Milestones in 2014

European Central Bank's Comprehensive Assessment

In October 2014, the European Central Bank (ECB) conducted a comprehensive assessment of the 128 largest banks in the euro area in cooperation with the national authorities and, for the stress test, in close collaboration with the European Banking Authority (EBA).

The Comprehensive Assessment (CA) began in November 2013 and was a prerequisite for the ECB to undertake its new supervisory functions, which it assumed one year later. The CA covered a very significant part of the processes and procedures of the banks that were analysed.

According to the published results, 25 institutions failed the test with a capital shortfall totalling €25,000 million. However, corrective actions implemented in 2014 had reduced the shortfall to €9,500 million, distributed among 13 banks. All Spanish banks passed the stress test and the AQR, with the exception of one minor institution (as defined by the ECB), whose capital shortfall was duly covered as a result of actions implemented in the first half of 2014.

Banco Sabadell was the only Spanish bank whose initial capital ratio was not adjusted as a result of the Asset Quality Review (AQR). Only 15 European banks were not required to make any adjustments.

In the stress test, Banco Sabadell attained a capital ratio (CET1) of 10.26% in the baseline scenario. In the adverse scenario, the ratio was 8.33%, i.e. above the required minimum of 5.5%. With these ratios, it was estimated that Banco Sabadell had surplus capital amounting to over €1,700 million in the baseline scenario and over €2,200 million in the adverse scenario.

These results did not take account of the e≠ect of mandatory convertible bonds (not included in the stress test even though they mature in 2015); neither did they include all of the deductions envisaged under Basel III. If those items had been considered, the CET1 ratio would have been 9.38% (including convertibles) and 8.8% (fully loaded) in the adverse scenario.

The Group’s directors believe that these results vindicate the capital-raising actions performed by Banco Sabadell in the last three years, while also strengthening its competitive position in Spain, and that they reflect the quality of its financial asset management.

Technological and functional integration of Banco Gallego
and Lloyds Banking Group Spain

The successful integration, in terms of technology and risk management, of the two absorbed banks (Banco Gallego and Lloyds Banking Group Spain) was concluded in 2014. The loan portfolio acquired from these banks, and also their branches, are now covered by the Group’s risk management framework, in terms of both acceptance and monitoring.

Risk appetite framework and enhanced governance
of the risk function

In 2014, the Banco Sabadell Group continued to strengthen its risk management framework and to make improvements in line with best practices in the financial sector.

The main milestones this year were the development of a new risk appetite framework which ensures control and proactive management of all group risks and strengthens the governance framework as a function of risks.

The new risk appetite framework, whose function is to ensure oversight and pro-active management of all the Group’s risks, includes a risk appetite statement, which establishes the amount and diversity of risks that the Group seeks and tolerates in order to achieve its business goals while maintaining a balance between risk and return.

The risk appetite framework is covered by an updated risk governance framework in accordance with European and national regulations (specifically, CRR and CRD IV and their transposition to Spanish law through Law 10/2014 on the organization, supervision and solvency of credit institutions).Accordingly, the Bank has strengthened the supervisory role of the Risk Committee, made up of non-executive Board members, whose main function is to ensure that the risks undertaken by the Group conform to the risk appetite statement approved by the Board of Directors.

Banco Sabadell Group complies with guidelines drawn up under the Basel Capital Accord, a fundamental principle of which is that a bank’s capital requirements should be more closely related to risks actually incurred, based on internal risk measurement models which have been independently validated.The bank has supervisory authorization to use its internal models for enterprises, property developers, specialized financing projects, financial institutions, retail businesses and the self-employed, mortgage and consumer loans, and individual credit cards for calculating regulatory capital requirements.