Banco de Sabadell, S.A. (SAB.MC) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining us. We are delighted to have with us today Cesar Gonzalez-Bueno, CEO of Banco Sabadell; and Sergio Palavecino, CFO. Good morning, Cesar.

Thank you. Good morning.

It's a pleasure to host you today. Thank you so much for taking the time.

My pleasure.

We have about 35 minutes together to go through the investment case. Then we will follow with some Q&A from the audience. And then we will close with a short investor survey, which you can take part in using the device in front of you. Should we move in to the fireside?

Let's go.

So addressing, I guess, the main topic for the story right now, the tender offer by BBVA. I wanted to ask from your perspective, how do you assess the BBVA proposal, particularly in light of the government conditions and integration timing? And what do you think should be the key consideration for Sabadell shareholders when assessing the bid against your stand-alone plan? And is there a level at which you would recommend tendering?

Okay. I think there are many elements that have to be explained before we go into the answer. The first one is that this offer is most probably not the last one because everybody is in agreement that this offer lacks merits. And I can say this openly because the Board already rejected an offer that was better than this one months ago. So in that sense, I'm not precluding what the Board might decide. On second instance, anything that we say today is relative in the sense that it has to be quite objective. It has to be based on the parameters of what we are observing. But it is pending the Board decision that has to come in the first 10 days, natural days after the tender -- after the offer and that is pending. So with all those caveats, let me make some few comments. The first one is that we saw all along also in the first offer that it was lacking a little bit of specificity. Again, we see issues with -- very clear issues with the synergies. The synergies, they are supposed to happen in the fourth year in full. Well, the assumptions because of the regulation that has been established means that there would be autonomy of management that is that both banks will be managed solely to the interest of their own shareholders and without seeking synergies for 3 to 5 years. They take the low range. That's the first one that is somewhat aggressive. The second one is that they assume that instantly, immediately after those 3 years have passed, the merger will be authorized. Well, it's a prerogative of the government. And usually, on top of that, it takes time. It requires the Board both shareholders meeting and then a legal authorization. So it can't happen in the first day immediately after. And second, that all the synergies occur exactly in that first year. And on top of that, they are higher than the ones that existed before. They include things like that are objectively not very realistic, which is like, for example, EUR 100 million -- close to EUR 100 million in synergies in financing when the gap has closed so severely that they are almost insignificant gap in financing synergies and as we see in the way we are -- our emissions are going. So that's one. Another element that is very relevant, and that has not been mentioned in the prospectus is the impact on retail shareholders because it's not trading shares, it's the equivalent of selling your shares and buying shares of BBVA. The impact from a tax perspective is very, very, very high, and that is because there is a cash component, and there are several other elements that will have to be reviewed. There's an element that is quite peculiar in the presentation of the BBVA. When they say that the EPS for Sabadell is 25%. Well, it has some conceptual -- I don't know how to call them, it has some things that are not precise or that are not correct methodologically. So for example, and it's quite flabbergasting. It doesn't include the EUR 2.5 billion and they are not reinvested to calculate that EPS, the EUR 2.5 billion of extraordinary dividend out of the proceeds of the sale of TSB. Therefore, there are so many elements that in due time, the Board will review. But I insist this offer I mean, common sense leads to believe that it can't be the final one. Because the value of Sabadell is quite big. The value of Sabadell is quite attractive. I mean if you look at the trajectory for the last 4 to 5 years, has been the best performing stock in Europe, the best performer of the banks, the best performing stock in the IBEX 35 and we are not done because if you look at elements like what is our PE compared to the pure Spanish banks, or what is our multiple to book, although that reference is getting every time less relevant. We are still below, and we have been catching up for the years and years and years, and we are not done for many strategic reasons that we might cover later.

That's very clear. And if we move now to the value creation that you were discussing, your stand-alone investment case, talking about organic growth. In your Capital Markets Day, you set organic growth as one of the key four pillars of the new business plan. Could you walk us through the main areas that you see driving that growth and how it contributes to your medium-term target?

