Banco Sabadell Annual Report 2014 133Rd Year 2 Banco Sabadell Annual Report 2014 Banco Sabadell Contents Annual Report 2014 133Rd Year

Banco Sabadell Annual report 2014 133rd Year 2 Banco Sabadell Annual report 2014 Banco Sabadell Contents Annual report 2014 133rd year

4 Key ﬁ gures in 2014

9 Chairman's message

12 Banco Sabadell Group 13 About Banco Sabadell 16 Corporate governance and general management 18 Economic, business and regulatory environment 25 Strategy, Business model and the BS brand 34 Banco Sabadell's key stakeholders

48 Banco Sabadell Group ﬁ nancial information 49 Profi t performance 55 Balance sheet management 62 Liquidity management and funding policy 65 Capital management

68 Group Businesses 70 Commercial Banking 82 Corporate Banking and Global Businesses 87 Markets and Private Banking 94 Asset Transformation 97 Sabadell America

100 Risk management 101 Milestones in 2014 105 Most signifi cant risks in the risk appetite framework

114 Report of the Audit and Control Committee

122 Corporate Social Responsibility

126 Statutory information 127 Director’s statement of responsibility 128 Auditor’s report 130 Annual accounts 315 Report of the directors

372 Contact Key ﬁ gures in 2014 Financial key ﬁ gures

Thousand euro Key data 2014 2013 (*) % 14/13 Shareholders’ equity 10,223,743 10,037,368 1.9 Total assets 163,345,673 163,522,541 (0.1) Gross loans and advances to customers, excluding repos 121,140,838 124,614,933 (2.8) Loans and advances to customers - gross 121,728,435 125,302,943 (2.9) On-balance sheet funds 121,806,632 123,753,008 (1.6) Customer deposits on balance sheet 94,460,668 94,497,187 (0.0) Mutual funds 15,705,612 11,018,570 42.5 Pension funds and third-party insurance products 11,755,126 12,423,646 (5.4) Funds under management 152,185,441 149,122,858 2.1

Thousand euro Income statement 2014 2013 (*) % 14/13 Net interest income 2,259,706 1,814,694 24.5 Gross income 4,800,526 3,831,198 25.3 Profi t pre provisions 2,749,104 1,879,690 46.3 Net attributable profi t 371,677 145,915 154.7

Resources 2014 2013 Number of branches 2,320 2,418 Number of employees 17,529 18,077

% Ratios 2014 2013 (*) Proﬁ tability and efﬁ ciency ROA (net profi t / average total assets) 0.23 0.10 ROE (profi t attributable to group / average shareholders’ equity) 3.70 1.58 ROTE (profi t attributable to group / average shareholders’ 4.14 1.75 equity less goodwill) Cost:income ratio (**) 53.14 64.19 Cost:income ratio excluding non-recurring expenses (**) 51.93 62.28 Capital ratios (BIS) (***) Core capital 11.7 11.7 Tier I 11.7 11.7 BIS Ratio 12.8 12.5 Risk management Non-performing loans (€’000) (***) 14,192,150 16,021,491 Loan loss ratio (****) 12.17 13.63 Reserves for NPLs and real estate (€’000) 17,441,989 18,341,298 Overall coverage ratio (*****) 13.1 13.6

Shares 2014 2013 (*) Number of shares 4,024,460,614 4,011,481,581 Number of shareholders 231,481 262,589 Share price (€) 2.205 1.896 Attributable earnings per share (€) 0.092 0.036 Attributable earnings per share adjusted for effect of mandatory 0.087 0.034 convertible bonds (€)

(*) Restated as a result of early application of IFRIC 21. (**) To calculate these ratios, gross operating income was adjusted considering only trading income and recurrent exchange differences. The historical series was restated on this basis. (***) 2013 ratios in accordance with Basel II. Data at December 2014, in accordance with Basel III criteria and applying the modifi cations envisioned in Bank of Spain Circular 2/2014, which was approved in July 2014. (****) The fi gures and percentages shown do not include assets covered by the Asset Protection Scheme (APS). (*****) Shows provision as a percentage of total exposure to loan and real estate portfolios.

Key fi gures in 2014 5 Non-fi nancial key fi gures

Non-ﬁ nancial key ﬁ gures: main sustainability indicators 2014 2013 % 14/13

Banco Sabadell customer service quality index (*) 7.16 6.89 3.9 Banco Sabadell staff satisfaction index (%) (**) — 66 — Gender diversity of the staff (women/total staff) (%) 50.1 50.0 0.2 Employees with indefi nite contract (%) 99.8 98.5 1.2 Hours of training per employee 33.62 25.55 31.6

(*) Source: STIGA, EQUOS Análisis de Calidad Objetiva en Redes Comerciales Bancarias (4Q 2014). The industry average rating was 6.29 in 2014 and 6.03 in 2013. (**) 66% of employees responded to the fi nal question in the 2013 employee satisfaction survey that “All things considered, I would say it is an excellent place to work”. No employee satisfaction survey was conducted in 2014. A survey will be conducted in 2015.

6 Banco Sabadell Annual report 2014

Banco Sabadell Annual report 2014 Chairman's message

Dear shareholder,

Banco Sabadell ended 2014, the first year of the 2014-2016 Triple Business Plan, with growth in profits, driven by an improvement in net interest income coupled with cost containment. The macroeconomic and financial context was more favourable in 2014, as the European Central Bank took on a new role in its mission to safeguard financial stability, by announcing monetary expansion policies which have materialized this year, and with the entry into operation of the new European System of Financial Supervision. Together with Basel III, the European Banking Authority and the Single Resolution Mechanism, it comprises the new regulatory and institutional framework of the Euro area’s financial system. The implementation of the Single Supervisory Mechanism and monetary expansion measures, consisting of massive purchases of Euro area government bonds plus funding to banking institutions as a function of their lending availability, have eased financial conditions in the market and led to a steady decline of interest rates to hitherto unseen levels. This also contributed to a decline in country risk premia, substantially reducing the market fragmentation of previous years. In addition to these internal conditions in the Euro area, there was also a positive exogenous impact of lower energy prices and the strong dollar, favouring exports. The recovery is visible, and there is every indication that it will pick up momentum in 2015 and 2016, creating a context of positive expectations, marred only by Greek debt risks in Europe and geopolitical risk factors, which are becoming increasingly serious, such as the conflict in Ukraine and wars related to radical Islamism. In Spain, the economic recovery is gaining traction, driven by more favourable funding conditions and the resolution of the financial sector’s most pressing problems. Banco Sabadell worked especially hard in 2014, resulting in a notable improvement in profitability, with net profit amounting to €371.7 million, while progress was made in restoring balance sheet health and in selling properties acquired as a result of the real estate crisis. Banco Sabadell also performed well in the European stress tests prior to the implementation of the new European supervisory system. The first portion of the tests — the Asset Quality Review — consisted of an analysis of banks’ financial statements. Of all of the European banks analysed, just 15 did not require any adjustments. Banco Sabadell was among them and, moreover, was the only Spanish bank in that group. The second part of the tests sought to confirm that the Bank had sufficient capital to weather various distressed scenarios, which included very adverse conditions. In- dubitably, the capital increase in September 2013 provided the necessary support to sustain the new size acquired by the Bank during banking consolidation in the crisis, and also strengthened the ratios required by regulators and the market. The stress tests confirmed the soundness of Banco Sabadell’s active approach to managing capital and liquidity, validating it to address the challenges of the future. Banco Sabadell’s core capital (CE Tier 1) ratio was 11.7% at the end of 2014.

Chairman's message 9 It was the first year in which the Bank evidenced the earnings trend during the Triple business plan; that performance is based on growth in business volumes and improvements in margins, with a view to returning to normal levels of earnings in the current context of interest rates and risk appetite. Due to active management of customer spreads, net interest income increased steadily during the year to €2,259.7 million, 24.5% more than in 2013. The policies applied to contain personnel and administrative costs while generating synergies in absorbing the acquisitions enabled the Bank to reduce operating costs by 4.4% year-on-year, in like-for-like terms. Although gross loans and advances to customers, excluding repos, fell 2.8% in year-on-year terms, to €122,140.8 million, there were signs of a revival in demand for credit, especially in the fourth quarter of 2014. New loan production, the good pace of deposit-taking, and sales of value-added products reflect notable growth among both individuals and companies. Intensive risk management and property sales — which exceeded the target for the first year of the Triple plan by 10.3% — supported the ongoing reduction of problematic assets. For the first time since the crisis began, the volume of assets reclassified as problematic declined, quarter on quarter, for the entire year, accelerating the improvement in the NPL ratio. The NPL coverage ratio remained above 50%. 2014 was the first year of a three-year plan aimed at changing the institution’s profile, by implementing strategies that constitute the essence of the Bank’s development in the medium term, following the consolidation process and the resolution of financial institutions in Spain: development of our business model based on relationship banking and closeness, underpinned by new technology and internationalization. The internal transformation of work systems and customer relations, together with preparing the Bank to address the challenge of digital competition, is one of the central pillars of the Triple plan, leveraging the information in our databases to provide better service and meet the needs of our customers at di≠erent points in their professional and business lives. In recent years, sizeable technical resources have been devoted to integration processes, and also to developing talent at the Bank, which will enable it to expand by seizing opportunities while acquiring the necessary skills to address the challenges arising from changes in customers’ habits in a world of digitized information. Internationalization is the other key factor driving the Bank’s future under the Triple Plan. Turning the institution into an international bank is a strategic decision to better o≠set risks, while also establishing parallel projects where our management capacity can add value. The integration of banks in recent years puts Banco Sabadell in a position to leverage the newly-acquired size in Spain, and also o≠ers a competitive advantage as a result of the technological experience acquired by our teams, who are capable of contributing value to projects in other countries. The integrations in the US prove this. In 2014, the Bank launched a new finance venture in Mexico, focused on corporate banking and structured finance. It is a market with growth potential, in which the Bank has had a presence since 1991 through a branch in Mexico City. At this time, Mexico is an additional focus of the internationalization strategy, as Banco Sabadell diversifies and expands into Latin American countries with which it is already familiar.

10 Banco Sabadell Annual report 2014 In April 2015, Banco Sabadell presented a tender o≠er for all of the shares of TSB Banking Group plc (TSB), one of the largest challenger banks in the UK. The TSB operation is an important milestone in the Bank’s history. It’s a European bank, outside of the Euro area, whose focus on retail investors and small businesses is aligned with Banco Sabadell’s expertise and experience. The bid has the support of the Board of Di- rectors of TSB, which has recommended that its shareholders accept it. The takeover is ongoing, pending authorisation by the authorities. Banco Sabadell’s actions will continue to be guided by the principles of transparency and integrity, which form the basis of our reputational capital, are an essential part of our Group’s business culture and represent distinctive values for business development. Underpinned by our values and ethical principles, Banco Sabadell will continue working to build a future which guarantees a positive impact on society. The Annual Report contains ﬁnancial information and details of how our business performed, as well as the Group’s business model, risk management and strategy. The day-to-day contribution, dedication and professionalism of all Banco Sabadell employees have been vital for building what is today one of Spain’s leading ﬁnancial institutions, and they are a priority for continuing to advance towards achieving our goals. In 2015, Banco Sabadell is focused on executing the 2014-2016 Triple Plan, while maintaining the high levels of service quality for which it is renowned.

Josep Oliu Creus Chairman

Chairman's message 11 Banco Sabadell Group About Banco Sabadell Bankers since 1881, Banco Sabadell has remained faithful to its origins.

Who we are

Established in 1881, Banco Sabadell is, today one of the main entities of the fi nacial system, Spain’s fifth largest banking group, and holds an important position in the personal and business banking market. With a young, well qualified sta≠ and equipped with the most up-to-date technology and business systems, Banco Sabadell's operating model is focused on its dual aim of being its customers' main bank and building relationships based on quality and commitment. With a strong focus on lasting and profitable relationships, Ban- co Sabadell supports its customers through every phase of their financial lives by following a multi-brand, multi- channel and multi-product strategy, providing options and channels that meet their needs and o≠ering a full range of products and services favourable to long-term customer retention. The Bank's development objectives are focused on profitable growth and the creation of shareholder value through a strategy of business diversification that is subject to periodic review based on quality of service, quality of risk, e∞ciency and profitability while maintaining high standards of ethics and professional conduct combined with sensitivity to stakeholders' interests.

Historical background and recent acquisitions

Since 1996, Banco Sabadell has embarked on a policy of rapid expansion which was particularly notable in recent years, during which it experienced a very major increase in scale.

Banco Sabadell Group 13 G1 Landmark developments

A group of 127 Acquisition of Successful Acquisition The Bank The Bank Acquisition of The Bank businessmen NatWest Spain bid for Banco of Banco acquires launches a Banco CAM begins and traders set Group and Atlántico. Urquijo. BBVA's private takeover bid for and creation operations up the Bank Banco banking 100% of Banco of Sabadell in Mexico. in the town de Asturias. business in Guipuzcoano. Urquijo BP. of Sabadell Miami, USA. to provide Sells 50% of funding for local its insurance industry. interests.

1881 1996 2003 2006 2008 2010 2012 2014 1965 2001 2004 2007 2009 2011 2013 Steady Banco Sabadell A capital Acquisition Acquisition of The Bank Acquisition expansion of is listed on increase puts of TransAtlantic Mellon United acquires the of Caixa branch network the stock the Bank in the Bank (Miami). National Bank. assets and Penedès and begins. exchange. The IBEX-35 league. liabilities of Banco Gallego Bank acquires Integration of Lydian Private branches and Banco Herrero. Banco Atlántico Bank (Florida) Lloyds Banking IT and business and announces Group's systems. the takeover of Spanish Banco CAM. operations.

G2 Banco Sabadell - foreign market presence

Branches Representative ofﬁ ces Foreign subsidiaries and United Kingdom Algiers (Algeria) Dubai (UAE) Istanbul (Turkey) key equity investments USA Sao Paulo (Brazil) New Delhi (India) Caracas (Venezuela) Andorra France Beijing (China) Mexico City (Mexico) Santo Domingo USA Morocco Shanghai (China) Warsaw (Poland) (Dominican Republic) Portugal New York (USA) Singapore Mexico

Banco Sabadell has always been seen by customers as a vi- a key theme. The Bank commenced operations in Mexico tal partner in cross-border transactions and foreign trade. in June 2014, with the result that it had a presence in 17 The Bank’s current 3-year plan (“Triple” — see the section countries through branches, representative ofﬁces, subsi- on “Strategy” below) includes international expansion as diaries and equity holdings at the end of 2014.

14 Banco Sabadell Annual report 2014 Banco Sabadell achieved a signiﬁ cant increase in scale in recent years.

T1 Banco Sabadell - changes 2007 2010 2014 2014/2007 in key numbers (€Mn.) Assets 76,776 97,099 163,346 X 2.1 Loans and advances (*) 63,165 73,058 121,141 X 1.9 Deposits (**) 34,717 49,374 94,461 X 2.7 Branches in Spain 1,225 1,428 2,267 X 1.9 Employees 10.234 10,777 17,529 X 1.7

(*) Gross loans and advances excluding repos. (**) On-balance sheet customer funds.

Mission and values innovative value propositions. Being able to imagine how the future might be. Banco Sabadell's mission is to "develop its business as a full-service bank with a focus on specialization based on Professionalism: Rigour, neatness, punctuality, accura- a programme of selective growth and a customer-centred cy, clear and truthful communication, commitment, res- approach". ponsibility, making the right decisions, and lifelong lear- Banco Sabadell believes in long-term relationships ning are the characteristics that defi ne professionalism. centred on values such as trust, authenticity and communication. This means that the Bank manages its aff airs at Ethics and social responsibility: Professional and per- all times according to a series of corporate values, namely: sonal life at Banco Sabadell is based on fairness, honesty, transparency and taking responsibility for the consequen- The desire to serve: The Bank's professional approach is ces of employees' actions. The Bank contributes to sustai- based on understanding the problems and needs of custo- nable social development through sponsorship, caring for mers and off ering them the full range of its individual the environment and rejecting all forms of discrimination and collective abilities in the form of rapid, simple and and exploitation against other human beings. eff ective solutions. Austerity: Austerity means using the company’s resou- Closeness: Closeness means taking all the necessary rces sensibly and avoiding ostentation and unnecessary steps to establish strong relationships and deliver a good expense. Sabadell applies this principle by distinguishing service. Customers should see the Bank as an equal what is necessary from what is inessential and seeking to partner which is sensitive to diversity, removes physical provide a distinctive level of quality. barriers, and uses new technology to facilitate communication and reduce the distance with customers. Prudence: Banco Sabadell undertakes business risks in a responsible way thanks to appropriate specialist training Adaptability: Banco Sabadell is agile in adapting to cus- and by making decisions based on information which is tomer needs by providing fl exible, e∞cient solutions. su∞cient and verifi ed.

Business approach: Being proactive, knowing the cus- Working together: Working together is key to the pro- tomer and his or her needs, anticipating those needs, and gress of mankind. We work as a team and bring people making mutually beneﬁ cial transactions are the basis of a and ideas together in the pursuit of a common goal which sustainable relationship; these are the key principles that generates enthusiasm and helps to retain talent, in which guide all the Group's actions. common objectives are more important than individual interests and information is shared openly and transpa- Innovation: Anticipating customers’ needs by developing rently. We respect diversity among individual members products and services which are surprisingly advanced of the Group, for it is this very diversity that enriches the yet simple to use. Carefully evaluating the potential whole. off ered by new technologies with a view to developing

Banco Sabadell Group 15 Corporate governance and General Management Composition of the Board and Board committees

The Board of Directors is the highest decision-making The members of the Board and Board committees at 2014 body in the Company and its consolidated group and is year-end were as follows: responsible under the law and the Articles of Association for the management and representation of the Company. The Board of Directors acts mainly as an instrument of Board of Directors supervision and control, and delegates the management of ordinary business matters of the Company to the ex- Chairman and CEO ecutive organs and management team. Josep Oliu Creus The Board of Directors is regulated by clear, trans- Deputy Chairmen parent rules of governance, speciﬁcally the Articles of José Manuel Lara Bosch Association and the Board's Rules of Procedure, which José Javier Echenique Landiribar conform to corporate governance standards. Managing Director The Bank's Articles of Association, the Board's (Consejero Delegado) Rules of Procedure and the Annual Report on Corporate Jaime Guardiola Romojaro Governance can be viewed on the Bank's web site Directors (www.grupobancosabadell.com). Héctor María Colonques Moreno Joaquín Folch-Rusiñol Corachán M. Teresa García-Milà Lloveras Joan Llonch Andreu David Martínez Guzmán José Manuel Martínez Martínez José Ramón Martínez Sufrategui Antonio Vítor Martins Monteiro José Permanyer Cunillera Director-General Manager José Luis Negro Rodríguez Secretary Miquel Roca i Junyent Deputy Secretary to the Board María José García Beato

T2 Board Committees - Membership

Position Executive Audit and Control Appointments Risk Control Strategy and Remuneration

Chairman Josep Oliu Creus Joan Llonch Andreu Héctor María José Manuel Josep Oliu Creus Colonques Moreno Martínez Martínez

Deputy Chairman — — — José Permanyer — Cunillera

Member José Javier María Teresa José Manuel María Teresa José Manuel Echenique Landiribar Garcia-Milà Lloveras Lara Bosch Garcia-Milà Lloveras Lara Bosch

Member Jaime Guardiola José Ramón José Javier Joan Llonch Andreu José Javier Romojaro Martínez Sufrategui Echenique Landiribar Echenique Landiribar

Member José Luis Negro — Joaquín Folch- — Jaime Guardiola Rodríguez Rusiñol Corachán Romojaro

Member José Permanyer — — — Joaquín Folch- Cunillera Rusiñol Corachán

Member — — — — José Manuel Martínez Martínez

Secretary María José Miquel Roca Miquel Roca María José Miquel Roca García Beato i Junyent i Junyent García Beato i Junyent

16 Banco Sabadell Annual report 2014 General Management

Management Committee Operating Divisions Central Service Divisions

Chairman and CEO Commercial Banking Risks Josep Oliu Creus Carlos Ventura Santamans José Luis Negro Rodríguez Managing Director Deputy General Manager Director-General Manager (CRO) (Consejero Delegado) Eduardo Currás de Don Pablos Rafael José García Nau≠al Jaime Guardiola Romojaro Manuel Tresánchez Montaner Assistant General Manager Director-General Manager Silvia Ávila Rivero General Secretary José Luis Negro Rodríguez Assistant General Managers María José García Beato Secretary–General Markets and Private Banking Secretary–General María José García Beato Ramón de la Riva Reina Gonzalo Barettino Coloma General Manager (CFO) Deputy General Manager Assistant General Manager Tomás Varela Muiña Cirus Andreu Cabot Chief Financial O∞cer General Manager (COO) Alfonso Ayuso Calle Tomás Varela Muiña Miguel Montes Güell Assistant General Managers General Manager (CFO) Deputy General Manager Sabadell America Sergio Palavecino Tomé Carlos Ventura Santamans Fernando Pérez-Hickman Assistant General Manager Deputy General Manager Deputy General Manager Operations and Corporate Fernando Pérez-Hickman Corporate Banking and Global Development Businesses Miguel Montes Güell Enric Rovira Masachs General Manager (COO) Assistant General Manager Federico Rodríguez Castillo Asset Transformation and Solvia Assistant General Manager Miguel Montes Güell Corporate Operations General Manager (COO) Joan M. Grumé Sierra Assistant General Manager Equity investments Regional Divisions Ignacio Camí Casellas Assistant General Manager Catalonia Region Communication and Institutional Luis Buil Vall Relations Assistant General Manager Ramon Rovira Pol Central Region Assistant General Manager Blanca Montero Corominas Human Resources Assistant General Manager Javier Vela Hernández Eastern Region Assistant General Manager Jaime Matas Vallverdú Internal Audit Assistant General Manager Nuria Lázaro Rubio Northeast Region Assistant General Manager Pablo Junceda Moreno Assistant General Manager Northern Region Pedro E. Sánchez Sologaistua Assistant General Manager Southern Region Juan Krauel Alonso Assistant General Manager

Banco Sabadell Group 17 Economic, business and regulatory environment barely showed any increase in activity as investment remained weak. Investor and business confidence was weig- Global economic and fi nancial environment hed down by geopolitical uncertainty over the confl ict in Ukraine. The United Kingdom continued to show robust World economic situation growth and steadily falling unemployment (G4). In Euro- pe, the European Commission presented a programme, In 2014 the world economy was characterized by modest the Juncker plan, whose aim is to mobilize €315 billion for growth, with infl ation remaining muted. The sharp fall investment over the period 2015-2017. In Japan an increa- in the price of oil (G3) in the latter months of the year sed tax on consumer spending put a brake on economic increased the downward pressure on infl ation. Oil prices, activity in the middle of the year. The emerging markets aff ected by demand as well as supply factors, fell by nearly continued to see a slowdown in their economic growth. 50% and now stand at the levels they were at in 2009. The China saw a continuation of the structural deceleration of financial markets continued to be supported by accommo- its economy, which was constrained by a weak real estate dative monetary policies although there were occasional market. In Latin America the dominant theme was econo- bouts of instability. mic fragility and political uncertainty in Brazil. In Mexico, In the global arena political and geopolitical deve- meanwhile, activity saw an upturn albeit at a pace that was lopments were a major focus of attention. Geopolitical slower than anticipated. The country continued to make tensions fl ared in the Middle East and, especially, in progress in implementing structural reforms. The Russian Ukraine. In Europe political events were the prime cause economy suff ered damage from geopolitical instability and of uncertainty. The fragmentation revealed by national vo- falling oil prices. This fall was a factor aff ecting oil exporting intention surveys has raised questions over the future ting countries generally. governability of certain countries. One example of this is Greece, where an early election was held at the beginning of 2015. In terms of economic activity, the global slowdown in growth masked divergent growth paths in diff erent countries. In the US the economy staged a gradual recovery and the labour market surprised on the upside. The Eurozone

120 G3 Oil price (Brent, US dollars per barrel) 110 Source: Bloomberg 100

70 60 50 Jan. 14 Mar. 14 May 14 Jul. 14 Sept. 14 Nov. 14

11 G4 US unemployment (% of working population) 10 Source: Bloomberg

4 2008 2009 2010 2011 2012 2013 2014

18 Banco Sabadell Annual report 2014 0.6 0.5 0.5 G5 Spain GDP (q.o.q. change %) 0.3 Source: INE 0.4 0.3 0.1 0.2

0.0 -0.1 -0.2 -0.4 -0.3 -0.5 -0.6 -0.6 -0.6 -0.8 -0.8 -1.0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

4 G6 Eurozone headline infl ation (HICP)(change %) 3 Source: Bloomberg

0 HICP -1 Core HICP 2007 2008 2009 2010 2011 2012 2013 2014

The Spanish economy keenly scrutinized variables. Infl ation indices consis- tently surprised on the downside and sank to very low The Spanish economy stood out as a success story within levels, especially on the European periphery. Surplus the Eurozone (G5). Activity recovered after bottoming out capacity, lower commodity prices and the sluggish growth in 2013 and began to create employment for the first time in bank lending all contributed to the decline. Against since 2008. Domestic demand was the main driver behind this backdrop, forecasts for long-term infl ation in the growth. Rising levels of activity were supported by a more Eurozone slipped lower. In the US the lack of pressure benign financial climate and a slackening in the pace of for pay increases helped infl ation to remain firmly below budgetary consolidation. At the same time, the construc- the Federal Reserve’s target. In the UK infl ation plunged tion industry steadied itself after the dramatic correction to levels not seen since the year 2000. Finally, in Japan it had gone through in the preceding years. Meanwhile, infl ation rose after the increase in the tax on consumer the process of private sector deleveraging continued spending before falling back into a gradual decline. throughout the year. The most significant reform was The monetary policies pursued by the principal cen- to make changes in the tax legislation, mainly aff ecting tral banks remained accommodative, albeit with regional the Personal Income Tax (“IRPF”) and corporation tax. variations. The ECB again resorted to stimulus measures the goal being to reduce the tax rate and restrict certain to counteract the low level of infl ation. Policy rates of deductions. interest were set at historically low levels (0.05%) and the deposit facility rate was taken into negative territory (-0.20%). The ECB also set up a programme of long-term Financial system liquidity-boosting operations (TLTROs) to encourage banks to increase lending. It also launched programmes In the financial arena, the European Union’s financial for the purchase of asset-backed securities (ABS’s) and assistance programme came to an end in January. covered bonds. The ECB has indicated its general aim of Infl ation fell back in all the main developed econo- increasing the size of its balance sheet to levels last seen in mies (G6). In the Eurozone, infl ation was one of the most early 2012 (G7). In such conditions, given the persistent

Banco Sabadell Group 19 low level of infl ation, it has left the door open for further debt for the first time since the country was bailed out. stimulus measures. In the US, the Fed brought its asset Both Portugal and Ireland gradually regained normal purchasing programme (US bonds and mortgage-backed access to global debt markets. In May, Portugal exited from securities) to an end. Despite keeping its key rate at its assistance plan without making any request for further historically low levels, the Fed thus marked a change of support. In Japan too, yields on government bonds fell, direction in its monetary policy. In the UK, the Bank of reaching their lowest-ever level. Massive bond purchases England kept base rates unchanged at 0.50% although by the Bank of Japan gave rise to distortions, causing the some members were in favour of an increase. The BoE market to become illiquid at times. also announced a number of macroprudential measures In the currency markets the euro weakened against to cool the property market. In Japan, the central bank the dollar and sterling (G10). The divergence between the moved aggressively to pull the country out of defl ation, monetary policies pursued by the ECB and the two other including a substantial increase in government bond pur- central banks were the main factor behind these move- chases. These purchases will absorb virtually the whole of ments. The weak economic performance of the Eurozone the government’s borrowing requirement for 2015. compared with the US and the UK contributed to the In the long-dated bond markets, yields fell sharply in decline. The yen showed a significant depreciation against the main developed economies. US bonds found support the dollar in the second half of the year, sinking to the in fears over global economic growth and a more uncertain levels of 2007. The Bank of Japan’s policy of monetary ea- geopolitical environment. German bond yields sank to sing and the deterioration of the country’s economy after all-time lows (G8). The German long bond was boosted the tax increase drove the yen lower. by falling infl ation, Eurozone economic weakness and In the global equity markets, key US stock indices the ECB’s accommodative policy stance. On the Euro- ended the year in positive territory. The S&P 500, in par- pean periphery, with the exception of Greece, risk premia ticular, rose by 26.9% in euro terms. Some of this impro- continued to tighten significantly. This was spurred by the vement in euro terms is explained by the strength of the ECB’s accommodative approach and expectations that dollar. In Europe the Euro Stoxx 50 did not show any clear it would finally adopt a broad programme of bond pur- trend. The index barely managed a rise of 1.2%. In Spain chases. In Spain, bond yields fell to historic lows — lower, the IBEX index was up by 3.7%, in sharp contrast to the even, than in the US (G9). During the year the three main 21.4% gain it had made in 2013. credit rating agencies upgraded their ratings for Spanish Equity markets in the emerging markets were sovereign debt. And Greece was able to issue long-term aff ected by high degrees of volatility and sharp currency

3250 G7 ECB balance sheet (€Bn.) Source: Bloomberg 3000

2750

2500

2250

2000

1750 Jul. 12 Jan. 13 Jul. 13 Jan. 14 Jul. 14 Dec. 14

4.0 G8 Yields on German 10-year government bonds (%) Source: Bloomberg 3.0

2.0

1.0

0.0 2010 2011 2012 2013 2014

20 Banco Sabadell Annual report 2014 depreciation (G11). This was fuelled by uncertainty over the extent of the economic slowdown in China. Further causes of weakness were political instability and wo- rries over the possible start of interest rate hikes by the Fed. Dramatic falls in the oil price also stoked ﬁnancial turmoil in countries such as Russia and Venezuela. In the case of Venezuela, this even aroused market fears that the country might have to seek a restructuring of its external debt.

700 G9 Risk premium on Spanish 10–year government bonds 600 (basis points) Source: Bloomberg

500

400

300

200

100

0 2010 2011 2012 2013 2014

1.40 G10 Dollar/euro rate Source: Bloomberg

1.35

1.30

1.25

1.20 Jan. 14 Mar. 14 May 14 Jul. 14 Sept. 14 Nov. 14

900 G11 Risk premium on emerging market debt (JPMorgan EMBI+; basis points) 800 Source: Bloomberg

700

600

500

400

300

200 2009 2010 2011 2012 2013 2014

Banco Sabadell Group 21 Banking industry Outlook for 2015

The main event in the sector in Europe was the Compre- The global economy will foreseeably continue to feel the hensive Review of banks’ balance sheets by the European after-eff ects of the financial crisis and grow at a modest Banking Authority and the ECB. In the wake of the review, pace. the ECB took on the role of single banking supervisor in The geopolitical landscape will remain a source of the Eurozone. This process was a major challenge for both concern and uncertainty fuelled by political develop- the financial institutions themselves and for the regula- ments will persist in Europe. tors. The banks strengthened their balance sheets subs- Core infl ation (ex food and energy) will continue at a tantially ahead of the process. The review was extremely low level in the world’s main regions and especially in the thorough, covering a large number of institutions in a Eurozone. short time. Recovery is likely to be fragile and uneven across the In October, the results of the assessment of 128 banks, euro area. The Spanish economy is set to remain one of representing more than 80% of bank assets in the Eu- the region’s few success stories. In the USA the growth of rozone, were published. The review included a detailed the economy is expected to stay close to its potential rate. classification, valuation and provisioning of the main The ECB will take further measures to counteract portfolios of each bank. The banks’ capacity to maintain a defl ation risks. In contrast, the Fed is expected to embark minimum regulatory capital in an adverse macroeconomic on a round of very gradual interest rate increases. scenario was also tested. In the field of banking union, eff orts will be focused on The results indicated that banks would comply with the implementation of the single resolution mechanism. the minimum regulatory capital requirements an adverse In 2015 the ECB will complete its first round of banking scenario, but that such a scenario would entail a sizeable supervision. reduction in that capital. The review also evidenced that Many emerging economies will have to steel themsel- Spanish banks are more robust than their peers in the ves for the onset of a process of deleveraging (especially by Eurozone as a whole. The results of this exercise and the companies) in an increasingly complex environment. strengthening of banks’ balance sheets helped norma- In China potential GDP growth is expected to conti- lise funding in the sector in 2014. In particular, the cost nue its downward trend. of wholesale funding and the gap between banks from various countries has diminished (G12). Details of the comprehensive assessment of Banco Sabadell are available in the Risk Management chapter of this Annual Report. In 2014, other essential progress was made to build the European Banking Union; this is set out in detail below, in the Regulatory Environment section.

250 G12 Spreads on euro- denominated bank debt 225 (basis points) Source: BofA Merrill Lynch 200

175

150

125

100 Italy 75 Spain

50 Core countries Dec. 13 Mar. 14 Jun. 14 Sept. 14 Dec. 14

22 Banco Sabadell Annual report 2014 Regulatory environment the SSM is backed by the collaboration and integration of banking supervisors of the national competent authorities European Banking Union (NCAs) for the Supervisory Review and Evaluation Pro- cess (SREP). The main regular supervisory tool consists Banking Union is a critical stage in the process of moving in the joint supervisory teams assigned to each signifi cant towards fuller economic and monetary union in Europe. bank (including Banco Sabadell) which, led by a coordina- The establishment of a Single Supervision Mechanism tor appointed by the ECB, are responsible for day-to-day (SSM) and the assumption by the ECB of its mandate as a oversight. prudential supervisor are key milestones in the process of The joint supervisory teams apply a harmonized su- establishing a banking union, which is to be supplemented pervisory process based on the assessment of each bank's by a Single Resolution Mechanism (SRM) and the imple- risks, governance and capital and liquidity situation (see mentation of a harmonized deposit guarantee system. The table T3). SSM is responsible for the supervision of all credit insti- For the SSM to be able to e∞ciently discharge its duties tutions in member states of the Economic and Monetary there must be a single rulebook in the European Union Union (EMU) and in those countries of the European (EU), particularly in connection with regulatory capital Union which do not have the euro as their currency but requirements. In this regard, it is worth highlighting the choose voluntarily to participate in the system. transposition of Basel III into European regulations, via The ECB took on its new role as Europe's banking Directive 2013/36/EU of the European Parliament and supervisor in November 2014, more than two years after of the Council (CRD IV) and Regulation (EU) 575/2013 the European sovereign debt crisis reached its peak and of the European Parliament and of the Council (CRR) the European authorities agreed to work towards greater on prudential requirements for credit institutions and fi nancial integration in the EU. The ECB is to carry out its investment fi rms, that establish new capital and liquidity new functions through the SSM, part of a new regulatory rules. This single rulebook is still being developed, using and operating regime approved in April 2014. the European Commission's technical standards and the guidelines and recommendations of the European Ban- king Authority. Pillar 1 In accordance with the aforementioned requirements, credit institutions must comply with a total capital ratio of The SSM is the fi rst fundamental pillar of Banking Union, 8% at all times. However, CRD IV grants the SSM certain the goals of which include (i) guaranteeing the security powers at Pillar II level, such as the countercyclical buff er, and solidity of the Eurozone banking system, (ii) boosting the systemic risk buff er, and specifi c macro-prudential integration and fi nancial stability in the region, and (iii) elements, in order to prevent future credit bubbles and ensuring the application of standard supervision. Accor- mitigate the eff ects of credit crunches in the future. Accor- dingly, the SSM seeks to ensure prudential compliance dingly, a number of corrective measures may be derived with the single European capital regulation and the from the supervisory process that, in the event, would be technical standards developed by the European Banking subject to the approval of the SSM Supervisory Board. Authority and approved by the European Commission. The focus of the SSM in the short and medium term Nevertheless, the SSM also has signifi cant executive will be on harmonizing supervisory practices and require- powers, such as the authorization of bank acquisitions ments; in particular, the diff erences between the models and licences, powers to intervene in banks that are at risk, for risk-weighting assets and the national discretionality and on-site inspections. From an operating standpoint, in defi ning banking capital will be examined.

