that helped to improve
the net interest margin.
Personnel and administration expenses,
on a like–for–like basis, were successfully held
down and this, combined with branch
network restructuring, resulted in a significantly
improved cost:income ratio.
Comparable results for the group for the years 2013, Banco Sabadell’s 132nd year of trading, and 2012 are as follows:
Million euro | |||
---|---|---|---|
2013 | 2012 | % 13/12 | |
Net interest income | 1,814.7 | 1,868.0 | (2.9%) |
Equity-accounted companies and dividends | 18.4 | (1.9) | – |
Free and commission income | 759.7 | 628.7 | 20.8% |
Income from trading and exchange differences | 1,547.1 | 606.1 | 155.2% |
Other operating income | (163.1) | (142.5) | 14.4% |
Gross income | 3,976.8 | 2,958.4 | 34.4% |
Personnel expenses | (1.098,2) | (996,5) | 10,2% |
Administration expenses | (587.9) | (515.1) | 14.1% |
Depreciation and amortization | (228,4) | (156,9) | 45,6% |
Profit/(loss) before impairment and other provisions |
2,062.3 | 1,289.9 | 59.9% |
Loan loss and other impairment provisions | (1,763.6) | (2,540.6) | (30.6%) |
Profit on disposal of current assets | 43.9 | 15.4 | 184.9% |
Negative goodwill | 0.6 | 933.3 | – |
Profit before tax | 343.2 | (302.0) | – |
Tax and other charges | (95.4) | 383.9 | – |
Profit/(loss) attributable to the group | 247.8 | 81.9 | 202.6% |
T5
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.