Yes. I mean growth, the growth that we have projected is very conservative because Spain is growing at more or less projected to grow at 4%, 2% GDP, last 2% inflation, and we are talking about the mid-single digit. What have we done during the last year? So year-on-year during the first half of '25. So we have, for example, grown by 20%, 20.1%, I think, in consumer lending. We have grown by 5.7% in mortgages, in line with the market. This one in line with the market, the previous one, clearly ahead of the market and gaining market share. 3.2 in SMEs, clearly above the market and gaining market share. And we have done that while reducing the cost of risk. So what we have done already is very much in line with the projection. But furthermore, and I say this with candor, in a complex situation because 16 months of hostile takeover, it's not the ideal environment to grow and to engage clients and do everything. It's like climbing a mountain with your bicycle with a tree, trailing a tree with a rope. Now let's cut the tree. Let's see what happens, and let's see the speed that we are able to attain. Also in -- the result has been very positive and very much in line with our projections in fees. We are taking off through private banking, which is growing very handsomely in assets under management. The insurance business, we have reviewed everything, all the products in combination with our partner. All the products, all the journeys, all of everything, and it's growing very handsomely and let's see payments, because of course, there's a deal that is pending and that I think both parties still are excited about, which is the billing payments with [indiscernible] . And furthermore, the growth in clients, we have been growing very handsomely in new clients with all the media noise, can you imagine, and a few years ago, 4 years ago, we did 0 client acquisition in retail digitally. Now it's more than half. So the transformation has been phenomenal. It's in progress, and I'm sure we will talk later about the risk and other things which have been at the core of the transformation of the bank.

So getting a little bit more specific on NII. You've set ambitious goal for NII growth. Could you talk to us through the main drivers of -- that you expect underpin that growth like whether it's repricing volume growth, funding mix? And how do you see this evolving given the competitive environment?

No. I'll leave this one to Sergio because he is the super conservative of us. So I leave the questions that are more sensitive, tell them how conservative you are about today.

Sure. Thank you. Let me focus on the ex DSP perimeter because I think it's going to be relevant when going forward, right? In the first half of the year, we achieved EUR 1.8 billion level, we are guiding to EUR 3.6 billion for 2025, and then this will grow in 2026 and 2027 level will be around EUR 3.9 billion, which was the level that we had a year ago. So we're expecting a second half NII similar to the first half. On a quarterly basis, the NII is already stable, as we saw in our last results presentation, and I think it's good looking into that to understand the moving parts now, right? So what we had is, of course, headwinds and tailwinds. The main headwind is coming from rates given that ECB was above 4% a year ago, and the ECB has been cutting rates to a normal level today, 2%, and that has affected margins in a way and it's been a headwind. But that has been already fully offset by the growth in volumes, such as I just explained and the savings that we are able to achieve from our wholesale funding transactions, which are coming at a cheaper level because of the upgrades in our ratings and also because we have lower needs and we will have lower needs going forward, right? So these are the drivers for the quarter. And I think we have explained quite in detail how those drivers then play going forward to 2027, while rates are expected to be more -- so to stabilize at some point in time, while volume will continuously kicking in, right? So to what we explained in the Capital Markets Day, we see still volumes growing positively. So we are optimistic about volumes. And let me remind you that our loan book grew more than 6% in the first half of the year and customer deposits more than 4%. That's continuing. So that's good news. That's in line with our expectation. And rates, if anything, and a bit are such more higher because we were expecting ECB potentially to get to 1.75, but it seems that market is expecting rates to be already stable at 2%, and we see already inflation risk quite well balanced. So we think that rates are a bit more supportive. And therefore, we are absolutely confirming our expectation that NII will grow from now to 2027.

And if we move to costs, you see costs growing at around 3% CAGR over the next 3 years even as you continue to invest in IT and digital, and you incentivize your workforce to compete for growth and you absorb M&A-related costs. How do you strike the right balance between keeping efficiency on track and investing and funding the long-term growth you're discussing?

