Banco Sabadell Annual Report 132nd year 2 Banco Sabadell Annual Report 2013 Banco Sabadell Index Annual Report 132nd year 04 Key financial highlights for the Banco Sabadell group in 2013 06 Chairman’s letter 10 Financial and share performance information 26 Acquisitions in 2013 30 Board of Directors and Senior Management 46 Banco Sabadell Group Contact details Key financial highlights for the Banco Sabadell group in 2013 Thousand euro Key financial data 2013 2012 % 13/12 Shareholders’ equity 10,226,534 9,148,074 11.8 Total assets 163,441,470 161,547,085 1.2 Gross loans and advances to customers, excluding reverse repos 124,614,933 119,638,113 4.2 Loans and advances to customers – gross 125,302,943 121,528,997 3.1 On-balance sheet funds 123,753,008 110,996,102 11.5 Customer deposits on balance sheet 94,497,187 80,179,388 17.9 Mutual funds 11,018,570 8,584,848 28.3 Pension funds and insurance sold 12,423,646 11,022,021 12.7 Funds under management 149,122,858 131,654,630 13.3 Thousand euro Income statement 2013 2012 % 13/12 Net interest income 1,814,694 1,867,988 (2.9) Gross income 3,976,794 2,958,446 34.4 Profit before impairment and other provisions 2,062,286 1,289,896 59.9 Profit attributable to the group 247,832 81,891 202.6 Resources 2013 2012 Number of branches 2,418 1,898 Number of employees 18,077 15,596 % Ratios 2013 2012 Profitability and efficiency ROA (net profit / average total assets) 0.16 0.07 ROE (profit attributable to group / average shareholders’ equity) 2.68 1.01 ROTE (profit attributable to group / average shareholders’ equity less goodwill) 2.96 1.12 Cost:income ratio (general expenses / gross income1) 47.64 51.10 Cost:income ratio excluding non-recurring expenses (recurring general expenses / gross income1) 47.23 50.34 BIS ratio Core capital 12.0 10.5 Tier I 12.0 10.5 BIS Ratio 12.8 11.4 Risk management Non-performing loans (€’0002) 16,021,491 10,286,332 Loan loss ratio2 13.63 9.33 Loan loss ratio excluding losses due to reclassification2 11.13 Loan loss and real estate impairment provisions (€’000) 18,341,298 17,589,940 Loan loss and real estate coverage ratio3 13.61 13.88 1 The ratio for 2013 includes a -€437.3 million adjustment to gross income for non-recurrent capital gains on the disposal of the held-to-maturity portfolio in the second half of the year. 2 These totals and ratios do not include assets covered by the asset protection scheme (APS). 3 This shows impairment provision coverage for the loan and real estate portfolios combined. Share data 2013 2012 Number of shares 4,011,481,581 2,959,555,017 Number of shareholders 262,589 236,774 Share price (€) 1.896 1.975 Attributable earnings per share (€) 0.06 0.03 Attributable earnings per share adjusted for effect of mandatory convertible bonds (€) 0.06 0.03 Key financial highlights for the Banco Sabadell group in 2013 5 Chairman’s letter Dear shareholder, At the end of 2013, our 132nd year of trading, Banco Sabadell could show a set of re- sults that reflected a recovery in margins and a return to profitable growth, a strength- ened balance sheet supported by one of the best capital ratios in the Spanish financial industry, and proven financial solidity. 2013 was also the last year of our ‘CREA’ Plan, launched in 2011 with business transformation and productivity as its main themes. Strong growth in business volumes and customer numbers were key developments during a complex 3-year period which saw substantial growth in market shares in line with the group’s increase in scale, in a challenging economic and financial environment. The gradual return of the financial markets to normality and the easing of capital market fragmentation in the eurozone from mid-2012 onwards continued all through 2013, punctuated by limited, short-term bouts of market instability such as those caused by the Cyprus bail-out or political tensions in Italy and Portugal. The eurozone began to free itself from the sovereign debt crisis as the headwinds facing the region abated and became less systemic. Ireland and Spain recently announced the cessation of their international assistance programmes, while agreements on a European bank- ing union provided further support for market normalization. This improvement in the financial markets was reflected in better funding conditions for the countries on the European periphery as country risk premiums dropped and inflows of foreign capital to the periphery recovered; it was also good for economic stability. The global economy grew at a moderate rate in 2013, with growth in the devel- oped countries gathering pace as the year progressed. The eurozone economy showed signs of reaching a turning point in the second half of