— Banco Sabadell —Annual Report 2011 — —Banco — Sabadell — 130th year —Annual — Report — 2011 — — 130th — year — — — — WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd Annual Report 2011 130th year WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd —Index — — — — — — — — WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd — — Annual Report 2011 — — 5 — The Banco Sabadell group in 2011 – financial highlights 9 — Chairman’s letter 12 — Financial and share performance information 35 — Group businesses 65 — Excellence 74 — Risk management 87 — Board of Directors and Senior Management Team 90 — Report of the Audit and Control Committee 102 — Report on Directors’ remuneration 109 — Corporate Social Responsibility 117 — Statutory information — Directors’ statement of responsibility — Auditor’s report — Annual accounts — Report of the directors 258 — Banco Sabadell group contact details WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd — — — — — — — — — WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd —The Banco Sabadell group in 2011– financial highlights — — WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd €'000 Financial highlights 2011 2010 % 11/10 Own funds 6,276,160 5,978,412 5.0 Total assets 100,437,380 97,099,209 3.4 Gross loans and advances to customers in 2011 – financial highlights The Banco Sabadell group ex reverse repos 73,635,342 73,057,928 0.8 Gross loans and advances to customers 74,922,073 76,190,720 (1.7) On-balance sheet deposits and issued securities 78,119,863 77,164,193 1.2 Customer deposits ex repos 52,827,042 49,374,406 7.0 Assets held in mutual funds 8,024,185 8,852,797 (9.4) Assets held in pension funds and insurance policies sold 8,784,677 8,742,691 0.5 Deposits and assets under management 96,061,962 95,998,199 0.1 €'000 Income and earnings performance Banco Sabadell Net interest income 1,537,263 1,459,116 5.4 Gross income 2,506,722 2,331,339 7.5 Annual Report 2011 Profi t before impairment and other provisions 1,230,710 1,136,304 8.3 Net attributable profi t 231,902 380,040 (39.0) Resources Number of branches 1,382 1,467 Number of employees 10,675 10,777 6 WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd % Ratios 2011 2010 Profi tability and effi ciency ratios: ROA (Net profi t / average total assets) 0.24 0.44 ROE (Net attributable profi t / average shareholders' equity) 3.82 7.32 in 2011 – financial highlights The Banco Sabadell group Cost:income (general administrative expenses / gross income) 47.32 46.20 BIS capital ratios: Core capital* 10.30 8.20 Tier I 9.80 9.36 Total 10.81 11.08 Risk management: Loan loss ratio 5.95 5.01 Loan loss coverage ratio 48.5 56.6 Loan loss coverage ratio including mortgage security 115.8 112.5 *The 2011 fi gure includes a €718 million buyback of preferred securities in exchange for ordinary shares. Banco Sabadell Share data Number of shares 1,391,048,717 1,263,630,834 Annual Report 2011 Number of shareholders 127,310 126,263 Quoted share price (€) 2.934 2.950 Attributable earnings per share (€) 0.17 0.32 Attributable earnings per share allowing for effect of mandatorily convertible bonds (€) 0.15 0.28 7 WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd —Chairman’s letter — WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd Dear Shareholder, Banco Sabadell ended 2011, its 130th year of operation, with across-the-board increases in business margins, a comfortable liquidity position and, with the help of an active capital management strategy, an improved core capital ratio. All this was achieved in a highly challenging environment marked by a prolonged bout of economic weakness and continuing fi nancial market turbulence. Operating conditions were overshadowed by the euro zone sovereign debt crisis which worsened signifi cantly in the second half of 2011. Notwithstanding the measures taken by the European authorities to mitigate fi nancial instability and improvements in economic and fi scal governance, Greece’s fi nancial position became ever more precarious, political problems erupted in Italy and doubts remained over the effi cacy of the bail-out mechanisms that had been put in place. As a result, the sovereign debt of European countries lost its risk-free status, particularly in systemic countries like Spain and Italy, exacerbating the negative feedback loop Chairman’s letter Chairman’s between funding problems in the government sector and in the banking sector. From the summer onwards, risk premiums in the inter-bank markets increased signifi cantly, almost to the heights seen in late 2008. Many of the funding markets tapped by banks and other lending institutions remained closed. The risk premium on the sovereign debt of Spain and a number of other countries rose to levels not seen since the inception of European monetary union, with spreads rising on occasion to more than 450 basis points and impacting on borrowing