This is a question that was already raised 5 years ago. Five years ago, everybody said, you're not a digital bank. It was true. We were very good with clients, but we were not digital. And you're going to have to invest so much that your costs are going to go through the roof. Here we are, a few years later, we have had an amazing track record in cost management, amazing track record. And we have modernized the bank and done a phenomenal job in digitalization. Why is this? It's not that we are magicians, we are not bad, but we are not magicians. It's quite simple. First, the things that are really demanding from an IT perspective, we have partners. We have world-class performance. In insurance, we have reach. In assets under management, we have Amundi. And we are working at the highest level with the highest partners and with limited investment. Then payments, payments it's pending. It's the other one that we want to do, and we don't want to do it because of raising capital. We have proven an ability to generate capital that is very good, and we are doing it for industrial reasons, and that will happen next. Those are the three that really consume a lot. Then you have the back end. Our back end was already very good when I came into the bank 4 years ago. And we were -- what we were missing is the front end. The front end is cheap. It's easy. It's just a question of understanding customer needs, of having every people working together, of not failing in the project, of being demand driven and really focused on what you do. And we are -- we have proved that we have become excellent at that, and we are leapfrogging, clearly leapfrogging. Another very relevant element in terms of investments is certainly, everything that is related to risk. But that I think the models that we have developed the ability to understand the probability of default of every transaction of every client of everything, we have really leapfrogged. So is there an issue? No, we expect to grow our payables with inflation, which is good. We expect to continue gaining efficiencies through technology, and that's not get our mouth here very big about AI and all these things. It's solid work. We are applying AI in the areas that can be applied, and we will be not in the bleeding edge, we will be in the leading edge, which is always the smart place to be. Some people tried just to copy the first lines of the newspapers and then they overspend and they really make mistakes. The good place is the leading edge and looking at -- and in terms of technology and depreciation, we will be slightly above inflation because we have invested and that's fair. And overall, I think that 3% is absolutely reasonable with a continuation of a journey that is very close to completion.

That's very clear. And in terms of -- and you were pointing to this before, one of the main levers of profitability improvement for Sabadell has been asset quality, no doubt. It's very impressive track record you've built over the past 3 years. You're guiding to a total cost of risk of 40 basis points by 2027, which will mark further step up in asset quality resilience. What are the drivers of this improvement? And what are the areas that you're watching most closely?

I think this is at the core. I think we were in a conference and I was still with Leopoldo Alvear. And there was a question like this, going to be a question now, and the question was, what is the thing that is going to be the most relevant as a driver for the future profitability of the bank, and the vote was NII. And Leo and I were -- and it was improvised, I have to say, looked at each other and said, "No, no, no. It's going to be the cost of risk. " Because like 4 years ago, we got together in the management retreat with the management team, and we thoroughly looked at what was the one lever that would change, there were others. But what was the one lever that would change the performance of the bank, and that was cost of risk. And there has been an alignment between the commercial people, second line of defense, risk people, the distribution network, everybody around that. And now we measure the expected loss, product by product, client by client, and that is at the core of our decision-making, and that makes a tremendous difference. The incentives before were all based on top line, and we were missing everything that is related to real value creation, which has to include the cost of risk, which has to include the cost of capital, which has to include the direct costs, and that is how we manage now but we are still in transition. It has been a journey. We first introduced the RaRoC as a metric. And then we introduced limits in terms of the risk that you could assume in every transaction. Because before, when you were just measuring the income, people took decisions that had impact on risk on the longer term, but they were not there anymore or whatever. There was not really accountability. And now I think that is -- I think we are getting really to a state-of-the-art type of management situation in which everything is measured in terms of value creation going forward. The implementation, we are at 50%. But nevertheless, you look, and I think we showed that very clearly, and I'm not going to bore you again here during Q2 presentation, and we saw that all of the expected loss of all the products of the very recent future is even much better than the one of the near future. So when we compare to '23 and we compare '24 in the first half of '25, the expected loss of the new production is completely different, and that is going through the book over time because it's not instant. You generate new production, but it has to go through the book to really alter the whole thing and alter the models and . So during the first half of the year, we have 37 basis points. We're aiming to 40. So we are aiming to somewhat deterioration of the cost of margin despite the fact of all these tendencies and why is that? Because we are focusing on the products that are more profitable, which is SMEs, consumer lending, which necessarily will have a little bit more of cost of risk. What happens during the period of transition between when you go to one model to the other model? And it's -- and we are just in the middle of it. Necessarily, there's a transition period in which your volumes grow less than they could because you're stopping to do a number of transactions that you should not be doing. But then when you're again at a stable level and that the run rate that is stable, then your growth should be even more attractive because you can be very proactive commercially and you can go really for growth, knowing that from an asset quality, it's quite resilient. I have to say it's a super, super exciting project.

