Banco De Sabadell, S.A. and Subsidiaries
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Banco de Sabadell, S.A. and Subsidiaries Condensed Consolidated Half-Yearly Accounts 30 June 2020 Consolidated Half-Yearly Directors’ Report For the period from 1 January to 30 June 2020 (With Auditor's Report Thereon) (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) KPMG Auditores, S.L. Torre Realia Plaça d’Europa, 41 -43 08908 L’Hospitalet de Llobregat (Barcelona) Independent Auditor's Report on the Condensed Consolidated Half-Yearly Accounts (Translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) To the Shareholders of Banco de Sabadell, S.A. REPORT ON THE CONDENSED CONSOLIDATED HALF-YEARLY ACCOUNTS Opinion __________________________________________________________________ We have audited the condensed consolidated half-yearly accounts of Banco de Sabadell, S.A. (the “Bank”) and its subsidiaries that, together with the Bank, form the Banco de Sabadell Group (the “Group”), which comp rise the consolidated balance sheet at 30 June 2020 and the consolidated income statement, consolidated statement of recognised income and expense, consolidated statement of total changes in equity and consolidated statement of cash flows for the six-month period then ended, and consolidated explanatory notes. In our opinion, the accompanying condensed consolidated half-yearly accounts of the Group for the six-month period ended 30 June 2020 have been prepared, in all material respects, in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting, as adopted by the European Union, for the preparation of condensed interim financial information, pursuant to article 12 of Royal Decree 1362/2007. Basis for Opinion _________________________________________________________ We conducted our audit in accordance with prevailing legislation regulating the audit of accounts in Spain. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Condensed Consolidated Half-Yearly Accounts section of our report. We are independent of the Group in accordance with the ethical requirements, including those regarding independence, that are relevant to our audit of the condensed consolidated half-yearly accounts pursuant to the legislation regulating the audit of accounts in Spain. We have not provided any non-audit services, nor have any situations or circumstances arisen which, under the aforementioned regulations, have affected the required independence such that this has been compromised. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KPMG Auditores, S.L., a limited liability Spanish company and a member firm of the On the Spanish Official Register of Auditors (“ROAC”) with No. S0702, and the KPMG network of independent member firms affiliated with KPMG International Spanish Institute of Registered Auditors’ list of companies with No. 10. Cooperative (“KPMG International”), a Swiss entity. Reg. Mer Madrid, T. 11.961, F. 90, Sec. 8, H. M -188.007, Inscrip. 9 Paseo de la Castellana, 259C – Torre de Cristal – 28046 Madrid N.I.F. B-78510153 2 (Translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) Key Audit Matters ________________________________________________________ Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the condensed consolidated half-yearly accounts of the current period. These matters were addressed in the context of our audit of the condensed consolidated half-yearly accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Impairment of loans and advances to other debtors See notes 1, 2, 4.1 and 10 to the condensed consolidated half-yearly accounts Key audit matter How the matter was addressed in our audit The Group’s portfolio of loans and advances to other Our audit approach in relation to the Group’s debtors reflects a net balance of Euros 148,018 estimate of impairment of loans and advances to million at 30 June 2020, while allowances and other debtors due to credit risk included an provisions recognised at that date for impairment assessment of the relevant controls associated with total Euros 3,364 million. the processes for estimating impairment, as well as different tests of detail on that estimate, for which For the purposes of estimating impairment, financial we involved our credit risk specialists. assets measured at amortised cost are classified into three categories (Stage 1, 2 or 3) according to Our procedures related to the control environment whether a significant increase in credit risk since their focused on the following key areas: initial recognition has been identified (Stage 2), · Identifying the credit risk management whether the financial assets are credit-impaired framework and assessing the compliance of the (Stage 3), or whether neither of the foregoing Group’s accounting policies with the applicable circumstances apply (Stage 1). For the Group, regulations. establishing this classification is a relevant process · Evaluating the appropriate classification of the inasmuch as the calculation of the credit risk loans and advances to other debtors portfolio provision varies depending on the category in which based on their credit risk, in accordance with the financial asset has been included. the criteria defined by the Group, particularly the criteria for identifying and classifying Impairment is calculated based on an expected loss refinancing and restructuring transactions. model, which the Group estimates on both an · Testing of the relevant controls relating to the individual and a collective basis. This calculation information available for the monitoring of loans outstanding. entails a considerable level of judgement as this is a · Evaluating the design and implementation of significant and complex estimate. the relevant controls over the management and measurement of collateral and guarantees. Individual provisions consider estimates of future · Evaluating the correct functioning of the internal business performance and the market value of models for estimating both individual and collateral provided for credit transactions. collective provisions for expected losses. · Assessing the consideration of the aspects For the collective analysis, estimates of expected observed by the Internal Valuation Unit in the losses are calculated using internal models that use recalibration and tests of the models to large databases, different macroeconomic scenarios, estimate collective provisions. 3 (Translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) Impairment of loans and advances to other debtors See notes 1, 2, 4.1 and 10 to the condensed consolidated half-yearly accounts Key audit matter How the matter was addressed in our audit parameters to estimate provisions, segmentation · Evaluating the integrity, accuracy and updating criteria and automated processes, which are complex of the data used and of the control and in their design and implementation and require past, management process in place. present and future information to be considered. The Group regularly conducts recalibrations and tests of Our tests of detail on the estimated expected losses its internal models in order to improve their predictive included the following: capabilities based on actual historical experience. · With regard to the impairment of individually significant transactions, we analysed the appropriateness of the cash flow discount The COVID-19 pandemic is affecting the economy models used by the Group. We also selected a and business activities of the countries where the sample from the population of significant credit - Group operates, leading to an economic recession in impaired risks and assessed the adequacy of many of these countries. To mitigate the impacts of the provision recognised. COVID-19, governments of different countries have · With respect to the allowances and provisions launched initiatives to support the most affected for impairment estimated collectively, we sectors and customers through various measures evaluated the methodology used by the Group, such as the provision of State-backed credit facilities, assessing the integrity and accuracy of the the deferral of payments without penalties input balances for the process and the correct (moratoriums) and flexible financing and liquidity functioning of the calculation engine by facilities. All these aspects have an impact on the repeating the calculation process for all parameters considered by the Group to quantify the contracts, taking into account the segmentation expected losses on financial assets (macroeconomic and assumptions used by the Group. variables, customer net revenues, value of collateral In carrying out our audit procedures, we have pledged, probability of default, etc.) and have had a taken into consideration the impacts of COVID- significant effect o n the allowances and provisions for 19 and the government aid on the parameters impairment of financial assets measured at amortised used to calculate the expected losses. We costs in the six-month period ended 30 June 2020. involved our specialists in valuation of corporate businesses to evaluate the macroeconomic The consideration of this aspect as a key audit matter scenarios used by the