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Sabadell sanguine on Brexit as UK unit boosts bottom line

Acheaper British pound is set to hit the earnings of Banco de Sabadell SA, which is heavily reliant on U.K.subsidiary TSB Banking GroupPlc.

Speakingon a conference call following second-quarter results, Sabadell executivesexpressed optimism about TSB's potential, despite the country's vote to leavethe EU on June 23. However, the bank lowered its full-year 2016 profit targetby a fifth, partly because of the effects of a weaker pound.

Thevalue of sterling slumped in the wake of the referendum and remains weakeragainst the dollar and the euro; £1 was worth €1.30 on the day of the vote, butjust €1.19 as of July 21. Currency effects had a negative impact of 0.3% onSabadell's second-quarter profit, said CFO Tomás Varela, but the bank uses anaverage of daily rates to calculate the conversion factor when it presentsresults. Given that the pound weakened against the euro late in the secondquarter, the effect is likely to be more pronounced in coming periods.

However,Varela said the vote for Brexit does not change Sabadell's plans in the U.K.,adding that in his view the markets "overreacted" to the ballot.

"Wethink that we won't see a major impact on performance in 2017," he toldanalysts.

Sabadellreported first-half group attributable net profit of €425.3 million, €279.6million of which was attributable to the business apart from TSB. Thenon-TSB profit was down 20.6% year over year.

CEOJaime Guardiola told the audience that he now expects a group net profit ofjust under €800 million for 2016, lower than the previous target of €1 billion.

"Theevolution of the interest rates has been very different compared to what we setwhen we launched the plan in February '14," Guardiola said. Sabadell willissue a new strategic plan by February 2017, he added.

HaitongBank analysts wrote that second-quarter profit of €173.3 million was 26% belowthe company-compiled consensus and missed Haitong's own projection by 27%. Theyblamed underlying provision charges that were 41% higher than consensus, which"more than offset a relatively better than expected quarter in operatingterms."

Sabadellmade provisions for nonperforming loans and other financial assets of €351.1million in the second quarter, down from €579.0 million in the year-ago period.It also booked a €91.9 million impairment against its stake in Portugal'sMillennium BCP.

Guardiolaalso said the bank is comfortable ahead of the July 29 publication of EuropeanBanking Authority stress test results. The bank's common equity Tier 1 ratio asof June 30 was 11.9% on a phase-in basis and 11.8% on a fully loaded basis,both flat compared to three months earlier.