Integrated approach T3 Harmonized Process phases Results supervision process

Risk Appetite A quantitative assessment of each 1 Statement (RAS) material risk and of the robustness of the institution's control and risk governance system Assessment of the institution's risk profi le Quantifi cation of capital Quantifi cation of capital and 2 and liquidity during SREP liquidity requirements (ICAAP/ILAAP) and assessment of the RAS Calculation of SREP Capital and Liquidity Ratios Top-down Top-down stress tests 3 stress tests on capital planning Defi nition of corrective Defi nition of supervisory Design of supervision plans, measures 4 oversight programmes identifying priorities for review and resource assignment

Banco Sabadell Group 23 Pillar 2 deposit guarantee schemes must be based on the volume of guaranteed deposits and on the risk assumed by each With regard to Pillar 2 of the Banking Union, Regulation participating bank. The contributions must be calculated (EU) No 806/2014 of the European Parliament and of the proportionately and must take into account the risks of Council of 15 July 2014 establishing uniform rules and a banks' business models. Accordingly, the contributions uniform procedure for the resolution of credit institutions of each member bank must refl ect i) likelihood of default, and certain investment fi rms in the framework of a Single and ii) the potential losses to be incurred by the DGS in Resolution Mechanism (SRM) and a Single Resolution the event of a bailout. Fund (SRF), was published in July 2014. Based on all the above measures, Banking Union is a The SRM will ensure that, when a bank supervised by very signifi cant step forward which should make a decisive the SSM fi nds itself in di∞culties, the resolution policy contribution to breaking the links between each country's will be (i) e∞cient, (ii) independent of the bank's location, national banking sector and its sovereign risk. and (iii) at a minimum cost to taxpayers. This is an integrated system of national resolution authorities headed by the Single Resolution Board as the common resolution Other European Union initiatives authority. This new agency will be in charge of the uniform application of the EU's common resolution rules as set out In January 2014 the European Commission submitted a in the new directive on banking restructuring and reso- proposal for structural reform of the banking system. The lution. This directive enters into force in 2015, when the aim of the proposal is to reduce the likelihood of retail Board must become operational. Furthermore, a Single banking being aff ected by contagion from the risks of Resolution Fund will be set up, under the Board's control, banks' fi nancial market operations. In particular, it is su- which in the medium term will act as funder of last resort ggested that the proprietary trading business of banks be when resolution entities are unable to cover the needs, transferred to entities that would be separate from them provided that shareholders and creditors have assumed both legally and fi nancially. The proposal would include losses. This Fund will be created in 2016 and, accordingly, all EU banks that were of a globally systemic nature or although the SRM's start date is January 2015, it will not whose proprietary trading was signifi cant. At the present be fully operational until 2016. time the proposal is under negotiation in the European Operation of the Fund is governed by an intergovern- Parliament. mental agreement which countries belonging to the Ban- In another development, negotiations are in progress king Union signed in May 2014. The banking industry will among a group of 11 EU countries (including Spain, Ger- contribute to the Fund over an eight-year period. National many and Italy) on the introduction of a fi nancial transac- contributions to the fund will gradually be merged until, tion tax. The negotiations relate to a proposal made by the after eight years, the fi nancial support it provides will no Commission in February 2013 which would impose a tax longer be national. Although, if necessary, the Fund may on transactions in the main fi nancial instruments linked receive public funds—national funds, during the fi rst ten to participating countries. years—these must be subsequently replenished using con- Finally, the European authorities have indicated that tributions from the banking industry, so as to guarantee they will increase the supervision of risks of non-bank the scheme's fi scal neutrality in the medium term. fi nancial institutions. In particular, they have highlighted In relation to the SRM, the European Central Bank the signifi cant growth in the corporate bond market and has published a large number of technical standards, the exposure of mutual funds to this market as a potential guidelines and recommendations, some of which are in the threat to fi nancial stability. However, this regulation is still consultation phase. at an early stage and initiatives are being spearheaded by the Financial Stability Board. In the EU proposals have focused on the liquidity of money market mutual funds and Pillar 3 on a reform of the securitization market. Progress has also been made in the regulation of collateral-based funding The fi nal pillar of the Banking Union is the harmonized operations. deposit guarantee system. Although EU countries have not yet been able to reach an agreement regarding a single European deposit guarantee scheme, due mainly to the potential budget implications, a fi rst step towards achieving such a fund was the publication in April 2014 of Di- rective 2014/49/EU of the Parliament and of the Council, concerning the deposit guarantee systems that member states must incorporate into their statute books by 3 July 2015 at the latest. In accordance with this Directive, by 3 July 2024, each member country must have set up a fund contai- ning 0.8% of insured deposits. Contributions to the

24 Banco Sabadell Annual report 2014 Strategy, Business model and the BS brand

Strategy Banco Sabadell initiated the Triple plan in 2014.

In 2014 Banco Sabadell launched a new business plan for balance sheet, its strong sales platform and its nationwide the period 2014- 2016, known as “Plan Triple”. The plan is footprint to lead a recovery in lending in the medium and designed to enable the Bank to leverage the strength of its long term.

G13 Plan Triple - Transformation Sales key themes Balance sheet Production model

Proﬁ tability Leveraging greater Triple scale into profi t

Internationalization Preparing for the Group's international expansion Entering new markets

The first priority of the new business plan is to increase In the rest of the country the focus is on growing customer profitability by working towards a target return on adjus- numbers and market share. The Bank also intends to con- ted equity (ROTE) of 12% for 2016. tinue improving customer relationships so as to become Having made a huge leap in scale, Banco Sabadell’s the customer’s banker of choice and to grow its market focus is now on consolidating its domestic business and shares in mutual funds and insurance. increasing the profitability of its newly acquired busines- The second key action area for Banco Sabadell has to ses. To do this, it has set out two strategies for di≠erent re- do with transformation: of the sales, the balance sheet gions according to its market position in each one. In the and the production model. In the case of the balance Catalonia and Southeast (Valencia and Murcia) regions, sheet, transformation was based on reducing loan losses the Bank has now reached a suitable scale and its busi- and divesting property. To reduce loan losses the Bank ness focus will therefore be on profitability, product o≠er has put in hand management programmes combining and closing the performance gap in its recently acquired pre-emptive actions (to anticipate new loan defaults) with businesses. recovery (faster debt recoveries).

G14 Main targets set by Triple business plan

40% 1% 1,000 M 100% 12% Cost:income Lending growth Income Loan-to-deposits ROTE 2016 ratio CAGR (*) 2016 2016 2016 2013 – 2016

(*) Compound Annual Growth Rate (CAGR)

Banco Sabadell Group 25 To reduce its holdings of real estate assets the Bank will centrally managed sales and marketing system and a continue to leverage the expertise of its asset transfor- customer relationship model to realize our aim of being mation division and the market-leading position of its our customers' main bank and building more lasting and property sales business, Solvia, while benefiting from an profitable relationships. improving real estate market. Once again this year, the ratings obtained by the Bank The goal of transforming the production and sales in the STIGA organization's “Equos-RCB” independent system is to increase productivity, but without any loss in survey of bank branch service quality confirmed Banco the quality of service for which the Bank has always been Sabadell's position as one of Spain’s market-leading renowned. For example, a new "instant banking" system banks, with a score of 7.16 compared with an industry has been created which will initially be rolled out in key average of 6.29. growth areas such as the Madrid region. With regard to balance sheet transformation, doubtful Along with these two action areas, the new business assets (other than those covered by the asset protection plan also focuses on internationalization, to prepare scheme) fell by €1,829 million in the course of 2014. the ground for future expansion into new markets. The The next section on the operating and organization Triple Plan also addresses talent and human resources model provides more information about transforming the management. operational model and organization during the year. As for the internationalization part of the plan, once the necessary permissions had been obtained from the Key milestones in 2014 Spanish supervisory authorities and Mexican regulators, Banco Sabadell started operations in Mexico via a new In the area of profitability, the primary focus of the Plan, subsidiary, Sabadell Capital, a Mexican multi-purpose good performance was shown by all the main indicators financial company ("SOFOM") which will provide spe- (G15). cialized financing in Mexican pesos and US dollars for In the area of business development transformation, projects in energy, infrastructure and other areas such as the Bank has launched major initiatives focused on the tourism, foreign trade and public administration. customer experience, including a new customer-oriented,

3,000 1.76% G15 Triple business 1.49% plan - key income 2,260 and profi t highlights 1.17% 1,815

Net interest income/ Net interest income Average total assets (€Mn.) (%) 2013 2014 2016 2013 2014 2016 Triple Triple

1,000 1,000 861 760

372 248 Net profi t Fees and commissions (€Mn.) (net) (€Mn.) 2013 2014 2016 2013 2014 2016 Triple Triple

Quality of service levels have improved.

26 Banco Sabadell Annual report 2014 Business model

Banco Sabadell has a relationship-driven business model and a widely recognized business franchise. It is a customer-based model that features a personalized, di≠erentiated management style based on value creation. Sales processes are based on the provision of advice and on high quality sales support systems. The relationship-driven approach is supplemented by product-specific customer-focused campaigns. In line with our aim to be our customers' main bank, our relationship-driven model places particular emphasis on quality, commitment and the role of the account manager, which is to support customers through every stage of their financial lives, thus ensuring lasting and profitable relationships.

BS strengths

Organization by business type

Focus on companies and personal banking

A leader in cross-border transactions

Multi-brand, multichannel strategy

State-of-the-art technology

Disciplined capital and risk management

Quality of service

Clarity and transparency in corporate governance

Banco Sabadell Group 27 Organization by business type and geography

Commercial Banking The largest of the Group’s business lines, Commercial Banking focuses on providing ﬁnancial products and services to large and medium-sized businesses, SMEs, retailers and sole proprietors, occupational Groupings, entrepreneurs and private individuals.

Corporate Banking and Global Businesses O≠ers products and services to large companies and ﬁnancial institutions, both domestic and foreign.

Markets and Private Banking Provides savings and investment management services ranging from research into alternative investment products to securities market trading, and include active wealth management and custodian services.

Asset Transformation The division's tasks are to take an integrated approach to the Group's real estate assets, develop and implement its asset transformation strategy and to carry on the business of a high-quality provider of real estate ﬁnance.

Real Estate Group (Solvia) Division The division specializes in the integrated management of a full range of real estate services —property sales and servicing, land management, preparation and development — and is driving forward the process of leveraging Solvia's servicing capabilities.

As a result of the rapid inorganic growth undergone in the last few years, Banco Sabadell now has a footprint covering the whole of Spain and a 7.6% share of the market (G16). Within the domestic market the Bank uses a number of brands, all of them under the Banco Sabadell umbrella (G17). Banco Sabadell is, in addition, a leading provider of foreign trade services. With a specialized product o≠ering and a powerful value proposition, Banco Sabadell is present in strategic business and ﬁnancial centres and partners with trade promotion bodies to provide support to customers in developing and growing their business in foreign markets.

28 Banco Sabadell Annual report 2014 G16 Market share by autonomous region

15.3 2.5 5.2 4.5 7.6 % 3.0 4.2 14.7 3.3 3.3 BS Market share in Spain

3.4

2.2 14.7 1.1 8.7 15.9 3.3

3.2

G17 Geographic distribution of brands

Distribution of the Spanish network at 2014 year-end

SabadellAtlántico SabadellCAM SabadellGallego SabadellGuipuzcoano SabadellHerrero SabadellSolbank SabadellUrquijo

Banco Sabadell Group 29 Quality management The Bank continues to assure highest standards in quality of service.

For Banco Sabadell, quality is not just a strategic option; The Bank had its “Madrid Excelente” quality mark rather, it is a whole approach to doing business, whether renewed in 2012. Keeping this accreditation current re- in the delivery of value to stakeholders or in the execution quires an annual assessment, which Banco Sabadell came of each and every process forming part of that business. through satisfactorily. This natural affinity with excellence helps to enhance The various initiatives carried out as part of the sales the Bank’s capabilities in all areas, transforming threats and promotion plan have borne fruit and customer into strengths and challenges into opportunities for the ratings reflect the improvements in the quality of our future. service, both in relation to the industry average and in Consequently, the Bank makes use of existing stan- absolute terms. Quality surveys show Banco Sabadell to dards and benchmarks to judge its own actions and satis- be the bank most highly rated by customers (G18). fy itself that its way of doing business is the right one, and sets itself new goals based on continual self-criticism. A key benchmark against which to measure and improve management practices is the European Founda- tion for Quality Management (EFQM) excellence model, against which the Bank is independently assessed every two years. The November 2014 assessment resulted in the Bank’s EFQM Gold Seal (+500 points) being renewed and a score of over 700 points being awarded according to EFQM’s very demanding standard. This was 100 points higher than the number awarded in 2012, a truly extraor- dinary result that few organizations would be capable of achieving. Banco Sabadell remains the only Spanish credit institution with 100% of its financial operations certified to the ISO 9001 standard, providing further proof of its customer-centred approach and diligent process management. In 2014 Banco Sabadell renewed its ISO 9001 certification for another three years.

7.54 G18 Quality of service 7.42 7.32 Source: STIGA "Equos RCB" objective quality 7.21 7.20 7.24 7.21 survey of bank branches (4Q 2014) 7.03 6.90 6.89 6.90 6.95 6.77 6.61 6.48 6.28 6.23 6.15 6.11 6.06 6.01 6.03 Sector Sabadell 2007 2008 2009 2010 2011 2012 2013 1Q14 2Q14 3Q14 4Q14

Note: fi gures for individual quarters.

30 Banco Sabadell Annual report 2014 Operational and organization change Expenditure management and cost control The Bank's new optimized control system allows in-depth Operational model monitoring of costs and expenses, a vital requirement if The Bank's operational model consists mainly of trans- cost reduction targets and capacity increases needed for ferring the entire administrative workload of branches business growth are to be kept in alignment. and central service departments to operational factories. In 2014 average transaction costs (ATCs) were down Releasing branches from administrative tasks in this way by 3% for lending-related products and remained un- increases the time available for sales-related work, im- changed for service-related products. proves customer service and boosts business generation. Concentrating the workload in factories allows average operating times (AOT) to be reduced as more tasks are industrialized; this leads to more e∞cient processes and/ or automation, speeds up response times and provides greater transaction traceability. These improvements help to bring greater operating e∞ciency along with a better customer experience, simpler, more responsive processes and a branch network that is more committed to and focused on giving advice and assistance to customers. In 2014 the work of transforming the production model was directed mainly at making improvements to the centralized handling of banking transactions at factories. Work also continued on transferring tasks from branches and central services divisions to central processing units, increasing centralized processing rates and bringing them ever closer to the target set by the transformation plan. The task of integrating the IT and business systems at Banco Gallego and Lloyds Bank was also completed.

Simple, agile processes enhance operating efﬁciency and make for a better customer experience.

100% G19 Proportion of transactions processed 90% at Central Processing Centres (2012-2014) 80% Service product 70% transactions Asset product 60% transactions

50% Risk analysis 2012 2013 2014

Banco Sabadell Group 31 The BS brand G20 Top of mind brand awareness

Brand perception indicators 5 4.7 In 2014 the Bank successfully continued its policy of rai- 4.1 sing awareness of its brand, as it was obliged to do in order 4 to increase its capacity for growth in the Spanish retail market and reach a level of brand recognition that was on 3 a par with its key competitors. In the course of the last five years “top of mind” awareness of the Sabadell brand has increased from 1% to 4.7%, 2 and total brand awareness from 4.7% to 17.3%, putting the 1.6 1.3 brand in fifth place among Spanish financial institutions 1.1 1 according to data from the FRS Inmark annual survey, a 1 key industry benchmarking tool (G20 & G21). 2009 2010 2011 2012 2013 2014

Advertising and promotional campaigns in 2014

In 2014 the Bank’s advertising and promotional cam- G21 Total brand awareness paigns continued to show a strong personal stamp that set them apart from those of other banking sector advertisers 25 and sought to highlight its professionalism, reliability, innovative customer service and entrepreneurial fl air. (rank 5) 20 The first quarter of the year saw the launch of the 17.3 “believing in business” campaign, whose aim was to boost 14.8 lending to small and midsize firms under the slogan 15 “Believing in businesses means giving them credit”, with the added promotional “hook” of a promise to respond to 10 (rank 12) 7.9 loan applications within a maximum of seven days. The 5.7 4.7 4.2 level of awareness generated by the campaign in its target 5 market was very high, with a recognition rate of over 70% of respondents being achieved. 0 The main communication breakthrough, however, 2009 2010 2011 2012 2013 2014 came in the third quarter with the appearance, for the first time in the Bank’s advertising history, of Rafael Nadal in a campaign under the slogan “Closeness: a private conversation between Rafa Nadal and John Carlin”. The agreement with the tennis star to act as a global ambassador for the Sabadell brand was reached in 2014 and can be seen as another big step forward in the Bank’s drive to raise awareness of its brand, supported by one of the world’s most admired sports personalities, who not only has enormous appeal in Spain but is associated with values that are very close to those that the Bank is seeking to communicate.

32 Banco Sabadell Annual report 2014 “I d don'ton' t“El tthinkhi n k éxito tthath at notthingshi nesg sla cchange h victoria,ange b byy tthemselves h sinoemse todol ves — you lo quehavehaaetocagete hasve to peleado changechange porthem”them ganar.””

Rafa Nadal, primer tenista de la historia capaz de ganar nueve veces el mismo torneo. Y el primer tenista que consigue vencer cinco veces consecutivas Roland Garros.

Banco Sabadell Group 33 Banco Sabadell's key stakeholders Banco Sabadell passed the stress test of Europe's banks.

BS share performance and shareholders investors. This included attendance at 20 international conferences and holding meetings with 646 investors. Share performance These increased interactions boosted the visibility of the stock. In 2014 the macroeconomic environment, the European The proportion of Banco Sabadell's shareholder base Central Bank's decisions on monetary policy and the represented by institutional investors increased over the stress tests carried out on Euro-pean banks by the ECB year from 38.5% in December 2013 to 48% in December prior to taking on the role of sole banking supervisor were 2014. dominant themes in the financial markets. In 2014 the way our shares were perceived by analysts In the first half of the year improving sentiment on tracking Banco Sabadell showed significant variations, economic recovery in Spain, the positive reaction to the with 70% of them recommending overweight or neutral Group's trading results and the announcement of its positions in the stock. new Triple business plan for 2014-2016 helped Banco Dividend payments to shareholders in 2014 comprised Sabadell's share price to outperform the rest of the ban- an interim dividend of €0.01 per share for the year 2013 king industry. and a final dividend equivalent to €0.02 per share, paid In the second half-year, uncertainty over the economic in the form of shares from the Bank’s holding of treasury situation in Europe and the Comprehensive Assessment shares. impacted on stock markets generally and a≠ected the A proposal will be made to the Annual General performance of Banco Sabadell's share price. Meeting for the payment of a dividend for 2014 as follows: After the publication by the ECB in late October of stress test results confirming the strength of Banco — Flexible shareholders remuneration amounting to an Sabadell's capital position, an improvement was seen in estimated €0.04 per share, in the form of a bonus issue the performance of the Bank's share price compared with charged to reserves, which shareholders may elect to its domestic peers. In its published test results the ECB receive in cash and/or in new shares. concluded that the valuations of Banco Sabadell's assets — An additional shareholder payment of €0.01 per share and collateral, as well as its provisions, were appropriate in the form of an allotment of shares of an equivalent and that, under any of the test scenarios, the Bank would value out of the Bank’s holding of treasury shares and not have any requirement for additional capital (for charged to the share premium account. further details of the test results see the chapter on Risk management). Following the capital-raising actions carried out in With the share price standing at €2.205 at 2014 2014 —conversions of mandatorily convertible bonds year-end, Banco Sabadell’s market capitalization at 31 into shares (for details see the chapter on Capital ma- December was €8,874 million, making it Spain’s fifth nagement in the notes to the accounts)— the number of largest banking group by market value and on most other ordinary shares of the Bank totalled 4,024 million. financial measures. At 31 December 2014, the price-to- book ratio at 0.87. Throughout 2014 Banco Sabadell's management sought to engage ever more actively with institutional

140 G22 Banco Sabadell share performance 130

120

110

100 Banco Sabadell Comparable Spanish banks 90 IBEX 35 80 DJ STOXX 600 31.12.13 31.03.14 30.06.14 30.09.14 31.12.14

34 Banco Sabadell Annual report 2014 In euro In euro In euro Shares T4 Monthly share price 2014 Closing Maximum Minimum Average daily movements 2014 price price price trading volume

January 2.193 2.198 1.820 38,817,451 February 2.394 2.437 2.139 28,683,423 March 2.242 2.429 2.126 27,360,620 April 2.450 2.474 2.181 31,943,575 May 2.424 2.588 2.214 25,182,099 June 2.492 2.713 2.404 22,433,254 July 2.434 2.570 2.238 20,337,269 August 2.396 2.479 2.150 27,708,202 September 2.344 2.538 2.294 23,562,633 October 2.300 2.404 1.958 27,559,637 November 2.281 2.310 2.016 30,103,889 December 2.205 2.377 2.056 24,259,056

in million €Mn. In euro €Mn. € T5 Earnings per share and book Number of Income Income Shareholders’ Book value value per share 2012-2014 shares attributed to per share equity per share the Group attributed to the Group

2012 2,960 82 0.028 9,120 3.08 2012 (*) 3,184 82 0.026 9,120 2.86 2013 4,011 146 0.036 10,227 2.55 2013 (**) 4,299 146 0.034 10,227 2.38 2014 4,024 372 0.092 10,224 2.54 2014 (***) 4,290 372 0.087 10,224 2.38

Figures for 2013 restated as a result of early application of IFRIC 21. (*) Includes the dilution effect of 224.28 million additional shares resulting from issues of convertible bonds. (**) Includes the dilution effect of 287.13 million additional shares resulting from issues of convertible bonds. (***) Includes the dilution effect of 265.27 million additional shares resulting from issues of convertible bonds.

T6 Analysis of shareholdings Number of shares Shareholders Shares in tranche % of capital at 31 December 2014 from 1 to 12,000 196,380 507,853,029 12.62% 12,001 to 120,000 33,095 974,338,672 24.21% 120,001 to 240,000 1,172 191,390,723 4.76% 240,001 to 1,200,000 701 312,497,888 7.76% 1,200,001 to 15,000,000 108 336,901,273 8.37% More than 15,000,000 25 1,701,479,029 42.28%

TOTAL 231,481 4,024,460,614 100.00%

T7 Analysis of shareholdings Number of shares Shareholders Shares in tranche % of capital at 31 December 2013 from 1 to 12,000 220,038 606,504,305 15.12% 12,001 to 120,000 40,339 1,173,220,164 29.25% 120,001 to 240,000 1,331 218,181,418 5.44% 240,001 to 1,200,000 756 340,786,387 8.50% 1,200,001 to 15,000,000 105 303,994,156 7.58% More than 15,000,000 20 1,368,795,151 34.12%

TOTAL 262,589 4,011,481,581 100.00%

Banco Sabadell Group 35 Shareholders Moreover, again as part of a commitment to transparency and communication appropriate to the increased size of Banco Sabadell seeks to reward its shareholders' the Group, Banco Sabadell's management redoubled its conﬁdence by assuring them of reasonable returns, a ba- e≠orts to engage with institutional investors through in- lanced, transparent corporate governance system and ca- creased attendance at international conferences and more reful management of the risks arising from its operations. frequent meetings with investors. As part of its continuing e≠orts to be transparent and The Bank is also meeting the need for greater commu- to communicate with the markets, in February Banco nication and transparency by making continual impro- Sabadell presented its "Plan Triple" business plan for vements to the reports and information it provides to 2014-2016 to the international investor community in investors on a regular basis. London, which gave a very positive reception to the main points of the plan.

700 646 G23 Number of investors visited 600 539 539 510 459 500

355 353 400 310 328 282 300

200

100

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

60 G24 Days spent on visits to investors 53 50 50

39 38 40 34 34 32 32 32 29 30

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Customers In 2014, for example, the Bank met businesses' need for credit through its "believing in business" campaign. In the The Bank's aim is to build lasting and profitable relation- campaign the Bank made a promise to answer businesses' ships with customers and to support them through all loan applications within not more than seven days, thus stages of their financial lives; for this reason it emphasizes showing support for them and giving them the prompt at- values such as trust, commitment, communication, clo- tention they needed. The Bank's promise of a speedy reply seness and desire to serve (see the section on Mission and was more than fulfilled, with customers' loan applications values in "About Banco Sabadell"). being answered within 3.2 days on average. Both in its day-to-day operations and when taking decisions for the medium term (e.g. business plans), Banco Sabadell is guided by those values and by its customer- centred business model.

36 Banco Sabadell Annual report 2014 Banco Sabadell presents: Believing. Believing in a business is giving it credit.

Enrique Tomás Gemma Nierga Félix Tena Manuel Teruel Clemente Cebrián Marta Seco Enrique Tomás Journalist Imaginarium Economist El Ganso Ten con Ten

Banco Sabadell Group 37 Quality in customer service

Banco Sabadell is a Spanish market leader in quality of service and satisfaction ratings from both business and individual customers. Professionalism, care and attention to detail, and insistence on best practice are the Group’s most charac- teristic values. Once again this year, the ratings obtained by the Stiga organization in its “Equos-RCB” independent survey of service quality at bank branches conﬁ rmed Banco Sabadell as one of Spain’s market-leading banks. The survey measures the quality of the service provided by banks in the course of visits to more than 3,500 bank branches. Expert quality assessors appear at branches unannounced, acting like ordinary customers, and rate each branch on a set of 200 variables. Stiga, as an independent research organization, guarantees that its measurements are fair and transparent. To make this possible, the Bank carries out regular studies that enable it to identify areas for improvement as they develop, both throughout the organization and at each individual branch. These include branch quality audits and customer satisfaction surveys. Banco Sabadell believes in long-term relationships centred on values such as trust and authenticity. Banco Sabadell seeks to protect the interests of its customers and has control mechanisms in place to supervise the products and services it off ers. Prior to off ering any ﬁnancial product on the market, the Bank assesses the product for suitability. Branches are provided with customer information sheets and, where more complex products are involved, an appropriateness or suitability test is carried out as required by the EU Markets in Financial Instruments Directive (MiFID).

Customer satisfaction with 2013 7.77 G25 Customer Banco Sabadell satisfaction 2014 7.88

Customer satisfaction with 2013 8.13 branch 2014 8.20

Customer satisfaction 2013 8.22 with account manager (*) 2014 8.72

(*) The surveys did not extend to the brands most recently added to the Group (Banco CAM, BMN-Penedès, Banco Gallego and SabadellSolbank).

38 Banco Sabadell Annual report 2014 Service channels ATM network A total of 94.7 million ATM transactions were performed The Bank maintains a number of channels for commu- in 2014 (3.7% more than in 2013), of which 65% were with nications with customers, both physical (network of cards and 35% with passbooks. branches in Spain and other countries, and network of At the end of 2014, the Banco Sabadell Group’s net- ATMs) and digital (BS Online, BS movil, Branch Direct work of self-service tills totalled 3,295 ATMs and 374 and social media), in response to its customers current passbook updating machines. That was a year-on-year demands. increase of 73 ATMs and 16 updaters. In 2014, Banco Sabadell stepped up its determination During the year, the Bank continued with its ATM to move steadily into digital by combining the best of its upgrade programme; 664 machines were upgraded (355 classic banking approach, based on personal relations, were replaced, and 309 were expanded). with the best of digital in order to off er great convenience The Bank also continued making improvements to coupled with ubiquity: customers need something right maximise availability of the ATM network, by adjusting now, regardless of where they may be; and they can ask for monitoring processes, consolidating cash management it or we can off er it to them. and expanding support and maintenance crews. The digital transformation entails using the advan- In May 2014, the styling of the application's on-screen tages of technology to leverage our knowledge of the content was modernized to enhance usability and accessi- customer. Using any channel, in a simple, transparent, bility to customers and users. immediate way, in processes that are simple end to end, New features were added during the year, including regardless of time or place. transactions with pre-paid cards (reloading, withdrawals, queries) and credit/debit card activation via ATMs. Chan- The initiatives conducted under the Triple business plan ges were also made to optimize the machines' ability to through the Instant Banking programme were: present commercial proposals and off ers.

— Deployment of remote transaction and contracting capabilities (Instant Selling programme) — Promoting the mobile channel as the primary relationship and service channel (with BS Móvil version 3.0 and the virtual code card) — Constantly pursuing the latest trends in digital in order to steadily enhance the customer experience (push notiﬁ cations).

The Bank views the knowledge of the digital world available among entrepreneurs and universities to be very enriching. In 2014, it worked on a web environment for external developers in order to develop a production version of an API to enable new apps to be integrated.

Branch network Bank's Spanish branches are shown in Table T8 below. For details of our foreign branches and a∞liates see ﬁ gure G2 in the section About BS.

T8 Distribution of Region Branches Region Branches branches by region

Andalusia 142 Valencia 392 Aragon 39 Extremadura 6 Asturias 146 Galicia 129 Balearic Islands 65 La Rioja 8 Canary Islands 31 Madrid 216 Cantabria 6 Murcia 149 Castilla-La Mancha 23 Navarra 19 Castilla y León 64 Basque Country 107 Catalonia 723 Ceuta and Melilla 2

Banco Sabadell Group 39 Remote-access channels Digital initiatives enable the Bank to provide a better service at a lower cost.

BS Online tablets was upgraded with a new design in which naviga- At the end of 2014, more than 2,751,000 individual tion is more intuitive. The new app highlights the client's customers and 597,000 businesses had signed up for the overall balance as the starting point for navigation to group’s online banking service, an 11% increase on the products and services. The information on cards was previous year. A total of 1.335 million transactions were reformatted to make it more visual and simple. performed online, a signifi cant 27% annual increase. The BS Móvil application on the various platforms The EFT ratio (the number of transactions done on (Android, iPhone/iPad, Windows Phone and BlackBerry) line as a proportion of the total) at year-end was 91.1%, a has been undergoing a process of constant updating with 0.5-point increase on the previous year’s fi gure. BS Online the result that it ranked among the top six downloads in continued the pattern of improving e∞ciency in the Spain for all 12 months of 2014. Bank’s service to customers. At the end of 2014, BS Online was the Spanish online Branch Direct banking service for individual customers with the third- In 2014, Branch Direct focused on improving technology highest rating for web service availability, according to and developing new features, the aim being always to en- metrics produced by EUROBITS, a specialist online ban- hance the customer experience. This was achieved while king benchmarking organization. BS Online Empresa, also successfully integrating Lloyds International Bank the Bank’s online banking service for businesses, fi nished and Banco Gallego. the year in fourth place. Service levels were maintained or exceeded in all During the year, a number of projects were performed remote channels. The telephone helpline handled over to incorporate transactions and promotions related to 2,400,000 calls and achieved a service level (calls answe- new products and services, and to adapt to the Single red as a proportion of calls received) of 97.8%, up from Euro Payments Area (SEPA). 96.27% in 2013. The service level in the e-mail channel was 92.3% of the over 300,000 e-mails received. The Banking on the move – BS Móvil online chat handled over 16,000 conversations, and there The number of active users of BS Móvil at 2014 year-end were over 75,000 mentions in social media, 15,000 cases was 970,825, 40% more than in the previous year. were handled, and the Bank ended the year with 133,000 During the year the Bank maintained its policy on SMS fans. messages with the aim of increasing e∞ciency and saving New features were implemented, such as "click to call" costs. To this end, it engaged in push messaging cam- (which enables website visitors to enter their phone num- paigns with the aim of signifi cantly reducing the existing ber and receive a call back immediately); the Sabadell costs of SMS messaging to customers. Chat channel, which provides a conversation format like In order to enhance the service, the app for mobiles and WhatsApp but with additional features enabling users

G26 BS Online G27 Internet usage G28 Transaction enrolments ratio (online transactions volume +11% as % of total) (in thousands) 597,000 515,000 +29% +1% 1,335

91.1% 1,052

90.5% Companies 2,500,000 2,751,000 Individuals

2013 2014 2013 2014 2013 2014

40 Banco Sabadell Annual report 2014 to operate with their accounts at any time and to arrange The "Close" project was kicked off with a new type of cam- for consumer loans in less than 48 hours (over 10,000 paign involving Rafa Nadal. As a result of the presence of applications were handled). Adaptation to SEPA (Single this world-class celebrity, it was among the most viewed Euro Payments Area) generated a signifi cant volume of commercials on YouTube (2,110,555 views). customer service tra∞c, particularly with companies in In particular, the "Som Sabadell" fl ashmob doubled the early months of the year. the number of views attained in 2013, to 60 million, The overall quality index was 91.57%, nearly 2 percen- without requiring expenditure on its distribution. tage points above target. The rating by customers, on a One of the most important content areas during scale of 1 to 5, averaged 4.46 in the year, almost 0.1 points the year was entrepreneurship and innovation. The @ more than in 2013. BStartup profi le was used to publicise webcasts of events under this programme, such as the "Conversations on the Social networking sites future", and live events on the corporate blog, such as the In 2014, the Bank attained nearly 140,000 followers, up Alumni Entrepreneurship Day. As regards innovation, 25% on the previous year, combining all social media the Bank's participation in 4YFN and Imagine Express in which it has a presence: Twitter, Facebook, YouTube, was webcast live. LinkedIn and Google+. As a result, Banco Sabadell was chosen by the Open The Bank published 516 blog posts and produced University of Catalonia (UOC) to cooperate in a Digital 80 videos. For the fi rst time, it arranged a webcast from Empowerment programme as a paradigm of a large orga- another country: the press conference to present the Tri- nization that is in full transition towards a digital culture ple business plan at the Bank's o∞ces in London. and is in a position to present successes in this fi eld. The Press Room on the website was redesigned and linked with the Group's social media. New technologies and social networking sites were used to publicize major events. One such case as the Barcelona Open Banc Sabadell Tennis Grand Slam. Ga- mifi cation enabled the #bcnopenbs hashtag to garner 88 million hits, whereas Banco Sabadell's monthly average is 10 million. The hashtag was used in nearly 20,000 tweets by approximately 6,000 users. Another such event was Instant Banking Hack Day, a technology encounter with developers of fi nancial apps. This generated 7,671 tweets and attained over 7 million impressions (the average weekly impact of @BancoSaba- dell is 2.5 million) and 2,000 tweets in a single weekend (1,200 in a single day). Work continued in developing a strategy based on distinctive value-added content, building on the success of previous years in designing campaigns that lend themselves to multiple channels. The "Believe" slogan centred the campaign on branded content that exemplifi es the brand using videos focused on entrepreneurs.

