Banco Bilbao Vizcaya Argentaria F4/A Registration of securities (foreign) (amended)

As filed with the Securities and Exchange Commission on October 15, 2024.

Registration No. 333-281111

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

Form F-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain

6029

Not Applicable

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

Calle Azul, 4

28050 Madrid

Spain

+34-91-537-7000

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

Diego Crasny

Banco Bilbao Vizcaya Argentaria, S.A.

New York Branch

1345 Avenue of the Americas, 44th Floor

New York, New York 10105

+1-212-728-1660

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Please send copies of all communications to:

Michael J. Willisch

Ester del Valle Izquierdo

Davis Polk & Wardwell LLP

Paseo de la Castellana, 41

28046 Madrid, Spain

+34-91-768-9610

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

†	The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

THE INFORMATION IN THIS PRELIMINARY OFFER TO EXCHANGE/PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE REGISTRANT MAY NOT COMPLETE THE OFFER AND ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES AND FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY OFFER TO EXCHANGE/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE OR OTHER JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

PRELIMINARY - SUBJECT TO COMPLETION DATED OCTOBER 15, 2024

Offer to Exchange/Prospectus

Offer to Exchange

100% of the shares of

BANCO DE SABADELL, S.A.

for shares of

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

and cash

Banco Bilbao Vizcaya Argentaria, S.A., a bank organized under the laws of the Kingdom of Spain (“Spain”) (“BBVA”, and, together with BBVA’s subsidiaries, the “BBVA Group”), is undertaking an exchange offer (the “exchange offer”) pursuant to the offering documents published (or that will be published) in Spain and made available (or that will be made available) to all shareholders of Banco de Sabadell, S.A., a bank organized under the laws of Spain (“Banco Sabadell”, and, together with its subsidiaries, the “Banco Sabadell Group”), to acquire all of the issued and outstanding shares of Banco Sabadell, with a nominal value of €0.125 per share (each, a “Banco Sabadell share”) in exchange for ordinary shares, with a par value of €0.49 per share, of BBVA (each, a “BBVA share”) and cash. The exchange offer will be addressed to U.S. holders of Banco Sabadell shares (as defined herein) (the “U.S. tranche of the exchange offer”) pursuant to this offer to exchange/prospectus.

Pursuant to the exchange offer, BBVA is offering one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares tendered and not withdrawn. Banco Sabadell shares are listed on the Madrid, Bilbao, Barcelona and Valencia Stock Exchanges (the “Spanish Stock Exchanges”).

No fractional BBVA shares will be issued in connection with the exchange offer. Instead of any such fractional BBVA shares that a tendering holder of Banco Sabadell shares would otherwise be entitled to receive, BBVA will pay to the relevant tendering holder an amount in cash equal to the weighted average price per BBVA share during the 15 trading sessions prior to the expiration date (including the expiration date) multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that a tendering holder of Banco Sabadell shares would otherwise be entitled to receive in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the cash to be received in lieu of any fractional shares.

With respect to the exchange offer cash consideration (as defined herein), tendering holders of Banco Sabadell shares that tender a number of Banco Sabadell shares that does not entitle them to receive at least one newly-issued BBVA share, or that entitles them to receive a whole number of newly-issued BBVA shares but have an excess number of Banco Sabadell shares that would entitle them to receive the above cash payment in lieu of a fractional BBVA share, will receive an amount in cash equal to €0.29 multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that they would otherwise be entitled to receive in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the exchange offer cash consideration.

exchange offered as consideration in the exchange offer or in such subsequent squeeze-out transaction, or both, as applicable, will be adjusted accordingly by an amount equal to the gross amount of the distribution per Banco Sabadell share. The adjustment will be made taking into account the weighted average price per BBVA share during the three-month period prior to the publication of BBVA’s announcement of its intention to make the exchange offer and the equivalent price per Banco Sabadell share resulting from the application of the original exchange ratio of 4.83, that is €10.24 per BBVA share and €2.12 per Banco Sabadell share. On October 1, 2024, Banco Sabadell paid a dividend of €0.08 per Banco Sabadell share and, as a result, the applicable exchange ratio was adjusted from the original exchange ratio of one newly-issued BBVA share for each 4.83 Banco Sabadell shares to one newly-issued BBVA share for each 5.0196 Banco Sabadell shares (which is the result of dividing €10.24 per BBVA share by €2.04 per ex-dividend Banco Sabadell share).

