Commercial Banking

In an operating environment showing early signs of economic recovery, the year 2014 saw improvements in net interest income, strengthened customer relationships, substantial growth in the insurance business and a major increase in mutual fund assets. The year also saw the completion of work to integrate the branches acquired from Banco Gallego and from Lloyds Bank International in Spain.

T1 Commercial Banking

Particularly encouraging was a drop in the loan loss ratio in the Commercial Banking business from 11.4% in 2013 to 10.3% in 2014.

Key business objectives for 2014 under the Group's current 3-year plan ("Triple") were to increase profitability and offer in its newly acquired businesses in the Catalonia and Valencia/Murcia regions, and to grow market shares in other parts of Spain A start was made in preparing the ground for development of the Bank's business in foreign markets.

Whether targeting business or individual customers, the focus was on increasing customer loyalty and transaction volumes and this resulted in steadily rising margins throughout 2014. This was reflected in continued progress in meeting a key goal of the current Triple 3-year business plan: being the main bank for the largest number of customers. On all these fronts a good performance was achieved in the business and individual customer segments.

Within the Bank's product range, the “Cuenta Expansión” and “Cuenta Expansión Negocios" accounts were once again the key instruments in meeting the Bank's targets for profitability and product offer.

Additionally, a number of positioning and brand recognition campaigns, both broad-based and focused, enabled the Bank to expand customer numbers in all segments. Of particular note was a campaign launched in late 2014 with Rafael Nadal as its main protagonist. The aim of the campaign, themed on the idea of "Closeness", was to continue the strategy behind the earlier "Believe" campaign, which expanded business with local retailers, and the campaign aimed at expatriates under the slogan "Specialists in serving you here as you'd expect to be served there".

As part of the Bank's "Opportunity Madrid" plan, designed to promote continued growth in the number of corporate, business and highand middle-income individual customers within the Madrid region, the year saw account management capabilities being strengthened at all branches where there was potential for growth. Additionally, the new active management approach, which revolves around the account manager and his/her special personal relationship with the customer, maintains and strengthens the bank's values: trustworthiness, authenticity, communication, desire to serve, professionalism, innovation and modernity.

Key action areas for the coming year are industrialization of the sales/promotion area supported by multi-channel marketing, and the new personal banking model, the aim in both cases being continued improvements in profitability. For the corporate segment, the Bank's aim will be to further strengthen its market-leading position with the "Promise to Businesses" plan. In specific regions the intention is to continue narrowing the profitability gap of customers in the newly acquired branch networks. The "Opportunity Madrid" plan includes opening a flagship branch in Madrid. It will be located at a new, centrally located site designed to raise the Bank's profile and enhance its reputation for innovation and quality of service, in surroundings that visitors will find pleasant and comfortable.

Companies, businesses and local authorities

The business customer market saw increases in both customer numbers (+4.1%) and market shares in all segments; market-leading positions were secured in ICO-sponsored lending—26.3% of ICO Internacional funding and 30% of ICO Garantía SGR funding—and energy-efficient operating leases for businesses. Additionally, there was a notable increase year-on-year in vehicle leasing (9.5%), other equipment leasing (52.1%), lending to public administrations (20.4%) and franchises (35%), the latter being an area in which Sabadell is an acknowledged leader. The Bank expanded its product catalogue, particularly in connection with international business, and set up two new business units specializing in the agricultural and tourist sectors.

Individuals

The customer base expanded for the fourth consecutive year, adding 347,424 new customers, with the result that 82.8% of the customer base consisted of middle-income people. The Bank experienced strong growth in home purchase loans (69.3%), credit card spending (24%), consumer lending (69.5%) and balance and market share of mutual funds (€3,595.8 million and 5.1%, respectively). The number of foreign customers expanded by 32%. Through campaigns and specific actions, the Bank has established itself as a leading banker to shops and private individuals and created Sabadell eBolsa, a product designed for retail investors.

Trading brands

The Bank's regionally-based brands, which have been retained out of respect for the long-established presence and good standing of local banks acquired in the last few years, continued to show an improved performance in terms of business margins, new customers (individuals and businesses) and market shares, and to gain leading positions in a variety of market segments. All brands performed a highly significant role in the social and cultural life of their regions thanks to their sponsorship and other socially responsible activities in their local communities.

Some of the more notable successes scored by the Group's other brands in 2014 were as follows:

SabadellHerrero

• Lendingincreasedby3.5%year-on-year,whilethe customer base was expanded by 2,905 companies and 17,866 individuals.
• It strengthened its position as a provider of ICO finance in Asturias and León and as the bank with the highest service quality in its territory.

SabadellGallego

• Integration of the pre-existing Banco Sabadell and Banco Gallego branches and systems was completed successfully, resulting in the addition of 5,176 business customers and 16,057 individuals, an increase in lending in year-on-year terms and an improvement in service quality indicators.

SabadellGuipuzcoano

• Once again, the loan-loss ratio was exceptionally low: 6.1%.
• The base of individual customers was expanded by 7.5% while the bank maintained solid market shares in the business segment (32.1% of SMEs and 71.1% of large companies).
• Lending increased by 3.1% with respect to 2013.

SabadellCAM

• A total of 94,000 new customers were added, and mortgage lending expanded by 17%.
• SabadellCAM accounted for 43% of sales by the real estate subsidiary in Spain and strengthened its leading position in ICO finance to SMEs.

BStartup

A key development in 2014 was a major initiative by the Group's newly formed Enterprise Department to reach out to the entrepreneur segment in Spain, chiefly through its "BStartup" programme. The programme has the aim of positioning Banco Sabadell as the bank most supportive of start-ups, and places special emphasis on those working in the digital/IT sphere, where scalability is greatest. In the framework of the BStartup programme, the Bank’s Enterprise Department invested in nine companies and achieved a considerable news impact in the sector, enabling it to generate €28.5 million in direct business.

Occupational groups and agent partners

In 2014, 2,285 blanket agreements were signed which contributed €18.350 billion. The network of agents processed business amounting to €6 billion.

Bancassurance

At 31 December 2014, the total volume of funds under management in insurance and pension plans was €11,840.9 million. Issued premiums on life and non-life policies totalled €256.3 million. The Group's insurance and pensions business generated an overall net profit of €241.5 million.

As a result of legacy bancassurance agreements signed by the acquired banks, the Bank continued to restructure its insurance business in 2014 through a number of transactions (acquisition of control of Banco Gallego Vida y Pensiones and signature of an agreement with insurer Zurich to extend the exclusive joint venture in insurance and pensions to all the branches in Spain) and significant operations (reinsurance contract with SCOR to cover Mediterráneo Vida's death benefit portfolio).

The reorganized Banco Sabadell insurance and pensions business that resulted from these arrangements was as follows:

• Sabadell Vida, Sabadell Pensiones and Sabadell Seguros Generales, operating as a joint venture with the Zurich insurance group since 2008.
• Mediterráneo Vida and Banco Gallego Vida y Pensiones, wholly-owned subsidiaries of Banco Sabadell Group.
• Sabadell Mediación, a bancassurance tied agent, as a bank tied broker.