BANCO DE SABADELL, S.A. 
- Net interest income increased by 20.7% year-on-year while pre-provision profit expanded by 16.1% with respect to the first half of 2014.
- Business volumes rose due to the acquisition of TSB Banking Group (TSB): lending +24.6% and on-balance sheet customer funds +37.2%. For the first time total assets exceeded 200 billion euro, having increased by 26.2% year-on-year.
- Non-performing loans were cut by a record 1,948 million euro with respect to December 2014, while the NPL coverage ratio reached 52.8% (53.7% including TSB). The NPL ratio fell to 10.98% (9.01% including TSB).
In the second quarter of the year, Banco Sabadell's consolidated results maintained the trend observed in the first quarter; net attributable profit amounted to 352.2 million euro, a 55.3% increase year-on-year, after booking 1,749.1 million euro in impairments for NPLs, securities and real estate.
Good ordinary business performance and strict control of recurring operating costs, coupled with active management of customer spreads and an improvement in asset quality characterised a second quarter in which the positive turning point in performing loans was confirmed and problem assets continued to be reduced.
At 30 June, Banco Sabadell had obtained the approval of the UK authorities to complete the acquisition of TSB Banking Group (TSB), a transaction that had been announced on 20 March. As a consequence Banco Sabadell's consolidated balance sheet as of 30 June 2015 includes TSB's entire balance sheet at the end of the second quarter.
Balance sheet
At the end of 2Q15, the total assets of Banco Sabadell amounted to €164,246.9 million, a 1.7% increase year-on-year. Including TSB, consolidated total assets increased by 26.2% with respect to the same date in 2014 and for the first time exceeded 200 billion euro (203,959.4 million euro).
Lending
Gross loans and advances to customers totalled 118,415.9 million euro, a 0.9% decline year-on-year. Taking into consideration TSB's figures this balance sheet item amounted to 148,962.6 million euro, 24.6% more than at 30 June 2014. Within the new group consolidation, including TSB, mortgage loans and credit amounted to 83,197.7 at 30 June 2015, a 41.5% increase year-on-year, and accounted for 56% of total gross lending. Uncollateralised loans increased by 21.3% year-on-year.
New mortgage production by the group in Spain increased by 31.2% in the last twelve months. Net lending to companies increased by 6.3% year-on-year, new lending having risen steadily for the last twelve consecutive months.
The ratio of non-performing loans to the group's total exposures continued to decline in the second quarter, reaching 10.98% at 30 June (9.01% including TSB), i.e. a 287 basis point decline in the year (176 basis points in the first six months of 2015).
Problematic assets were cut by 733 million euro since March (by 2,670 million euro in the last 12 months) and the total balance of doubtful exposures had been cut by a record 1,948 million euro by 30 June.
The sale of real estate on the balance sheet continued as planned in the first half, in line with the objectives set in the TRIple Plan 2014-2016. A total of 5,190 units were sold at a gross discount of 46.4% (4,968 units were sold in the first half of 2014, at a discount of 52.4%).
Customer funds
At 30 June 2015, on-balance sheet customer funds were practically unchanged (+0.3%) at 95,344.5 million euro. Including TSB that figure amounts to 130,369.6 million euro, a 37.2% increase year-on-year.
The stock of current accounts performed particularly well, rising by 30.8% to 36,544.6 million euro. TSB adds 48,097.6 million euro to that figure, resulting in a 72.1% increase with respect to 30 June 2014. Additionally, the volume of savings accounts increased by 17.6% (13,495.4 million euro). Including TSB, the growth was 184.9% (32,688.4 million euro).
The stock of term deposits totalled 45,510.3 million euro, 22.7% less year-on-year, in line with general market performance. TSB contributed 49,789.2 million euro, resulting in a 15.5% decline in year-on-year terms.
Off-balance sheet customer funds grew by 23.8% year-on-year to 35,409.6 million euro. Total funds under management have risen steadily for the last 12 months, to 20,230.2 million euro at 30 June 2015, a 47.6% increase in the last twelve months.
At the end of the quarter, assets in third-party pension funds amounted to 4,361.6 million euro, practically stable year-on-year. Insurance sales totalled 7,083.2 million euro in the first half of 2015. Total consolidated funds at 30 June 2015 amounted to 191,598.8 million euro, a 25.1% increase on the 153,188.0 million euro figure on the same date in 2014.
In the first six months of the year, Banco Sabadell increased its share of business with both companies and individuals. The group's share of loans to companies in Spain as a whole amounted to 10.74%, its share of export credit was 31.48% and of TPV sales 15.88%. Banco Sabadell has a 5.72% share of individuals' investment funds in Spain, 7.89% of credit cards and 4.90% of life insurance contracts.
Profit & loss account
In contrast with the balance sheet, the profit and loss account for the six months ended 30 June 2015 does not yet reflect the consolidation of TSB. At 30 June, it maintained the favourable trend observed in the first quarter with the positive impact of lower funding costs, improved commercial activity and strict cost control. Net interest income continued to rise quarter-on-quarter, reaching 1,299.0 million euro at 30 June, i.e. 20.7% more than on the same date in 2014.
Dividends received and income from subsidiaries and equity-accounted affiliates amounted to 27.3 million euro (8.5 million euro on the same date in 2014).
Increasing revenues from the assets under management business together with good performance from cross-selling of products and services boosted net commission revenues to 454.0 million euro in the period ended 30 June 2015, 9.5% more than in the same period of 2014.
This increase was observed in all types of fees and commissions (risk operations, services, mutual funds and insurance); in particular, there was a notable year-on-year improvement in fee revenue from cards (+11.8%), payment orders (+5.4%) and management of investment funds (+3 8.5%).