Realistic, interesting, certainly. If we move to, I guess, a key topic, which is capital and return, you see R&D raising from 14.5% this year to 16% in 2027, which implies significant value creation. How should we think about the balance between reinvesting to support organic growth, inorganic growth opportunities and the potential for increasing shareholder return?

I think we have done those calculations very clearly and very conservatively, and it's obvious that we can grow at mid-single-digit without any problem and at the same time, fulfill the expectation that we have given. We have given an expectation of EUR 1.3 billion on the back of '25 plus the EUR 2.5 billion on the back of the sale, that means in a very short period of time, I mean towards the beginning of next year, the sum, I'm not very good at math, 1.3 plus 2.5? It's a ton of money.

Absolutely, EUR 3.8 billion as soon as it has already started.

EUR 3.8 billion, wow.

The first dividend was paid at the end of August. It's already happening.

Yes. They are already happening. And then we expect another EUR 2.5 billion on the back of '26 and '27. That's very handsome. That's around 40% of our market cap, 40% of our market cap in -- until '27, quite spectacular, and I think that's how we are working because our metrics have changed. You see you can manage through EPS. It's great. You can manage through NII. That's great. You can manage through this. You can manage through that. But the synthesis of the whole thing is capital generation for distribution, and that's what we are doing. And I think one of the beauties is when you are able to -- because you can also shrink to glory. That's always a solution. You give everything away, even your shirt, you give everything away, and then for a short period of time, it's pretty good. But we are doing that and at the same time, growing at a marginally faster rate than the market. If you overdo it, then it doesn't work, because then you break everything and competition in mature markets. And that's why we are projecting only to get 25 to 30 basis points until the end of '27 from our more or less 8% market share to 8.3% or something like that.

Okay. And you touched upon the next topic, which is TSB. And on this specifically, how do you think about the value that you have crystallized with the sale? TSB has long been part of Sabadell profitability story. What was not the right moment to sell? And how would you frame the trade-off between crystallizing value today versus the profits that you were going to get from TSB contribution? And also, regarding your U.K. IT platform, how much do you -- how much value do you see embedded in it?

I want to leave this question to Sergio because I'm so passionate about the TSB and the whole story and the whole recovery, I will become emotional. So please...

Definitely, we are. It was not an easy decision when you decide to sell a good asset is never an easy decision. But we were certain that it was an acceleration of value creation for our shareholders, and it has all the components, and maybe let me discuss very quickly the components, the elements that we analyzed. On the back of being a very good asset and TSB management doing a fantastic work as they are doing. We found a very credible buyer with a lot of interest that had to compete for the asset because they were more than well interested. So we found -- so it was a process that was run on the back of competition. It was a perfectly driven process, competitive process. On the back of this process, Santander won with a price that clearly includes part of the synergies that they expect by combining TSB with their existing operations in the U.K. and therefore, improving the shape of the combined entity, right? The price that was obtained was GBP 2.9 billion, equivalent to EUR 3.4 billion. And from any angle that we can look at that, it was a good price. It was a multiple of 1.5x tangible book value. When we look at the pricing pounds plus the dividends. Actually, it means that Sabadell shareholders have doubled investment. It was a EUR 1.7 billion investment back in 2015, and it's been doubled. So price reaction at the day of announcement was -- it was clearly a testament of all this. And as I'm sure you are aware, we are under a tender offer process currently, so following the Spanish specificity rules, we had to submit this to the shareholders. There was a shareholder assembly back in August 6. Attendance was as high as 75% and the approval rate was 100%, 100% approval with attendance of 75%. So I think shareholders clearly back the decision and the proposal. And then finally, get into your question of the U.K. platform. The perimeter of the transaction is actually the shares of TSB and the bonds that we hold, the MREL. But it's not the IT platform. So the IT platform property remains within Sabadell. There is further value on the agreement because Santander has agreed to keep on using the platform for a number of years as TSB is doing. So we will receive the servicing fee for a number of years, and after that we will have the property. I think it's early to assign a value. It's a bit premature, but it's definitely something that is in our to-do list going forward. We have plenty of time to do it, to analyze what can be the uses and the value of the platform. So the good thing is that it's on the upside attached to that.

