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Spanish bank Sabadell aims to double key profitability ratio by 2020

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Spanish bank Sabadell aims to double key profitability ratio by 2020

Spain's Banco de Sabadell SA is aiming to almost double its return on tangible equity — a key profitability ratio — in the coming two years as it targets growth at its Spain and U.K. businesses and reduces exposure to nonperforming assets.

The bank had a ROTE of 7.27% at the end of 2017, and aims to boost this to 13% by 2020, according to Chairman Josep Oliu.

Speaking on an analyst call following the publication of the bank's fourth-quarter 2017 earnings results, Oliu said Sabadell had not yet achieved the level of profits it wanted, partly because of a stricter regulatory environment in the European banking sector. Since the global financial crisis, new rules have forced banks to hold more capital, and some have complained that tighter regulation has stifled growth.

Sabadell's main aim now is to boost profitability, and to do so it will seek to expand its position in the small and medium-sized business market in Spain over the next three years, to take advantage of recent strong growth in the domestic economy, according to Oliu.

The bank has been focusing on building up its deposit base and now wants to focus on its traditional SME business, which will be "the driver for our growth," he said.

Competition for the higher-margin small and medium-sized business market is intensifying in Spain, especially after Banco Santander SA acquired Banco Popular Español SA in June 2017, giving the combined bank a quarter of the market share for SME lending.

Sabadell reported fourth-quarter 2017 net attributable profit of €147.7 million, compared to €63.5 million a year earlier. Net interest income totaled €924.6 million, compared to €946.9 million in the fourth quarter of 2016.

UK ops, bad-loan management

It moved its headquarters to Alicante in October 2017 after the group’s share price dropped amid political tensions in Catalonia following an independence referendum.

With regards to its U.K. operations, CEO Jaime Guardiola said he expected lending growth to pick up at TSB Banking Group Plc in 2018 after a slower 2017 fourth quarter. Full-year growth will be in line with that of 2017 when customer lending grew 11.9% year over year, he said. Sabadell acquired TSB in 2015.

Oliu said the group had seen very little impact on its business following the U.K.'s decision to leave the EU.

Sabadell, like many other Spanish lenders, is still grappling with the legacy of bad loans after the country's real estate bubble burst in 2008. Executives said the bank had reduced nonperforming assets by €2.2 billion in 2017 and created a new business line, Solvia Desarrollos, which will develop real estate services and have AUM of €1.3 billion. Including this amount, nonperforming assets fell by €3.5 billion. Total problem assets stood at €15.17 billion at the end of 2017.

The bank's fully loaded common equity Tier 1 ratio stood at 12.8% at 2017-end, compared to 12.7% at Sept. 30, 2017, and 12.0% at the end of 2016. CFO Tomás Varela said the introduction of new accounting rules, known as IFRS 9, at the beginning of January, would reduce capital by 78 basis points and result in provisions of €900 million.

Sabadell is planning an investor day Feb. 23, when it will present its strategy for the next three years, executives said.