Against a backdrop of considerable volatility, income from financial transactions amounted to 1,114.3 million euro, while net foreign exchange income at 30 June 2015 amounted to 82.3 million euro, 114.6% more than in the second quarter or 2014, with the result that these two items together increased by 2.2% with respect to 2Q14.
As a result, gross operating income exceeded the market consensus estimate, rising by 10.3% to 2,960.0 million euro.
Operating costs totalled 908.0 million euro, practically unchanged in the last twelve months (+0.5%).
The combination of good recurring revenue performance and strict cost control drove a steady improvement in the cost-to-income ratio, which was 48.58% at 30 June 2015, excluding non-recurring trading income and exchange differences but accruing for the contribution to the Deposit Guarantee Fund. In the first six months of the year, the cost-to-income ratio improved by 456 basis points, i.e. 65% of the 699 basis point improvement registered in the last twelve months, in line with the target under the TRIple Plan of reaching 40% by 31 December 2016.
As a result, profit before provisions amounted to 1,908.6 million euro at 30 June 2015, 16.1% more than in the same period of 2014.
Provisions for loan losses and other impairments (mainly real estate and financial assets) amounted to 1,749.1 million euro (+23.6% year-on-year), including additional provisions.
In order to increase reserves. At the end of the second quarter, coverage of non-performing loans had increased to 52.8% (53.7% including TSB) while coverage of foreclosed real estate stood at 43.3%.
The TSB acquisition had a positive impact on the consolidated profit and loss account for the quarter as a result of the recognition of negative goodwill amounting to 207.4 million euro (net of taxes) which was allocated entirely to additional provisions.
After deducting income tax and minority interests, net income attributed to the group amounted to 352.2 million euro at the end of the second quarter of 2015. That is 55.3% more than in the same period of 2014 (226.8 million euro). Accruing the FGD contribution in both years, income attributed to the group would have been 287.3 million euro in the first half of 2015, compared with 167.7 million euro in the same period of 2014, i.e. a 71.3% increase.
At 30 June 2015, having completed the TSB acquisition, Banco Sabadell is one of the best-capitalised banks in the Spanish financial system, with a CET1 ratio of 11.5% (11.2% fully loaded, i.e. applying Basel III before schedule). The BIS capital ratio was 13.0% (12.4% at 30 June 2014). Net equity improved by 11.4% year-on-year to 12,076.9 million euro.
Other key developments in the second quarter
Acquisition of TSB Banking Group
At the end of the second quarter, Banco Sabadell announced that it had received the green light from the Prudential Regulatory Authority to complete the acquisition of TSB Banking Group (TSB), which had been announced on 20 March, in a deal worth 1,700 million pounds (approximately 2,350 million euro).
TSB, which belonged to the Lloyds Bank group, is the seventh-largest bank in the UK. It has branches in over 600 locations in the UK, with 8,700 employees and 4.7 million customers. It will be delisted from the London Stock Exchange on 28 July.
Upon closing of the transaction, Banco Sabadell implemented a new corporate governance structure at TSB and established a Project Office in London. In parallel, it launched a "100-day plan" to begin merging workflows.
A key feature of this first phase of integrating TSB into the Banco Sabadell group is the development of a new technology platform, whose protocol is already under development. This new technical infrastructure is scheduled to be operational by the end of 2016, so that the bank can be integrated operationally in the fourth quarter of 2017.
Lloyds Bank's contribution, amounting to 450 million pounds (approximately 622 million euro), to cover the technological integration covers the costs of migrating to the new platform, whose design will include a varied catalogue of products and services for SMEs with the goal of enabling TSB to expand in this segment in the UK.
Technology synergies are estimated at about 160 million pounds per year (about 221 million euro) before taxes, starting in 2018, due to technology optimisation.
Operational and digital transformation advancing
At the half-way point of its TRIple Plan 2014-2016, Banco Sabadell is advancing with the digital adaptation and transformation of its customer relationship model (the T in the plan's name, alongside the R, which stands for profitability, and the I, which means Internationalisation), with the result that 88% of all basic customer transactions are currently performed via the internet or on mobile devices. These distance channels are used by 2 million customers, 38% of total active customers.
For the fourth consecutive year, users of Apple Store and Google Play rated Banco Sabadell's mobile application the best in the market. The use of internet and mobile channels is growing rapidly; user numbers are up 25% year-on-year (900,000 new digital customers), while downloads are up 15% (+1.6 million in the last twelve months), and there are more than 6 million monthly accesses.
Progress is also being made with Active Customer Management, the goal being to manage a significant volume of customers remotely by 2016 year-end (extended support and service 24/7), while the "Rapid Expansion Account Pack" expedites the process of signing up new customers by simplifying the procedure and the paperwork.
Expansion of the Management Committee
As part of the TRIple business plan for 2014-2016 and in the context of internationalisation in the Americas and the United Kingdom, Banco Sabadell expanded its Management Committee in the second quarter by incorporating Ramón de la Riva, Deputy General Manager in charge of Markets and Private Banking, and Enric Rovira, Deputy General Manager in charge of Asset Transformation and Industrial and Real Estate Holdings.
In parallel, the Finance and Operations and Corporate Development departments were restructured and the functions and current management structure in the Americas, headed by Deputy General Manager Fernando Pérez-Hickman, were expanded, while the area was renamed America & Global Corporate Banking and now encompasses managing all representative offices outside Spain and the group's Corporate Banking and Structured Finance businesses.
Additionally, the Group's Technology Department was strengthened by the appointment of Rüdiger Schmidt, who has transferred from Deutsche Bank and now heads the global technology and systems, certification and digital transformation functions .
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