the year: Spain, in particular, achieved positive growth in the third quarter for the first time in more than two years, while its labour market appeared to be stabilizing. Activity was also supported by the country’s strong export performance as financing conditions became more benign and the European Commission allowed some relaxation of fiscal discipline. Moreover, structural reforms and rapid progress in correcting the imbalances that had built up during the previous boom helped to bring about an improvement in how Spain was seen in other countries and prepared the ground for faster, more balanced economic growth. The restructuring of the banking system in Spain resulted in a consolidation of the industry and made banks more solvent. Banco Sabadell extended its geographical reach and increased its share of the Spanish market, having during the past year com- pleted the acquisition of Banco Mare Nostrum’s branches and business in Catalonia and Aragón, and the business of Banco Gallego and Lloyds España; these acquisitions have strengthened our position in some of Spain’s most promising regions. Banco Sabadell ended the year with total assets of €163,441.5 million and a core capital ratio of 12%. In 2013 Banco Sabadell increased its capital base by more than €1,500 million. In September it carried out a €1,383 million capital-raising in two separate share offerings. The first of these, a €650 million accelerated bookbuild offering, was aimed at institutional investors. The second was a €733 million rights issue for existing shareholders. Chairman’s letter 7 In October 2013 a capital management exercise was carried out in which the holders of Banco Gallego preferred and subordinated debt securities were invited to exchange their securities for subordinated notes mandatorily convertible to Banco Sabadell shares. The exercise resulted in a further capital increase of €122 million. These transactions enabled Banco Sabadell to strengthen its capital position and to place itself alongside Europe’s best-capitalized banks, meet the stricter capital re- quirements being imposed on the banking industry and bring its capital structure into line with the increased size of its consolidated balance sheet following the acquisitions of the last few years. The Bank’s funding policy was focused on attracting deposits and other customer accounts and thus reducing its reliance on the wholesale market; this ensured that in 2013 it was once again able to generate a substantial funding gap — €10,123 million — and significantly increase its liquidity position. Actively managed interest spreads and the contributions of the newly-acquired businesses brought our net interest income to a year-end total of €1,814.7 million. This was a 2.9% fall compared with 2012 — a result, mainly, of the negative effects of a falling yield curve in the first half of the year. An improved performance in the second half, however, confirmed the shift to an upward trend. Higher net profits from the fixed-income portfolio, coupled with a firm grip on costs that reduced like-for-like personnel and general expenses by 13.2% and 11.4% respectively, helped our profit before provisions to rise by 59.9% on the figure for 2012 to reach a total of €2,062.3 million. Banco Sabadell posted a net profit for 2013 of €247.8 million, three times the figure for 2012. This confirms our ability to maintain solid progress and to generate consistently positive results after impairment charges and other provisions amounting to €1,763.6 million. Provision coverage of credit and real estate exposures, at 13.6%, was above the average for the industry as a whole. A high rate of new customer acquisition with customer enrolments averaging 8,900 a week, rising market shares, and good progress in restoring health to the new businesses added to the group; these were the dominant themes of an extremely busy year which saw customers increasing to a total of 6.5 million while top-quality service being maintained at all times. Gross loans and advances to customers (excluding repos) increased strongly in 2013, rising by more than 4.2% on the previous year to a total of €124,614.9 million. Specific provision coverage for assets classified as doubtful due to loan arrears was 50.1%, and here too there were signs of a change: non-performing loans dropped by €64 million in the fourth quarter and there was a slowing in the pace of balance sheet asset writedowns. The year 2013 saw the successful completion of the integration of Banco Mare Nostrum’s Catalonia and Aragón branch network and business, making Banco Sabadell the fourth largest bank in Catalonia with 12% of bank branches in the region.