If BBVA makes any distribution of dividends, reserves or any other type of distribution to its shareholders (regardless of whether it is an ordinary, extraordinary, interim or complementary distribution) prior to the settlement of the exchange offer or, if applicable, after the settlement of the exchange offer but before the settlement of a subsequent squeeze-out transaction, the consideration payable upon settlement of the exchange offer or settlement of such subsequent squeeze-out transaction, or both, as applicable, will be adjusted upwards by including a cash payment for each Banco Sabadell share tendered pursuant to the exchange offer or acquired in such subsequent squeeze-out transaction, or both, as applicable, equal to the gross amount of the relevant distribution per BBVA share divided by the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). On October 10, 2024, BBVA paid a dividend of €0.29 per BBVA share and, as a result, BBVA increased the exchange offer consideration to one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares tendered and not withdrawn. The purpose of the exchange offer cash consideration is to provide tendering holders of Banco Sabadell shares with an amount equivalent to the interim dividend with respect to financial year 2024 paid by BBVA to its shareholders on October 10, 2024, as such amount would have been received by such tendering holders of Banco Sabadell shares, along with the rest of BBVA’s shareholders, had the exchange offer been completed and had they been shareholders of BBVA at the time the dividend was paid. As a result, tendering holders of Banco Sabadell shares will receive this equivalent amount once they become shareholders of BBVA.

This offer to exchange/prospectus is being addressed to all holders of Banco Sabadell shares that are residents of, or located in, the United States (each, a “U.S. holder”). Separate offering documents are being (or will be) published in Spain and made available (or will be made available) to all holders of Banco Sabadell shares.

The exchange offer is being made on the terms and subject to the conditions set forth in this offer to exchange/prospectus under “The Exchange Offer” beginning on page 104.

THE EXCHANGE OFFER WILL EXPIRE AT 17:59:59 P.M. EASTERN TIME (23:59:59 P.M. CENTRAL EUROPEAN TIME) (THE “EXPIRATION TIME”) ON , 2024 (AS SUCH DATE MAY BE EXTENDED, THE “EXPIRATION DATE”), UNLESS THE EXCHANGE OFFER IS EXTENDED.

BBVA shares are listed on the Spanish Stock Exchanges under the symbol “BBVA”. BBVA shares are also listed on the London Stock Exchange (“LSE”) under the symbol “BVA” and the Mexican Stock Exchange under the symbol “BBVA”. BBVA’s American Depositary Shares (“BBVA ADSs”) are listed on the New York Stock Exchange (“NYSE”) under the symbol “BBVA”. Each BBVA ADS represents the right to receive one BBVA share. Banco Sabadell shares are listed on the Spanish Stock Exchanges under the symbol “SAB”. On October 11, 2024, the closing price of the BBVA shares listed on the Spanish Stock Exchanges was €9.228 (equivalent to U.S.$10.09 based on the exchange rate as published by the European Central Bank (“ECB”) on such date). On October 11, 2024, the closing price of the Banco Sabadell shares listed on the Spanish Stock Exchanges was €1.858 (equivalent to U.S.$2.03 based on the exchange rate as published by the ECB on such date).

See “Risk Factors” in this offer to exchange/prospectus beginning on page 34 for a discussion of various risk factors that you should consider before deciding whether or not to tender your Banco Sabadell shares into the exchange offer.

Neither the U.S. Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of the securities to be issued in the transactions described in this offer to exchange/prospectus or passed upon the adequacy or accuracy of this offer to exchange/prospectus. Any representation to the contrary is a criminal offense.

The date of this offer to exchange/prospectus is , 2024

TABLE OF CONTENTS


	Page
REGULATORY STATEMENT		1

QUESTIONS AND ANSWERS ABOUT THE PROPOSED EXCHANGE OFFER		2

WHERE YOU CAN FIND MORE INFORMATION		12

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE		13

NOTE ON BANCO SABADELL INFORMATION		15

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		17

SUMMARY		20

RISK FACTORS		34

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION		49

COMPARATIVE MARKET PRICE AND DIVIDEND PER SHARE INFORMATION		63

INFORMATION ABOUT BBVA		64

INFORMATION ABOUT BANCO SABADELL		66

BACKGROUND OF THE EXCHANGE OFFER		99

BBVA’S REASONS FOR THE PROPOSED EXCHANGE OFFER		101

THE EXCHANGE OFFER		104

DESCRIPTION OF BBVA SHARES		138

COMPARISON OF RIGHTS OF HOLDERS OF BBVA SHARES AND BANCO SABADELL SHARES		153

VALIDITY OF SECURITIES		156

EXPERTS		156

ENFORCEABILITY OF CIVIL LIABILITIES		156

APPENDIX I		A-1

This offer to exchange/prospectus incorporates by reference important business and financial information about BBVA that is contained in its filings with the SEC but which is not included in, or delivered with, this offer to exchange/prospectus. This information is available on the SEC’s website at www.sec.gov and from other sources. For more information about how to obtain copies of these documents, see “Where You Can Find More Information” in this offer to exchange/prospectus beginning on page 12. BBVA will also make copies of the reports incorporated by reference in this document available to you without charge upon your written or oral request to Sodali & Co., whose contact details can be found on page 12. In order to receive timely delivery of these documents, you must make such a request no later than five U.S. business days before the then-scheduled expiration date of the exchange offer. This deadline is currently , 2024 because the expiration date of the exchange offer is currently , 2024, but the actual deadline will be different if the exchange offer is extended.