Thank you, Sergio, and just to wrap it up on the strategy. So beyond the headline targets, what do you think are Sabadell's biggest strength or underappreciated opportunities, areas where you feel the bank can surprise positively over the next few years?

Well, I think Spain is an attractive market, and now we are Spanish bank. After -- we were mainly a Spanish bank, but after the sale of TSB, it's obvious that we are purely Spanish bank. Second, I think we are focused on SMEs. We are a universal bank. We do a little bit of everything. I think we are growing everywhere in a healthy manner. I think our retail business, that was a problem, now it's a source of value creation, but having a very strong footprint in SMEs is very relevant. If you think about the future and you've seen long term strategically, SMEs is where the new entrants are going to have a harder time. You see them entering in payments. You see them entering in aggregation. You see them entering in offering multiple in platforms mortgages. You see a lot of things going on. SMEs is not one of them. SMEs requires proximity, requires technology, but it requires mainly that you have a commercial relationship and a trust that takes years to build. If you look at Porter and the barriers of entry, the place where there are barriers of entry, and therefore, there's a bigger opportunity of having reasonable margins and not being squeezed out, it's SMEs, and that's where we are. I think we are in the middle of a trajectory that hasn't finished, that has been very much appreciated by the market to a very large extent, but that still has room to grow. If you look at the basic metrics and we can go much more deep and much more complex. But if you look at PE ratios, if you look at the price to book, we are far beyond, far beyond, far below and far away from our major competitors, and we should close that gap and even potentially, well, let's see if we can even able to improve it because we have really leaped from. We have gone from an organization that was all passion for its clients and quality of service, and we have kept that. And on top of that, we have added very significant and meaningful metrics that are completely aligned with shareholder value creation. So -- and furthermore, we are very focused on distribution of that. We are not thinking of having any inorganic growth, that's not what we are chasing. I think what we are chasing is basically to develop this fantastic franchise to the next level. Can you imagine how much we can grow once we have put all these systems in place and we don't have the complexity of a takeover? I think our projections in that sense have been like always, and with this, I finish, have always been extremely conservative, and we have always exceeded them, and that's the way we like it to be and the way we hope it will continue to be.

Thank you very much, Cesar. Should we move now, given that we're running out of time to an investor survey. Would you like that? Investor survey.

Of course.

Yes.

Scary.

Let's see, first question. I will go only through the questions. You can read the options. What would cause you to become more positive on Banco Sabadell shares? Okay. Resolution of M&A uncertainty.

So we think that we will go up if that was resolved. More positive. Yes. Resolution. I think they should vote again. Is that really what they think? That's what I think, but I'm surprised. Very positive. So they are saying that if there's clarity and the uncertainty resolution, okay, resolution, what does that mean resolution? Positive or not?

Yes. What are you most concerned about Banco Sabadell? M&A risk? I think you answered that question on the last one. Number three. How do you expect Banco Sabadell's ROCE to develop over the next couple of years relative to 2025? Modestly higher. And then if we move to the next question, how do you see potential risk to Banco Sabadell's capital and dividend? Upside risk on better earnings. 83% consensus. Number five, please. How would you view significant acquisitions for the group?

I think I know this one.

Marginally negative, and finally, how do you see Sabadell's medium-term stand-alone plan being valued by the market? Targets look probably fair. Okay, well, thank you very much for taking the time to speak to us today. It's was a real pleasure to host you. So thank you.

Thank you.