costs and the pricing of new loans. The European Central Bank became the principal source of funding for the banking system and the counterparty of a large number of fi nancial institutions. Europe’s supreme monetary authority, which had increased offi cial interest rates on two occasions earlier in the year, not only reversed its interest rate policy but began to grant loans with very long maturities (36 months) in an effort to ease stressed bank funding conditions. The Spanish economy remained virtually fl at throughout 2011, with activity actually falling in the last part of the year. Domestic demand was affected by factors such as fi scal tightening, a deteriorating labour market and global fi nancial market instability. However, the imbalances Banco Sabadell that had built up during the cyclical boom period continued to be addressed. Structural reforms continued and changes to the law were made to reinforce the country’s commitment to maintain healthy public accounts in the medium and long term. A sound approach to managing the Annual Report 2011 Spanish economy will be critical to an early resolution of the current diffi culties. The restructuring of Spain’s fi nancial sector continued throughout 2011 and minimum capital requirements for banks were increased by a new Law on Strengthening the Financial System (Royal Decree-Law 2011), which raised the capital adequacy threshold for fi nancial institutions. The process of recapitalizing the banks to meet the requirements of the new law was completed in September, with a number of institutions receiving capital injections from the Fund for Orderly Bank Restructuring (FROB). All this made it necessary for banks to actively manage their capital and to allocate large amounts of funds to cleaning up their balance-sheets, putting further pressure on their profi t margins. Against this backdrop, Banco Sabadell saw good revenue growth and increased margins 10 across all earnings metrics. Resolute asset and liability management and determined sales efforts at branch level made it possible to end the year with a 5.4% increase in net interest income, with gross operating income rising by 7.5% compared with the previous year. The profi t before provisions totalled €1,230.7 million, up 8.3% on the year (or 2.7% on a comparable basis, with the effect of the Banco Guipuzcoano merger included). This was achieved despite diffi cult operating conditions, rising borrowing costs and poor credit accessibility. After balance-sheet strengthening allocations of €1,048.9 million in loan impairment and other provisions – 8.4% more than in the previous year – Banco Sabadell posted a net profi t of €231.9 million at the close of 2011. A highly proactive strategy made 2011 a year of record-breaking achievement for the Bank, both in terms of increased deposits and winning new customers. Strong organic growth led to gains in market share and pushed up the Bank’s customer base to over 2.7 million with 342,096 new customers being added during the year, ensuring that targets were met. WorldReginfo - 1390730b-1978-4c67-a557-8d754b1de9cd The Bank continued to enjoy a comfortable liquidity position, thanks in large measure to its success in attracting deposits and the effectiveness of its branch network, which enabled it to continue to generate a signifi cant surplus of deposits over loans of almost €4,000 million. Core capital was substantially strengthened during the year. The Bank carried out two capital-bolstering exercises: the fi rst of these, in February, was an issue and offering of new shares for the purpose of redeeming various issues of subordinated and preferred debt; the second, in December 2011, was an offer to buy back preferred securities by exchanging them for new shares. These transactions resulted in the Bank’s core capital ratio reaching 10.3% by the close of the year. The second quarter of the year saw the completion of the integration of Banco Guipuzcoano into the Banco Sabadell group. The integration was carried out in a period of barely fi ve months and underscores the Bank’s record of solid achievement, expertise and technical capability in executing integration processes. As a result Banco Sabadell is now the Chairman’s letter Chairman’s fourth largest fi nancial institution in the Basque Country and Navarre regions, trading under the new SabadellGuipuzcoano local brand. In August Sabadell United Bank, Banco Sabadell’s subsidiary in Miami, was granted permission to take over Lydian Private Bank, a local institution which had until then been under administration by the US authorities. As a result of this transaction the total revenue of Banco Sabadell’s Florida subsidiary increased by 51%, strengthening its position in the state of Florida and making it the state’s seventh largest local bank by deposits. In a further development, on 7 December 2011 Banco Sabadell acquired Banco CAM S.A.