140,000 G29 Followers in 2014

118,981

January December

Banco Sabadell Group 41 Human resources

Human resources management model

The human resources model is based on a scheme that leads from strategy design to results, using four key levels.

G30

People Structure

Strategy Objectives

Management Management style and systems culture

F R Formulation Implementation Results

This is based on four premises that govern Group human involvement in and engagement with the Group's future capital management at all times: development.

— Human resources policies and rules do not rank below Five core initiatives were deﬁ ned in order to undertake other corporate guidelines, either in deﬁ nition or in this transformation: application. — People are a distinctive asset and a critical success 1. Integrated talent management factor for Banco Sabadell. Strengthening leadership and developing a culture of ta- — The employees belong to the entire organization and lent planning and development to assist with the Group's form part of a single team: Banco Sabadell. expansion. An integrated talent management model that is, universal (for all employees) and corporate, in order to It is necessary to constantly reinforce the emotional con- harness the talent of the Group wherever it is, focusing tract between the Bank and its people. investment in key groups.

2. New performance management system Human resources management strategy under the Triple An updated common model that facilitates a culture of plan and lines of action in 2014 active performance management. This will be achieved by enhancing the performance appraisal process, incre- Talent and human capital management forms an essen- asing its validity and reliability, as the cornerstone of the tial component of the Triple strategic business plan along Group's approach to managing people. with other key action areas of the plan. It encompasses drivers of organizational change and development as well 3. Segmented people management as a wide-ranging and completely updated view of the Developing a human resources management model inspi- Human Resources function. red by sales models, which provides more and better infor- In the area of organizational change and develop- mation about employees to support decisions in managing ment, three strategic priorities have been identiﬁ ed: people and teams, drive performance and professional organization-wide talent management to meet the needs development, discover hidden talent, and leverage human of the enlarged Group, raising the bar on employee perfor- resources products and services. mance across the organization and securing employee

42 Banco Sabadell Annual report 2014 4. The brand as employer and commitment manager Composition of Group workforce The goal is for all employees to become involved with and make a commitment to the Group's future. This will be At the end of 2014 the Banco Sabadell Group was emplo- implemented by developing and leveraging the advanta- ying a total of 17,529 people, a decrease of 548 compared ges of working for BS, developing an "employee experien- with the previous year. The average age of employees was ce", and off ering an image of the brand as an employer 43.1 years and the average length of service was 17.2 years. that is commensurate with our commercial image. It will The gender split was 49.9% men and 50.1% women (G31) also provide metrics of commitment in order to deﬁ ne speciﬁ c action and continuous improvement levers.

5. Transforming training An innovative, comprehensive approach to training and development that is embedded in the organization, incor- porates new pedagogy models and new learning paths by 1 extending training solutions to other business areas, with 2 a core set for central services staff , while also including internal knowledge management practices. This is implemented via the "corporate school", whose implementation will begin with the Commercial Banking School.

These initiatives answer the question "how?", but it is just G31 Employee breakdown by gender as important to focus on "who?". To this end, four additio- 1 Men 49.9% nal initiatives were designed to enhance the capabilities 2 Women 50.1% of the organization's key human resources.

1. Executive quality The human resources master plan entails major changes Corporate projects under way in 2014 as part of the Triple in the way in which executives and managers manage business plan people and teams; this initiative seeks to delimit those changes and provide the necessary means to implement In-service and leadership training them. In parallel with the implementation of the initiatives under the Master Plan, active talent management practices 2. Policies for work-life balance and extension of the and projects are being developed, including notably: working life The goal of this area is to provide the organization with Training in sales and in managing sales teams the tools and solutions to facilitate work-life balance The implementation of the new model of sales and that the organization needs to enhance productivity and referrals in the branch network as a whole required competitiveness. training to be delivered in cascade to the entire sales network, from territorial management functions down to 3. Change management o∞ce customer-facing functions. The process is related to the Its mission is to respond to needs arising from the trans- Bank's growth in recent years as a result of integrating formation processes under the Triple plan that have an acquisitions (increased number of employees, branches, impact on people. customers and proﬁ les).

4. International human resources model Integration training The human resources model and policies call for a signi- This training is linked to the integration of the acquisi- ﬁ cant increase in international mobility. Work continues tions in 2014 (Banco Gallego and Lloyds), totalling 46,165 on developing a pool of professionals to drive future contact hours at Banco Gallego and 11,526 hours in the expansion and to include international experience in the case of Lloyds (over 80 hours per employee in both cases). executive career path. A vital role was also played by the Branch Support Tutors, experts in branch banking operations who were brought into branches to provide support during the two weeks following integration. A total of 144 professionals participated in this process as tutors.

Banco Sabadell Group 43 The training plans at Banco Gallego and Lloyd's conclu- Training linked to the new models in the banking ded in 2014. business In both integration processes, over 90% of employees Training is being given that is attuned to new customer rated the training as Very good or Good. relationship formulas and branch models.

Training plans. University certifi cation of BS internal Mobility training A total of 18 international assignments were arranged in Further progress was made in establishing in-service 2014: training across the entire branch network (training in products, regulations, sales, fi nance and tax, etc.), with — Short-term international assignments (under 1 year): more than 73% of branch network employees taking part. 9 (6 to Uruguay; 3 to Mexico). This included the “Laude” scheme, an arrangement with — Long-term international assignments (1-3 years): 9 (6 the University of Barcelona under which group employees to Mexico; 1 to Morocco; 2 to the USA). taking in-service training can have their achievement recognized by the award of a university qualifi cation. In A total of 100 interviews were conducted with interna- 2014 the scheme was repeated for the eight and ninth tionally mobile employees from the total of 347 emplo- times for the GCO/GCS, DPYME and GBP functions, as yees from across the Banco Sabadell Group who in 2014 well as a second round for the DO function, resulting in showed an interest in taking up appointments in foreign the award of 184 qualifi cations. A total of 531 employees countries. have obtained qualifi cations in this way to date. Employee engagement and volunteer programme Senior management training Social and volunteer programmes and initiatives are In the area of training at senior management level, fresh publicized on the employee portal under the "Solidaris" progress was made in 2014 in the Group’s approach label. The success of these programmes year after year to developing management skills. A further round of caused the number of participants to increase substan- 360-degree assessments took place as part of the ongoing tially and led to a rise in the number of activities in 2014, Manager Leadership Programme. The programme aims many of them as a result of suggestions from employees. to provide managers with their own personal solutions to help them develop their strengths and explore more fully Some of the main activities in 2014 are described below: their areas for improvement. An improvement in management performance was observed in all areas in this — Oxfam-Intermon Trailwalker. A total of 144 people second wave. represented Banco Sabadell in the 2014 event, making us the company with the largest number of employees Management quality training taking part and raising more than €40,000 to be To meet the group’s current and future challenges the full used for Oxfam's water management projects in the cooperation of all management personnel will be vital. Sahara. For that reason, we will continue to work to instil a per- — Sant Jordi Solidari at the CBS and 901-SC buildings. formance-driven culture. A number of workshops were This event enabled the animal protection societies of held to equip executives to handle Annual Performance Mataró (SPAM) and Sabadell to raise over €4,000 net. Assessment interviews, and a set of tools and resources Employees were also able to acquire products from was provided to help and support them in carrying out writers and associations, the entire proceeds being staff assessments. Over 500 managers participated in donated to charity. An employee played the leading 2013 and 2014. role in each of these activities. In the same line, during 2014 a fourth round of the — Employee participation in health activities promoted Corporate Management Programme (CMP) was carried by Unicef. out during the year. This is aimed at newly appointed — Over 300 surplus items of furniture (desks, chairs, middle-management employees and equips them with shelving units, etc.) were donated to associations and the new management and leadership skills expected of a NGOs. Banco Sabadell executive. The four CMPs held so far have — In cooperation with the Blood and Tissue Bank, Banco given training to a total of 131 managers. Sabadell arranged its regular blood donation campaign, in which participation rise considerably year Compliance training after year. The compliance training off er was redesigned and — For the second year in a row, 105 volunteers from expanded to adapt to new needs and requirements by the Bank participated in workshops for fourth grade regulators. pupils as part of the Schools Financial Education Pro- gramme in Catalonia (EFEC). The result of a partnership agreement with Catalonia’s regional government and the Financial Study Institute, the programme covers 20% of secondary schools in Catalonia.

44 Banco Sabadell Annual report 2014 — A number of corporate volunteer programmes were Randstad Award arranged in 2014 in connection with entrepreneurship An independent global study rated Banco Sabadell, for and in cooperation with seniors and with the involve- the fi rst time, as one of three most attractive employers in ment of foundations that are particularly relevant and the Spanish fi nancial services industry. have a notable impact in society: Fundación Emprèn, Each year the Randstad Award identifi es the most Fundación Príncep de Girona, Proyecto Cecrem and attractive companies to work for in diff erent countries. Fundación Novia Salcedo. The winner is chosen based on the fi ndings of the most ex- — This year, through the Magone Foundation, 309 tensive study of employer branding anywhere in the world. letters were sponsored under which Banco Sabadell Moreover, unlike other studies, it looks at the perceptions employees made Christmas wishes come true for chil- of employees only and takes a large sample of 7,000 people dren at risk of social exclusion. in each country between the ages of 18 and 65 who are — For another year, 102 volunteers participated in the asked about their impressions of the 150 biggest emplo- TV3 telethon to raise funds for research into cardio- yers in their country. Companies cannot ask to take part vascular diseases. in the study and winners are selected on the basis of their — COACH Foundation: a corporate volunteer initiative attractiveness as employers once the respondents' answers that uses coaching and mentoring to enhance the em- have been collated. This method ensures that the study is ployability of young people at risk of social exclusion. totally objective. Six young people benefi ted from the programme in 2014. Oxfam-Intermon Trailwalker Banco Sabadell won the prize for the largest number of Achievements and awards volunteers, which is given for success in mobilizing people Talent Mobility Award (26 teams) and also for the communication skills deployed Banco Sabadell was named Best Spanish Company in in the promotion of this fundraising event. the fi rst Talent Mobility Awards, which are given in recognition of best practice in talent mobility, an inte- Qualis Awards for Excellence grated management process that concerns itself with Established by the Bank in 2002, the Qualis Prizes are an organization's ability to identify, develop and deploy awarded to people and groups of people who have been talent eff ectively. particularly noted for the excellence of their work during The award pays tribute to Banco Sabadell's success the year. in managing talent, as demonstrated in a succession of In 2014 the Qualis prizes, now in their 12th year, were integrations following the eight corporate mergers of the awarded for performance in 2013. This year the arran- last few years. gements were changed in keeping with the increase in Consistency, innovation and an emphasis on in-house the size of the Group since 2003 when the prizes were talent were among the qualities cited by the jury in awar- instituted. ding the fi rst prize of its kind to our organization. The Bank felt that it was time to change the structure of the prizes for best branch so as to move from a prize for overall excellence to a system that gave recognition to the best branches in each Regional Division.

An independent global study described the Bank as one of three most attractive employers in the Spanish ﬁ nancial services industry.

Banco Sabadell Group 45 Consequently, the awards for the Bank's best branches are orient disruptive ideas in connection with the Challenge particularly noteworthy because they recognise collective theme, a group of experts drew up a goals document which merit: was released to the organization on the same day as the “Evento BS Idea Forum”, a lecture/dialogue broadcast live Catalonia Region on BancSabadell TV to all employees from the Auditorium Vilana-Bonanova branch (377) in Barcelona City of the CBS building.As part of the event, the BS person Vielha branch (5127) in Catalonia West in charge of the Challenge sets out the objectives, and an El Masnou branch (67) in Catalonia East inﬂ uencer with acknowledged prestige in the ﬁ eld sti- (#1 branch overall) mulates employees to adopt a new perspective; the event concludes with a question and answer session open to the Eastern Region entire Community. The event takes place a few days before Orihuela Cabo Roig (621), in the Alicante Region the Challenge Week, to give employees time to meditate on Caravaca de la Cruz O.P. (5247), in the Murcia region the issue. Benicassim branch (4325) in the Valencia Region Not only the ideas produced by employees are welco- Jesús branch (1407) in the Balearic Islands med:, any customer or other person can make comments, suggestions or requests to Banco Sabadell via its pages on Central Region Facebook or Twitter or make use of the feedback platform Madrid-General Perón branch (5276) in Madrid at www.feedback.bancsabadell.com. Customers can use Torrijos branch (5377) in Castille the platform to put forward suggested improvements or new ideas on remote banking channels, mobile phone Northeast Region services, operating processes, product features, accounts, Astorga branch (5037) in Asturias & León credit and debit cards and so on. A Coruña-Pza. de los Caídos branch (505) in Galicia

Southern Region Ceuta branch (1291)

Northern Region Zaragoza–Sagasta branch (5583)

Awards were also granted in the categories of "Best Com- pany Banking branch", "Best Zone", "Best Head O∞ce Unit" and "Best Improvement Plan". The Gold Qualis award for an entire career was granted to Lluis Buil Vall, Deputy General Manager and Head of the Catalonia Region.

Employee participation for improvement and innovation To encourage employee engagement a Web 2.0-based collaborative platform, BS Idea, has been set up on the corporate Intranet. The platform provides an easy, amicable way for employees to use their creativity and put forward suggestions for improvements in working methods or additions to the range of products and services. A major advantage of this system is its transparency: employees’ ideas are immediately visible to all other employees and can be voted on, improved upon or enriched with further opinions and ideas. This helps to establish priorities for implementation, since the number of votes in favour of an idea gives an excellent indication of the beneﬁ ts that it could bring to the organization. In 2014 a total of 5,179 employees were active participants on the site and 3,024 ideas were put forward. To supplement the quarterly competition a "Challenge Week" was introduced in which, for a single week, all employees are asked to produce ideas on a strategic theme. To

46 Banco Sabadell Annual report 2014 Customer and user protection

Any customer or user of the Group can contact the Cus- tomer Service Department (CSD) for the resolution of any complaint or claim that has not been settled with the branch in the normal way. The CSD is independent from the business and operational side of the Group and is governed by the Group’s own rules and procedures for the protection of customers and users of its ﬁ nancial services. Customers and users may also avail themselves of the Customer Ombudsman, a forum that is independent of the Group and is competent to decide on claims made to it either directly or on appeal from a prior procedure (G32 & G33). Decisions of the CSD or the Ombudsman are binding on all Bank units or departments. Of the total complaints and claims examined by the Customer Service Department, 39.2% resulted in a decision favourable for the Bank, 8.4% were settled by agreement with the customer or user and 0.8% were resolved partly in favour of the customer or user. In 0.9% of cases customers withdrew the claim (0.3% in 2013), and 42.1% were resolved in favour of the customer or user. At 31 December, 6.0% of cases had yet to be ruled on by the regulatory bodies and the Customer and Investor Ombudsman. Finally, the Bank declared itself not to be competent in 2.6% of the cases.

1 24,821 26,085

2013 2014

G32 Complaints and claims G33 Complaints and claims - handled breakdown

1 Complaints 11.1% 2 Claims 88.9%

Banco Sabadell Group 47 Banco Sabadell Group ﬁ nancial information Proﬁ t performance

Banco Sabadell obtained €371.7 million in net attributable proﬁ t in 2014.

This result exceeds the targets set for the ﬁ rst year of the Triple plan.

Containment of personnel and administration expenses, on a like–for–like basis, combined with branch network restructuring resulted in a signiﬁ cantly improved cost:income ratio.

Consolidated data for 2014, the Bank’s 133rd year of existence, reﬂ ects a sound balance sheet and conﬁrms that the Banco Sabadell Group is growing steadily, based on consistent improvements in ordinary banking revenues and rigorous containment of operating costs (T1).

Banco Sabadell Group ﬁ nancial information 49 Thousand euro T1 2014 % of ATA (**) 2013 (*) % of ATA (**) 14/13

Interest and similar income 4,513,497 2.76 4,863,170 2.92 (7.2) Interest and similar charges (2,253,791) (1.38) (3,048,476) (1.83) (26.1)

Net interest income 2,259,706 1.38 1,814,694 1.09 24.5

Return on equity instruments 8,628 0.01 7,329 — 17.7 Share of profi t/(loss) of equity-accounted 101 — 11,107 0.01 (99.1) undertakings Net fees 860,891 0.53 759,670 0.46 13.3 Income from trading (net) 1,763,604 1,08 1,479,185 0.89 19.2 Exchange differences (net) 99,556 0.06 67,871 0.04 46.7 Other operating income and expense (191,960) (0.12) (308,658) (0.19) (37.8)

Gross income 4,800,526 2,94 3,831,198 2.30 25.3

Personnel expenses (1,202,604) (0.74) (1,135,175) (0.68) 5.9 Other general administrative expenses (570,714) (0.35) (587,886) (0.35) (2.9) Depreciation and amortization (278,104) (0.17) (228,447) (0.14) 21.7

Proﬁ t before impairment and other provisions 2,749,104 1.68 1,879,690 1.13 46.3

Loan loss and other provisions (2,499,659) (1.53) (1,768,998) (1.06) 41.3 Profi t on disposal of assets 236,948 0.15 43,893 0.03 439.8 Goodwill — — 30,295 0.02 (100.0)

Income before tax 486,393 0.30 184,880 0.11 163.1

Corporate income tax (109,748) (0.07) (17,962) (0.01) —

Consolidated proﬁ t/(loss) for the year 376,645 0.23 166,918 0.10 125.6

Profi t/(loss) attributable to non-controlling 4,968 21,003 (76.3) interests

Proﬁ t/(loss) attributable to the Group 371,677 145,915 154.7

(*) Restated as a result of early application of IFRIC 21. (**) Average total assets

Net interest income Steady improvement in customer spreads in a context of low interest rates.

Net interest income totalled €2,259.7 million in 2014, rising by 24.5% on the previous year’s ﬁgure, with the ratio of net interest income to average total assets and the customer spread both increasing signiﬁcantly. This upward trend was already observable in the second quarter of 2013 and resulted mainly from the reduction in funding costs (T2).

50 Banco Sabadell Annual report 2014 Thousand euro T2 Average 2014 Income/ Average 2013 Income/ amount rate Expense amount rate Expense

Cash, central banks and other credit 4,259,117 0.94 40,099 4,529,883 0.90 40,794 institutions Loans and advances to customers 106,441,489 3.42 3,640,970 105,997,323 3.64 3,859,745 Fixed-income portfolio 22,703,810 3.55 806,852 28,629,589 3.28 938,309 Equities portfolio 1,325,403 — 0 1,961,883 — 0 Tangible and intangible fi xed assets 3,761,914 — 0 3,246,609 — 0 Other assets 24,881,079 0.10 25,576 22,206,175 0.11 24,322

Total investment 163,372,812 2.76 4,513,497 166,571,462 2.92 4,863,170

Credit institutions 13,234,024 (1.47) (194,307) 25,838,912 (1.15) (298,066) Customer deposits 93,079,509 (1.19) (1,107,189) 84,303,805 (1.93) (1,627,350) Capital market 26,901,563 (3.38) (908,505) 29,654,453 (3.50) (1,038,410) Repurchase agreements 8,597,642 (0.57) (49,179) 6,732,891 (1.05) (70,657) Other liabilities 10,785,387 0.05 5,389 10,855,651 (0.13) (13,993) Own funds 10,774,687 — 9,185,750 —

Total funds 163,372,812 (1.38) (2,253,791) 166,571,462 (1.83) (3,048,476)

Net interest income 1.38 2,259,706 1.09 1,814,694

In terms of overall annual averages, the net interest margin for the year was 1.4%, 29 basis points higher than the ﬁgure for the previous year (1.1%). The increase in average returns on average total assets was due to a number of factors, mainly higher customer spreads (due to the lower cost of customer deposits), the lower cost of capital market funding, the reduction in the volume of problem assets, and the improvement in the proﬁtability of the acquired businesses.

Deposit repricing was the main driver and this trend is expected to continue in 2015 and 2016.

Banco Sabadell Group ﬁ nancial information 51 On a quarterly basis, net interest income has been increasing since the second quarter of 2013. That improvement continued in subsequent quarters in both absolute and relative terms (G1 & G2).

2,35 G1 Margin performance (%) 2.29 2.22 2.06 1.86 1.75 1.62 1.59 1.49 1.40 1.36 1.29 1.14 1.17 Customer spread 1.05 1.00 Net interest income/ Average total assets 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

3.94 G2 Credit yields and cost 3.66 of customer funds (%) 3.49 3.51 3.50 3.47 3.39 3.32

2.19 2.07 1.87 1.65 1.44 1.25 1.10 0.97 Yield on custom loans Cost of customer funds 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

Gross income

Dividends received and income from equity-accounted undertakings together amounted to €8.7 million, compared with €18.4 million in 2013, a decline of €9.7 million. The reduction was due to the fact that the number for 2013 included a €14.6 million contribution from Centro Financiero BHD, which was sold in December 2013. The branch network’s focus on selling managed investment products and services boosted net fees and commissions to €860.9 million at year-end, an increase of 13.3% year-on-year. This growth was observed across the board in all types of fees and commissions (risk operations, services, mutual funds, insurance and pension sales) (T3).

52 Banco Sabadell Annual report 2014 Thousand euro T3 2014 2013 % 14/13

Lending-related fees 115,982 113,177 2.5 Guarantees 105,124 103,757 1.3 Paid to other banks (1,856) (4,702) (60.5)

Fees derived from risk operations 219,250 212,232 3.3

Cards 146,273 132,080 10.7 Payment orders 45,992 45,167 1.8 Securities 79,795 52,786 51.2 Current account charges 85,875 72,488 18.5 Other fees 93,508 121,497 (23.0)

Fees charged on services 451,443 424,018 6.5

Mutual funds 123,163 77,948 58.0 Marketing of pension funds 67,035 45,472 47.4 and insurance

Commissions on sales of mutual funds, 190,198 123,420 54.1 pension funds and insurance

Total fees and commissions (net) 860,891 759,670 13.3

Income from financial transactions totalled €1,763.6 million. In particular, capital gains on the disposal of available-for-sale financial assets amounted to €1,860.7 million in 2014. In 2013 net income from trading was €1,479.2 million, including gains of €927.8 million on the sale of available-for-sale fixed- income assets, €437.3 million on the sale of held-to-maturity investments, €58.8 million on the sale of equity securities, and €53.6 million in income from the trading portfolio. Net gains due to foreign exchange diff erences totalled €99.6 million, a considerable increase with respect to 2013 (€67.9 million). This 46.7% year-on- year increase was due mainly to a higher volume of transactions in 2014 and to a number of currency deals that provided positive results. Other operating income and expenses amounted to €192.0 million. A major component of this item consisted of contributions to the bank deposit guarantee fund amounting to €158.4 million.

Banco Sabadell Group ﬁ nancial information 53 Proﬁ t before impairment and other provisions

Operating expenses (personnel and general) amounted to €1,773.3 million in 2014, of which €40.2 million are non-recurrent items (mainly personnel indemnities); Operating expenses amounted to €1,723.1 million in 2013, including €51.4 million in non-recurrent items (basically non-interest expenses related to the acquisition of Banco Gallego). On a strictly comparable basis, however, operating expenses for 2014 shrank by 4.4% overall compared with 2013 (personnel expenses fell by 1.2% and general expenses were reduced by 10.5%) (T4).

Thousand euro T4 2014 2013 % 14/13

Wages and salaries (865,697) (814,712) 6.3 Social welfare costs (203,686) (179,597) 13.4 Other personnel expenses (133,221) (140,866) (5.4)

Personnel expenses (1,202,604) (1,135,175) 5.9

IT and systems (92,263) (84,980) 8.6 Communications (35,190) (27,892) 26.2 Advertising (38,765) (54,269) (28.6) Property, plant and equipment (145,180) (155,419) (6.6) Printed material and offi ce supplies (7,646) (8,004) (4.5) Taxes (99,383) (98,619) 0.8 Other expenses (152,287) (158,703) (4.0)

Other admistration expenses (570,714) (587,886) (2.9)

Total administration expenses (1,773,318) (1,723,061) 2.9

The increase in gross income in 2014 combined with the policies to hold down operating expenses resulted in an improved cost:income ratio which at the end of the year stood at 53.1%, down from 64.2% at the end of 2013 (the figures for both years excluded non-recurrent income from trading and net foreign exchange gains, in accordance with the revised procedure introduced in 2014 and applied also to 2013). The profit and loss developments outlined above resulted in a profit before impairment and other provisions of €2,749.1 million. Provisions for loan losses and other impairments (mainly real estate and financial assets) amounted to €2,499.7 million (€1,769.0 million in 2013) (T5).

Thousand euro T5 2014 2013 % 14/13

Loan impairment provisions (1,541,051) (1,147,132) 34.3 Land and buildings (853,952) (591,158) 44.5 Impairment of investments in associated (57,876) (33,287) 73.9 undertakings Other net provisions and impairment charges (46,780) 2,579 —

Total net provisions and impairment charges (2,499,659) (1,768,998) 41.3

54 Banco Sabadell Annual report 2014 Capital gains on asset disposals amounted to €236.9 million and were made up largely of a €162 million gross capital gain on the sale of the group’s debt management and recovery business and an exceptional payment of €80 million (net of arrangement expenses) on the signature of a reinsurance treaty with SCOR Global Life in respect of the Mediterráneo Vida portfolio of individual life and permanent disability policies. In 2013, capital gains on asset disposals amounted to €43.9 million, including net gains of €25.6 million in December 2013 from the sale of Banco Sabadell’s stake in Centro Financiero BHD.

Net attributable proﬁ t

The group’s income statement for 2013 included a credit item of €30.3 million under negative goodwill, mainly attributable to the acquisition of Banco Gallego. After deducting income tax and the share of profit attributed to non-controlling interests, the year-end profit attributed to the Group for 2014 was €371.7 million, compared with €247.8 million in 2013. Considering the impact of early application of IFRIC 21, the 2013 profit and loss account reveals €145.9 million of attributable profit in that year.

Balance sheet management Demand for credit is reviving.

The balance of doubtful loans and problem assets is declining.

Off -balance sheet funds grew steadily throughout the year.

Banco Sabadell Group ﬁ nancial information 55 Thousand euro T6 Assets 2014 2013 (*) % 14/13

Cash and balances with central banks 1,189,787 3,201,898 (62.8) Assets held for trading. derivatives and other fi nancial assets 3,253,356 2,623,485 24.0 Available-for-sale fi nancial assets 21,095,619 19,277,672 9.4 Loans and receivables 117,895,179 118,989,126 (0.9) Loans and advances to credit institutions 4,623,197 3,525,521 31.1 Loans and advances to customers (net) 110,835,723 112,928,890 (1.9) Debt securities 2,436,259 2,534,715 (3.9) Investments 513,227 640,842 (19.9) Tangible assets 3,982,866 3,935,322 1.2 Intangible assets 1,591,296 1,501,737 6.0 Other assets 13,824,343 13,352,459 3.5

Total assets 163,345,673 163,522,541 (0.1)

Liabilities 2014 2013 (*) % 14/13

Liabilities held for trading and derivatives 2,254,459 1,972,190 14.3 Financial liabilities at amortized cost 145,580,114 147,269,474 (1.1) Deposits from central banks 7,201,546 9,227,492 (22.0) Deposits from credit institutions 16,288,193 13,857,264 17.5 Customer deposits 98,208,370 99,362,908 (1.2) Marketable debt securities 20,196,329 21,166,915 (4.6) Subordinated liabilities 1,012,362 1,089,046 (7.0) Other ﬁ nancial liabilities 2,673,314 2,565,849 4.2 Liabilities under insurance contracts 2,389,571 2,134,139 12.0 Provisions 395,215 664,246 (40.5) Other liabilities 1,510,362 1,266,067 19.3

Total liabilities 152,129,721 153,306,116 (0.8)

Equity 2014 2013 (*) % 14/13

Shareholders' funds 10,223,743 10,037,368 1.9 Valuation adjustments 937,416 120,814 — Non-controlling interests 54,793 58,243 (5.9)

Total equity 11,215,952 10,216,425 9.8

Total liabilities and equity 163,345,673 163,522,541 (0.1)

Memorandum accounts 2014 2013 (*) % 14/13

Contingent exposures 9,132,560 8,663,950 5.4 Contingent commitments 14,769,638 12,026,000 22.8

Total memorandum accounts 23,902,198 20,689,950 15.5

(*) Restated as a result of early application of IFRIC 21. Presented solely for the purposes of comparison.

56 Banco Sabadell Annual report 2014 Assets Lending to companies, of all sizes, is rising.

At the end of 2014, the total assets of Banco Sabadell and its Group amou- 6 7 nted to €163,345.7 million, i.e. very similar to the ﬁ gure at the end of 2013 1 (€163,522.5 million).

Gross loans and advances to customers (excluding repos) accounted for 5 75% of the group's total consolidated assets and amounted to €121,140.8 million at year-end. Although this item declined by 2.8% year-on-year (mainly 2 as a result of the lower volume of doubtful balances), demand for credit showed 4 signs of recovering in the ﬁ nal months of the year. Gross loans and advances (excluding repos and NPLs) increased by €773.1 million in the fourth quarter 3 (T7, G3 & G4).

G3 Loans and advances to customers 31.12.2013 T7 Loans and advances 1 Demand loans and other 7.8% 2 Mortgage loans & credit 57.4%

Thousand euro 3 Other secured loans & 2.4% credit 2014 2013 % 14/13 4 Trade credit 4.7%

Secured loans and credit 56,415,509 59,938,349 (5.9) 5 Other loans 21.8% Trade credit 4,867,272 4,756,581 2.3 6 Other credit 3.7% Other loans and credit 28,382,718 25,537,113 11.1 7 Leasing 2.2% Other loans and credit 31,475,338 34,382,890 (8.5)

Gross loans and advances to customers, 121,140,837 124,614,933 (2.8) excluding repos

Assets acquired under repo agreements 587,597 688,010 (14.6) 6 7

Loans and advances to customers - gross 121,728,434 125,302,943 (2.9) 1

Provisions for bad and doubtful debts and (10,892,711) (12,374,053) (12.0) 5 country risk

Loans and advances to customers - net 110,835,723 112,928,890 (1.9) 2 Memorandum item: total securitized assets 12,938,909 17,349,918 (25.4) 4 Securitized mortgage assets 12,348,343 16,372,319 (24.6) Other securitized assets 590,566 977,599 (39.6) 3 Of which: securitization issues after 01.01.2004 12,284,506 15,672,353 (21.6) Securitized mortgage assets 11,739,188 14,751,681 (20.4) G4 Other securitized assets 545,318 920,672 (40.8) Loans and advances to customers 31.12.2014 1 Demand loans and other 7.8% 2 Mortgage loans & credit 54.5% 3 Other secured loans & 2.2% credit 4 Trade credit 4.9% 5 Other loans 24.3% 6 Other credit 4.2% 7 Leasing 2.1%

Banco Sabadell Group ﬁ nancial information 57 The problem asset situation improved in 2014; excluding the assets covered by the Asset Protection Scheme (APS) for Banco CAM, the NPL ratio was 12.2% at 2014 year-end, down from 13.6% a year earlier. The coverage ratio, expressed with respect to total exposure to loans and real estate, was 13.1% at the end of 2014 (T8).

Thousand euro T8 2014 2013 % 14/13

Total non-performing exposures (*) 14,192,150 16,021,491 (11.4) Total risks (*) (**) 116,607,540 117,584,592 (0.8)

Loan loss ratio (%) (*) 12.17 13.63

Loan and real estate impairment 17,441,989 18,341,298 (4.9) provisions

Overall coverage ratio (%) (***) 13.1 13.6

(*) The fi gures and percentages shown do not include assets covered by the Asset Protection Scheme (APS). (**) Includes contingent liabilities. (***) Expressed with respect to total exposure to loans and real estate.

In 2014, Solvia sold 16,172 units of real estate on the balance sheet for €2,744 million. Table T9 shows the trend in doubtful assets and real estate, excluding the APS (not including reclassiﬁed loans and changes prior to the ﬁrst quarter of 2014).

Amount (€m) T9 2014 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Ordinary net increase (83) (203) (316) (457) 388 760 365 (12) (*) Change in real estate 64 148 202 263 394 1 218 400 (*)

Net increase plus (19) (55) (114) (194) 782 761 583 388 (*) real estate

Defaults 265 97 224 298 247 305 105 51

Quarterly change (284) (152) (338) (492) 535 456 478 337 in doubtful balances and real estate

(*) Assets newly classifi ed as doubtful, not considering the acquisitions in 2013. The ordinary net increase does not include assets reclassifi ed as doubtful in 2013 as a result of the change in approach to classifying refi nanced loans.

The ratio of non-performing loans improved and NPL coverage remained high.

58 Banco Sabadell Annual report 2014 In 2014, the value of Banco Sabadell’s securities portfolio increased by 7.7% year-on-year to a year-end total of €24,293 million. The Bank’s ﬁxed-income holdings lend stability to net interest income (T10).

Thousand euro T10 2014 2013 %14/13

Government securities 18,247,358 16,327,014 11.8 Treasury bills 57,303 40,966 39.9 Other government securities 18,190,055 16,286,048 11.7 Fixed-income securities 5,159,807 5,415,881 (4.7) Doubtful assets 952 96 891.7

Total ﬁ xed-income securities 23,408,117 21,742,991 7.7

Shares and equity investments Credit institutions 250,330 186,679 34.1 Other private sector issuers 341,789 351,417 (2.7) Equity investments in associated 292,655 272,844 7.3 undertakings

Total shares and equity investments 884,774 810,940 9.1

Total investment portfolio 24,292,891 22,553,931 7.7

Real estate sales were 10.3% above target.

Liabilities

Within on-balance sheet liabilities, demand account balances (current and savings accounts) totalled €43,275.0 million, a 17.4% increase year-on-year. Balances in time deposits amounted to €53,395.9 million, a 12.2% decline year-on-year that reﬂ ected the downward trend in interest rates in the ﬁnancial markets, which drove investors to switch to more attractive investments in search of better returns. Liabilities in the form of tradeable securities amounted to €20,196.3 million at 2014 year-end, compared with €21,166.9 million at 31 December 2013. This decline was due mainly to a net reduction in balances of asset-backed securities and mortgage covered bonds because of maturity (T11, G5 & G6).

Banco Sabadell Group ﬁ nancial information 59 Thousand euro T11 2014 2013 % 14/13

Current accounts 31,098,746 26,260,652 18.4 Savings accounts 12,176,217 10,601,835 14.9 Time deposits 53,395,928 60,798,681 (12.2) Repurchase agreements 1,291,799 1,347,184 (4.1) Time-period adjustments 447,697 611,168 (26.7) Adjustments due to hedging derivatives (202,017) (256,612) (21.3)

Customer deposits 98,208,370 99,362,908 (1.2)

Debt securities and other negotiable 20,196,329 21,166,915 (4.6) instruments

Subordinated liabilities 1,012,362 1,089,046 (7.0)

Liabilities under insurance contracts 2,389,571 2,134,139 12.0

Total on-balance sheet deposits and 121,806,632 123,753,008 (1.6) issued securities

With regard to off -balance sheet customer funds, assets in collective investment schemes expanded steadily, to €15,705.6 million at 31 December 2014, a 42.5% increase with respect to the end of 2013 (T12).

