Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Banco de Sabadell SA (BNDSF, Financial) reported a significant increase in net profit, reaching EUR791 million in the first half of 2024, a 40% increase year-on-year.
- The bank's return on tangible equity (ROTE) improved to 13.1%, indicating strong profitability.
- Net interest income (NII) grew by 2.5% quarter-on-quarter and 9.8% year-on-year, driven by higher customer margins and increased loan volumes.
- The bank announced an increase in its payout ratio to 60% and approved the distribution of an interim dividend of EUR0.08 per share.
- Asset quality remains strong, with a 5% increase in non-performing assets (NPAs) and improved coverage ratios, contributing to a lower cost of risk.
Negative Points
- Despite the positive financial performance, the bank faces intense competition in the mortgage and SME lending markets, which could pressure margins.
- The cost of deposits in Spain increased by 1 basis point quarter-on-quarter, indicating potential future pressure on NII.
- TSB's contribution to the group's net profit was EUR95 million, half of its contribution in 2023, highlighting challenges in the UK market.
- The bank's fee income decreased by 1.4% quarter-on-quarter and 3.3% year-on-year, impacted by card costs and other factors.
- The bank's capital distribution plan, including the EUR2.9 billion target, is based on conservative estimates and may need adjustments depending on future financial performance and regulatory changes.
Q & A Highlights
Q: The first one is on the loan markets. You've been saying previously that it was competitive and you've been protecting your margins now the new production has accelerated, notably across all the segments. And my question is what drives this pickup and has your view changed?
A: The loan growth is on the back of a ton of things that have been done to prepare for this and actually, we announced that this was our expectation. We said very clearly in '23 that in a market that was not growing where we only saw, the elements that are related to consumption. So we saw consumer lending growing, and we saw the working capital growing in '22 and '23. But we and we saw very weak demand on mortgages, which is an investment for individuals and was also very weak investment in mid term and long-term CapEx investment from enterprises. And we said very clearly at the end of '24 that we had the expectation that this might change in the future and that we were ready for growth when the market grows. I think that sound strategy to grow when the market -- to grow even more than the market growth when the market grows and not to try to gain market share when the market shrinks because it affects certainly your margins and even you can put that risk your cost of risk. We have executed exactly on that. We have, if I may. So on the SMEs, we have done a lot of pre authorizations. So we have calculated the expected loss for every client. You have to remember that one in two of the SMEs are clients of Banco Sabadell. So we know them very well. And what we have been is very proactive at calculating the probability of default of each and every one of them. Understanding their needs and being very proactive at providing the alternative sources of financing, as they need them. In mortgages, exactly analogous, not exactly the same, but exactly analogous. The processes have been thoroughly transformed with specialists, we have done a much better segmentation of pricing, adjusted risk, the cross-selling of the different products that are related to it, and we have been able to convert and to increase dramatically -- significantly dramatically certain exaggeration. Significantly the conversion rate based on much better processes. So this loan growth is just what we were aiming for. And we are very happy to express that we have been successful at executing it.
Q: What was the impact of risk model updates on the cost of risk in the second quarter?
A: The evolution of cost of risk has been slightly better than expected. But within the trend we said from the beginning of the year, that cost of risk is going to come down. Q1, it was 50 basis points. And now we're coming down a little bit. Why basically, I would say the new production, the new lending, it's been more supportive as we tried to show on slide with the decline in PDs on the one hand. This also drives that individual analysis from a risk standpoint has been having a very good performance as companies are having a very good performance in the last quarters/years, the models have been reasonably stable Q-on-Q. So nothing of any interest on that regard. And we're not seeing any kind of early warning indicators at all, as what we have been discussing in the last few quarters. When we look at earliest KPI suggest, you know, 30 days in arrears. As a matter of fact, we are performing better than last year in mortgages and consumer loans and absolutely in line in terms of the SMEs and corporates. So I think to start with -- the starting situation is very, very healthy as we have discussed before, the Spanish economy has undergone a huge deleveraging exercise in the last 10 years. So the starting point in terms of leverage is very, very low for both households and SMEs and corporates plus we've been working very hard in the last three years to improve our risk procedures in order to improve the quality of the new lending. And we are starting to see that. And the macro, it's very important going forward, no, unless there's a change that we cannot foresee right now. So the combination of these three factors, you know, macro, internal management of risks no, and the back book pretty healthy, but book 60% of mortgages are fixed. Remember that while we're very confident that cost of risk will keep on having a very good evolution in the coming quarters. No, just like the trend that we have been seeing in the last few.
Q: On Nexi view I know this is not your central scenario, but I was wondering if there is any breakup clause that implies finds in case you decide to walk away from the deal?
A: There are no breaking closes. I think we are both absolutely committed what we have just put it the deal on hold. And this just makes sense. I mean, in the middle of a hostile takeover. It doesn't make sense to engage in a significant change of any major activity. And it is with pleasure that I have to announce that we remain committed that the discussions have been very healthy and that we have just remained with exactly the same agreement just postponed until the end of the tender. So expectedly, it will happen in around mid-'25.
Q: I have two questions, one on the Nanya and another one, another one on capital. So I'm looking to the cost of deposits in the quarter, there has been a very good performance in Spain. Wanted to see how do you see that evolving at both in terms of pricing of deposits and the mix shift towards time deposits and on NII as one would like to have your tenants about the competitive landscape in mortgages and business lending, how do you see the market behaving currently into in these two segments.
A: In terms of deposits, yes, the evolution has been again, probably better than expected. So we were from the beginning of the year we said that, you know, because of losses, which is going to grow this year by much, much, much less than in 23. And the evolution has been very benign now we've already seen some rate cuts. So from here onwards, I expect things to perform. And but in line what we have seen so far, no, we might see in some quarters some volatility and some increase because we are doing more campaigns if you issue of digital deposits or whatever, just like all the banks are doing it. But all in all, I expect the evolution of deposits to be fairly fairly subdued. No pressure, for example, in Spain, I believe the cost of deposits shall remain well below 1% for the year. And now and this was our budget we might even it's slightly better is what we're doing in the first half. So on the trend seems to be quite resilient if you wish now let's remember that around 45% of deposit costs are concentrated in three business segments, private banking, institutionals and public sector. And in those sectors, the BDI is very, very high. In other words, they are basically linked to Euribor. So basically, as rates start to go down, the cost of those deposits will have already started to go
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
