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Banco de Sabadell sees low-double-digit profit growth in 2017

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Banco de Sabadell sees low-double-digit profit growth in 2017

Banco de Sabadell SA is aiming for low-double-digit profit growth in 2017 as cost cutting, a reduction in problem assets and increasing fees at group level offset costs related to its acquisition of TSB Banking Group Plc two years ago, according to the Spanish lender's chairman.

Josep Oliú said the group would continue to face challenges in integrating its U.K. subsidiary as TSB switches over to Sabadell's IT systems and because TSB provisions would be consolidated in group results for the first time.

The CEO of TSB, Paul Pester, said the British lender's profit will "definitely go down materially" in 2017 due to a £200 million cost related to its use of former parent Lloyds Banking Group Plc's IT platform, the Financial Times reported Jan. 26.

"The aim of this year will be that all those challenges … will be neutralized at group level," Oliú told an analyst call after publication of the bank's fourth-quarter 2016 results.

Sabadell derives about a quarter of its profits from its U.K. business, but Oliú said its British operations had not yet felt any negative impact from Britain's decision to leave the European Union.

"So far, we have not had any negative impact on the economy. We have not had any negative impact that we can foresee yet in the bank," he said, adding that Sabadell concentrates on retail banking in the U.K., where continuing strong demand in the domestic economy is helping to underpin growth.

Mortgage-floor clauses

Spain's fourth-largest lender in terms of assets — whose fourth-quarter 2016 net profit dropped 71% year over year to €63.5 million, while its annual net profit rose 0.3% to €710.4 million — is one of several banks in the country to have been hit by a European Court of Justice ruling on mortgage-floor clauses.

In the last three months of 2016, it set aside €130 million in additional provisions because of the ruling, which stipulates that banks have to compensate customers who signed up for mortgages with floor clauses that prevented them from benefiting from the drop in interest rates. CEO Jaime Guardiola said full-year 2016 provisions related to the clauses were €410 million.

Oliú said Sabadell had been transparent in its granting of mortgages with floor clauses, and having already renegotiated the mortgages, the bank does not intend to increase its provisions, he told the call.

"We have done all the provisions that will be sufficient for the worst-case scenario," he said, adding: "We do not think we will arrive at that scenario at all."

Meanwhile, the bank is continuing its expansion in Mexico, where it opened six branches last year and plans to open a further six this year, focusing on medium-sized companies. Mexican operations are now contributing positively to the bank's profits, Guardiola told the call.

The bank's nonperforming loan ratio fell to 6.1% at the end of 2016 from 7.8% a year earlier. It has fallen from 13.6% since December 2013, and Oliú said the group plans to dispose of €2 billion in toxic assets this year.

Sabadell was rumored to have been in merger talks with Spanish lender Banco Popular Español SA, and speculation intensified following the ousting of Popular's long-term chairman in December 2016. Oliú, however, said Sabadell was not interested in a potential merger with Popular.

"There have been changes at Banco Popular, and we are not considering anything now," he told the call.

Sabadell is planning to announce full-year guidance when it presents its strategic update on Feb. 7.