4 4

1 1

3 3

2 2

G5 G6 Customer deposits (*) Customer deposits (*) 31.12.2013 31.12.2014 1 Current accounts 26.5% 1 Current accounts 31.8% 2 Savings accounts 10.7% 2 Savings accounts 12.4% 3 Time deposits 61.4% 3 Time deposits 54.5% 4 Assets ceded under 1.4% 4 Assets ceded under 1.3% repurchase agreements repurchase agreements

(*) Excluding adjustments for accruals and hedges with derivatives.

A sharp increase in market share in mutual funds.

60 Banco Sabadell Annual report 2014 Thousand euro T12 2014 2013 % 14/13

Managed collective investment schemes 12,006,900 8,178,584 46.8 Equity funds 953,518 584,740 63.1 Balanced funds 1,695,488 866,585 95.7 Fixed-income funds 3,829,651 2,474,177 54.8 Guaranteed funds 3,793,940 2,788,376 36.1 Real estate funds 9,225 44,364 (79.2) Open-end investment companies (OEICs) 1,725,078 1,420,342 21.5 Mutual funds and OEICs distributed by the Group 3,698,712 2,839,986 30.2

Collective investment schemes 15,705,612 11,018,570 42.5

Individual 2,861,552 2,857,495 0.1 Company 1,456,994 1,478,333 (1.4) Group 16,069 20,463 (21.5)

Pension funds 4,334,615 4,356,291 (0.5)

Total funds 20,040,227 15,374,861 30.3

Assets in pension funds marketed by the Group amounted to €4,334.6 million at 2014 year-end, a very similar balance to the end of the previous year (€4,356.3 million). Total funds under management amounted to €152,185.4 million at 31 December 2014, an increase of 2.1% with respect to the balance of €149,122.9 million at 31 December 2013 (T13).

Thousand euro T13 2014 2013 % 14/13

Creditors - general government 2,804,065 3,197,859 (12.3) Creditors - resident sector 86,449,217 88,788,617 (2.6) Creditors - non-resident sector 8,709,408 7,021,876 24.0 Time-period adjustments 447,697 611,168 (26.7) Adjustments due to hedging derivatives (202,017) (256,612) (21.3) Debt securities and other negotiable 20,196,329 21,166,915 (4.6) instruments Subordinated liabilities 1,012,362 1,089,046 (7.0) Collective investment schemes 15,705,612 11,018,570 42.5 Pension funds 4,334,615 4,356,291 (0.5) Insurance policies sold and 9,810,082 10,201,494 (3.8) liabilities under insurance contracts Wealth management 2,918,071 1,927,634 51.4

Total customer deposits and assets 152,185,441 149,122,858 2.1 under agement

Banco Sabadell Group ﬁ nancial information 61 Liquidity management and funding policy 6

In recent years, the Bank’s funding policy has focused on generating a positive 5 liquidity gap in the banking business by reducing the total amount of funding obtained from the wholesale markets and increasing the Group’s liquidity 4 1 position. 3 The Bank’s standard practices in liquidity management are as follows: 2 — Each year, it draws up a funding plan taking account of each business unit’s funding needs and the amount to be raised on the capital markets, diversifying between the various short- and long-term funding programmes. — Compliance with the funding plan is checked at regular intervals, devia- G7 tions by individual business units are identiﬁed, and the plan is updated Funding sources accordingly. 1 Deposits 65.8% — At regular intervals, the Bank checks the level of short-term commitments 2 Retail investment products 1.3% it has assumed, its treasury position and future projections, in order to en- 3 Repos 6.2% sure that it has su∞cient liquidity to cover its funding needs in the short and 4 ICO fi nance 5.0% long term. 5 Wholesale market 16.5% — Banco Sabadell also regularly updates its liquidity contingency plan to 6 ECB 5.2% ensure that it has su∞cient liquidity assets to address a number of liquidity stress scenarios; in parallel, it assesses the quality of its portfolio of liquid assets by analysing those assets’ sensitivity to a number of scenarios regarding rating downgrades and market movements. 6

Liquidity management in 2014 4 1 The Group’s main source of funding is the customer deposit base (mainly demand deposits and time deposits captured through the branch network), 3 together with funding from the interbank and capital markets, where the Bank 2 has a number of short- and long-term funding programmes in place to assure it of a suitable diversity of products, maturities and investors. The group’s main sources of funding at the close of 2014 are further analy- G8 sed in diagrams G7 and G8. Wholesale market funding 1 Mortgage covered bonds 62.4% 2 Senior debt 4.2% 3 Preference shares & 4.0% subordinated debt 4 European and institutional 9.1% commercial paper 5 Asset-backed securities 15.7% 6 Guaranteed debt 4.6%

The funding structure is balanced.

62 Banco Sabadell Annual report 2014 Customer deposits on balance sheet

At 31 December 2014, customer funds on the balance sheet amounted to €94,461 million, compared with €94,497 million at 2013 year-end and €80,179 million at 2012 year-end. The sharp 17.9% increase in 2013 over 2012 was due mainly to acquisitions. There was a shift from time deposits to demand deposits in 2014 due to lower interest rates. At 31 December 2014, demand deposits (which include current and savings accounts) had increased to €43,275 million (up 17.4%) at the expense of time deposits, which shrank by 12.2%. The deposit base has grown in recent years, displacing capital market funding, with a positive impact on the Group's bottom line while also reducing the loan-to-deposits (LTD) ratio (calculated as net loans and advances adjusted for subsidised funding/retail funding) from 122% at 2012 year-end to 104% at the end of 2014.

Capital market

As a result of deleveraging by the Group and its successful campaign to attract deposits, the proportion of funding raised on the wholesale markets has declined steadily in recent years. At the end of 2014 the outstanding balance of capital market funding was €23,085 million, compared with €26.063 million at the end of 2013.

Short-term funding

Short-term funding arrangements include a Spanish commercial paper programme whose outstanding amount cannot exceed €5,000 million and a Euro Commercial Paper (ECP) programme for a nominal value of up to €3,500 million. The outstanding balance of the commercial paper programme, which is placed mainly in Spain, remained stable throughout the year. At 31 Decem- ber, the outstanding balance was €2,745 million (net of commercial paper purchased by Group companies). The balance of the ECP programme, aimed at qualiﬁ ed international investors, expanded slightly from €98.6 million at the end of 2013 to €165.2 million at 31 December 2014.

Long-term funding

As part of the Group's longer-term funding, on 29 April 2014 an issuance programme of non-equity ﬁ xed-income securities with an upper limit of €10,000 million was registered with the CNMV. During 2014, Banco Sabadell issued bonds totalling €4,087 million under the programme, both for placement on the market and for retention by the Group. During the year, the Group tapped the markets on a number of occasions. Banco Sabadell made a public off ering of 7-year mortgage covered bonds totalling €1,250 million; three issues of 8- and 9-year mortgage covered bonds totalling €388 million, underwritten in their entirety by the European Investment Bank (EIB); six issues of senior debt between 1.5 and 5 years totalling €916.5 million; and 13 issues of structured bonds amounting to €68 million with maturities of between one and 10 years. Additionally, as part of funding arrangements agreed between the ICO and Banco Sabadell, the Bank carried out 71 issues of straight bonds with maturities of between two and six years, all of which were fully subscribed by the ICO for a total of €588.9 million. Historically the Group has been very active in originating asset-backed securities. It currently has 40 such issues outstanding (including issues by Banco Guipuzcoano, Banco CAM, BMN and Banco Gallego); a portion was retained by the Group as liquid assets available for use as eligible collateral in funding

Banco Sabadell Group ﬁ nancial information 63 arrangements with the European Central Bank, and the remaining bonds were sold on the capital markets. At the end of 2014 the Group had €4,062.3 million outstanding in asset-backed securities. For reasons of e∞ciency, six asset- backed issues with relatively small outstanding balances were redeemed early in 2014.

Liquidity buffers

In addition to these sources of funding, Banco Sabadell holds a buff er of liquid assets to cover any liquidity requirement that may arise. Since the start of the crisis, Banco Sabadell has accelerated the process of building up this liquidity buff er as a fi rst line of defence. At the end of 2011 the size of the Group’s fi rst-line liquidity buff er was €11,399 million, i.e. market value less the haircut applied by the ECB in its monetary policy operations to eligible assets, and with the reduction in the Liquidity Coverage Ratio (LCR) in other cases. During 2012, Banco Sabadell continued to strengthen its liquid asset base by generating a positive funding gap through the branch network, bringing its fi rst-line liquidity buff er up to €17,396 million by the end of that year. The amount of fi rst-line liquid assets increased to €19,009 million by the close of 2013. The liquidity buff er was maintained throughout 2014, at the end of which the Group’s fi rst-line reserve amounted to €18,758 million. In addition to its fi rst-line liquidity buff er, the Group maintains a buff er of mortgage assets and public sector loans that are eligible as collateral for mortgage and public sector covered bonds, respectively. At the end of 2014, these provided an additional capability for the issuance of covered bonds — eligible to be discounted as collateral with the ECB — in the amount of €9,941 million. By the close of the year, the Group’s available liquidity reserve had reached an eff ective amount of €28,699 million, composed of the Group’s fi rst-line liquidity reserve plus its year-end capacity to issue mortgage and public sector covered bonds. Banco Sabadell participated in the ECB’s 3-year liquidity auctions on 22 December 2011 and 1 March 2012, receiving an overall total of €23,650 million. Part of these borrowings were repaid gradually in 2013 and the balance stood at €8,800 million at 31 December 2013; this was repaid in full in July 2014. The Bank also participated in the ECB’s 4-year TLTRO liquidity auction on 17 De- cember 2014, obtaining €5,500 million, approximately the maximum amount permitted by the Bank’s balance sheet position. At 31 December 2014, Banco Sabadell held €7,200 million in borrowings from the ECB.

64 Banco Sabadell Annual report 2014 Agency ratings

In recent years, like the rest of the banking sector, Banco Sabadell experienced rating downgrades by the major agencies in response to the reduction of Spain's sovereign credit ratings. In 2014, the three agencies that were rating Banco Sabadell’s credit quality were Standard & Poor’s, Moody’s and DBRS. Table T14 shows the current ratings, and the last dates on which they were a∞rmed. In the context of the latest review of Spain's economic risk, Standard & Poor's performed a number of rating actions with respect to Spanish banks in November. Speciﬁ cally, on 27 November, the agency upgraded Banco Sabadell's long-term rating by one notch to BB+ (from BB) and a∞rmed its short-term rating at B. The negative outlook reﬂ ects the possible reduction in government support for European banks when the bank resolution framework is introduced.

T14 Capital ratio Long term Short term Outlook Last review (BIS)

Standard & Poor´s BB+ B Negative 27.11.2014 Moody's Ba2 NP Negative 23.10.2014 DBRS A (low) R1 (low) Negative 09.01.2015

Capital management

At 2014 year-end, Banco Sabadell had a core capital (CET 1) ratio of 11.7%.

In 2014, Banco Sabadell continued to pursue the active capital management policy it had been following for the last few years, with major implications for its future growth. In the last four years, the Bank increased its capital base by issuing securities qualifying as ﬁ rst-tier capital; as a result its capital resources grew by more than €5,000 million (T15):

Banco Sabadell Group ﬁ nancial information 65 €Mn T15 Capital Actions Amount Impact on capital

September 2010 Equity issue 196 +11bp Core Tier I February 2011 Debt-for-equity swap (equity via book-building 411 +68bp Core Tier I and redemption of preference shares and subordinated debt) February 2012 Exchange of preference for common shares 785 +131bp Core Tier I March 2012 Equity issue 903 +161bp Core Tier I July 2012 Exchange of Banco CAM preference shares 1,404 +186bp Core Tier I and subordinated debt for shares September 2013 Accelerated placement of shares, and 1,383 +178bp Core Tier I rights issue

Note: The impact on capital (in basis points) is calculated using year-end data, which have varied signifi cantly as the Group has expanded in recent years.

Consequently, the Bank has been able to maintain a sound capital position, as evidenced by the year-end capital ratios (T16). Capital management is the result of an ongoing capital planning process. This process considers expected economic, regulatory and industry performance as well as adverse scenarios. It factors in projected capital consumption in the various businesses under a number of scenarios as well as market conditions that may determine the e∞cacy of measures that may be taken. The process is conducted in line with the Bank’s strategic goals and the pursuit of attractive returns for shareholders, while always ensuring that own funds are su∞cient to attend to the risks inherent in the business. As a result of these actions and events, Banco Sabadell increased its core equity Tier 1 ratio at 2014 year-end to 11.7%, or 11.5% if the Basel III standards required in 2018 were applied (i.e. “fully loaded”). The BIS ratio was 12.8%. The capital requirements regulation and directive (CRD IV/CRR), which govern minimum capital requirements for Spanish credit institutions, on an individual and consolidated basis, and the way in which own funds are de- termined, came into force on 1 January 2014; they also regulate the various processes by which banks must evaluate their own capital and the disclosures to the market. Under CRR, credit institutions must have a capital ratio of at least 8% at all times. Nevertheless, under the new framework, regulators may require banks to have additional capital.

66 Banco Sabadell Annual report 2014 Thousand euro T16 BIS capital 2014 2013 (*) Year-on-year ratios change (%)

Capital 503,058 501,435 0.32 Reserves 8,855,717 8,891,722 (0.40) Convertible bonds — — — Non-controlling interests 28,919 40,845 (29.20) Deductions (684,483) (599,027) 14.27

Core capital resources 8,703,211 8,834,975 (1.49)

Core capital (%) 11.7 11.0 Preference shares, convertible bonds — — — and deductions

Tier one resources 8,703,211 8,834,975 (1.49)

Tier I (%) 11.7 11.0

Tier two resources 838,681 885,874 (5.33)

Tier II (%) 1.1 1.1

Capital base 9,541,892 9,720,849 (1.84)

Minimum capital requirement 5,953,425 5,830,103 2.12

Capital surplus 3,588,467 3,890,746 (7.77)

BIS Ratio (%) 12.8 12.1 5.77

Risk Weighted Assets (RWA) 74,417,813 80,189,579 (7.20)

(*) For comparison purposes, the 2013 information has been calculated based on Basel III requirements and not restated to take account of early application of IFRIC 21.

Banco Sabadell Group ﬁ nancial information 67 Group Businesses The Group is organized into a number of business areas which are shown below. It also has ﬁ ve regional divisions with full responsibility for their local areas and several business-focused support teams.

Corporate Commercial Banking Markets and Asset Sabadell Banking and Global Private Banking transformation America Businesses

Banco Sabadell is at the head of Spain’s fi fth largest ban- Markets and Private Banking king group by total assets. The Group off ers a full range of banking and fi nancial services through its diff erent Banco Sabadell has a comprehensive range of products fi nancial institutions, brands, subsidiaries and associates. and services to off er customers wishing to place their sa- The Group's development objectives are focused on vings and investments under its management. These ran- profi table growth and the generation of shareholder value ge from researching investment alternatives to trading through a strategy of business diversifi cation based on in securities, active wealth management and custodian high returns, e∞ciency and quality of service together with services. The unit's operations embrace SabadellUrquijo a conservative risk profi le, while maintaining high stan- Private Banking; Investment, Products and Research; dards of ethics and professional conduct combined with Treasury and Capital Markets; and Securities Trading sensitivity to stakeholders' interests. and Custodian Services.

Commercial Banking Asset transformation

Commercial Banking is the largest of the Group’s busi- In late 2014, in view of changing market trends and the ness lines. It focuses on providing ﬁ nancial products and high regard in which the Group's Solvia unit is held in the services to large and medium-sized businesses, SMEs, property market, the asset management business was retailers and sole proprietors, professional groupings, split into two areas: Banco Sabadell Asset Transforma- entrepreneurs and personal customers. Its high degree tion, which handles the overall management of the Bank's of market specialization ensures that customers receive a real estate assets taking an integrated view of the whole top-quality, personalized service that is totally oriented transformation process; and Solvia, which provides servi- to meeting customers' needs, whether from expert staff ces for real estate asset portfolios for both the Group and throughout its extensive, multi-brand branch network or third parties with a focus on business and adding value. via other channels that support the customer relationship and give access to remote banking services. Sabadell America

Corporate Banking and Global Businesses The Sabadell America operation comprises an international full branch, Sabadell United Bank, Sabadell The unit off ers products and services to large corporates Securities USA, Inc., and other business units, a∞liates and fi nancial institutions, both Spanish and internatio- and representative o∞ces (New York since 2012) which nal. Its activities embrace corporate banking, structured together provide fi nancial services in the corporate ban- fi nance, corporate fi nance, development capital, interna- king, private banking and commercial banking fi elds in tional trade and consumer fi nance. the US.

Group Businesses 69 Commercial Banking

Overview

SabadellAtlántico, the Group’s ﬂagship brand, operates in most of the country’s regions except for those served by other Group brands. These are Asturias and León, an area served by the Group’s SabadellHerrero brand; the Basque Country, Navarre and La Rioja, where the Group is represented by its SabadellGuipuzcoano network; and the Valencia and Murcia regions, where it operates under the SabadellCAM brand. Last year saw the SabadellGalle- go name being incorporated into the Group’s multi-brand strategy to identify its branches in the Galicia region, following the recent acquisition of Banco Gallego by Banco Sabadell. The Group’s SabadellSolbank branches have the primary aim of meeting the needs of resident expatriates from other European countries. It does this through a chain of specialist branches operating only in the Canary Islands, the Balearic Islands and the country’s southern and south-eastern mainland coastal areas. Finally, Acti- voBank is there to serve customers who prefer to do their banking exclusively by telephone or online. 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, chieﬂ y 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.

Key developments in 2014

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 integra- te the branches acquired from Banco Gallego and from Lloyds Bank International in Spain (now rebranded as SabadellSolbank).

70 Banco Sabadell Annual report 2014 Thousand euro T1 Commercial Banking 2014 2013 % 14/13

Net interest income 1,778,469 1,353,679 31.4

Net fees 636,270 576,411 10.4 Other income (76,970) (51,732) 48.8

Gross income 2,337,769 1,878,358 24.5

Operating expenses (1,345,734) (1,258,142) 7.0

Operating proﬁt/(loss) 992,035 620,216 59.9

Losses due to asset impairment (644,154) (325,014) 98.2

Proﬁt/(loss) before taxes 347,881 295,202 17.8

Ratios (%) ROE (profit / average shareholders’ equity) 8.0 7.0 Cost:income (general administrative 57.6 67.0 expenses / gross income) Loan loss ratio 10.3 11.4 Loan-loss coverage ratio 52.4 52.5

Business volumes (€Mn.) Loans and receivables 79,853 81,956 (2.6) Customer accounts 90,785 88,130 3.0 Securities 8,678 8,424 3.0

Other data Employees 12,562 13,225 (5.0) Spanish branches 2,253 2,356 (4.4)

Particularly encouraging was a drop in the loan loss ratio also significant, in both relative and absolute terms, in in the Commercial Banking business from 11.4% in 2013 the infl ow of savings into mutual funds from the personal to 10.3% in 2014. customer segment. An enhanced product off ering geared Key business objectives for 2014 under the Group’s cu- to this customer group included Sabadell e-Bolsa, which rrent 3-year plan (“Triple”) were to increase profitability is designed to increase investment in securities by retail and off er in its newly acquired businesses in the Catalonia customers. and Valencia/Murcia regions, and to grow market shares Within the Bank’s product range, the “Cuenta Expan- in other parts of Spain A start was made in preparing sión” and “Cuenta Expansión Negocios” accounts were the ground for development of the Bank’s business in once again the key instruments in meeting the Bank’s foreign markets. On all these fronts a good performance targets for profitability and product off er. Whether tar- was achieved in the business and individual customer geting business or individual customers, the focus was on segments. increasing customer loyalty and transaction volumes and The business customer market saw increases in this resulted in steadily rising margins throughout the both customer numbers and market shares in all seg- year. This was refl ected in continued progress in meeting ments; market-leading positions were secured in the a key goal of the current Triple 3-year business plan: being ICO-sponsored lending and energy-e∞cient fl eet rental the main bank for the largest number of customers. One businesses. Other improvements included an enlarged milestone in achieving this goal was the full implemen- product off ering, among which were new facilities for tation of the Business Development Programme, key cross-border operations such as online tools and training aspects of which are promoting teamwork and producti- sessions organized at the request of customers interested vity and driving up service quality by promoting the idea in the possibilities off ered by foreign trade. The Bank ear- that “giving customers what they need helps us to be more ned accolades as an acknowledged leader in serving the profitable”. franchising industry; it also set up two new business units Of particular importance in boosting the Bank’s specializing in the agricultural and tourist sectors. public image as a totally trustworthy institution was a The personal or individual customer segment saw a campaign launched in late 2014 with Rafael Nadal as steady rise in customer enrolments which was refl ected in its main protagonist. The aim of the campaign, themed increased market shares, especially in the middle-income on the idea of “closeness”, was to continue the strategy and resident expatriate sub-segments. Increases were behind the earlier “Believe” campaign. The purpose of

Group Businesses 71 “Believe”, which took place in 2014, was to make and Finally, as part of the “Opportunity Madrid” plan a fl ags- successfully deliver on a promise to customers which no hip branch will be opened in Madrid to address the need bank had ever made and extended to all aspects of busi- for a new approach in the way the Bank manages custo- ness finance. Local area campaigns during the year inclu- mer relationships. The fl agship branch will be located on ded one targeted on 36 Spanish municipalities with the a new, centrally located site designed to raise the Bank’s slogan “We believe in...”. This was not only well received profile and bolster its reputation for innovation and by the media but served as a stimulus to local business quality of service, in surroundings that visitors will find and won new individual and business customers for the pleasant and comfortable. It will work to strengthen and Bank. In addition, a special initiative aimed at foreign add value to relationships with particular customers and customers was designed and implemented with the aim provide a state-of-the-art o∞ce environment in which of boosting the Bank’s position as a market-leading natio- the Bank can pilot new approaches to customer care and nal player for the full range of financial services, with the service. strapline “Specialists in serving you here as you’d expect to be served there”. As part of the Bank’s “Opportunity Madrid” plan, Customer segments designed to promote continued growth in the number of corporate, business and high- and middle-income This section describes the Bank’s activities in the corpo- individual customers within the Madrid region, the year rate, business, central and local government, and indivi- saw account management capabilities being strengthened dual customer segments. at all branches where there was potential for growth. In June 2014 a dedicated customer-winning team was set up and is operating under a new “active management” model. Companies, businesses, government The account manager, and the special personal relations- and local authorities hip built up between account manager and customer, are central to this new approach. This model maintains and In line with its current 3-year business plan, 2014 was strengthens the Bank’s values: trustworthiness, authen- another “more businesses” year for Banco Sabadell. In ticity, communication, desire to serve, professionalism, the course of the year 95,432 businesses were enrolled innovation and modernity. as Banco Sabadell customers, an increase of 4.1% over The Bank’s regionally-based brands, which have been the previous year. Market shares surged in the small and retained out of respect for the long-established presence midsize business and large corporate segments, having and good standing of local banks acquired in the last few risen by 7.6% and 3.3% respectively by the third quarter. years, continued to show an improved performance in Significantly, large corporates accounted for 69.7% of the terms of business margins, new customers (individuals division’s business and public sector customers. This was and businesses) and market shares, and to gain leading due in large measure to the added value aff orded by our positions in market segments such as ICO-sponsored network of dedicated branches serving large corporate credit schemes. All these brands saw increases in cus- clients. At the end of the year there were 69 of these spe- tomer numbers thanks to proactive eff orts to win new cialist branches covering every part the country. customers by entering into agreements with key public A key priority for the Bank in 2014 was to make it bodies and private-sector organizations. In addition, all easier for businesses to obtain credit. It was this that led brands performed a highly significant role in the social to the “Believe” campaign, which grew out of a desire to and cultural life of their regions thanks to their sponsor- make credit more readily available to businesses and con- ship and other socially responsible activities in their local tained a promise by the Bank to respond to applications communities. for credit within six days. A commitment to give prompt answers to enquiries that has more than been fulfilled: response times are averaging just 3.2 days. The “Believe” Objectives for 2015 campaign, along with a major promotional eff ort, resulted in some €34,000 million in new finance being agreed. Key action areas for the coming year are industrialization The Bank remains committed to increasing its lending to of the sales/promotion area supported by multi-channel customers, subject always to having full knowledge of cus- marketing, and the new personal banking model, the tomers and their needs and after carrying out the careful, aim in both cases being continued improvements in rigorous scrutiny that characterizes its risk acceptance profitability. For the corporate segment, the Bank’s aim policy and the Group generally. will be to further strengthen its market-leading position The unit maintained its focus on broadening its with the “Promise to Businesses” plan, whose key features range of financing products, especially to meet working are commitment to good service and the use of remote capital requirements. Despite a backdrop of declining channels. In specific regions the intention is to continue credit availability in the Spanish market, a satisfactory narrowing the profitability gap of newly acquired branches performance was achieved. Specialist financing such in Catalonia and Valencia/Murcia, to attract new custo- as factoring (11.7% market share) and reverse factoring mers and to increase profitability in other regions of Spain. (10.1% market share) increased over the year, especially

72 Banco Sabadell Annual report 2014 in cross-border finance, ensuring that for another year customers as well as support for technological change in customers had a solution to their payment and collection such areas as lighting, building envelopes, sanitary water control requirements anywhere in the world. At the same heating, climate control and renewable energy sources time, as envisaged in the Triple business plan, the unit (geothermal, solar, photovoltaic) as required by the EU’s worked hard to develop and extend its product range by energy e∞ciency Directives 2010/31 and 2012/27. It is also being innovative and leading the way in growing transac- a provider of finance to end users, energy services compa- tion volumes and making it easier for customers to move nies and suppliers of diff erent forms of energy. A steady into markets where the Bank has a presence. rise in sales to major fl eet operators during the year led to Another key loan product for businesses and sole pro- the creation of a new dedicated unit to serve this business prietors that received much attention during the year was sector. A project was also launched to take the Group’s finance provided under O∞cial Credit Institute (“ICO”) contract leasing business into foreign markets by ma- schemes, in which the Bank´s share rose to 17.5%, putting king agreements with other operators to serve customers it in third place in the league table of lenders of ICO expanding outside their home market. finance. The most successful of the ICO-backed schemes As required by the Triple business plan, the leasing were ICO Business and Entrepreneur and ICO Expor- business is looking to develop the potential of sales ter, with totalling €3,009.8 million and €603.2 million channels such as sales introducers/agents, which enable respectively. The Bank was the biggest provider of finance customers to obtain extra income by off ering finance under the “ICO International” and “ICO Guarantee SGR” along with their products. Channels used by individual schemes, having arranged 26.3% and 30% of the funding customers proved to be a key instrument in raising the disbursed under these two schemes. profile of the rent-a-car operation, with attractive off ers The Bank also entered into partnership agreements designed to appeal to the youth market. These younger with mutual guarantee societies represented by the users tend to prefer pay-as-you-go options and are ever Spanish Confederation of Mutual Guarantee Societies more demanding in relation to both service and tools for (CESGAR) and with the Spanish Refinancing Company online access, such as apps and websites, in their interac- (CERSA), an agency of the Spanish Ministry for Industry, tion with Sabadell Renting, the Group’s specialist vehicle Energy and Tourism. The purpose of the agreement was leasing subsidiary. Tools like these are seen as vital not to facilitate the provision of €400 million in funding for only to keep track of the services being provided but also small and midsize companies (SMEs) and sole proprie- to give maximum service fl exibility to customers while tors. An increased funding agreement with the European on the move. Investment Bank to fund loans to customers enabled the The business customer segment saw a steady increa- Bank to off er business customers €700 million in additio- se in sales in line with the growth seen in the preceding nal finance. years. The “Cuenta Expansión Negocios” account was In the foreign trade arena, an international business once again the key product in the campaign to win and website was set up with a far stronger focus on services to retain new customers. It was also a key tool for customers business, particularly in foreign trade and markets likely in their day-to-day banking operations and this was to be attractive to Spanish companies. The “Export to helped by a user support plan launched in 2012. The plan Grow” programme was continued and exporting mee- was designed to maximize the business opportunities tings were organized, mainly for firms in the fruit and provided by the large number of business customers and vegetable and wine industries, obtaining high approval ensure a high quality service, as well as to forge links with ratings. A programme of seminars was started, focusing customers at an early stage in the relationship through on markets covered by the Export to Grow programme. centrally planned initiatives. Another important aspect “Next Step Mexico”, an 8-session course that was atten- in the management of business customers during the year ded by more than 1,000 companies. was a review of agreed overdraft limits to help meet the A significant highlight in the area of medium and financing needs of sole proprietors, small retailers and long-term finance was the growth in the Group’s fl eet ren- other small businesses. Overdraft facilities amounting to tal and contract equipment leasing operations (“Sabadell €2,500 million were off ered to 178,000 customers; the Renting”) with business increasing by 9.5% and 52.15% resulting increases in overdraft finance and in customers respectively. This is a further boost to the Group’s leading benefiting from them were 230% and 250%, respecti- position as a provider of energy-e∞cient solutions for vely, compared with 2013. Since the new policy came

Banco Sabadell is the “more businesses” bank.

Group Businesses 73 Thousand euro T2 Companies, businesses, 2014 2013 % 14/13 government and local authorities Net interest income 892,582 683,779 30.5

Fees and commissions (net) 239,011 217,905 9.7 Other profi ts/(losses) (3,508) 6,811 —

Gross income 1,128,085 908,495 24.2

Business volumes (€Mn.) Loans and advances 43,327 43,644 (0.7) Customer funds 37,715 35,221 7.1 Securities 4,579 4,276 7.1 Loan loss ratio (%) 10.3 11.9 —

into eff ect in 2012, the Bank has granted credit totalling thanks to its innovative off ering of products and services almost €4,000 million to more than 270,000 Spanish for public bodies. businesses. In its business with institutional clients, the Bank In 2014 a series of coordinated actions focusing on maintained and built on its success in attracting depo- retail establishments was launched as part of the “We be- sits. Bringing down funding costs remains a priority for lieve in...” campaign in 36 towns and cities all over Spain, the Bank and the infl ow of deposits is helping to increa- with more than 36,000 outlets being visited. The aim of se margins for the unit. In accordance with the Triple the campaign was to encourage people to visit shops in business plan, this has helped in winning customers who their neighbourhood, spend some money and thus give a wish to use the Bank to invest or safekeep their assets. boost to business activity in Spain’s towns and cities. The Improvements to the Bank’s off ering of products to attract message was clear: to believe in a local neighbourhood is more funds from institutional clients were followed by the to believe in its local traders. Key to the campaign’s suc- launch of the first hedge fund by Banco Sabadell open to cess was the involvement of branch managers, who perso- third parties (Aurica III). nally visited each shop in their neighbourhood to present Another key development in 2014 was the setting up of the campaign, thus creating opportunities for winning two new business units, Sabadell Negocio Agrario and Sa- and strengthening relationships with customers in the badell Negocio Turístico. This will underpin the growth of local retailer community. In each local area the campaign a high-value, comprehensive service to firms and indivi- was supported by press, radio and billboard advertise- duals working in the agriculture and tourist industries, ments, giving it widespread diff usion and a resounding with both units coordinated by teams of expert managers media impact. whose aim will be to position the Bank as a leader in ser- Another significant development during the year ving these two industries. was an intensified eff ort to target the franchising industry. This resulted in a number of industry partnership agreements which were instrumental in generating more Individuals than €200 million in new lending —a 35% increase on the previous year— to over 1,000 franchisees. The Bank also In 2014 the integration of Banco Gallego and Lloyds increased its attendance at franchising industry meetings International Bank (renamed Sabadell Solbank) was and conferences, thus consolidating its position as a lea- brought to completion. This inorganic growth brought ding provider of financial services to the industry. in more than 150,000 customers, over and above a net In the Bank’s approach to the government and increase of 347,424 individual customers. local authority sector, the year saw continued eff orts The Bank’s performance in 2014 was made possible and successes in meeting the aims set out in the Triple by the success of a strategy based on two key aims: first, business plan. A major promotional eff ort was successful having a competitive product off ering and continuously in securing public sector contracts with impacts on large developing its capabilities so as to become our customers’ sections of the public, thus increasing the number and main bank; and second, making renewed eff orts to raise diversity of transactions and preventing the build-up of its profile. business over-concentrations. Public sector contracts Key to the first of these aims was developing ways of of this kind resulted in increases of 30.1% in transac- doing business that were aligned with the needs of each tions and 20.4% in revenues, placing the Bank among customer. For middle-income customers the empha- the leading providers of financial services to central and sis was on products and e∞ciency, while for personal local government. Banco Sabadell remains, in any case, banking customers it was on personalization and diff e- a leading financial industry player for the public sector rentiation. This realignment was accompanied by a major

74 Banco Sabadell Annual report 2014 eff ort and shift of focus at branch level and the progres- loans for non-subsidized housing and the number of loans sive roll-out of self-service facilities to meet customers’ to owner/occupiers was down on the year before. Loans requirements. for unsubsidized housing accounted for 61.5% of the total With regard to the second aim, profile raising, a big in 2014, compared with 39.8% in 2013. impact on the individual customer segment was scored by In personal loans, loan approvals were up 69.5% by the “Creer” (Believing), “Cerca” (Closeness) and “Cree- value compared with the previous year. This result was mos” (We believe) promotional campaigns. To promote achieved thanks to intensified business development the Bank’s real estate business to the private customer, a activity by branches, greater promotional use of remote high-intensity campaign was launched to raise awareness distribution channels, the success of “Linea Expansión”, of Solvia, the Bank’s real estate brand specializing in pro- a low-value credit product for households, and a higher perty sales and related services, including finance. uptake of study loans available under agreements with As for the personal banking customer segment, business schools and universities. actions directed at this group were aff ected by lower Our payment media business continued to expand at risk premia and continual reductions in interest rates the excellent pace observed in recent years. The number by central banks. Even so, there was a substantial in- of debit and credit cards in use increased to 4.4 million, fl ow of customer savings into mutual funds, which grew a rise of 8.8%. Card billing was up by 24%. The EFTPOS by €3,595.8 million and raised the Bank’s share of the business also showed substantial increases on the pre- market from 4.1% to 5.1%. A new addition to products vious year, with billing up by 26% and the number of EF- targeted on the personal customer group was Sabadell TPOS users rising by 16%. During the year the platform eBolsa, a securities service launched in October. The aims was upgraded to support new mobile payment technolo- behind the new service are to increase market trading for gies and a number of projects were put in hand to provide retail investors, position the Bank as a leading player in international payment solutions for retailers and other this segment of the securities industry and grow its se- businesses. The Bank was able to position itself as a mar- curities management and custodian services business as ket leader in handling payments for online sales, which one of the strategic growth drivers envisaged by the Triple saw a year-on-year increase of 131%. Banco Sabadell was business plan. In setting up Sabadell eBolsa, the intention named Best eCommerce Payment Provider at Spain’s was to leverage the Bank’s sizeable share of the Spanish leading industry event for e-commerce practitioners. securities brokerage market (at 10%, the second largest With regard to the resident expatriate customer seg- according to the stock exchange management company, ment, in 2014 the Bank’s market position was boosted by Bolsas y Mercados Españolas) and its dealing capabilities a business relaunch campaign with the slogan “Specialists to double the number of contracts per branch and win in serving you here as you’d expect to be served there”. The new customers. campaign emphasized the Bank’s experience and know- For the middle-income sub-segment, which now how in supporting customers from foreign countries and accounts for 82.8% of the individual customer base, one gave credence to the idea that with Banco Sabadell, custo- of the main priorities was to “be our customers’ main mers are guaranteed the same degree of solvency, reliabi- bank”. Our success in achieving this aim was refl ected in lity and good practice as they would get from a financial a marked increase in customer account activity (regular institution in their own country. The campaign coincided income payments, credit/debit cards and utility bills); this with a series of improvements in the approach used in ser- was possible thanks to a competitive product off ering that ving foreign customers and in its specially targeted value included the “Cuenta Expansión”, a major policy realign- off ering. The combination of all these measures and chan- ment at branches, a series of centrally managed initiatives ging market conditions helped the Bank to see improved and continuing service excellence. business metrics in all areas related to the expatriate New housing loans increased 69.3% by value (53.8% segment: customer numbers increased by 28.8% and new by number of loans), bringing the Bank’s share of new mortgage loans by 58.2%. Moreover, it became increa- housing loans up to 7.4% by value and 7.0% by number of singly clear that 2014 was the turning point in Spain’s loans in the year to September 2014. The corresponding attractiveness to foreigners as a country in which to place figures for the year to September 2013 were 4.9% and their assets, as confidence in the country returned. The 4.8% respectively. This growth consisted very largely of volume of funds under the Bank’s management increased

Strong performance in 2014 was possible thanks to our competitive products, expanding capabilities and investment in proﬁle-raising.

