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Banco de Sabadell expects 2019 loss at UK TSB unit as restructuring continues

Banco de Sabadell SA is expecting a second consecutive annual loss at its U.K. operations as it continues to face restructuring costs at the unit.

The Spanish bank had been expecting a 2019 profit at TSB Banking Group PLC, but CEO Jaime Guardiola said the U.K. lender would suffer a full-year loss after posting a €5 million loss in the first nine months of the year. The bank booked a full-year 2018 pretax loss of £105.4 million as it absorbed the costs of rectifying a bungled IT migration, in turn dragging down Sabadell's profit by 59.1% to €328.1 million.

Sabadell acquired TSB in 2015 to offset low revenues on the Spanish market but the IT debacle, which left 1.9 million customers locked out of their online accounts, has acted as a brake on growth.

Restructuring costs

In a presentation following publication of Sabadell's third-quarter results, Guardiola said TSB had incurred €25 million in restructuring costs in the first nine months of the year, and that there could be further costs in the fourth quarter. However, he said any further costs would not hurt the bank's capital levels.

"There may be some more in the fourth quarter but everything is all factored in and taken into account," he said.

CFO Tomás Varela said the restructuring costs were mainly related to job reductions. The U.K. lender's new CEO, Debbie Crosbie, has been working on a cost-cutting plan, which includes layoffs. TSB is planning to hold an investor day Nov. 25 to discuss its new strategy.

Although Guardiola qualified the competitive U.K. market as "challenging," he said the net interest margin in Sabadell's U.K. operations was "resilient." TSB's net interest margin stood at 2.10% in the quarter, down from 2.23% in the same period of 2018, as net interest income dropped to €217 million from €232 million.

Overall, Sabadell's third-quarter net profit stood at €251 million, up from the TSB-impacted €127 million recorded in the same period of 2018. Attributable net income excluding TSB rose to €258 million from €150 million.

Net interest income fell to €906 million from €933 million in the third quarter of 2018, as the bank was hit by low interest rates like many of its European peers.


Sabadell is on track to meet its updated guidance for the year, and Guardiola said full-year net interest income should be flat or fall up to 1%. The bank lowered its 2019 targets in July in advance of the ECB's decision in September to further cut interest rates.

The group's return on equity, a key measure of profitability, was 6.9% in the first nine months of the year, meaning the group is on track to meet its full-year target of ROE of above 6.5%.

Consumer lending has been slowing in Spain, and strong economic growth has been showing signs of spluttering, but Guardiola said Sabadell was seeing less of a slowdown in consumer lending that its peers because it was less aggressive in what is a highly competitive market.

"We're suffering less from this contraction that ... has been observed in the market since August," he said.

Guardiola said the bank was able to preserve margins and grow volumes thanks to its strong position in the small and medium-sized business market, where it can maintain strong lending without lowering its prices.