Group Businesses 75 Thousand euro T3 Individuals 2014 2013 % 14/13

Net interest income 885,887 669,900 32.2

Fees and commissions (net) 397,259 358,506 10.8 Other profi ts/(losses) (73,462) (58,543) 25.5

Gross income 1,209,684 969,863 24.7

Business volumes (€Mn.) Loans and advances 36,526 38,312 (4.7) Customer funds 53,070 52,909 0.3 Securities 4,099 4,148 (1.2) Loan loss ratio (%) 10.3 11.0 —

by 8.3%, reversing the trend of the last few years. At the customers, a key priority of the Bank. This commitment close of the year the Bank’s foreign customer base totalled was embodied in a promise to respond to loan applica- 430,000 resident expatriates accounting for a total of tions within a maximum of seven days. The reality was, in 8,469.1 million in assets under management. fact, better than the promise, and answers to applications Finally, ActivoBank concentrated on wealth mana- were being received from SabadellHerrero within Com- gement for its 56,000 customers and recorded a total of mercial Banking’s average time of 3.2 days. €1,327.1 million in assets under management at the end The ability to meet customers’ expectations in this way of the year. Key highlights were increases in off -balance was a major factor in justifying SabadellHerrero’s reputa- sheet funds of 9.6% and, especially, in mutual fund assets, tion for quality of service. which were up 22.1% and reached a total of €113.7 million. According to independent survey data from STIGA/ EQUOS, SabadellHerrero scores well above the average for quality of service within the market it serves. Trading brands One consequence of constantly striving to meet customers’ needs and maintaining high quality standards The Bank’s regionally-based brands, which have been was a steady increase in its customer base over the year, retained out of respect for the long-established presence with a gain of 17,866 individual customers and 2,905 and good standing of local banks acquired in the last few business customers. Its tireless eff orts to forge partner- years, continued to show an improved performance in ship agreements with business, trade and professional terms of business margins, new customers (individuals associations were key to securing this growth in custo- and businesses) and market shares, and to gain leading mer numbers.Chief among these partnerships were: an positions in a variety of market segments. All brands per- agreement with the Asturias Federation of Metalworkers, formed a highly significant role in the social and cultural the region’s most important trade association and one life of their regions thanks to their sponsorship and other that combines the traditions of a regional industry with a socially responsible activities in their local communities. strong focus on exporting; and a multi-party agreement Some of the more notable successes scored by Group aimed at increasing the supply of credit to entrepreneurs brands in 2014 were as follows: and businesses within the province of León. The latter agreement was achieved thanks to the combined eff orts of the provincial government, the León Enterprise Federa- SabadellHerrero tion, and the León and Astorga Chambers of Commerce and SabadellHerrero. The year 2014 was a turning point in the demand for cre- These eff orts in support of business were recognized dit from households and businesses. In these circumstan- by the León Enterprise Federation, which named Pablo ces SabadellHerrero worked hard to increase its lending Junceda, the Bank’s Assistant General Manager and and improve its share of loans granted in Asturias and Head of its North-eastern Region, León’s Businessman León. Lending showed a year-on-year increase of 3.5%, of the Year for 2014. This was the first time in the award’s well above the figure for the banking industry as a whole 23-year history that a financial institution had been so within the area served by the brand. honoured. A clear indication of this growth was that, for another Another award with strong business associations, year, SabadellHerrero captured the largest share which entered its fourth edition in 2014, is the Álvarez- —30%— of ICO-sponsored finance in Asturias, and the Margaride prize, which is given, on the recommendation second largest in León, with 23%. To the Herrero brand’s of SabadellHerrero and the APQ (Asturias Patria Queri- tradition of serving the business community was added da) Association, for outstanding achievement in business. the commitment to meet the demand for credit from This year the prize went to an Asturian businessman,

76 Banco Sabadell Annual report 2014 Francisco Rodríguez, president of ILAS (Industrias Lác- or to the conduct of business. Quality of service improved teas Asturianas) who has made Asturian milk products considerably from March 2014 when integration was well known all over the world through dedication, innova- completed and by the latter part of the year was not only tion and talent. above the average for banks serving the Galician market And it is talent, precisely, that the Bank promotes and but was probably up to the standards of the top Spanish supports through the Banco Sabadell Foundation. This banks and coming close to Banco Sabadell’s own stan- support takes the form of agreements with the univer- dards of excellence. sities of Oviedo and León for the provision of grants to The growth in SabadellGallego’s customer base can enable students to apply their training in the practical thus be seen as the result of new, more powerful informa- day-to-day business of a bank. The Foundation also funds tion and business systems and continual improvements grants to undertake work experience at the Inter-Ame- in quality of service. A total of 16,057 individuals and rican Development Bank. These grants enable top-per- 5,176 businesses were added to the Bank’s customer base forming students from the University of Oviedo to obtain in Galicia, far exceeding the growth numbers recorded training of the highest order at the Bank’s headquarters in previous years. Agreements were entered into with in Washington DC. As part of its work to promote talent the Confederation of Galician Businessmen (“CEG”) and and excellence the Banco Sabadell Foundation, in the other provincial and industry organizations and a number 20th year of the SabadellHerrero Prize for Research in of chambers of commerce. As a result of these agreements Economics, awarded its prize for Best Young Economist the Bank was able to increase its share of loans granted to Natalia Fabra, a lecturer at the University of Carlos III, within Galicia, which was up by 7.5% on the previous Madrid and a specialist in regulation and competition year. policy. Another key customer group for the Bank was primary Notable examples of support provided by the Bank and food and agriculture industries, with agreements in the cultural sphere could be seen in events organi- being reached with agriculture and livestock cooperatives zed by the SabadellHerrero exhibition hall in Oviedo in and fishery associations. By the end of 2014 the Bank was partnership with the Asturias Regional Government’s in partnerships with 85% of Galicia’s largest food, agri- department of Culture and sponsored by the Bank, and culture and fishery businesses and cooperatives (firms an agreement with the Oviedo Opera Foundation to with sales of more than €10 million) and had made solid sponsor a work in the Oviedo Opera’s forthcoming season. progress in its dealings with the sector and increased its The Bank’s support was also visible in its sponsorship of revenues twofold. Oviedo Opera cards for Members and Friends. Scientific In the social and cultural domains, the Banco Saba- research was another beneficiary of SabadellHerrero dell Foundation began a collaboration with universities support through the new Asturias Foundation for Biosa- in Galicia and signed an agreement with the Galician nitary Research (“FINBA”), of which the Bank is a major Business Universities Foundation (“FEUGA”) for 40 sponsor. graduates to undertake work experience, 30 of them with the Bank itself and another ten with the Galicia Asso- ciation of Nonprofit Workplaces for Persons with Disa- SabadellGallego bilities (“CEGASAL”). In the specifically cultural sphere the Foundation sponsored an exhibition entitled “Fresh SabadellGallego, the regional brand created when Banco Water” organized by the Galician Regional Government’s Sabadell’s existing branches in the Galicia region and Department of Culture, Education and Universities in those of Banco Gallego were brought together under a Santiago de Compostela’s Culture City. The exhibition single umbrella, began the year 2014 with the challenge was seen by 40,000 people and featured 700 artworks in of integrating the operations of both networks. A time- a variety of disciplines. saving, rapid integration that would enable all branches to operate with the new business and IT systems without aff ecting the service to customers was critical to ensure a SabadellGuipuzcoano successful merger. The speed and precision of the work was such as to Following the guidelines set out in the Triple business make the SabadellGallego integration the fastest of any plan, business objectives at SabadellGuipuzcoano in integration carried out to date, being completed in just 2014 were centred on profitability. Notwithstanding the four months without hitches or delays of any significance. price war being waged in the banking sector, Sabadell- The exercise was conducted with the help of support Guipuzcoano was able to increase its income by actively teams from all over the organization and was accompa- managing its extensive customer base, which had grown nied by refurbishments to branches and cash machine significantly thanks to its eff orts to win new customers upgrades. Increases were made in sta∞ng at branches in in the last few years. With its enlarged customer base Sa- rural areas to enable them to remain open for a full wor- badellGuipuzcoano was able to claim substantial shares king day and not only on certain days or at certain hours. of the local business customer market (32.1% of SMEs The highly e∞cient operational integration was and 71.1% of large corporates). This made it possible for completed without any impairment to customer service the Bank give a major boost to its lending which resulted

Group Businesses 77 in a rise of 3.1% in the outstanding balance of loans and from Banco Gallego and Lloyds International Bank advances, while maintaining a loan loss ratio of just 6.1%, (SabadellSolbank). well below the average for other Group brands and for the The hard work done to meet this goal and the trust industry as a whole. placed in us by business people and the general public New business generation was also at a high level in the helped us to win more than 94,000 customers. Moreover, individual customer and retailer segments, with the Bank customer quality surveys show that quality standards are increasing its share of this market by 7.5% to reach 5.7%, now back where they were before the mergers and are in above its 5.4% share of the region’s bank branches. The line with those generally applicable throughout Commer- branch network successfully absorbed the new branches cial Banking. in its region that were added as a result of the integra- SabadellCAM launched a pioneering initiative in tion of Banco Gallego and Lloyds International Bank setting up new-style “dual” and “quick service” branches (renamed SabadellSolbank). It was further enlarged by in Novelda and Elda respectively. The aim here was to the opening of a new urban branch in Logroño, making off er customers a greater variety of self-service facilities a total of 131 branches well distributed throughout the such as ATMs and change dispensers with a wider range Basque Country, Navarre and La Rioja. of features to make it quicker and easier for customers to SabadellGuipuzcoano has made itself one of the best- do their banking. This enabled the Bank to improve its known financial services brands within its geographical e∞ciency without any loss of personalized attention or area and has achieved high levels of brand recognition professionalism in dealing with customers. based on an exceptionally high degree of a∞nity with the The year 2014 saw the value of personal loans and local community. This has been helped by a continuing credit facilities granted to customers increase to €1,704 high level of locally-focused activity. million, 17% up on the figure for 2013. Mortgage loans One of its most notable successes was in the area of to individual borrowers doubled both in value and in business collaboration agreements. These included agre- number with respect to 2013 as residential property ements with the local development agency for practically prices stabilized and the real estate and financial services every district in the region and with the main business industries returned to normal, with high infl ows of non- federations in Bizkaia (CEBEK) and Gipuzkoa (ADEGI). resident visitors from abroad providing an added boost. SabadellGuipuzcoano also continued its very active These non-resident foreigners accounted for one fourth of programme of external promotion and event sponsorship. the total volume of mortgages granted by SabadellCAM In the social and business domains, this included spon- and 25% of real estate purchases from the Bank’s real sorship of the Basque Enterprise Evening in Bilbao and estate subsidiary, Solvia. This last number is an indication the Guipuzcoan Industry Prizes, as well as organizing the of the valuable synergies between introductions from the ninth International Business Day held, on this occasion, branch network and the Solvia sales team. There can be at the Kursaal Palace in San Sebastián. no doubt of the importance of SabadellCAM for Solvia’s In the sporting arena, the Bank’s support program- property sales, given that as much as 41% of the total me included sponsoring the Tour of the Basque Country number of sales by Solvia in the Spanish market —almost cycle race; in the cultural sphere it sponsored the widely 6,523 units with an overall value close to €879 million— admired San Sebastián Gastronomika food fair and fun- were made within the region served by SabadellCAM. ded a research grant to BioDonostia through the Banco The resident expatriate sector was one of the main tar- Sabadell Foundation. gets of sales initiatives and awareness-raising campaigns. SabadellSolbank, strengthened by the merger with Lloyds International Bank, enjoys a privileged position as a SabadellCAM leading brand serving the expatriate community, which has a significant presence in the regions of Valencia and The main action areas for SabadellCAM in 2014 were Murcia and the Balearic Islands. focused on achieving the target rate of return set by the With regard to business customers, for the second Triple business plan. A key priority was to bring about year in succession SabadellCAM secured a leading posi- improvements in service quality, customer care and tion among financial institutions in channelling business closeness to the customer and strategies were drawn up to loans under ICO schemes, a clear indication of its ongoing increase new business development, leading to almost 3.5 support for small and midsize businesses in the three million commercially useful contacts between account Spanish regions served by the brand. In addition, a large managers and customers. number of meetings were held in the five provinces to Shareholders and customers are aware of the ad- promote international trade, and this led to an increase vantages in being one of the country’s best capitalized in income from cross-border operations fuelled by rising banks with a solid liquidity position and well regarded by exports and companies taking the “export to grow” route. markets and investors. After a transitional phase in which SabadellCAM was involved in more than 1.7 million branch networks were being integrated, eff orts were cross-border transactions with an overall value of more focused on boosting profitability ratios. This was the right than €9,200 million. time to extract value from the newly-acquired capacity, Other important events in 2014 included the signa- further enlarged in 2014 by the addition of branches ture of numerous collaboration agreements with public

78 Banco Sabadell Annual report 2014 sector bodies, business federations, local authorities and selected and funding was finally granted for nine. The regional governments, as well as the publicizing of Banco third call for applications closed on 21 December 2014 Sabadell’s new entrepreneur programme, BStartup. and 490 businesses applied, from which another five com- A key priority was for the SabadellCAM brand to panies were selected during the early months of 2015. In become yet more closely associated with the social and its first year the programme generated enormous publi- cultural life of the region. Actions to achieve this aim city, with numerous media appearances and a big social included organizing and sponsoring exhibitions and media impact; it also involved participation in 66 events. concerts and designing programmes for the Principal By the end of the year collaboration agreements had Theatre in Alicante, of which the Bank is a shareholding been signed with 15 companies that support entrepre- partner. Another act of sponsorship by the bank was to neurs all over Spain and are in a position to recommend loan to the University of Alicante, for an initial ten-year the Bank’s products and services. period, a landmark building in the Calle San Fernando With regard to direct lending to business start-ups, with the aim of strengthening its links with one of the a total of 626 loan applications were received amoun- most representative institutions in the province of Alican- ting to almost €40 million; 528 of these applications, for te. All these actions were of necessity carried out with the amounts totalling €32.4 million (81.1% of the total), were involvement of the Banco Sabadell Foundation. approved. The assistance programme put in hand by the Bank to help former employees enrolled in the programme to re-enter the world of work and a number of initiatives to Occupational groups and agent partners create employment were wound up during the year. Both programmes brought substantial benefits to the social In the Bank’s work with professional associations, occu- and economic life of the regions of Valencia and Mur- pational groups and agent partners, the key aim in 2014 cia. One of these programmes, when it came to an end, continued to be the winning of new customers in the had helped 70% of those who had enrolled to find work. individual and retailer categories and among professio- Another was a project to revitalize the economies of the nal partnerships and firms. At the end of the year 2,285 Valencia and Murcia regions by off ering incentives for the collaboration agreements with professional associations creation of employment. The final outcome was that 705 and occupational groupings were in existence covering a jobs were created, 50% more than the 500 expected at total of 2,248,669 individual members, of whom 568,478 the start of the project. The plan will continue to benefit were customers of the Bank and accounted for more than the region of Murcia, as the agreement between Banco €18,350 million in deposits and other funds. Sabadell and C-Tracción remains in eff ect and is expected Banco Sabadell is an industry leader in doing business to generate more than 1,000 jobs. with professional/occupational groupings throughout the country. The special nature of its service is based on keeping in close and frequent touch with the association BStartup or other grouping, thus enabling it to be aware at all times of each grouping’s specific needs and to provide the most Most of the key initiatives launched in 2014 by the Bank’s eff ective solutions. Enterprise Department, set up in late 2013, were under- The Bank’s agent partner network is seen as an taken in the context of the BStartup programme. The e∞cient channel for capturing new business; in 2014, programme has the aim of positioning Banco Sabadell 29,000 new customers were recruited in this way. New as the bank most supportive of start-up businesses, and customer deposits generated by this business amounted places special emphasis on firms working in the digital/ to more than €6,000 million. technology sphere where the potential for scalability is greatest. Some key elements of the programme were, first, designating 71 specialist branches and setting up a special risk analysis procedure that would serve business start- ups more eff ectively; and second, working closely with the Bank’s Open Innovation programmes and taking part is a variety of events designed to publicize the initiative. One such event was the BStartup10 initiative, in which the Bank is investing €1 million a year in ten firms at the seed capital stage of development. The ten businesses are off ered a highly intensive programme with the seed accelerator Inspirit to help them become established in the marketplace and gain access to further injections of capital to continue their growth. In the first two calls for applications for BStartup10 made in 2014, projects were presented by 749 firms, from which 10 projects were

Group Businesses 79 Bancassurance

Bancassurance - a key part of the Triple business plan.

At 31 December 2014, the total volume of funds un- takeover of Banco CAM, was sold to BanSabadell Seguros der management in insurance and pension plans was Generales by Gestión Financiera del Mediterráneo, S.A. €11,840.9 million. Issued premiums on life and non-life (a wholly-owned Banco Sabadell subsidiary) and Banco policies totalled €256.3 million. The Group’s insurance Sabadell, following Banco Sabadell’s purchase of a 50% and pensions business generated an overall net proﬁt of holding in Mediterráneo Seguros Diversos from Caja de €241.5 million. Seguros Reunidos, S.A., by exercising the purchase option The Bank extended its off ering of insurance products it held on that holding. As a result of these transactions to customers of the recently acquired Banco Gallego and BanSabadell Seguros Generales acquired exclusive dis- Sabadell Solbank on the day on which they were merged tribution rights in respect of general insurance written by into the Bank in March 2014. Mediterráneo Seguros Diversos. In March the Group’s life insurance subsidiary Medi- The reorganized Banco Sabadell insurance and pen- terráneo Vida, Sociedad Anónima de Seguros y Reasegu- sions business that resulted from these arrangements was ros concluded a reinsurance treaty with reinsurers SCOR as follows: Global Life Reinsurance Ireland Plc, for its individual life — Sabadell Vida, Sabadell Pensiones and Sabadell Se- and permanent disability portfolio at 31 December 2013. guros Generales, operating as a joint venture with the Total premiums for reinsurance credited to the income Zurich insurance group since 2008. statement of Mediterráneo Vida, and therefore the Group, — Mediterráneo Vida and Banco Gallego Vida y Pen- were €82.1 million. siones, wholly-owned subsidiaries of Banco Sabadell In 2014 the Bank continued its reorganization of Ban- Group. cassurance arrangements inherited from recently merged — Sabadell Mediación, a bancassurance tied agent, as a organizations. bank tied broker. In February the Bank acquired the 75% stake in Banco Gallego Vida y Pensiones held by Caja de Seguros Reunidos, Compañía de Seguros y Reaseguros, S.A., thus becoming the owner of 100% of the share capital of the company. In May 2014 the Bank concluded an agreement with Zurich, the insurers, under which exclusive distribution rights for the insurance and pensions products of the following joint venture partners would be extended to all Banco Sabadell branches in Spain: BanSabadell Vida, So- ciedad Anónima de Seguros y Reaseguros; BanSabadell Pensiones, Entidad Gestora de Fondos de Pensiones, S.A., and BanSabadell Seguros Generales, Sociedad Anónima de Seguros y Reaseguros. The agreement, in essence, was to eff ect three transactions: First, exclusive distribution rights in respect of life insurance products (except for group savings products for large companies) were transferred from Mediterráneo Vida, S.A., Compañía de Seguros y Reaseguros to BanSa- badell Vida, with eff ect from June 2014. Second, exclusive distribution rights in respect of pension plans (except for employment-related pension schemes) were transferred from Mediterráneo Vida, S.A., Compañía de Seguros y Reaseguros, along with its portfolio of individual pension plans, to BanSabadell Pensiones, with eff ect from June 2014. Third, the whole of the share capital of Mediterráneo Seguros Diversos, S.A., a company acquired as part of the

80 Banco Sabadell Annual report 2014 Sabadell Vida Sabadell Previsión, EPSV

Total premium income in life insurance for the year Sabadell Previsión, a voluntary social insurance society, 2014 was €1,297.3 million, with Sabadell Vida ranking distributes pension/retirement plans within the Basque in eighth place among Spanish life o∞ces according to Country. In 2014 the society held €341.4 million in sa- recent data published by ICEA, a research organization vings under management, a volume increase of 6%. for the insurance and pension industries. In death benefit insurance (including personal acci- dent), premium income totalled €144.1 million, up 38% Mediterráneo Vida on the year-end figure for 2013. Free-standing life policies sold well, with the Life Care product generating €58.5 The company’s insurance operations in 2014 generated million in premium income, a 32% increase. In life-with- premiums and contributions of €259.1 million, of which savings products, savings under management reached a €35.4 million were death benefit (including personal acci- year-end total of €5,021.8 million. This ranked Sabadell dent) policies. In the life-with-savings business the com- Vida in ninth place among its Spanish life industry peers pany ended the year with provisions totalling €1,916.8 mi- according to recent data from ICEA. Sabadell Vida made llion. Mediterráneo Vida contributed a net profit of €176.4 a net contribution to Group earnings of €38.3 million. million to Group earnings. This includes exceptional income received on the signature of a reinsurance treaty with SCOR and on the transfer of exclusive distribution Sabadell Pensiones rights in respect of life insurance and pension plans under an agreement with Zurich as described above. Funds under management by Sabadell Pensiones rea- The company’s pension fund management business ched an end-2014 total of €3,473.8 million. Of this total, had a total of €336.4 million under management at the €2,070.6 million related to individual and group pension end of the year. Of this amount €281.0 million related to plans —up by 8% on 2013— and €1,403.2 million origi- individual and group pension plans and €55.3 million to nated from company schemes, up 35% on the 2013 figure. employment-related schemes. On these measures, Sabadell Pensiones ranked 10th in the industry as a whole according to recent data from Inverco. Sabadell Pensiones made a net contribution to Mediterráneo Seguros Diversos Group earnings of €1.4 million. The company is a signatory of the United Nations The company’s total issued premiums for 2014 amoun- Principles for Responsible Investment in the “investment ted to €36.9 million. The net profit for the year was €5.0 manager” category: The principles cover social, environ- million. As from 31 October the company came under the mental and governance criteria in investment policies and ownership of Sabadell Seguros Generales and ceased to practices. Sabadell Pensiones sells a socially responsible write any further insurance. investment product with a humanitarian bias and dona- tes a portion of its management fees to humanitarian aid and development projects. This product is the “Ethical Banco Gallego Vida y Pensiones and Solidarity” pension plan, which has €16.3 million in assets and 1,256 planholders. 50% of its management fees Issued premiums on the company’s death benefit policies are donated to Intermon Oxfam. at 31 December 2014 totalled €1.4 million. Provisions on life-with-savings policies stood at €47 million and pension plan assets at €46.8 million. A net profit was Sabadell Seguros Generales posted of €2.2 million. The company is in run-off and is not writing new business. Premium income for the Group’s general insurance provider in 2014 was €108.5 million. Sales of company policies did especially well, with premium income increasing by Sabadell Mediación 46%. Sabadell Seguros Generales made a net contribution of €2.4 million to Group earnings. Sabadell Mediación is the Bank’s insurance brokerage subsidiary. It operates as a tied agent for bancassurance products and is the company through which distribution of insurance by branches is handled.

Group Businesses 81 The processes of reorganization and bedding in of mer- As a result of these mergers Sabadell Mediación became gers of bancassurance operators in the insurance indus- the sole bancassurance operator for the Bank’s branch try continued throughout 2014 as the ﬁnancial services network. This meant that Bank was compliant with industry consolidated. In line with this trend, the mergers Spanish legislation, under which credit institutions may of Galebán Gestión Riesgos S.A. and Lloydesa Operador only make their distribution networks available to a single de Bancaseguros Vinculado, S.A.U. into Sabadell Media- bancassurance operator. ción were completed in March 2014. These two compa- Sales commission income totalled €51.1 million and nies were the bancassurance operators for Banco Gallego brokered premium income was €1,783.8 million. The net and Lloyds Bank (now Sabadell Solbank). contribution to Group earnings from Sabadell Mediación in 2014 was €20.8 million.

Corporate Banking and Global Businesses

Teams of global bankers specialized in individual business sectors, combined with a direct presence in large corporations’ target markets.

Corporate Banking and Global Businesses off ers financial Corporate Banking solutions and advisory services to large companies and financial institutions, both Spanish and foreign, with Overview branches throughout Spain and in 14 other countries. Its activities embrace corporate banking, structured finance, Corporate Banking is the unit responsible for mana- corporate finance, development capital, international ging our business with large corporations. The business trade and consumer finance. is handled by a team of global bankers specializing in The year 2014 was critical for the Corporate Banking particular sectors or industries and working from o∞ces and Global Businesses unit: a time for finalizing and in Madrid, Barcelona, London, Paris, Miami, Mexico City setting in motion plans that would lead to fulfilment of and Casablanca. the goals set out in the Triple business plan. Significant The team’s business model is based on close, strate- progress was made in areas such as internationalization gic relationships with customers. Customers are off ered (including a “priority action markets” plan), finalizing a comprehensive solutions to suit their requirements for new relationship model for large corporate customers, a financial services, ranging from cash management to start on establishing a corporate banking and structured highly complex solutions to their needs in such areas as finance business in Mexico, launching the “Fincom 1000” finance, risk management or cross-border operations. plan and the design of a new and innovative investment process for BS Capital. In 2015 the focus will continue to be on transforming Key developments in 2014 and internationalizing our global businesses. Meanwhile it is vital that the action plans laid in 2014 are implemen- During 2014 the Group completed a restructuring of its ted in the specified time and manner and with the same Corporate Banking organization that began in 2013. A key priority always in mind: the customer. In addition, key feature of the new organizational model is the crea- this year we will continue to leverage one of our key as- tion of teams of “global bankers” specializing in indivi- sets: the ability of all the highly trained people at Corpo- dual business sectors and establishing a direct presence rate Banking and Global Businesses to work together and in customers’ target markets, thus ensuring that Banco continue striving to bring to completion a major project Sabadell’s large corporate customers benefit from the that will deliver value for the community and returns for best possible banking experience. The model is based on our shareholders. close, long-term relationships with customers and aims to provide comprehensive solutions to meet the operational needs of each company and market.

82 Banco Sabadell Annual report 2014 The unit’s competence in such areas as advisory services, closeness to the customer or breadth of coverage is supported by the excellence of our middle o∞ce team and its ability to ensure that customers’ day-to-day transactions are conducted smoothly and swiftly. The year 2014 saw notable improvements in our “closeness to the customer” business (cash management, payments and collections, etc.), with revenue increasing by 15%. A key policy aim in relation to foreign trade was to have the full resources of the Bank available for this activity. This helped to increase both income (up 32%) and the volume of transactions handled (up 69%). Profit and loss data for the unit show gross income to be broadly in line with the previous year and this, when set against the unit’s costs, shows a very low cost:income ratio of just 13.4%. Loan defaults remained at a level (2.5%) that was very low by industry standards, thanks to large corporates’ lower exposure to the performance of the Spanish economy, since exports make up a large proportion of their turnover. For all these reasons we were able to report a profit after provisions of €70 million, down 14% on the previous year as a consequence of an increase in provisions. The unit’s contribution to Group profitability (return on equity) for the year was 7.1%.

Thousand euro T4 Corporate Banking 2014 2013 % 14/13

Net interest income 162,499 161,797 0.4

Net fees 24,942 27,962 (10.8) Other income 11,439 9,154 25.0

Gross income 198,880 198,913 (0.0)

Operating expenses (26,596) (26,274) 1.2

Operating proﬁt/(loss) 172,284 172,639 (0.2)

Losses due to asset impairment (102,236) (90,784) 12.6 Other profit/(loss) —

Proﬁt/(loss) before taxes 70,048 81,855 (14.4)

Ratios (%) ROE (profit / average shareholders’ equity) 7.1 8.0 Cost:income (general administrative 13.4 13.2 expenses / gross income) Loan loss ratio 2.5 2.5 Loan-loss coverage ratio 58.0 58.0

Business volumes (€Mn.) Loans and receivables 10,820 11,455 (5.5) Customer accounts 5,177 4,366 18.6 Securities 662 593 11.6

Other data Employees 113 110 2.7 Spanish branches 2 2 — Branches abroad 3 3 —

Group Businesses 83 Structured Finance loan-and-credit forms of finance, was given a boost by a joint initiative with the Bank’s Treasury department to Overview raise finance for customers on the bond market, enabling the Bank to position itself as a leading player on Spain’s The Bank’s structured finance business consists of Alternative Fixed-Income Market (Spanish initials: origination and structuring of corporate and acquisition MARF). This new business has increased the Bank’s abili- finance and project finance deals. In addition to tradi- ty to off er customers a wide range of options in long-term tional forms of bank lending, it has specialized in corpo- finance packages. rate bond issuance, enabling it to cover the full range of options in long-term business finance. Banco Sabadell’s structured finance team operates from o∞ces in Madrid, Corporate Finance Barcelona, Alicante, Bilbao, Miami, New York and Mexi- co City, and has more than 20 years’ experience. Overview

Sabadell Corporate Finance is the Bank’s subsidiary that Key developments in 2014 advises on mergers and acquisitions, whether in relation to corporate operations such as company sales and acqui- The Bank completed another year as an industry leader in sitions, or in searches for new or replacement partners or structured financing. It is one of the principal banks enga- independent value appraisals. ged in the origination and structuring of financing deals for customers, including project finance and corporate and acquisition finance. Key developments in 2014 During the year Banco Sabadell continued its policy of supporting customers and adapting to meet their new The year 2014 was a busy time for the Group’s merger needs as the economic environment in Spain improved, and acquisition advisory business. Seven transactions having regard to changing conditions in the credit mar- were brought to a successful conclusion in the sports kets. A key indicator of the strength of business activity complex, automotive engineering, logistics, mining, in the year was the volume of origination activity which fl uid handling, renewable energy and funeral services was in excess of €4,300 million, spread over a total of 193 industries. deals. The Group holds corporate finance mandates in the A notable success on the international front, in ac- specialist retail, homes for the elderly, distance learning, cordance with the Triple business plan, was the Bank’s renewable energy, facility services, sports complex and launch of a new Mexican subsidiary, Sabadell Capital, secondary school sectors, all at an advanced stage of through which it participated in numerous syndicated execution. Among the year’s other milestones were an loan deals with Mexican companies. The Bank’s structu- increase in the number of cross-border mandates thanks red finance business in the US also did well, with increa- to the Terra group with its global network of contacts ses being seen both in the number of deals and in direct and its presence in 20 countries, and the launch of a new lending thanks to the work done by the Miami and New corporate finance business in Mexico through the forging York branches. Fee income in these and other foreign of links with three local M&A companies. markets where the unit operates increased by 71.2%. Finally, in 2014, for the second year in succession the 31.6% of the fees earned by Structured Financing in 2014 Bank received the accolade of Best Corporate Finance was generated in foreign markets. Firm - Spain and M&A Firm of the Year - Spain from the Another area of business, aside from more traditional, British specialist publication Acquisition International.

Driving business in new international markets.

84 Banco Sabadell Annual report 2014 Development capital energy sector. Sinia Renovables took the opportunity off e- red to it and divested its 25% shareholdings in Adelanta Overview Corporación, S.A., generating a net capital gain of €0.9 million, and Parque Eólico Veciana-Cabaro, S.A. (29.27 BS Capital is the Bank’s development capital unit through MW), for a net proﬁt of €0.8 million. which it conducts its business of taking short-term equity Following these disposals, the renewable energy port- positions in non-ﬁnancial companies and/or projects. folio managed by Sinia Renovables totalled 127 MW. BS Capital channels and manages its investments through three investment vehicles: Aurica XXI for De- velopment Capital, Sinia Renovables SCR for renewable International trade energy projects and BIDSA for investments of a more institutional nature. Overview

In its International Operations business the Bank aims to Aurica XXI, SCR de Régimen Simplifi cado, S.A. be present in markets that are of most interest to companies actively engaging in foreign trade, and has a large Venture capital firm Aurica XXI is the vehicle through network of foreign branches, subsidiaries and associates which the Bank supports the growth of well-managed to support its customers’ operations in other countries. non-financial companies with strong, industry-leading It also maintains working arrangements with more than positions and a good presence in foreign markets, by pro- 2,800 correspondent banks all over the world, thereby viding temporary capital and active assistance. providing customers with a further assurance of genui- The keynote to 2014 was active management of the nely global coverage. company’s investment portfolio. No further acquisitions were made in the period. Aurica XXI sold its 25% equity interest in Eurofra- gance, S.L., generating a profit of €9.5 million for the Group.

Sinia Renovables, SCR de Régimen Simpliﬁ cado, S.A.

Through venture capital ﬁrm Sinia Renovables, the Bank acquires, manages and divests short-term shareholdings in companies in the renewable energy sector, with an emphasis on wind power and, to a lesser degree, photovoltaic and small hydroelectric power generation. During the year the company continued its careful monitoring of the portfolio of renewable energy projects and ﬁrms (which together produce an output of over 160 MW) in which Sinia Renovables has direct shareholdings. The Spanish government took steps to provide a stable regulatory framework in Royal Decree-Law 413/2014, thus encouraging investors to return to the Spanish renewable

For the second year in succession, the Bank won an accolade from the publication Acquisition International.

Group Businesses 85 Key developments in 2014 Consumer Finance: Sabadell Fincom

In 2014 International Operations met all the business Overview development targets that had been set for it in the first year of the Triple business plan in relation to markets, Sabadell Fincom is a Group subsidiary specializing in customers and products. point-of-sale consumer fi nance. It operates through va- A key event was the Sabadell Banking Conference, riety of channels and enters into partnership agreements the fi rst of its kind to be organized by the Bank’s Interna- with retail establishments such as auto dealers, shops, tional Operations Division. The event brought together dental clinics, hearing aid centres, beauty parlours, home close to 100 fi nancial services fi rms from 32 countries equipment suppliers, etc. and provided the Bank with an opportunity to showcase its business strategy, raise its profi le, and build closer ties of cooperation and trust with other leading banks and Key developments in 2014 institutions. Direct approaches were made to more than 360 correspondent banks in fi ve continents, enabling the The fi st signs of an upturn in private consumption and Bank to capture business worth some €1,340 million in consumer lending helped Sabadell Fincom to see an in- cross-border transactions. The Bank also gained healthy crease in the number of loans compared with the previous market shares in documentary credits received from year, as well as an increase in market share. Business correspondent banks, winning a 29.8% share of export volumes continued to improve during the year compared documentary credits — 5% more than in 2013 — based on with previous years, with signifi cant improvements in SWIFT tra∞c data. interest spreads and operating income. The International Division underwent a reorganiza- E∞cient debt recovery processes led to a further re- tion designed to increase its capabilities and make it a duction (3.9%) in loan delinquencies. leader in foreign market specialization, in line with the During the year a total of 185,000 new loans were policy set out in the Group’s business plan. The intention arranged through 6,000 points of sale all over the coun- was also to seize new business opportunities in mar- try. The amount of new lending arranged in 2014 totalled kets that were of special interest to Spanish companies, €340.9 million. To support business growth Sabadell whether in connection with their commercial endeavours Fincom continued to roll out a programme of operational or with their investment and implementation plans in and technological improvements. The latter included the foreign markets. The Bank has long been a pioneer in introduction of electronic signatures to loan agreements building a presence in foreign markets, including such key on mobile devices or tablets. All these improvements markets as China where it has two representative o∞ces helped to bring down the cost:income ratio to 32% by the (in Shanghai and Beijing), India, Singapore, Turkey, the end of the year. United Arab Emirates and Algeria. This continues to bring signifi cant added value to the international operations of Spanish businesses.

The Sabadell Banking Conference – a ﬁrst for Banco Sabadell.

86 Banco Sabadell Annual report 2014 Markets and Private Banking SabadellUrquijo Private Banking

Markets and Private Banking showed once again that it Overview was well equipped to create and supply high added-value products and services to deliver good returns to custo- SabadellUrquijo Private Banking is the department of mers, increase and diversify the customer base and ensure Banco Sabadell that concentrates on off ering integrated that investment processes remained consistent and were solutions to customers requiring a specialized service based on disciplined analysis and proven quality. There tailored to their particular requirements. was a also move towards a multi-channel approach to The unit comprises a team of 185 private bankers wor- customer relationship management. Markets and Private king from 12 specialist branches and 19 customer service Banking comprises the following units: SabadellUrquijo centres. It can also count on the support and assistance Private Banking; Investment, Products and Research; of expert product, tax planning and wealth management Treasury and Capital Markets, and Securities Trading advisors. and Custodian Services. The year saw continued eff orts to secure proper recog- The Bank has a design and approval process for nition of SabadellUrquijo Private Banking as a leading products and services which ensures that the full range banker to high net worth individuals, addressing the of off erings available to customers more than meets their needs of customers who demand products and services to requirements in terms of quality, returns and ability suit their risk profi les and constantly striving to maximize to meet the needs of the market. Constantly reviewed their investment returns. identifi cation and “know your customer” procedures and The year saw continued progress in the induction practices ensure that products are off ered and inves- of new employees from banks and businesses recently tments are selected and managed with customers’ profi les acquired and incorporated into the Group. This process fi rmly in mind and that all investor protection measures was conducted in a natural and unhurried way by the are complied with as required by the Markets in Finan- Bank’s regional divisions and business units, with talent cial Instruments Directive (MiFID) and its provisions as management and a focus on human capital being prime transposed into domestic law. considerations. The eff ort put into designing a range of products and The sales team worked diligently to increase personal services to meet the needs of each customer continued contact with customers by making more frequent visits and to strengthen and enhance the Bank’s position as an follow-up calls to ensure that customers felt well served. intermediary and a provider of access to new markets Even greater eff orts were directed at new customers acqui- and its ability to off er customers new services, create new red as a result of recent acquisitions. opportunities in collective investment and raise the pro- A notable development that refl ected the aims of the fi le of the brand under which we operate in this business: Triple business plan and the business transformation SabadellUrquijo Banca Privada. drive was a change in the “customer funds under management” heading of the balance sheet, with mutual funds, discretionary portfolio management services and SICAVs gaining in importance at the expense of more liquid assets with less attractive returns such as time deposits, demand deposits and commercial papers, for which there was less demand from investors. This change in the composition of clients’ investment portfolios resulted in an increase in profi tability for Private Banking. Quality, productivity and e∞ciency were key themes in the day-to-day operation of the business. By constantly striving for quality the unit sought to maximize customer satisfaction and operational e∞ciency while assuring regulatory compliance. This meant that documents to be signed by customers, customer profi ling tests and investment recommendations/suitability assessments came to be seen as essential in dealing with customers and safeguarding their interests. A such, they became a vital element in, and driver of, the Bank’s day-to-day operations.

Group Businesses 87 Key developments in 2014

Thousand euro T5 SabadellUrquijo Private Banking 2014 2013 % 14/13

Net interest income 16,601 10,549 57.4

Net fees 45,456 37,971 19.7 Other income 3,248 3,318 (2.1)

Gross income 65,305 51,838 26.0

Operating expenses (36,626) (36,034) 1.6

Operating proﬁt/(loss) 28,679 15,804 81.5

Provisions (net) 0 0 — Losses due to asset impairment 995 (1,926) — Other profit/(loss) 0 0 —

Proﬁt/(loss) before taxes 29,674 13,878 113.8

Ratios (%) ROE (profit / average shareholders’ equity) 59.3 29.1 Cost:income (general administrative 56.1 69.5 expenses / gross income) Loan loss ratio 3.4 3.9 Loan-loss coverage ratio 58.7 56.7

Business volumes (€Mn.) Loans and receivables 1,029 1,053 (2.3) Customer accounts 16,896 15,513 8.9 Securities 7,326 7,007 4.6

Other data Employees 271 269 0.7 Spanish branches 12 12 0.0

In the year to December 2014 the unit secured a total of Objectives for 2015 1,897 new mandates for discretionary portfolio management with an overall value of €639 million, bringing the In 2015 the focus will remain fi rmly on off ering a quality number of mandate agreements to some 4,700 with an advisory service to meet specifi c needs, supported by aggregate value of over €1,500 million. Mutual fund and appropriate tools that will be made available to custo- SICAV investments under management increased by over mers. In the area of regulatory compliance, the unit will €1,618 million, 32% higher than the corresponding fi gure continue to ensure that products and services are totally for 2013. suited to the needs of each risk profi le; in the area of tech- An indication of the growing strength of the business nology, every eff ort will be made to make communication was a 5.4% share in SICAVs , which reached 183 in num- with customers easier and more fl uid, and to channel that ber and held investments worth €1,702 million, an in- communication in faster and more advanced ways while crease of 19.7% over the fi gure as of December 2013. This guaranteeing the same high standards of security and allowed the Bank to claim an industry-leading position in protection. terms of the increase in the assets and number of SICA- Vs, a clear indicator of the strong position held by Saba- dellUrquijo Banca Privada in investments of this type. The unit saw its business volumes increase by 7.1% over the year to reach a total of €25,251 million as of De- cember 2014. Its customer base rose to over 30,900.

88 Banco Sabadell Annual report 2014 Investment, Products and Research The Investment, Products and Research department is therefore responsible for deciding on all information and Overview content that is published by the Investment Research Department. It is also responsible for the range of inves- Investment, Products and Research is part of the Markets tment products off ered by the Bank and for deciding how and Private Banking Division and is a separate area of these should develop based on the investment oppor- the Bank tasked with providing investment advice and tunities that arise. The Department formulates asset managing the investment portfolios of private custo- allocation recommendations to achieve the optimum mers, companies and institutional investors. Within the balance of risk and return in the interest of customers department are other separate, more specialized areas: and provides investment advice that is diff erent from Sabadell Inversión, the parent of a number of mana- and superior to the advice given by our competitors. Part gement companies that manage the Bank’s collective of its mission is to oversee the investment management investment schemes (CIS’s), and its Investment Research business conducted by the management companies of Department. the Group’s collective investment schemes.

Key developments in 2014

Thousand euro T6 Investment, products and research 2014 2013 % 14/13

Gross income 42,448 29,015 46.3

Operating expenses (20,546) (20,191) 1.8

Operating proﬁt/(loss) 21,902 8,824 148.2

Other profit/(loss) 0 (13) (100.0)

Proﬁt/(loss) before taxes 21,902 8,811 148.6

Ratios (%) ROE (profit / average shareholders’ equity) 59.9 29.0 Cost:income (general administrative 48.4 69.6 expenses /gross income)

Business volumes (€Mn.) Assets under management in CIS's 12,007 8,070 48.8 Total assets including CIS's sold but 15,706 10,193 54.1 not managed

Other data Employees 145 147 (1.4) Spanish branches — —

Research Banco Sabadell’s research team Best Industry Earnings Estimator in the materials category. This corroborates the In 2014 the Investment Research Department continued Spanish industry rankings given to the Bank’s research to increase its output of reports on the equity and corpo- department (placed second in 2013 and third in 2010) for rate bond markets. Greater emphasis was placed on the the accuracy of its recommendations. analysis and coverage of reports on corporate issuers of high-yield, non-investment grade debt. In-depth studies were carried out on European listed companies and Product more detailed comparisons were made of global investment options. The Department’s catalogue of equity and The year 2014 was marked by low economic growth and bond market strategy reports was broadened to include return forecasts were inevitably very modest ; for this research into Spanish regional governments issuing debt reason, expert management and careful risk control securities on the capital markets. were of vital importance. Against this background, the In 2013 Banco Sabadell’s research department earned Investment Product and Customer Strategy department a number of accolades and distinctions.In a survey of followed its asset allocation strategy as a conceptual fra- Spanish investment analysis ﬁ rms in 2014, Thomson mework to shape its investment approach, the planning Reuters’ investment analysis arm, StarMine, named of its investment product off ering, and the work done to

Group Businesses 89 analyse and research markets and investment opportuni- investment products: Fondo Sabadell Inversión Ética y ties. In this way market trends were anticipated and the Solidaria, FI (€37.5 million in assets; 432 shareholders; most favourable selections were made in terms of expec- 0.35% of fund assets donated to Cáritas Española); and ted risk and return. UrquijoCooperación, SICAV (€4.4 million in assets; 136 Slow economic growth in Europe caused an already shareholders; 50% of management fee donated to NGOs). lax Eurozone monetary policy to resort to ever more aggressive stimulus measures. This acted as a support factor for all types of investment asset, but especially for Investment equities. Good market performance puts the Bank at a more advanced stage in the investment cycle, causing The Group’s Investment Management business encom- return forecasts to show a gradual decline. Despite this, passes collective investment management companies, in- the Bank made use of market opportunities to launch cluding investment management and the distribution and capital guarantee products with the support of powerful administration of collective investment schemes (CIS’s); themes such as the positive outlook for European equities its activities also include selecting, off ering and recom- or the likely appreciation of the dollar. The dollar appre- mending third-party funds and managing investments ciation scenario was based on a more positive growth for other Banco Sabadell Group businesses. forecast for the US economy and expectations that the US Following the mergers of Banco Gallego and Lloyds Federal Reserve would be the fi rst central bank to embark España in the fi rst quarter of 2014, the Banco Sabadell on a cycle of interest rate increases to bring rates back to Group’s investment management companies ended the more normal levels. For more sophisticated investors, we year with €9,952.6 million in assets under management continued to search for value in assets that were less well in Spanish-domiciled mutual funds, 59.1% more than at known or more di∞cult to invest in, and we began to de- 2013 year-end and far in excess of the 26.7% growth rate sign products based on relative share price performance. of the industry as a whole. This volume of assets under Despite the challenging investment environment, in management brought the Group’s share of mutual fund 2014 approval was given to 330 proposals for new inves- assets to over 5%, with its management company, Saba- tment products as part of a product process involving 31 dell Inversión, being ranked fourth largest manager of heads of functional areas. Among the more important Spanish-domiciled mutual funds. products were families of guaranteed funds and structu- In 2014 the strongest growth in mutual fund subs- red deposits with return of capital; all of these products criptions was seen in the balanced fund category, which were without risk of capital loss and accounted for some continued to be the preferred option for investors with 62% of forecast product sales. The average maturity of assets under management increasing by a factor of 2.4 to investment products approved in 2014 was 3.5 years. €1,573.6 million. The Bank’s off ering of guaranteed funds Major improvements were made by the Bank in remained unchanged in 2014, with return guarantees providing information to its customers on its investment being issued for eight guaranteed funds amounting to approach, with personalized mass mailings being sent €1,492.8 million at 31 December 2014. Guaranteed funds out via new communication channels. This included as a whole accounted for €3,765.7 million worth of assets sending numerous alerts and investor information notes at the close of the year. Assets in variable-return gua- to customers and shareholders, as well as market news ranteed funds increased in 2014 and accounted for 23% and reports of unexpected events, with more than one of the Bank’s Spanish-domiciled funds overall, up from million messages being sent to customers during the 17.8% in 2013. However, guaranteed funds of all types year. The drive for better communication culminated in declined as a proportion of the total, falling from 44.4% in the distribution of a video on asset allocation strategy 2013 to 37.8% in 2014. to more than 150,000 customers per mailing. The video Banco Sabadell mutual funds earned some outstan- was also published on the Bank’s website for anyone who ding accolades. Sabadell Rendimiento, FI was honou- might be interested. red with the award for Best Fund in the Fixed Income The Bank off ers socially responsible investment category – Money market by the Spanish business daily products that exclude investments in companies whose Expansión. The British publishing group Citywire paid activities are harmful to human rights, social justice or tribute to the performance of six fi xed-income and equity the environment, but are weighted in favour of compa- fund managers at Sabadell Inversión, based on a study of nies in the FTSE4Good sustainability index. During the fund returns over the last three years. Three fixed-income year the Bank began to market two socially responsible managers were awarded AA ratings and three equity

Spanish-domiciled mutual funds had a market share of over 5%.

90 Banco Sabadell Annual report 2014 fund managers were given A+ ratings. Finally, in the 2014 business aims to encourage investment in mutual funds, mutual fund portfolio performance rankings organized not only by more frequent and experienced investors but each year by Expansión, Sabadell Inversión won a distin- also by savers looking for winning solutions in a zero in- guished position with its portfolios being given ﬁ rst place terest rate environment and willing to accept a degree of in the aggressive category, having produced an annual risk and a certain maturity horizon in their investments. return of 14.5% over the year 2014, and second place in Winning new subscribers will require an improvement in the conservative category, with an annual return of 6.6%. the marketing of mutual funds, greater transparency and A total of 16 fund management companies participated more help and support. The development of investment in the rankings, which included some of the best Spanish asset allocation products and solutions will add value to fund managers as well as some outstanding international our customers’ positions in mutual funds. The introduc- ﬁ rms. tion of shares classes into managed investment funds The enlargement of the Group through acquisitions should attract more large investors to our investor base. made it necessary to simplify the mutual fund catalogue Ultimately, the aim is to grow, and to outpace the market by carrying out ten merger processes in which 23 mu- in so doing. tual funds were absorbed into other funds with the same investment objectives, having regard always to investors’ best interests. At the end of the year the number of Treasury and Capital Markets Spanish-jurisdiction collective investment schemes stood at 282 with management split between BanSabadell In- Overview versión, S.A., S.G.I.I.C., Sociedad Unipersonal (99 mutual funds, one REIC and one SICAV) and Urquijo Gestión, The Treasury and Capital Markets Division is responsible S.A., S.G.I.I.C., Sociedad Unipersonal (181 SICAVs). for marketing Treasury Products to Group customers The Investment Management business also operates through the units to which that task has been assigned, as a portfolio manager for customers of the Bank requi- be they bank branches or specialist distributors. The ring comprehensive investment solutions, that is, pac- Division is also responsible for the activities of the Capital kages of services that give an integrated response to the Markets unit, which operates the business of placing cor- needs of existing and potential customers. Requirements porate debt, either for third party issuers or for the Group. of this type are catered for by BS Fondos Gran Selección, In addition, it manages the Bank’s short-term liqui- a business with 14,336 contracts and assets of €1,236 dity position and manages and oversees compliance with million in 2014, up from 5,724 contracts and €419 million regulatory numbers and ratios. Another of its functions in assets in 2013. is to monitor risk from proprietary trading, interest rate Another business worth mentioning is the manage- risk, currency risk and the risks generated in the course ment and administration of institutional portfolios, a of business on a variety diff erent accounts, mainly from business carried on by the Institutional Services unit. The transactions with internal and external customers, by the unit is responsible for managing the investment portfolios Bank’s own distribution units, by the Finance Division, or of other Group businesses, assets in which totalled €6,859 by the branch network. million at the end of 2014.

Objectives for 2015

For the Investment, Products and Research department, the primary objective is to maintain the high success rate achieved in its research-based recommendations on equity shares of European listed companies and on government and corporate debt. The Department’s customer strategy and its management of the Bank’s off ering of investment products are spearheading a Group-wide initiative, as set out in the Triple business plan, to build a multi-product, segmented approach in its policy on customers’ investments. The Investment Management

T7 Spanish-domiciled 2014 2013 2012 2011 2010 2009 2008 2007 mutual funds Assets under management (€Mn.) 9,952.6 6,356.7 4,443.2 4,203.3 4,312.4 5,609.6 5,844.5 9.102,4 Market share (%) 5.11 4.13 3.63 3.29 3.12 3.44 3.49 3.81

Group Businesses 91 Key developments in 2014 In the area of sales and marketing, the Bank ran a campaign directed at some 4,000 customers with the aim In 2014 the European Central Bank reduced o∞cial of increasing foreign exchange transaction activity. In interest rates to lowest-ever levels and this impacted and structured investments, a strong focus on marketing and imposed limits on large areas of the operating environ- a series of new product launches for distribution at branch ment, business opportunities and the functioning of the level resulted in an unprecedented 78% increase in the fi nancial markets. product inventory. Despite this, the stirrings of economic recovery, In the campaign to expand the international customer helped by strong exports, and the focus on implementa- base, international distribution targets were more than tion of business development actions and campaigns for met through planned actions that gained more than 200 Treasury and Capital Markets envisaged in the Triple new customers in 17 countries. business plan, enabled us to achieve the targets set for In the Bank’s trading and related processes, the aim this year. was to meet liquidity management requirements and also The implementation of the proposed improvements to take a proactive approach to the management of the contained in the plan was conducted against a back- fi xed-income portfolio and the sizeable currency trading ground of activities and processes coming to fruition in business generated by orders from customers. During the the Treasury department, which were in harmony with year projects were put in hand in the area of liquidity and the design, the resources and the enhanced capabilities collateral management and to develop models for mana- and initiatives proposed for Treasury under the plan. ging returns associated with risk. In its programme of developing and expanding its Capital Market activities, the Bank earned and repaid the trust of issuing companies and fi rms and received help Objectives for 2015 and support from institutional clients, both domestic and foreign, that channelled their investment requirements Key action areas for 2015, all of them within the aims of through the Bank and created levels of demand that won the Triple business plan, will be to complete the roll-out the Bank recognition for its competence and market- and implementation of current initiatives to increase leading position. product sales, product rotation and transaction volumes. This led the Bank to increase its market presence These aims will be achieved through the introduction through active participation in new issues by Spanish re- of new selling platforms, the development of corporate gional governments. It acted as lead manager of a €1,600 fi nance products and issuance vehicles usable as collate- million issue of 10-year debt by the Community of Madrid ral in capital markets, and ongoing sales and marketing and, at the high-yield end of the market, participated in actions focused on a more international end customer, as issues by Isolux, Grupo Antolín, Kaufman & Broad and they come to fruition and produce returns. Aldesa, with an overall nominal value of €1,620 million. In Spain’s Alternative Fixed-Income Market (Spanish initials: MARF), of which Banco Sabadell is a member Securities trading and custodian services and a registered advisor, the Bank fulfi lled its aim of providing fi rms requiring an additional, alternative source Overview of fi nance with an added-value service that includes comprehensive coverage of every stage of the capital-raising The Securities Trading and Custodian Services De- process. The Bank’s operations on MARF included the partment performs the functions of broker for the Bank as origination and coordination of two new bond issues for a member of the Spanish stock markets. These functions Tecnocom and Grupo Ortíz with nominal values of €35 are to handle and execute sale and purchase orders million and €50 million respectively, and participating in directly via its trading desk. As a product manager, it is a €20 million commercial paper issuance programme for responsible for all equity securities at Group level. It also Copasa. designs and manages the Bank’s off ering of custodian and depository services.

The Banco Sabadell Group maintained its position as the market’s second largest broker by volume.

92 Banco Sabadell Annual report 2014 Key developments in 2014

2014 was a year of volume growth in equity trading, which aff ected all sectors of the market and saw a recovery, to some degree, in trading and custodian services for non- resident institutional clients, which had fallen to very low levels in recent years. This meant increased business for global, rather than local, brokers. The Bank was able to retain its position as the second largest broker in the market (according to the market management company’s report on trading volumes per member) with its share of market trading increasing to 10%, slightly higher than in 2013 (T8). During the year the Bank carried out a number of actions to boost its position in the retail market; these included the launch of Sabadell eBolsa with the aim of having the Bank commissioned to provide a complete investment management service to new and existing customers by capturing investment portfolios and thus being able to off er customers a high standard of service and support throughout the life of the investment at the best price available in the marketplace. To further this aim, it is intended that the initiatives set out in the Triple business plan should be brought forward, especially those related to new product launches.

€ million T8 Securities trading 2014 2013 2012 (market volumes)

Trading volume - market total 1,767,740 1,406,526 1,397,358 Trading volume - BS 352,596 267,266 176,538 Share (%) 10.0 9.5 6.3

G1 Trading volumes (% market shares)

2013 2014

BBVA 18.3 BBVA 13.8 BS 9.5 BS 10.0 Santander 7.2 Morgan Stanley 8.9 Morgan Stanley 6.8 Santander 8.6 Merrill Lynch 6.4 Crédit Suisse Securities 6.6 Société Générale 5.8 Société Générale 6.4 Crédit Suisse Securities 5.8 Merrill Lynch 6.3 Cortal Consors 4.4 DB 4.7 DB 4.1 BNP Paribas 4.6 BES 4.0 UBS 3.2

005510 15 20 10 15 20

Group Businesses 93 Asset transformation

Non-performing assets continue to decline, while real estate inventories are increasing more slowly.

Thousand euro T9 Asset transformation 2014 2013 % 14/13

Net interest income (11,192) 42,085 (126.6)

Net fees (659) (2,826) (76.7) Other income 15,228 (6,972) (318.4)

Gross income 3,377 32,287 (89.5)

Operating expenses (135,824) (193,726) (29.9)

Operating proﬁt/(loss) (132,447) (161,439) (18.0)

Provisions (net) (1,469) (301) 388.0 Losses due to asset impairment (143,512) (362,215) (60.4) Other profit/(loss) (720,044) (520,861) 38.2

Proﬁt/(loss) before taxes (997,472) (1,044,816) (4.5)

Ratios (%) ROE (profit / average shareholders’ equity) (39.3) (39.9) Cost:income (general administrative —— expenses / gross income) Loan loss ratio 61.9 56.0 Loan-loss coverage ratio 49.8 50.8

Business volumes (€Mn.) Loans and receivables 14,989 18,894 (20.7) Customer accounts 484 466 3.9 Real estate assets (gross) 14,601 12,361 18.1

Other data Employees 668 807 (17.2) Spanish branches — — —

94 Banco Sabadell Annual report 2014 Overview G2 Reductions in doubtful assets in 2014 (€Mn.) The Group continued to perfect its approach to managing its real estate and non-performing assets. In 2012 it introduced a pioneering new management system and Q1 Q2 Q3 Q4 set up a new asset transformation structure. Solvia, the company that services the Group’s real estate assets, has -263 been gaining in skill and expertise in every area of the real -531 estate servicing cycle, from land development through to property sales. -888 In late 2013 Solvia introduced a new approach to managing bad and doubtful loans and set up a dedicated unit -1,272 for resolving mortgage debts of individual borrowers by - 2,954 taking early action when borrowers fell into arrears. In late 2014 the Group split its asset management operation into two areas: Banco Sabadell Asset Trans- formation, and Solvia. Asset Transformation has the primary task of taking an integrated approach to the Group’s real estate assets and designing and carrying out its asset transformation strategy. Solvia, a real estate G3 Real estate sales business, focuses on real estate services through all stages (€Mn.) of the product cycle — property sales and servicing, land management, preparation and development. It manages 3,120 real estate portfolios both for the Group and for third 2,744 parties, and has positioned itself as a key player in Spain’s real estate market.

Key developments in 2014

In 2014 Solvia reaped the beneﬁ ts of its new preventive 2013 2014 approach to managing loan defaults by individual and business borrowers, developed in earlier years, and was thus able to achieve a faster rate of reduction in non- performing loans, speed up the pace of debt clearance and reduce new loan defaults quarter by quarter. In 2014 Banco Sabadell’s Restructuring and Recovery G4 Foreclosures and Mortgage Resolution departments were able to redu- (€Mn.) ce doubtful assets (G2) and to continue the improvement that began in the third quarter of 2013. The reduction in 1,368 doubtful assets was particularly signiﬁ cant in the real 1,117 estate developer segment and was helped by an improving real estate market. There was, in fact, an increase in sales from developers’ own inventories (G3). 2013 2014 The Bank took active steps to tackle housing security issues by engaging with occupiers at risk of social exclusion and acting according to social responsibility guidelines. In 2014 it added 140 homes to the 260 it had already contributed to the Social Housing Fund set up by the Spanish government in the previous year and other homes were made available to housing charities. In 2014 the Group’s exposure to the real estate sector increased by less than it had the year before (foreclosed real estate assets rose by €1,368 million in 2013, while in 2014 the increase was €1,117 million, a fall of 18%) (G4). Sales to the retail market as well as sales of property portfolios to institutional clients contributed to the reduction. In 2014 sales of real estate assets increased to €2,744 million, exceeding sales targets. This was achieved thanks

Group Businesses 95 to a change of strategy to reduce discounting and to sell Solvia is therefore increasing its capacity to off er services higher-value properties, thereby helping to slow down the to third parties. In November 2014 Solvia won a contract increase in the Group’s real estate exposure. to provide services to a portfolio held by Sareb (Spain’s The Bank has not only a sales unit for the retail market “bad bank” for non-performing assets), which will double (within Solvia) but also sales teams specializing in the sale the size of its managed portfolio and provide it with an of portfolios of assets to institutional buyers and in dispo- additional source of income. Solvia was chosen by Sareb sing of properties with special or unusual features. for its proven capability in servicing (administration, In 2014 the demand from institutional buyers was marketing, real estate development and preparation of a factor speciﬁ c to the Spanish real estate market, and properties for sale) portfolios owned by the Bank and by one which helped to revitalize it. The Bank completed a third parties, for the competence of its personnel and for number of portfolio sale transactions which demonstrated its well-designed, scalable platform. Solvia Inmobiliaria its ability to generate sales and position itself vis-à-vis the is now well positioned as a leading servicer in the Spanish institutional buyer. These transactions included the sale of market covering all stages of the property cycle (from as- the Vodafone head o∞ce building in Madrid, the sale of a set transformation through to distribution and sale), with building with 300,000 sq. ft. of space in Castellón, the sale 50,000 properties sold since 2011, nationwide coverage, of a portfolio of fully provisioned loans and an increase in a strong presence in Catalonia, Valencia and Murcia, and sales of sites ready for development. with the capability to off er services to third parties. The Group continued to be very active in property development and returned to selling properties off -plan in developments in Madrid, Barcelona, Alicante and other towns and cities. By the end of 2014, 25 development schemes and 729 homes had been completed; at the start of 2015 another 17 development projects were under way. For sales to the retail market, the Group can boast one of the best real estate servicing companies in the industry: Solvia Servicios Inmobiliarios. Solvia is currently Spain’s second largest bank-operated real estate web site and the country’s second most widely-recognized brand in the residential property and construction sector, with a brand recognition factor of over 76% (according to the Spanish Public Opinion Institute [IOPE] list for housing and construction) among potential property purchasers at the end of 2014. This year Solvia continued the marketing strategy, introduced in 2013, of focusing on market opportunities and customer service rather than on price. In addition to being a widely recognized brand, Solvia has an eff ective multi-channel retail sales model which operates through both tied and third-party agents, including an international channel launched in 2013 that specializes in property sales to persons resident outside Spain. The Bank recently set up an “open sales platform” to enable a single property to be marketed simulta- neously by more than one agent and thus maximize sales e∞ciency. Solvia has a segmented pricing model which makes systematic price adjustments based on demand and marketing velocity. This has led to increases in the values of properties off ered for sale and made it possible to raise prices for the ﬁ rst time since 2007. For properties in new construction projects, stock rotation targets have been successfully used to secure higher sale prices in 16 projects. For individual properties an auction procedure was introduced where there was more than one buyer interested in the property. In 2014 11% of retail sales were at auction and average sale prices increased to 12% above the advertised selling price. Capabilities like these are highly prized in the marketplace, where large holders of real estate assets and new foreign investors are in need of services of this kind.

96 Banco Sabadell Annual report 2014 Sabadell America to products for individual customers and an extensive off ering of products and services commonly required by Overview business and professional people and by companies of all sizes. The Banco Sabadell America operation comprises business units, a bank, a stock market and investment broker and several a∞liates and representative o∞ces which Objectives for 2015 together provide fi nancial services in the corporate banking, private banking and commercial banking fi elds. The In keeping with the strategy laid down in the Triple busi- business is managed from Miami, where Banco Sabadell ness plan, in 2015 the Bank’s aim is to continue growing has a full-service international branch which has been in in the region in all areas of its current operations and to operation since 1993. It also has a commercial banking introduce additional products and services to bring added operation, Sabadell United Bank, serving the south of value to customers. Florida. In 2012 the Bank opened a representative o∞ce As part of this aim, in 2015 the Bank intends to apply in New York where a large part of the Sabadell America for a banking licence in Mexico to enable it to operate as a structured fi nance business is handled. bank in that country, to begin taking deposits and to meet Sabadell United Bank works in tandem with repre- customers’ fi nancing needs by broadening the range of sentative o∞ces in Mexico, the Dominican Republic and products currently being off ered by Sabadell Capital. Venezuela to off er service and support to our customers. It is also intended that, in line with the Bank’s internationalization plan, representation o∞ces should be opened in Colombia and Peru to support the Bank’s growing Key developments in 2014 business in those countries.

During the year 2014 the Bank continued to pursue its aim of growing its domestic banking operation in the Banco Sabadell Miami Branch state of Florida through its subsidiary Sabadell United Bank, mainly through its developing associate network At the close of the year Banco Sabadell’s operating branch and improvements in operating e∞ciency. in Miami was holding nearly USD 4,500 million in custo- In July the acquisition of the Miami-based JGB Bank mer deposits and funds under management. Investment was brought to completion and the company was mer- management services saw a 10% rise. Loans and advances ged into Sabadell United Bank and integrated onto its were up 51% and reached USD 2,100 million as the bank business systems. This completed the Bank’s seventh met the needs of international corporations by arranging corporate action in Florida within a period of six years, loan or credit facilities to provide working capital and and followed the acquisition of TransAtlantic Bank in medium- and long-term fi nance. The branch also conti- 2007, the absorption of BBVA’s private banking business nued to build up its portfolio of private banking clients, in 2008, the purchase of Mellon United National Bank enlarged by additional clients as a result of the acquisition in 2010, the purchase of assets and liabilities of Lydian of Lloyds TSB Bank’s Miami branch in late 2013. Private Bank in 2011 and of the Miami branch of Caja de In 2014 Banco Sabadell Miami branch continued to Ahorros del Mediterráneo in 2012, and the acquisition of provide fi nance for projects in the energy and tourism the private banking business of Lloyds TSB Bank’s Miami sectors, mainly in the US and Mexico. branch in 2013. Another of the year’s milestones was the launch of Sabadell Capital in Mexico — the fi rst small step towards Sabadell United Bank what will become the Group’s banking business in that country as soon as o∞cial approval has been obtained. During the year Sabadell United Bank made further pro- Sabadell Capital is a multi-object fi nancial company (‘SO- gress in implementing its operating and sales e∞ciency FOM”) which will aim to build a loan portfolio concentra- drive, with particular emphasis on promoting its mort- ting on the infrastructure, energy and tourism industries. gage plan to its customer base, boosting sales activity at Banco Sabadell’s activities in the US are generating branches and developing alternative sales and service business volumes amounting to over USD 14,400 million channels. in loans, customer deposits and off -balance sheet cus- At the time of writing Sabadell United Bank had a tomer assets; total assets stand at USD 7,500 million, total of 27 branches off ering services within the state making it Florida’s fi fth largest local bank by total assets of Florida, mainly in Miami-Dade, Broward and Palm (Sabadell Miami branch and Sabadell United Bank Beach counties but also in the west coast counties of Tam- combined). Banco Sabadell is one of the few fi nancial pa, Sarasota and Naples. It is the eighth largest local bank institutions in the area with the capability and experience by deposits. to provide a full range of banking and fi nancial services, During the year 2014 Sabadell United Bank continued ranging from highly complex and sophisticated products its programme to promote brand awareness among the for large corporate clients, including project fi nance, market segments it serves. The campaign was specifi cally

Group Businesses 97 targeted on professional people and entrepreneurs, as Sabadell Securities well as high net worth individuals, to whom it provides private banking and wealth management services Sabadell Securities USA Inc., an SEC-registered inves- through its Wealth Management division, Sabadell Bank tment consultancy, operates as a stockbroker and advisor & Trust. to securities market investors. The business is both a In the area of Corporate Banking, Sabadell United complement to and a strengthening factor in the Sabadell Bank expanded its business during the year by increasing America strategy. syndicated loans to large corporate clients and project Sabadell Securities provides investment and wealth fi nance deals in the energy and infrastructure sectors, management services to commercial banking customers thus furthering its aim of diversifying its loan portfolio as well as to personal banking, corporate banking and and capturing valuable new business for the bank. private banking clients. Its business strategy is based on At the end of 2014, Sabadell United Bank was ma- meeting customers’ fi nancial needs by providing advice naging assets of some USD 4,600 million, with deposits on capital market investments. of approximately USD 3,600 million and loans and Sabadell Securities is a member of the Financial advances approaching USD 3,500 million. The value of Industry Regulatory Authority (FINRA) and the Secu- its managed investment portfolios was close to USD 700 rities Investor Protection Corporation (SIPC). It uses the million. It was serving more than 45,000 customers. In services of Pershing LLC, a Bank of New York Mellon 2014 Sabadell United Bank contributed a net profi t of subsidiary, for clearing, custodian and administrative USD 18 million to the Group. services.

Banco Sabadell continued with its plan to expand in the United States.

Other businesses

Banco Sabadell has a 51% stake in BancSabadell d’Andorra, a ﬁ nancial institution incorporated in 2000. Ownership of the remaining shares is spread across a broad base of Andorran shareholders. At the close of 2014, the company’s contribution to Group earnings was a net proﬁ t of €7.1 million, with deposits growing at a steady 10% per annum and an ROE of 11%.

98 Banco Sabadell Annual report 2014

Risk management Milestones in 2014 applications). In the case of Banco Sabadell, the entire loan book was considered, which entailed a review of 905 Banco Sabadell passed the comprehensive assessment borrowers (including the 210 largest customers) and re- conducted by the European Central Bank (ECB) in the measurement of more than 1,500 property appraisals. framework of the Single Supervisory Mechanism, which This phase, which was assisted by leading audit fi rms examined the 128 largest banks in the euro area in coope- and was subject to quality control by the ECB and the ration with the national authorities and in close collabo- Bank of Spain, had the potential to trigger adjustments ration with the European Banking Authority (EBA). to the level of CET1 to be used as the starting level for the The published results concluded that the values of stress test. Banco Sabadell’s assets, collateral and reserves were appropriate and that the Bank would not require additional 2. Stress test capital in any of the scenarios considered. This second phase sought to analyse the ability of banks’ In 2014, the Banco Sabadell Group continued to balance sheets to withstand two hypothetical scenarios: strengthen its risk management framework and to make a baseline, or more probable, scenario (macroeconomic improvements in line with best practices in the fi nancial scenario approved by the European Commission) and an sector. adverse or more severe one (established by the European The main milestones this year were the development Systemic Risk Board) for 2014-2016. of a new risk appetite framework which ensures control The test was based on consolidated balance sheets at and proactive management of all Group risks and stren- 2013 year-end and used a bottom-up approach, applying gthens the governance framework as a function of risks. the methodology defi ned by the EBA at the lowest level In 2014, the Group also integrated the businesses acqui- of granularity in the Bank’s portfolio, including in this red from Banco Gallego and Lloyds Banking Group Spain case all of its lending and all of its exposure to sovereign (the latter renamed SabadellSolbank) into its systems by and corporate debt, investees and real estate. As a result, standardizing risk management and control. all the main credit, market, counterparty and real estate risks were analysed. Detailed templates were used to ensure that the exerci- European Central Bank’s Comprehensive Assessment se was unbiased; as with the previous phase, the ECB and the Bank of Spain oversaw quality. In October 2014, the European Central Bank (ECB) The minimum capital threshold was fi xed at 8% in the conducted a comprehensive assessment of the 128 largest baseline scenario and 5.5% in the adverse scenario. 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). Profi t performance The Comprehensive Assessment (CA) began in Nov- ember 2013 and was a prerequisite for the ECB to un- According to the published results of the Comprehensive dertake its new supervisory functions, which it assumed Assessment for each of Europe’s 128 largest banks, 25 one year later. The CA covered a very signifi cant part institutions failed the test with a capital shortfall totalling of the processes and procedures of the banks that were €25,000 million. However, corrective actions implemen- analysed. ted 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 Phases of the comprehensive assessment minor institution (as defi ned by the ECB), whose capital shortfall was duly covered as a result of actions implemen- 1. Asset Quality Review (AQR) ted in the fi rst half of 2014. The objective of the fi rst phase was to perform a detailed Banco Sabadell was the only Spanish bank whose ini- review of bank balance sheets to determine, inter alia, tial capital ratio was not adjusted as a result of the Asset whether their loan classifi cations (performing/doubt- Quality Review (AQR). Only 15 European banks were not ful), provisions and valuations of specifi c assets were required to make any adjustments. appropriate. The stress test concluded that, in the baseline scena- The ECB started by reviewing the Bank’s main ac- rio, Banco Sabadell had a common equity Tier 1 (CET1) counting policies, processes and criteria, covering areas ratio of 10.26% and that, in the most adverse scenario, the related to funding activities (treatment of refi nanced ratio would be 8.33%, well above the required minimum loans, the accounting system for provisions, and the de- of 5.5%. With these ratios, it was estimated that Banco fi nition of “doubtful”), and other areas such as consolida- Sabadell had surplus capital amounting to over €1,700 tion and measurement of fi nancial instruments, including million in the baseline scenario and over €2,200 million derivatives. in the adverse scenario. Next, after selecting the portfolios that represen- These results did not take account of the eff ect of man- ted the highest levels of risk and exposure, the ECB datory convertible bonds (not included in the stress test reviewed a sample of borrowers (based mainly on loan even though they are due to convert in 2015); neither did

Risk management 101 they include all of the deductions envisaged under Basel Technological and functional integration of Banco Galle- III. If those items had been considered, the CET1 ratio go and Lloyds Banking Group Spain would have been 9.38% (including convertibles) and 8.8% (fully loaded) in the adverse scenario. The successful integration, in terms of technology and The Group’s directors believe that these results vin- risk management, of the two absorbed banks (Banco Ga- dicate the capital-raising actions performed by Banco llego and Lloyds Banking Group Spain) was concluded in Sabadell in the last three years, while also strengthening 2014. The loan portfolio acquired from these banks, and its competitive position in Spain, and that they reﬂ ect the also their branches, are now covered by the Group’s risk quality of its ﬁ nancial asset management. management framework, in terms of both acceptance and monitoring.

10.26% G1 Stress tests - adjustment factors 9.38% -1.93% 8.33% 1.08%

5.50% Threshold

CET1 ratio Impact of CET1 2016e Includes Regulatory 2013 stress test adverse convertible equivalent CET1 adverse scenario bonds (*) 2016e adverse scenario scenario

(*) Since convertibles were not included in the stress tests, they are included here for illustrative purposes.

Total balance of mandatory convertible bonds amounting to €860 million euro at 2013 year-end, of which €17.6 million mature in 2014, €755.6 million in 2015, €68.6 million in 2016 and €17.6 million in 2017.

102 Banco Sabadell Annual report 2014 Risk appetite framework and enhanced governance of the risk function

Banco Sabadell has a risk appetite framework in line with best practices in the ﬁnancial sector.

The risk appetite framework ensures control and proactive management of risks under an enhanced corporate governance framework.

The Banco Sabadell Group has a new risk appetite fra- In addition to the quantitative metrics of the risk appetite mework, which aims to ensure control and proactive ma- framework, there are also qualitative metrics, such as: nagement of all Group risks. This new framework includes a risk appetite statement, which establishes the amount — The entity’s general position with regard to risk-taking and diversity of risks that the Group seeks and tolerates seeks a medium-low risk proﬁ le through a prudent, in order to achieve its business goals while maintaining a balanced risk policy that ensures steadily rising balance between risk and return. proﬁ tability and is aligned with the Group’s strategic The risk appetite statement is applied to the entire objectives. organisation through the risk appetite framework, using — The Banco Sabadell group’s risk management and various instruments. control approach consists of a broad framework of The risk appetite statement comprises quantitati- advanced measurement principles, policies, proce- ve metrics which allow the group to monitor the risk dures and methodologies integrated into an e∞cient management objectives and related qualitative aspects, decision-making structure. organised into six basic management sections (G2).

G2 Risk appetite statement

Quantitative metrics

Capital and capital Liquidity Proﬁ tability Asset quality Losses Credit and adequacy concentration

Level and quality Liquidity buffers Match between Level of asset quality For the various Individual of capital Funding return and risk and coverage key risks Sectoral structure In stressed scenarios

Risk management 103 — Risk management is underpinned by solid, ongoing Strengthening risk function governance procedures for checking that risks conform to pre-set limits. The risk appetite framework is covered by an updated risk — The assumption of market trading risk seeks to cover governance framework in accordance with European and the fl ow of transactions arising from customer busi- national regulations (specifi cally, CRR and CRD IV and ness and to seize market opportunities while maintai- their transposition to Spanish law through Law 10/2014 ning a position that is commensurate with the Bank’s on the organization, supervision and solvency of credit market share, risk appetite, capacity and profi le. institutions). — The risk function is independent and has strong senior The Board of Directors is the body responsible for management involvement, ensuring a strong risk establishing the general guidelines on the organizatio- culture focused on protecting capital and ensuring an nal distribution of the risk management and control adequate return on same. functions and for determining the main lines of strategy — The Board of Directors is committed to the risk main this respect. It is the body responsible for approving the nagement and control processes: approval of policies, risk appetite framework (developed in cooperation with limits, management model and procedures, and the the managing director, the director of risk and the chief measurement, tracking and control methodology. fi nancial o∞cer) and ensuring that it is aligned with the — The institution will have su∞cient human and techno- bank’s short- and long-term objectives, as well as with the logical resources to track, control and manage all the business plan, capital planning, risk capacity and com- risks that may materialize in the course of its business. pensation programmes. — The Group’s compensation systems should align indi- Within the Board of Directors, there are four com- vidual interests with compliance with the risk appetite mittees involved in risk management and control (Risk, framework. Executive, Audit and Control and Appointments and Re- muneration). The bank also has several other committees The principles, policies, procedures and methodologies which participate in this function. framework is refl ected in the document entitled “Banco Accordingly, the Bank has strengthened the supervi- Sabadell Group Risk Management Policies,” which is sory role of the Risk Committee, made up of non-executi- revised at least once per year. The Board of Directors is ve Board members, whose main function is to ensure that responsible for its approval. The document was last upda- the risks undertaken by the Group conform to the risk ted in January 2015. appetite statement approved by the Board of Directors. For each of the Group’s relevant risks, the main parties The Group has state-of-the-art risk control systems involved and their functions, policies, methods and proce- that is well suited to the activities of its business units and dures, as well as the relevant monitoring and control me- to the risk profi le it pursues. These control systems are chanisms, are explained in detail. Details are also given of built into the Bank’s principal risk acceptance, monito- risk function organization, indicating the roles and respon- ring, mitigation and recovery procedures. sibilities of managers and committees with regard to risks The Bank’s risk control function includes monitoring and risk control systems, adapted to the business units’ and assessing the most signifi cant risks, which ensures activities, including loan and credit granting functions. that all of the risks identifi ed are eff ectively supervised by the various business units and are monitored on an ongoing basis so that the bank’s risk profi le aligns with the Advanced internal credit rating models risk appetite statement. Reviewing compliance with the established control The Banco Sabadell Group complies with guidelines framework and its application to management is the drawn up under the Basel Capital Accord, a fundamental responsibility of the Internal Audit Department, which principle of which is that a bank’s capital requirements advises the Board of Directors and Senior Management should be more closely related to risks actually incurred, on the eff ectiveness and adequacy of established proces- based on internal risk measurement models which have ses and controls. been independently validated. The Bank has supervisory authorization to use its internal models for enterprises, property developers, specialized fi nancing projects, fi nancial institutions, retail businesses and the self-employed, mortgage and consumer loans, and individual credit cards for calculating regulatory capital requirements. Based on the risk metrics provided by these new methodologies, Banco Sabadell has a consolidated system in place for measuring risk.

104 Banco Sabadell Annual report 2014 Most signiﬁ cant risks in the risk G3 Main risks appetite framework

The signifi cant risks managed by the bank are shown in diagram G3. 1 Of all types of risk, credit is the most signifi cant in Banco Sabadell’s portfolio (G4). Credit and concentration risk Below are some of the main characteristics of managing each of these risks. More comprehensive information can be found in the Directors’ Report and the fi nancial Concentration Counterparty Country risk statements, which are available on the Bank’s website risk risk (www.grupobancosabadell.com).

Credit risk 2

Credit risk is the possibility that losses may be incurred Liquidity risk as a result of borrowers failing to meet their obligations or through losses in value due simply to deterioration in borrower quality. The policies for these risks are established in terms of 3 the management framework and in the form of caps on exposure and mitigation/eligible collateral techniques. Market risk Both are enshrined in regulations and speciﬁ c training programmes with a view to applying them throughout the organisation. Trading risk Structural risks on Diagram G5 illustrates the breakdown of credit risk the balance sheet among the group’s various segments and portfolios. 4

Operational risk

5 Reputational Technology Model risk 9 1 3 risk risk

2 2 8 1 5 3

7 6 Fiscal risk 5 4

G4 G5 Capital allocation by type of risk Overall risk proﬁle by customer category (distribution of credit risk exposures) 6 %EAD (Exposure at default) 1 Credit risk 79.1% Compliance risk 2 Structural risk 7.0% 1 Large corporates 12.6% 3 Operational risk 8.1% 2 Midsize businesses 15.2% 4 Market risk 1.3% 3 Small businesses 8.3% 5 Other risks 4.4% 4 Retailers and sole 2.1% proprietors 5 Mortgage loans 25.9% 6 Consumer loans 1.1% 7 Banks 2.7% 8 Sovereigns 20.9% 9 Other risks 11.4%

Risk management 105 To maximize the business opportunities provided by each on historical data to identify key predictive factors customer and to guarantee an appropriate degree of se- (Diagram G7 refl ects the breakdown of individuals as curity, responsibility for approving and monitoring risks a function of their scoring). is shared between the relationship manager and the risk — Early alert tool: there are early alert tools for both analyst, who are thus able to obtain a comprehensive view companies and individuals. With an early warning of each customer’s individual circumstances. system, the quality of a risk can be monitored in an Of special note are the advanced internal credit rating integrated way and risks transferred to recovery spe- models for clients and operations: cialists who are best equipped to determine the most suitable type of recovery procedure in each case. — Rating: credit risk exposures to corporate customers, real estate developers, specialized financing projects, By analysing indicators and early warning alerts in addi- retailers and sole proprietors, financial institutions tion to credit rating reviews, the quality of a risk can be and countries are assessed according to a system of constantly monitored in an integrated way. The establis- credit ratings based on predictive factors and internal hment of e∞cient processes for managing existing risk estimates of the probability of default (Diagram G6 exposures also benefi ts the process of managing past-due reflects the breakdown of companies as a function of and irregular accounts, since the early identifi cation their rating). of probable default cases ensures that measures can be — Scoring: credit risk exposures to individual cus- taken proactively. tomers are classified by means of scoring systems In accordance with responsible banking, the entire which make use of quantitative modelling based branch network has access to documents to help analysts

% EAD* G6 Individual customer loan portfolio credit rating profi le 40% * EAD (exposure at default) 35%

30%

25%

20%

15%

10%

0% 9876543210 + Credit quality –

% EAD* G7 Individual customer loan portfolio credit score profi le 40% * EAD (exposure at default) 35%

30%

25%

20%

15%

10%

0% 9876543210 + Credit quality –

106 Banco Sabadell Annual report 2014 assess the environmental risk associated with an industry Counterparty risk or business activity. All risks, including environmental risks, are set out in the risk assessment and are considered Arises from trading in fi nancial instruments with fi nan- when a decision on a loan application is taken. cial counterparties and in the fi xed-income portfolio. In the particular case of derivatives and repos, risk exposure is generally substantially below the nominal amount of Country risk the contract (counterparty risk). Banco Sabadell has a system in place for assessing This is the risk of incurring loss from exposures to sove- and managing these risks which allows compliance with reign borrowers or to persons domiciled in a particular approved limits to be monitored and controlled on a daily country for reasons connected with national sovereignty basis. or the economic situation of the country, and therefore Additionally, to mitigate exposure to counterparty unrelated to normal business risks. Country risk includes risk, Banco Sabadell has Credit Support Annexes (CSA) sovereign risk, transfer risk and other risks inherent in and Global Master Repurchase Agreements (GMRA) global fi nancial operations (war, expropriation, nationali- with most counterparties, which notably reduces the risks zation, etc.). incurred through the provision of collateral. Diagram G8 illustrates the geographic distribution of Diagrams G9 and G10 illustrate the breakdown of credit risk. counterparty risk by geographic area and credit quality.

5 4 6 4 3 4

11 12 3 13 2 3 10 5

9 2

8 6 1

7 G8 G9 G10 Geographic distribution Breakdown of counterparty risk Breakdown of counterparty risk of credit risk by geographic area by rating

1 Spain 84.8% 1 Eurozone 65.4% 1 AAA / Aaa 0.0% 2 Rest of European Union 9.3% 2 Rest of Europe 19.0% 2 AA+ / Aa1 0.0% 3 North America 4.4% 3 USA and Canada 13.1% 3 AA / Aa2 2.3% 4 Rest of the world 0.9% 4 Rest of the world 2.5% 4 AA- / Aa3 2.4% 5 Latin America 0.5% 5 A+ / A1 27.4% 6 Rest of OECD 0.2% 6 A / A2 20.4% 7 A- / A3 1.2% 8 BBB+ / Baa1 16.4% 9 BBB / Baa2 12.8% 10 BBB- / Baa3 3.8% 11 BB+ / Ba1 0.1% 12 BB / Ba2 0.6% 13 Other 12.6%

Risk management 107 Concentration risk of liquid assets su∞cient to cover the net balance of infl ows and outfl ows in a stress situation lasting for up Concentration risk refers to exposures that can potentia- to a year. lly generate losses large enough to threaten the fi nancial — General market information: issues, spreads, external health of an institution or the viability of its ordinary rating agency reports, etc. business activity. Concentration risk is organised into two subtypes: As regards the new short-term liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), Banco — Individual concentration risk: imperfect diversifi ca- Sabadell is reporting the required information to the tion of idiosyncratic risk in portfolio due to its small regulator using the ECB’s new monthly and quarterly li- size or to large exposure by specifi c clients. quidity templates, respectively. The Group amply exceeds — Sectoral concentration risk: imperfect diversifi cation the LCR requirement. At the end of 2014, its LCR was of systematic risk components in the portfolio. Such over 100%, compared with the minimum requirement concentrations may occur in particular sectors or of 60% in 2015. The NSFR is still in the fi nal phases of geographical regions, for example. being analysed and defi ned. The NSFR is expected to be implemented in January 2018, with a phase-in period, Concentration risk is controlled and managed on the basis like the LCR. of the defi nition in the risk appetite statement, which establishes limits in terms of exposure to concentration, at both individual and sector level. Market risk

Market risk arises from possible fl uctuations in the fair Liquidity risk value or future cash fl ows of a fi nancial instrument as a result of changes in market risk factors. Several types of Liquidity risk is due to the possibility of losses being market risk factors can be distinguished, the main types incurred as a result of the Bank’s being unable, albeit being interest rate risk, exchange rate risk, equity price temporarily, to honour payment commitments due to a risk and credit spread risk. lack of liquid assets, or of its being unable to access the Diff erent approaches are taken to manage this risk, markets to refi nance debts at a reasonable cost. This may depending on which of the Group’s main business lines be associated with factors of a systemic nature or specifi c has given rise to it: to the Bank itself. Liquidity risk management is established around the — Risk arising from proprietary trading as part of the basic requirement that the Bank have, at all times, liquidi- strategy of focusing on customer business. Risk that is ty at least su∞cient to comply with the levels established primarily attributable to Treasury and Capital Market by regulation and by the Bank’s internal risk management operations using currency instruments, equities policies. and fi xed-income, in both the cash and derivatives As an additional policy, the Bank requires a reserve markets. margin to cover liquidity needs arising from maintaining — Risks arising from the Group’s commercial banking liquid assets classifi ed as eligible collateral by the Euro- with customers and its corporate banking busines- pean Central Bank that is su∞cient to fund debt issued on ses, known as structural balance sheet risk. These the capital markets that matures in the next 12 months. risks can be sub-classifi ed into interest rate risk and A number of methodologies and information systems currency risk. This risk is defi ned as arising from the are used to evaluate this risk: possibility of loss in the market value of fi nancial asset positions due to variations in risk factors with an — Information in connection with the daily balance impact on their market prices, volatility or correlation of assets and liabilities and the fi nancial market between then (e.g. stock prices, interest rates, exchan- situation. ge rates). — Information on liquid assets and second-line liquidity reserves based on assets eligible for discounting with the ECB. Trading — Liquidity gap using the tool’s measurement framework to assess interest rate risk, with the ability to The main indicator used to measure market risk is VaR perform simulations. (Value at Risk), which allows the risks on diff erent types — Information on the maturities of funding obtained in of fi nancial market transaction to be analysed as a single the wholesale markets. class. The VaR method provides an estimate of the poten- — Period stress tests. Banco Sabadell regularly carries tial maximum loss on a position that would result from out a stress test centred on the Bank’s position in the an adverse, though normal, movement in any of the risk institutional market. The result of this exercise is factors. This estimate is expressed in money terms and to ensure that the Bank continues to hold a cushion is calculated at a specifi ed date, to a specifi ed confi dence

108 Banco Sabadell Annual report 2014 level and over a specifi ed time horizon. The estimate takes account of the diff erent levels of market risk factors (interest rate, currency rate, equities and credit spread) to which the transaction is exposed. Market risk is monitored on a daily basis and reports on current risk levels and on compliance with the limits assigned to each unit are sent to the risk control functions. Limits are assigned by the relevant decision- making bodies for each risk monitoring unit (based on nominal amounts, VaR or sensitivity limits, as applicable). This makes it possible to track changes in exposure levels and measure the contribution of each risk factor. The VaR methodology used to assess potential losses is the historical simulation for a time horizon of one day and a confi dence interval of 99%. Risk incurred in terms of VaR in 2014 from trading is illustrated in diagram G11. Risk control of this kind is supplemented by special simulation exercises and extreme market scenarios (stress testing), which provide the positions’ risk profi le. Therefo- re, the VaR methodology does not rule out the possibility that losses will exceed the set limits, as signifi cant market movements may occur that exceed the confi dence levels being applied. The reliability of the VaR methodology is validated by back-testing techniques which are used to verify that VaR estimates are consistent with the specifi ed confi dence level. The T1 table shows a stress analysis for trading.

5 G11 Market risk (million euro)

3 VaR 2 Yield Exchange rate 1 Equities

0 Credit spread Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

T1 Stress test results at Scenario Result 2014 year-end (million euro)

2008 bank crisis (1.38) Stressed sovereign debt scenario (7.74) Parallel curve decline scenario (9.69) Curve fl attening scenario (11.58) Parallel curve increase scenario 9.15 Curve steepening scenario 11.63

Risk management 109 Structural risks Exchange rate risk Structural exchange rate risk arises as a result of changes Interest rate risk in the exchange rates between diff erent currencies and Interest rate risk is caused by changes, as refl ected in the the possibility that these movements may result in losses position or the slope of the yield curve, in the interest rates on fi nancial investments and on permanent investments to which asset, liability and off -balance sheet positions in foreign o∞ces and subsidiaries. are linked. Gaps or mismatches arise between these items Exchange rate risk is monitored on a daily basis and because of diff erences in repricing and maturity dates so reports on current risk levels and on compliance with that rate changes aff ect them at diff erent times; this in the limits assigned to each unit are sent to the decision- turn aff ects the robustness and stability of results. making bodies. Management of interest rate risk focuses on overall At year-end 2014, the asset exposure sensitivity to a fi nancial exposure for the Group as a whole and involves 1% depreciation in exchange rates against the euro of the proposing alternative business or hedging strategies that main currencies to which exposure exists amounted to will meet business objectives and are appropriate to mar- €6.5 million, of which 52% pertains to the US dollar and ket conditions and within the exposure limits that apply 39% to the Mexican peso. across the Group. A number of methodologies are used to measure interest rate risk. These include measuring the sensitivity of net interest income to changes in interest rates over a one-year horizon. This is done by means of static (gap analysis) and dynamic (simulation) techniques based, in the latter case, on diff erent assumptions of balance sheet growth and changes in the slope of the yield curve. Another technique is to measure the sensitivity of equity to changes in interest rates using duration gap analysis. This measures the eff ect of interest rate changes over a longer time horizon. The sensitivity of net interest income and shareholders’ equity to a 100 basis point change in interest rates is illustrated in diagram G12.

€Mn. % G12 Structural interest rate risk (sensitivity to interest rates) 30 10 Net interest income sensitivity (million euro) 25 9 Equity sensitivity (%)

20 8 26.49 15 7

10 6

5 5 4.33 2013 0 4 2014

-5 3 2.33

-10 2

-19.68 -15 1

-20 0

110 Banco Sabadell Annual report 2014 Operational and fi scal risk 1 3 2 Operational risk is defi ned as the risk of loss resulting from failures or inadequacies in people, processes, and systems or from unforeseen external events. This defi ni- 4 tion includes model, technology and reputational risk (the 7 latter includes behavioural risk). Management of operational risk is decentralized and devolved to process managers throughout the organiza- 5 tion. All of those processes are identifi ed on a corporate 6 process map, thus facilitating the compilation of information in a way that refl ects the structure of the organization. The Group has a specialized central unit to manage G13 operational risk, whose main functions are to coordinate, Distribution of operational risk supervise and promote the identifi cation, assessment and events by amount (12 months) management of risks by process managers in line with the 1 Internal fraud 0.4% Banco Sabadell Group’s process-based approach. 2 External fraud 9.6% Senior managers and the Board of Directors play a di- 3 Staff relations and job 1.9% rect, hands-on role in managing operational risk by appro- security issues ving the management framework and its implementation 4 Customers, products and 24.0% as proposed by an Operational Risk Committee made up business practices of senior managers from diff erent functional areas of the 5 Property damage 8.0% group. They also ensure that regular audits are carried out 6 Business disruption/ 0.2% on the management strategy being applied, the reliability systems failure of the information being reported, and the internal valida- 7 Process execution, 55.9% delivery and management tion tests required by the operational risk model. The database contains historical records of actual losses resulting from operational risk going back to 2002. It is constantly being updated as information is received on 1 losses and recoveries, whether resulting from the Bank’s own eff orts or from insurance provision (G13 & G14). 2 3

Operational risk includes management and control of 7 the following main risks:

— Reputational risk: the possibility of losses arising from negative publicity related to the Bank’s practices and 4 activities, potentially leading to a loss of trust in the 6 5 institution with an impact on its solvency. — Technology risk:possibility of losses due to the inability of the systems infrastructure to fully support the continuation of ordinary business activity. G14 — Model risk: the possibility of losses arising from deci- Distribution of operational risk events sion-making based on the use of inadequate models by amount (last 5 years) 1 Internal fraud 3.0% Banco Sabadell’s objective in this area is to ensure com- 2 External fraud 10.8% pliance with tax obligations while guaranteeing adequate 3 Staff relations and job 1.6% returns for our shareholders. security issues The Board of Directors determines the tax risk control 4 Customers, products and 43.0% and management policies, as well as the tax strategy, with business practices the double objective of ensuring that legal obligations are 5 Property damage 5.0% met and ensuring greater returns for shareholders. 6 Business disruption/ 0.3% The Tax Advisory Area provides an independent re- systems failure view of the Bank’s operations to ensure that they conform 7 Process execution, 36.2% delivery and management to the tax legislation in force.

Risk management 111 Compliance risk — Strengthening the mechanisms for overseeing compliance with the group’s Internal Code of Conduct for Compliance risk is defi ned as the risk of incurring legal or trading on the securities market. administrative penalties, signifi cant fi nancial loss or an — Promoting and monitoring implementation of the impairment of reputation due to a breach of laws, regula- Foreign Account Tax Compliance Act (FATCA). tions, internal rules and codes of conduct applicable to the — Implementing these compliance systems at branches banking industry. taken over following the acquisition of assets from One of the essential aspects of the Bank’s policy, Banco Gallego Group and SabadellSolbank (formerly and the basis of its organizational culture, is rigorous Lloyds Bank España). compliance with all legal provisions. The pursuit of our business objectives must be compliant at all times with the current legislation and with best practice. With this aim in view, the group has a compliance policy that handles the setting of policies, procedures and controls centrally at head o∞ce and delegates implementation to its subsidiaries and branches in other countries. This is a fl exible risk-focused approach that can adapt with agility to the Group’s strategy at any given time and which takes advantage of synergy, particularly in areas with complex far-reaching impacts that require technology to be developed. The main challenge is standardisation of the level of compliance oversight within the Group by establishing obligatory minimum standards regardless of the activity or the country where the group operates. The policy has six main components: technology, training, procedures, communication channels, verifi cation and control programmes, and approval procedure for products and regulations. The Banco Sabadell Group has installed a more robust and eff ective control infrastructure in all areas where a compliance risk may be present, such as prevention of money laundering and the fi nancing of terrorism, market abuse, internal codes of conduct and investor protection (MiFID). Key actions implemented in 2014 included the following:

— Constantly updated anti-money laundering monitoring systems and Know-your-Customer and Customer Acceptance procedures. — Progress in complying with Spanish anti-money laundering legislation on the keeping and updating of customer documents and due diligence procedures. — Expanded and more rigorous measures to bring greater transparency to all dealings with customers, particularly in the marketing of products and the terms of contracts; making available to the public all fees, commissions, costs and expenses actually charged on the more common banking products and services. — Improving investor protection by implementing new procedures to evaluate the timeliness and suitability of investments. — Strengthening the group’s resources for the detection of possible market abuse by incorporating additional risk parameters; this will make alerts systems more sensitive and extend the range of possible suspicious behaviour patterns.

112 Banco Sabadell Annual report 2014

Report of the Audit and Control Committee Introduction The Audit and Control Committee underwent the following changes in 2014: This report on the work of the Audit and Control Com- As a result of José Manuel Martínez Martínez’s mittee for 2014, addressed to the shareholders of Banco resignation as a member of the committee, and following de Sabadell S.A., was authorized by the Committee at its a favourable report by the Appointments and Remunera- meeting of 28 January 2015 and will be submitted to the tion Committee, on 24 July 2014 the Board of Directors Board of Directors of Banco de Sabadell S.A. for approval appointed the director José Ramón Martínez Sufrategui at its meeting on 29 January 2015. as a member of the Audit and Control Committee. The Committee is regulated by Article 59 bis of the On 20 November 2014, Sol Daurella Comadrán Articles of Association and Article 13 of the Regulations resigned as a director of Banco de Sabadell, S.A., with of the Board of Directors of Banco de Sabadell S.A.; it also the result that she also stepped down as a member of the has its own rules of organization and procedure which are committee. published on the group website (www.grupobancosaba- Accordingly, all directors on the Audit and Control dell.com). Committee are non-proprietary, independent directors This regulatory structure ensures that the Audit and and have the knowledge and experience required to per- Control Committee is compliant with the reporting requi- form the duties assigned to the Committee by the Board rements laid down by Law 44/2002 of 22 November on of Directors. Measures to Reform the Financial System, as amended. The Audit and Control Committee meets as often as As required by the Bank’s articles and other regu- necessary and, in any event, not less than once every three lations, the Committee consists of a maximum of fi ve months. The Committee may request the attendance at its directors appointed by the Board, one of whom is appoin- meetings of such executives, including executive directed by the Board to chair the Committee. The chairperson tors, as it sees fi t. It may also seek assistance from inde- may hold o∞ce for a maximum of four years and cannot pendent advisors in carrying out its duties. be re-appointed for at least one year after the end of their This report summarizes the range of activities carried four-year term. Additional directors may be appointed to out by the Audit and Control Committee in the course of attend meetings without the right to vote in order to fi ll the six meetings that it held during the year 2014, from a vacancy on the Committee or replace a member who is which it can be seen that the Committee discharged the indisposed. duties assigned to it in its rules of procedure by the Board The Board also appoints a secretary to the Committee, of Directors of Banco de Sabadell, S.A. within its main who cannot be a Director. The secretary takes minutes areas of responsibility. of every meeting and these are approved at the end of the Together with the publication of an annual report on meeting itself or at the next meeting. A report of each corporate governance and the information available on meeting of the Committee is read out at the immediately the group’s website, the distribution of this report at the following meeting of the Board of Directors. Annual General Meeting underlines once again Banco As of 31 December 2014, the members of the Audit and Sabadell’s commitment to providing shareholders and Control Committee were as follows: investors with the tools and resources they need to keep themselves fully informed of the Company’s performance Chairman and to ensure that it is transparent in everything that it Joan Llonch Andreu does.

Committee members Mª Teresa García-Milà Lloveras José Ramón Martínez Sufrategui

Secretary Miquel Roca i Junyent

Report of the Audit and Control Committee 115 Terms of reference respective remits had been merged following amendments to the Bank’s Articles of Association and to the Regula- The Audit and Control Committee has the following tions of the Board of Directors. responsibilities: On 20 October 2003 the Committee adopted new rules setting out the principles that would govern the work 1 Reporting to the General Meeting on all issues raised of the Audit and Control Committee of Banco de Sabadell by shareholders that are within its remit. S.A. and basic rules on organization and procedure, within 2 Supervising the eff ectiveness of the company’s internal the framework of the Articles of Association and the Regu- control system, any internal audits, and risk manage- lations of the Board of Directors. The rules were approved ment systems, and discussing with the auditors any and confi rmed by the Board of Directors at a meeting on material weaknesses in the internal control system that 30 October 2003 and were executed on 18 November are detected during the audit. 2003 before a notary in Sabadell, Javier Micó Giner. 3 Overseeing the preparation and presentation of statu- On 28 April 2009, the committee reviewed and repor- tory fi nancial information. ted favourably on a proposed amendment to article 13.1 4 Making recommendations to the Board of Direc- of the Regulations of the Board of Directors to provide for tors, for submission to the General Meeting, on the the appointment of alternate members of the Committee. appointment of external auditors and their terms of It also resolved to amend article 7.1 of the rules of proce- engagement, the scope of their professional mandate dure of the Audit and Control Committee accordingly. The and, if applicable, the termination or non-renewal of amendments to article 13.1 of the Regulations of the Board their engagement; reviewing the performance of the of Directors and to article 7.1 of the rules of procedure auditing agreement and ensuring that the opinion of the Audit and Control Committee were approved and on the annual accounts and the main fi ndings of the confi rmed by the Board of Directors at a meeting on 27 Auditor’s report are expressed in a clear and precise May 2009 and executed in a public instrument on 11 June way. 2009 before the notary in Sabadell, Javier Micó Giner. 5 Advising on the annual, quarterly and half-yearly In 2010, article 59 bis of the Articles of Association and fi nancial statements and the prospectuses that must article 13.1 of the Regulations of the Board of Directors be submitted to the regulatory or supervisory bodies, of Banco de Sabadell, S.A.were amended to fi x the num- exercising vigilance to ensure compliance with the ber of members of the Audit and Control Committee at a requirements of the law and the proper application of maximum of fi ve in order to keep the number of members generally accepted accounting principles, and advising of the Committee in the same proportion with respect to on proposals to amend those principles. the number of members of the Board. The committee also 6 Maintaining working relations with external auditors resolved to amend article 7.1 of its rules of procedure so as to receive information on, and enquire into, any issues to incorporate that amendment concerning the number of that might compromise their independence and kee- members. ping itself informed of any other matters related to the In 2012, the committee made amendments to a num- audit process and to auditing standards. ber of articles of its rules of procedure to bring them into 7 Reporting on any issues referred to the Committee line with the amended Articles of Association of Banco de by the Board of Directors that are within its terms of Sabadell, S.A. and at the same time make those articles reference. compliant with changes in the Spanish legislation on 8 Any other matters for which the Committee is res- public limited companies [Ley de Sociedades de Capital], ponsible by law or under the Articles of Association and with Law 12/2010, of 30 June, amended Spanish le- or any regulations made in accordance therewith, gislation on auditing (Law 19/1988) and the stock market or under any generally applicable rules on corporate (Law 24/1988) and to the consolidated text of the Compa- governance. nies Act, approved by Legislative Royal Decree 1564/1989, of 22 December, to make them compliant with EU law.

Regulatory structure Activities As required by the Law on Measures to Reform the Financial System, on 9 July 2003 the regulations of the Six meetings were held by the Audit and Control Commit- Board of Directors were amended by notarial instrument tee in 2014 in accordance with the regulatory structure to incorporate new rules on the composition and working described above. Meetings were attended regularly, at the of the Audit Committee. These changes were made having Committee’s request, by the Director-General Manager regard to amendments to certain articles of the Bank’s Ar- and the head of Internal Audit.Meetings were also atten- ticles of Association that had been adopted by a resolution ded by the Chief Financial O∞cer when the business on of the Annual General Meeting on 24 April 2003. the agenda included pre-publication reviews of quarterly By another instrument executed on that same date, and half-yearly trading and ﬁ nancial reports, and by other the Audit and Control Committee was set up to replace Group senior executives when the nature of the business the former Audit and Budget Control committees, whose on the agenda made their attendance desirable.

116 Banco Sabadell Annual report 2014 The committee also maintained regular contacts with the progress being made by the Group in developing and external auditors to keep itself informed of progress in the deploying advanced systems for the management and auditing of the accounts. measurement of operational risk. These contacts and attendances ensured that the Com- During the course of 2014, the committee moni- mittee was able to obtain all the information it required to tored the progress and results of the Comprehensive perform the tasks delegated to it by the Board of Directors Assessment, conducted by the European Central Bank within its main areas of responsibility, as follows: within the framework of the Single Supervisory Mecha- nism on 128 Euro area banks, together with the national authorities and, with respect to the stress test, in close Functions related to fi nancial reporting, risk cooperation with the European Banking Authority (EBA). management and internal control systems The results confi rmed that the values of Banco Sabadell’s assets, collateral and reserves are appropriate and that The committee carried out a review to verify that ban- Banco Sabadell would not require additional capital in any king or accounting best practice was being applied at all of the scenarios considered. levels of the organization. On the basis of reports from the Specifi cally, the Asset Quality Review (AQR) did not external auditor, Internal Audit or the Director-General lead to any adjustment in the valuations presented by Ban- Manager, the Committee satisfi ed itself that suitable steps co Sabadell as of 31 December 2013, while the stress test were being taken at General Manager level and by other revealed that Banco Sabadell would have surplus capital senior executive functions to ensure that the Group’s main amounting to over 1.7 billion euro in the baseline scenario risks were being appropriately identifi ed, measured and and over 2.2 billion euro in the most adverse scenario. controlled. At its 28 January 2015 meeting, the Committee reviewed a report presented by the Risk Department on governance and risk management and control systems Risk management and control systems for the year 2014, and reached the conclusion that these systems were appropriate to the group’s risk profi le. During the year the Committee reviewed the Group’s risk management systems as described in reports prepared by the Risk, Finance and Internal Audit departments. Internal controls over the preparation and To meet the group’s market disclosure obligations and presentation of regulated fi nancial information other requirements set out in the Bank of Spain’s Circular CBE 3/2008 (the “Solvency Circular”) and subsequent In 2014, the Audit and Control Committee approved amendments (CBE 9/2010 and CBE 4/2011), at its Internal Audit’s strategic plan for 2014-2016 setting out meeting on 24 March 2014 the Committee reviewed the a detailed programme for the supervision of the group’s contents of the document entitled “Basel II – Pillar III system of internal control over fi nancial reporting (ICFR). Disclosures” dated 31 December 2013. At that meeting it The plan provides for tests on areas considered to be of key examined information concerning the Group’s qualifying importance within the group over the three-year period to capital resources and its capital adequacy position, and which the plan refers, with the exception of certain areas discussed their compliance with the Solvency Circular or processes considered to be of especial signifi cance; and the objectives set out in the Group’s risk management these include critical controls of period-end closing pro- policies. The Committee also carried out a detailed review cedures, reviews of judgements and estimates and general of all fi nancial data to be relied on as a basis for the Group’s controls on reporting systems subject to evaluation on an conservative risk profi le in the diff erent categories of risk annual basis. for which disclosure was required, including: credit and In the course of 2014, the reports provided by Inter- dilution risk, market risk in the trading book, operational Audit on the ICFR evaluation tests were presented nal risk, specifi c data on equity investments and equity and were reviewed by members of the Audit and Control instruments not included in the trading book, interest Committee; any weaknesses identifi ed in the reports were rate risk on non-trading positions, and disclosures on evaluated and the action plans proposed for correcting remuneration. them were approved. With regard to the Group-wide implementation of in- A favourable opinion on the ICFR was also expressed ternal ratings-based (IRB) credit risk assessment models, by the external auditor (PricewaterhouseCoopers) in a re- the Committee reviewed the fi ndings of internal audits port dated 23 January 2014 with reference to the accounts carried out on these models at the request of the Bank of for the year to 31 December 2013. Spain’s Supervision Department. These audits enabled the Committee to keep itself informed of the action being taken to comply with requirements specifi ed by the Bank Supervision of internal controls of Spain in its approval notices for the use of Basel II risk on the Group’s offshore operations assessment models. From reports provided to it by Internal Audit during The Committee paid particular attention to overseeing the year, the Committee was able to observe the signifi cant the system of internal controls over the group’s off shore

Report of the Audit and Control Committee 117 operations. This was in response to the recommendations also reviewed the procedures and tools used by the fi rm to set out in the Bank of Spain’s “Banking Supervision Me- ensure compliance with the auditor independence requi- morandum” for 2003 with regard to the policies of banks rements. Written confi rmation of the fi rm’s independence and other lenders on the use of o≠shore establishments to with respect to the Banco Sabadell Group was received by expand their off shore operations.In carrying out this res- the Committee on 28 January 2015. Based on the results ponsibility, the Committee reviewed the fi ndings of audits of its enquiries, the Committee submitted a report to the carried out by o∞cial regulators, audit reports prepared by Board of Directors, before the Auditor’s report on the the Group’s Internal Audit department, the results of au- accounts had been issued, giving a favourable opinion on dits carried out by units with local internal audit functions compliance with the auditor independence requirement and auditors’ reports prepared during the year 2013 on the and concluding that all work for which auditors had been accounts of subsidiaries with o≠shore operations. engaged satisfi ed the independence requirements of the As a result of its review, the Committee was able to con- Consolidated Text of the Audit Law, enacted by Legislative clude that Group operations conducted through o≠shore Royal Decree 1/2011, of 1 July. establishments were being reduced and that adequate sys- The Committee remained in contact with the Auditor tems were in place to ensure that o≠shore establishments constantly throughout the year to ensure that it was kept were subject to internal control by the parent company, as informed of any signifi cant accounting or fi nancial repor- required by the Group’s policy on discontinuing any ope- ting issues arising in the course of the auditor’s work. rations likely to give rise to legal or reputational risks. A re- In the area of external supervision and regulation, port on this area of the Committee’s supervisory duties was the external auditors reported to the Committee, at its submitted to the Board of Directors on 24 March 2014. meetings on 22 April, 22 July and 17 December 2014, on the new structure and content of the audit report, in accordance with the new Audit Technical Standards, on the Functions related to auditing content of the new accounting framework for reserves, the status of the Draft Law on Auditing and the main impacts The Committee’s functions in relation to auditing include of the introduction of the Single Supervisory Mechanism, making recommendations to the Board regarding the ap- in force since 4 November 2014, and specifi cally on the key pointment of auditors and reviewing their terms of enga- areas subject to evaluation: the governance framework, gement. At its meeting on 21 January 2014, the Committee roles and responsibilities, the capital, liquidity and fun- reviewed group policy on engagement and, as a result, ding plan, the risk appetite framework, internal models recommended to the Board that the fi rm of Pricewater- and the recovery plan. houseCoopers Auditores, S.L. be re-appointed as auditors As part of the Committee’s oversight of the auditors’ of the Bank’s separate and consolidated accounts for the performance of their terms of engagement, at its meeting year 2014.The Board of Directors resolved to submit the on 22 July 2014 the auditors reported on the results of Committee’s recommendation to the Annual General their review of the summary consolidated accounts for the Meeting, which approved it on 27 March 2014. fi rst half of 2014, giving an unqualifi ed opinion. The Committee reviewed and approved the auditor’s At a meeting on 28 January 2015, the auditor presen- fees for 2014. Details of fees paid to auditors can be found ted the results of its review of the separate and consolida- in the annual accounts. ted accounts for the year 2014 and expressed the opinion As regards compliance with independence require- that, as in previous years, the accounts presented a true ments, the Audit and Control Committee reviewed the and fair view, in all material respects, of the consolidated main non-audit services provided by PriceWaterhouse- equity of the Bank and the group and of the results of their Coopers in 2014, which were mainly to advisory services operations and their consolidated cash fl ows for the year on real estate investment portfolios and non-performing as required by applicable fi nancial reporting standards debt and non-performing asset management platforms, and regulations and, in particular, the accounting princi- and to advisory services in treasury and capital market ples and practices embodied therein. projects. All these tasks were undertaken in conformity with the independence requirements contained in the consolidated text of the Law on Auditing, enacted by Functions related to trading and fi nancial reports Legislative Royal Decree 1/2011, of 1 July, and in the Audit Technical Standards issued by Spain’s Institute of Accoun- In the course of the year, the Committee paid particular ting and Auditing. attention to reviewing the Company’s accounts and its To verify the Group’s compliance with statutory limits quarterly and half-yearly trading and fi nancial reports as on concentrations of auditing business, the Committee well as other information disclosed to the market, inclu- reviewed the proportion which the fees paid to Pricewa- ding the share registration document, before they were terhouseCoopers by the group represent in the fi rm’s total released for publication. annual revenue. The share was less than 0.02% of the total At a meeting on 24 March 2014, the Committee for the PricewaterhouseCoopers worldwide organization, reviewed and reported favourably on the Share Registra- and 0.83% of the total for its Spanish organization. From tion Document of Banco de Sabadell S.A. to be fi led with information provided by the auditors, the Committee the National Securities Market Commission (CNMV) in

118 Banco Sabadell Annual report 2014 accordance with Commission Regulation (EC) 809/2004 into force of the Single Supervisory Mechanism, audits of of 29 April 2004, which came into eff ect on 18 July 2005, the new management model and the decline in delinquen- implementing Directive 2003/71/EC as regards infor- cy and the reduction in real estate exposure, review of the mation contained in prospectuses as well as the format, asset protection scheme, technology and fraud prevention incorporation by reference and publication of such pros- audits, and a review of the technological-operational inte- pectuses and dissemination of advertisements. gration projects completed during the year and projects to At meetings on 22 April, 22 July and 29 October 2014 implement international platforms. and 28 January 2015, the Committee reported favourably The implementation of that audit plan resulted in on the quarterly fi nancial statements for the periods en- the production of over 500 audit reports whose main ding on 31 March, 30 June, 30 September and 31 Decem- fi ndings, along with replies from management to the ber 2014, respectively, prior to their being approved by the recommendations contained in them, were evaluated by Board of Directors and released to the markets. the Committee. At its 22 July meeting, the Committee reported favou- All meetings held by the Committee were attended rably on the summary consolidated fi rst half-year fi nancial by the head of Internal Audit. The following reports were statements of the Banco Sabadell Group for fi ling with the presented: National Securities Market Commission (CNMV), fi nding them to have been prepared and presented in conformity — A report on the main internal auditing results for the with IAS 34 on Interim Financial Reporting as incorpo- fourth quarter of 2013, at the meeting on 21 January rated into IFRS-EU, with the detailed disclosure require- 2014. ments specifi ed by the CNMV in its Circular 1/2008 of 30 — A summary of Internal Audit’s annual report on its January, and article 12 of Royal Decree 1362/2007. activities in 2013, the 2014-2016 strategic plan and the To undertake this work, the Committee received plan of activities for 2014, at the meeting on 21 January documents and held meetings with the Director-General 2014. Manager, the Chief Financial O∞cer and the Auditor to — A report on the main internal auditing results for the satisfy itself that the applicable accounting standards had fi rst quarter of 2014, at the meeting on 22 April 2014. been properly applied. — A report on the main internal auditing results for the second quarter of 2014, at the meeting on 22 July 2014. — A report on the main internal auditing results for the Functions related to Internal Audit third quarter of 2014, at the meeting on 29 October 2014. One of the Committee’s tasks is to approve the plans and methodologies of the Internal Audit department and as- The Committee kept itself fully informed of progress in sess the extent to which the department’s plans are being implementing the recommendations of previous audit followed and its recommendations are being implemen- reports and each meeting included the presentation of a ted. This responsibility was met largely through the appro- specifi c report on the Audit Department’s monitoring of val and oversight of the Internal Audit Plan for the year. the Group scorecard of key quality indicators. This year, the Internal Audit Department presented At its meeting on 17 December 2014, the Committee the Internal Audit Strategic Plan for 2014-2016 to the approved the update to the basic rules on internal audits, Audit and Control Committee on 21 January 2014, the which includes changes in the reporting hierarchy of the goal of which is to be uses as the basis for supervising the internal audit function, in accordance with the changes in Group’s risk management and internal control during the the organization chart since the previous update and other next three years. This plan was based on an evaluation of aspects of internal organization with a view to adapting the Group’s strategic objectives established in the 2014- to the regulatory frameworks and best practices in the 2016 Triple Master Plan, of the business risks arising from profession. the current economic context and the systems for analysis, measuring and control adopted by the Group, together with the supervisor’s requirements and regulatory require- Functions related to compliance with legal and ments. The Audit and Control Committee approved the regulatory requirements on Corporate Governance strategic plan as the basis for supervising the Group’s risks and internal control during the next three years, and the One aspect of the Committee’s work in the area of corpo- annual internal audit plan for 2014, which itemizes the rate governance was to review reports prepared by the tasks to be completed during the year. Director-General Manager and Internal Audit on com- In 2014, the internal audit activities were focused on pliance with applicable laws, internal rules and regulatory reviewing internal control systems to mitigate fi nancial, requirements. credit, operational, accounting and regulatory risks to To meet the requirement of Royal Decree 217/2008 for which the Group’s activities are exposed. Specifi cally, spe- regular reviews of compliance with the EU Directive on cial attention was paid to certain strategic aspects with a Markets in Financial Instruments (MiFID) by investment material impact on the Bank in 2014: monitoring the com- fi rms, the Audit and Control Committee received informa- prehensive assessment process resulting from the entry tion specifi cally related to the implementation of MiFID

Report of the Audit and Control Committee 119 rules by the Banco Sabadell Group, based on an internal Reports from supervisory authorities audit report prepared for the purpose. As required by CNMV Circular 5/2009 of 25 Novem- In 2014, the committee received information about the ber, the Committee also reviewed the Auditor’s annual re- conclusions of the reports issued by the supervisory autho- port on the protection of customer assets held or managed rities. From the information provided, the Committee by Banco de Sabadell, S.A., Sabadell Solbank, S.A.U. and was able to satisfy itself that the improvements recom- Banco Gallego, S.A. from the point of view of the measures mended by the supervisory authorities were being fully adopted by those undertakings to comply with customer implemented. asset protection requirements. The report’s conclusions were satisfactory and no material weaknesses were detected in relation to the existence or suitability of internal Conclusion asset protection systems in any of the undertakings. The activities described in this report ensured that the Au- dit and Control Committee was able fully to discharge the Corporate Governance duties assigned to it in its rules of procedure by the Board of Directors of Banco de Sabadell, S.A., within its main At its meeting on 21 January 2014, the Committee decided areas of responsibility. to recommend that the Board of Directors give its appro- As a result of its review and oversight of reports recei- val to a report on the corporate governance structure and ved during the year from the Director-General Manager, practices at Banco Sabadell in 2013 that had been submit- the Chief Financial O∞cer, the head of Internal Audit and ted by the Executive Committee. the external auditor, the Committee was able to conclude The Committee also examined half-yearly reports from that the Annual Accounts to be authorized by the Board the Group’s Corporate Ethics Committee on action taken of Directors provide a true and fair view of the equity to ensure compliance with the Banco Sabadell Group Code and fi nancial position and the results of operations, and of Conduct in relation to the securities market, the Group’s contain necessary and su∞cient information for their general Code of Conduct, initiatives undertaken in the area comprehension. of Corporate Social Responsibility and other key aspects. The Committee was, in addition, able to verify that Additionally, and in view of best practices in corpo- all business, fi nancial and legal risks to which Banco de rate governance, the transactions performed by the bank Sabadell S.A. and its subsidiary undertakings may be with directors, signifi cant shareholders or shareholders exposed are clearly and straightforwardly explained in the with Board representation, or their related parties were annual accounts and the report of the Directors. Finally, reviewed and, as appropriate, a favourable report was it reviewed the contents of the auditor’s report to ensure submitted to the Board of Directors. that the opinion on the annual accounts and the main fi ndings of the auditor’s report are expressed in a clear and precise way. Treasury shares

In conformity with the recommendations contained in a document published by the CNMV on 18 July 2013 setting out recommended principles and practices to be observed by issuers of securities and by ﬁ nancial intermediaries acting for issuers engaging in discretionary trading in their own shares, the Audit and Control Committee received regular brieﬁ ngs from the Director-General Manager and the head of treasury share management on any trading activity involving the Bank’s own shares and on its conformity to the regulator’s recommendations.

Self-assessment

In line with corporate governance standards, the members of the Audit and Control Committee carried out a self- assessment and submitted a report on the Committee’s performance to the Board of Directors for consideration at its meeting on 17 December. The report found that the Committee had fully and properly discharged the responsibilities entrusted to it in its rules of procedure by the Board of Directors of the Bank.

120 Banco Sabadell Annual report 2014

Corporate Social Responsibility Corporate Social Responsibility (CSR) Corporate Ethics Committee, in complete conﬁdence via a special email address, to raise any issue relating to ethical Banco Sabadell operates in a transparent and ethical business practices in the organization. manner. In the current climate, the Group seeks to address the concerns of the community by accepting its role Social commitment as a driver of the economy and ensuring an appropriate Banco Sabadell plays a responsible role in society, both as a impact on society and the environment. Each and every creator of employment and a provider of ﬁnance to people person in the organization has a part to play in the process and business projects. This contributes to the creation of of transforming the business and helping, in a disciplined wealth in the Spanish economy in a context of sustainable and professional way, to make it ever more competitive growth. In 2014 Banco Sabadell was directly employing while respecting the principles and policies of corporate 17,529 people and disbursed more than €1,202 million in social responsibility. wages and social welfare contributions. It spent €2,037 million on procurement of goods and services (T8).

CSR Master Plan Assistance in cases of mortgage default In 2014, the Bank confirmed its support for the Code of In 2013, the Bank approved a Corporate Social Respon- Good Banking Practice to mitigate the e≠ects of indeb- sibility (CSR) Master Plan rea≠irming the values and tedness and facilitate the rehabilitation of debtors at risk ethical principles that govern its actions, at a time when from social exclusion. In this framework, the Bank also there was a need to demonstrate its commitment to main- accepted proposed amendments to the Social Housing taining the trust and reliance placed on it by stakeholders. Fund (“FSV”) that would relax the eligibility requirements The Plan comprises five main action areas: responsible for FSV housing and allow the reduced rents payable by banking, a healthy organization, environmental sustaina- occupants of repossessed homes to be included in FSV bility, a CSR-supportive culture and value sharing. provisions. During 2014 the Bank started work on drawing up Additionally, measures were established to ensure that programmes for the di≠erent action areas of its CSR Mas- persons at risk of social exclusion do not lose their habitual ter Plan. The healthy company line of action is detailed in abode. the section on human resources under Banco Sabadell’s Where a customer is unable to pay their mortgage, the key stakeholders. Bank works with the customer to look for solutions that will help them to overcome any temporary di≠iculty and Responsible banking avoid foreclosure. Wherever possible, the Bank propo- Commitment to business ethics ses changes to the terms of the mortgage based on the For Banco Sabadell it is of vital importance to ensure the borrower’s ability to pay. This may mean lengthening the strictest compliance with the law and with the policies, payment period, granting a grace period or reviewing the internal procedures and codes of conduct that guarantee rate of interest. The Bank may also agree to take posses- ethical and responsible conduct at all levels of the organi- sion of the property and release the customer from his zation, using a range of tools throughout the organisation debt; this has happened in 2,706 cases involving loans and in all Group activities. totalling €460 million. — Code of conduct: applies generally to all persons di- Where a mortgage is foreclosed, the Bank does not take rectly involved with the Group, whether as employees forcible eviction proceedings. In 84% of repossessions, the or as members of its governing bodies. property involved was already unoccupied. In the remai- — The Internal Code of Conduct in connection with the ning cases, where a family is at risk of social exclusion, the securities market. Bank enters into discussions with the occupants to look — The Suppliers’ Code of Conduct. for the best way of avoiding eviction. The Bank may o≠er — Policy on ethics and human rights. a customer the option of remaining in their property or — Policy on corporate social responsibility. moving to another one and paying a subsidized rent. — Policies related to stakeholders (shareholders and in- It rea≠irmed its support for the FSV’s mandate by vestors, customers, suppliers, employees, the environ- increasing from 260 to 400 the number of repossessed ho- ment and the community). mes let to their former owners in 286 di≠erent municipali- — A plan to foster genuine equality between women and ties all over Spain; at the close of the year arrangements of men at Banco Sabadell. this kind were in place in 84% of these properties. — A code of conduct governing the use of social networks. The Bank also transferred 92 properties to 49 charitable — Membership of Autocontrol, a self-regulatory body on and not-for-profit organizations with a mandate to assist business communication. and support the underprivileged and the needy. — Adopting the Code of Good Banking Practice. The Banco Sabadell Group has 3,494 homes let at The Bank has a standing Corporate Ethics Committee reduced rents to customers facing financial hardship whose chairman and five other members are appointed by as a result of mortgage foreclosure, repossession in the Board of Directors to advise the Board on the adoption lieu of payment, or living in substandard or unsuitable of CSR-related policies. Any employee may contact the accommodation.

Corporate Social Responsibility 123 T8 2014 2013

Direct economic value generated(€'000) 5,037,474 4,020.687

Net sales plus revenues from fi nancial investments and 5,037,474 4,020.687 sales of assets (includes gross income and capital gains on asset sales)

Direct economic value distributed(€'000) 3,448,361 2,567,217

Payments to suppliers 2,036,626 1,267,452 Personnel expenses (includes social welfare costs) 1,202,604 1,135,175 Corporate income and other taxes (*) 209,131 160,260 Investment in community and cultural programmes 5,492 4,330

Economic value retained(€'000) 1,589,113 1,453,470

Other information

Customers(million) 6.4 6.5 Shareholders 231,481 262,589 Branches in Spain 2,267 2,418 Employees 17,529 18,077

(*) Figures for 2013 were restated due to early application of IFRIC 21.

Banco Sabadell is in regular contact with charities and economy (the “Personal Finance” tool available on BS other organizations (Caritas, ICAV, Ofideute, local social Online); and for SME’s (the “Exporting for Growth” pro- services, etc.), as well as Plataformas de Afectados por gramme o≠ers businesses a range of tools and resources la Hipoteca (an organization that supports people with to assist them with foreign trade). mortgage di≠iculties), central government and local To set people thinking, in 2013 the Bank launched a authorities. The Bank is a member of an evictions panel campaign entitled “How long are we going to live?” The set up by the Catalan Government at the request of the campaign was organized around four full-length talks Catalan Parliament. (which can be viewed on www.bancosabadell.com/futuro) in which four well-known scientists give their answers to Transparency towards customers the question that defined the campaign. The scientists set One of the responsible banking programmes is transpa- out reasons why life expectancy in the Spanish population rency vis-à-vis customers. is set to increase significantly in the future. Given this Since 2010, the Bank has been a member of Autocon- foreseeable trend, the Bank invites viewers to think about trol, an organization that promotes responsible adverti- the need to set up a plan to save for their retirement. sing, thus making a commitment to responsible advertising and to ensuring that all information, contract terms Environmental sustainability and operating features conform to current legislation. We care about the future and about sustainability. This is why Banco Sabadell has an environmental policy in place Financial education and promotes commitment to the environment globa- Another responsible banking programme is Financial lly. The Bank’s environmental policy is to minimize the Education. In 2011, Banco Sabadell became party to an potential impacts of processes, facilities and services; to agreement with the Spanish Banking Association (AEB), manage e≠ectively the environmental threats and oppor- the CNMV and the Bank of Spain to carry out a program- tunities inherent in its business, and to promote a global me of activities as part of the National Financial Educa- commitment to the environment. The Bank adheres to a tion Plan, with the aim of encouraging greater financial number of global initiatives, including the Equator Prin- awareness among the general public. ciples and the Carbon Disclosure Project (CDP). The Bank has taken other initiatives related to Banco Sabadell promotes the development of a more financial education: for the very young (at http://paraque- sustainable energy model by investing directly in, and sirveeldinero.com); for school-age children (current and providing funding for, renewable energy projects (len- retired employees of the Group are working as volunteers ding €141 million in 2014), investing in power generation on a scheme entitled “Financial Education for Schools projects using renewable energy and advising on this type in Catalonia”, a pioneering project in Spain led by the of project. It has also participated as a speaker at the main Financial Studies Institute); to help manage a household fora in Spain: these included events organized by the

124 Banco Sabadell Annual report 2014 Spanish Wind Energy Association and the Association of — Adoption of the ten principles of the United Nations Renewable Energy Producers. Global Compact in the areas of human rights, labour, The Bank has an environmental management system the environment and the fight against corruption. (EMS) which was set up in 2006 in accordance with the — Signing the Equator Principles, which requires it ISO 14001:2004 standard and has been certified for six to take account of social and environmental issues Central Services buildings. With regard to environmental in financing major projects and in loans to large training and awareness-raising, all Group employees have corporates. access to an on-line training course which is obligatory for — Integration of CSR policies into business practice in sta≠ at Central Service facilities certified to ISO 14001. accordance with ISO 26000 guidance. Employees also have an online guide, “Connect with the — A signatory of the United Nations Principles for Environment” which gives them ready access to informa- Responsible Investment in the “investment manager” tion about the Bank’s environmental footprint, resource category. consumption and waste management at branches or — Party to an agreement between the Spanish Banking Central Services buildings. Association (AEB), the CNMV and the Bank of Spain The Bank also informs all suppliers of the Group’s to carry out a programme of activities as part of the environmental policy and uses a range of mechanisms National Financial Education Plan. to incorporate environmental and social responsibility — Banco Sabadell is among the stocks included in the into its supply chain. Banco Sabadell’s basic contract with FTSE4Good, FTSE4Good IBEX, Euronext Vigeo suppliers includes specific clauses on compliance with en- Europe 120 and Euronext Vigeo Eurozone 120 sustai- vironmental criteria, human rights and the Ten Principles nable stock market indices. of the United Nations Global Compact, as well as accep- — Awarded the European Foundation for Quality Mana- tance of the Supplier Code of Conduct. gement (EFQM) Gold Seal of Excellence. — ISO 9001 certification for 100% of processes and ope- Shared value rations of the group’s financial undertakings in Spain. Creation of shared value and Social and cultural action — A signatory of the Carbon Disclosure Project (CDP) for Banco Sabadell nurtures and gives recognition to people’s action against climate change and its Water Disclosu- talent and transformative potential. It does this through re programme. Banco Sabadell has been disclosing its such awards as the UPFemprèn Prize for entrepreneurial CO2 emissions since 2009. initiative by students, Imagine Cultura Barcelona and the ESADE Alumni-Banco Sabadell Prize for Best Business For more details of the Group’s CSR policies, see the CSR Start-up. section of the Bank’s website (www.grupobancosabadell. It also supports and works to channel the capaci- com). ty for innovation shown by employees, customers and consumers and add value to society as a whole. Exam- ples include the BStartup 10 high-performance scheme for 10 young Spanish business start-ups showing high potential, in each of which it has invested €100,000 to help them grow and internationalize; organizing the first “hackathon” on digital banking, in which the winning project, Wallabe, introduced a new concept in banking that included “socialbanking” and “socialcash”; and keeping channels open for customers and employees to put forward their ideas. Banco Sabadell’s policy of support for the community and for cultural activities is part of its commitment to society and to value creation. Its activities in these areas are conducted in cooperation with Banco Sabadell Founda- tion. The Foundation presents several distinctions, such as the SabadellHerrero Award for Economic Research and the Banco Sabadell Award for Biomedical Research.

Adoption of national and international initiatives

In recent years, the implementation of social responsibility policies at Banco Sabadell has resulted in the Bank joining or associating itself with a number of initiatives and receiving awards and distinctions.

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Statutory information 237 6HWRXWEHORZDUHWKHPDLQYDOXDWLRQPHWKRGVDVVXPSWLRQVDQGLQSXWVXVHGZKHQHVWLPDWLQJWKHIDLUYDOXHRI WKHILQDQFLDOLQVWUXPHQWVFODVVLILHGLQ/HYHOVDQGDFFRUGLQJWRWKHW\SHRILQVWUXPHQWFRQFHUQHG Level 2 financial Valuation methods Main assumptions Main inputs used instrum ents

Debt securities Calculation of the present value of financial instruments as the present value of future cash flow s (discounted at market interest rates), taking - Issuer credit spreads Present value method into account: - Observable market interest rates - An estimate of pre-payment rates - Issuers' credit risk Equity - Current market interest rates instruments

For equity derivatives, inflation, currencies or commodities: Black-Scholes model - Black-Scholes assumes a lognormal process of (analytic/semi-analytic formulae) forw ard rates taking into account potential convexity adjustments

For equity derivatives, inflation, currencies or commodities: - Forw ard structure of the underlying asset, given by market data (dividends, sw aps points, For equity derivatives, currencies Black-Scholes model: a lognormal distribution is etc.) or commodities: assumed for the underlying asset w ith volatility - Option volatility surfaces - Monte Carlo simulations depending on the term. Deriv atives - SABR - SABR: stochastic volatility model. For interest rate derivatives: - Interest rate time structure - Underlying asset volatility surfaces

For credit derivatives: For interest-rate derivatives: This model assumes that: - Credit Default Sw aps (CDS) values - Libor Market Model - The forw ard rates in the term structure of the - Historic credit spread volatility interest rate curve are perfectly correlated

These models assume a default probability For credit derivatives: structure resulting from term-based default - Intensity models intensity rates.

238 Banco Sabadell Annual report 2014 Level 3 financial Valuation methods Main assumptions Main non-observable inputs instruments

Calculation of the present value of financial Debt securities instruments as the present value of future cash flows (discounted at market interest rates), taking - Estimated credit spreads of issuer or a similar Present value method into account: issuer. Equity - An estimate of pre-payment rates instruments - Issuers' credit risk - Current market interest rates

For equity derivatives, inflation, currencies or For equity derivatives, currencies Black-Scholes model: a lognormal distribution is commodities: or commodities: assumed for the underlying asset with volatility - Historical volatilities - Monte Carlo simulations depending on the term. - Historical corelations - SABR: stochastic volatility model. - PD for calculation CVA and DVA (a)

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Chairman José Oliu Joan Llonch Héctor M aría José M anuel Martínez José Oliu Creus Andreu Colonques M oreno M artínez Creus

Deputy Chairman José Permanyer Cunillera

M ember Jo sé Javier Echenique M aría Teresa Jo sé Javier Echenique M aría Teresa Jo sé Javier Echenique Landiribar Garcia-M ilà Llo veras Landiribar Garcia-M ilà Lloveras Landiribar

M ember Jaime Guardio la Jo sé Ramón Jo aquín Folch- Joan Llonch Jo aquín Folch- Romojaro M artínez Sufrategui Rusiñol Corachán Andreu Rusiñol Corachán

M ember José Luis Negro José M anuel Jaime Guardiola Rodríguez Lara Bosch Romojaro

M ember José Permanyer José M anuel Cunillera Lara Bosch

Member Jo sé M anuel M artínez Martínez

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370 Banco Sabadell Annual report 2014 &RUSRUDWH*RYHUQDQFH&RUSRUDWH*RYHUQDQFH

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Statutory information 371 Contact Communication and Regional Divisions Banco Sabadell institutional relations Registered ofﬁ ces +34 902 030 255 Catalonia Region Plaza Sant Roc, 20 [email protected] Av. Diagonal, 407 bis 08201 Sabadell 08008 Barcelona Barcelona Investor relations +34 902 030 255 +34 902 030 255 Corporate head ofﬁ ce [email protected] Central Region Sena, 12 Príncipe de Vergara, 125 Parque de actividades económicas Shareholder relations 28002 Madrid Can Sant Joan +34 937 288 882 +34 913 217 159 08174 Sant Cugat del Vallès [email protected] Eastern Region General enquiries Customer Care Service (SAC) Pintor Sorolla, 6 +34 902 323 555 Sena, 12 46002 Valencia [email protected] Parque de actividades económicas +34 963 984 044 www.grupobancosabadell.com Can Sant Joan 08174 Sant Cugat del Valles Northeast Region @bancosabadell + 34 902 030 255 Fruela, 11 facebook.com/bancosabadell [email protected] 33007 Oviedo +34 985 968 020 Customer Ombudsman + 34 914 295 661 Northern Region ofi [email protected] Av. Libertad, 21 20004 San Sebastián +34 943 418 298 This Annual Report is available on the Group's website (www.grupobancosabadell.com), along with executive version, statutory information, the annual Southern Region corporate governance report, and information on Martínez, 11 corporate social responsibility. If you have a smartphone or tablet, you can access those reports 29005 Málaga on your device using the QR code. +34 952 122 350

The legal name of the issuer is Banco de Sabadell, Barcelona, tome 20.093, folio 1, sheet B-1561, and Companies Act, the Securities Market Act and their S.A., and its commercial name is Banco Sabadell. in the Bank of Spain Register of Banks and Bankers implementing regulations. Its activity is governed to Banco Sabadell was incorporated for an indefi nite with number 0081.Banco de Sabadell, S.A. is the specifi c legislation governing credit institutions, period on 31 December 1881 by a public instrument domiciled in Sabadell, Plaza de Sant Roc, 20, with and it is subject to supervision and oversight by the granted before the notary Antonio Capdevila Gomá. Tax ID no. A-08000143. Banco Sabadell has the legal Bank of Spain. It is registered in the Mercantile Registry of form of a corporation and is governed by the Capital

Contact 373 Credits

Creative Director Mario Eskenazi

Graphic design Gemma Villegas Marta Claverol

Photography Elena Claverol

This document is printed on FSC-certifi ed paper and produced using environmentally-friendly processes.

Legal deposit: B-17201-2012