REGULATORY STATEMENT

Pursuant to exemptive relief granted on May 29, 2024 by the SEC from Rule 14e-5 under the Exchange Act (as defined herein), and subject to certain enumerated conditions set forth in the relief letter, BBVA, BBVA’s subsidiaries and their respective affiliates and separately identifiable departments (collectively, the “BBVA Prospective Purchasers”) may purchase or arrange to purchase Banco Sabadell shares, securities that are immediately convertible into, exchangeable for or exercisable for Banco Sabadell shares, and various derivatives related to such securities (collectively, “Banco Sabadell Securities”) prior to and during the conduct of, but outside of, the exchange offer in the ordinary course of their businesses. Such purchases or arrangements to purchase may not be carried out for the purpose of promoting or otherwise facilitating the exchange offer or for the purpose of creating actual, or apparent, active trading in, or maintaining, or affecting the prices of the Banco Sabadell Securities.

For a description of the trading activities included within the scope of the SEC’s relief, see “The Exchange Offer—Relief Requested from the SEC—Tender Offer Rules Exemptive Relief”.

The BBVA Prospective Purchasers intend to effect such purchases in the ordinary course of their businesses in reliance on the relief granted by the SEC, subject to the conditions imposed by the SEC and otherwise in accordance with applicable law.

QUESTIONS AND ANSWERS ABOUT THE PROPOSED EXCHANGE OFFER

The summary term sheet in question-and-answer format set forth below highlights selected information about the exchange offer that is included elsewhere in this offer to exchange/prospectus. It does not, however, contain all of the information included in, or incorporated by reference into, this offer to exchange/prospectus and you should read and consider all such information carefully before deciding whether or not to tender your Banco Sabadell shares into the exchange offer.

Q.	Who is offering to acquire my Banco Sabadell shares?

The exchange offer is being undertaken by BBVA, the parent company of the BBVA Group. The BBVA Group is a customer-centric global financial services group founded in 1857. Internationally diversified and with strengths in retail banking, asset management and wholesale banking, the BBVA Group is committed to offering a compelling digital proposition focused on customer experience. BBVA has a leadership position in the Spanish market, it is the largest financial institution in Mexico in terms of assets, it has leading franchises in South America, and it is the majority shareholder in Garanti BBVA, Turkey’s largest bank in terms of market capitalization. The BBVA Group had consolidated assets of €759,534 million and €775,558 million as of June 30, 2024 and December 31, 2023, respectively, and net attributable profit/(loss) of €4,994 million and €8,019 million for the six months ended June 30, 2024 and the year ended December 31, 2023, respectively.

Additional information about the BBVA Group is included in its 2023 Form 20-F (as defined herein) and BBVA First Half 2024 Results Form 6-K (as defined herein), which are incorporated by reference in this offer to exchange/prospectus.

Q.	What is BBVA proposing to do?

A.	BBVA is undertaking an exchange offer to acquire all of the Banco Sabadell shares. Pursuant to the exchange offer, BBVA is offering one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares tendered and not withdrawn.

Q.	Why is BBVA making this exchange offer?

As explained in “BBVA’s Reasons for the Proposed Exchange Offer”, BBVA is undertaking the exchange offer to acquire control of Banco Sabadell in order to be in a position to, subject to relevant approvals, integrate both businesses and create a stronger combined group through the merger of both companies, which is expected to result in:

the achievement of a larger scale in a highly competitive sector, resulting in higher efficiency. Scale is essential in the financial sector in order to be able to meet increasing fixed costs associated with the investments in technology that will need to be made over the next few years in the face of changing client needs;

ii.

the creation of a franchise that combines the financial results of both entities, capturing substantial cost synergies, which BBVA has projected at approximately €850 million per year before taxes for Spain and Mexico, once they are fully realized;

iii.

the combination of very complementary businesses, both in terms of geographical diversification and in terms of the positioning in different client segments in Spain; and

iv.

a combined group with ample solvency (CET1 above 12%) and a higher resilience to external shocks and a lower vulnerability through economic cycles due to increased diversification.

Additionally, BBVA believes that the intended merger, if completed, will have a positive impact on the clients and employees of both entities and society as a whole.

Q.	How is the exchange offer structured?

BBVA is undertaking the exchange offer pursuant to the offering documents published (or that will be published) in Spain and made available (or that will be made available) to all shareholders of Banco Sabadell and this offer to exchange/prospectus, for legal reasons to comply with Spanish and U.S. regulatory requirements.

Q.	Can I tender my Banco Sabadell shares into the exchange offer?

A.	If you are a U.S. holder of Banco Sabadell shares, you can tender them into the exchange offer and you will receive BBVA shares in exchange for your Banco Sabadell shares if the exchange offer is completed.

Q.	Has BBVA discussed the offer with Banco Sabadell’s board of directors?

A.	In evaluating the exchange offer, you should be aware that BBVA has not negotiated the price or terms of the exchange offer with Banco Sabadell and neither Banco Sabadell nor its board of directors has approved the exchange offer.

On April 17, 2024, the Chair of BBVA and the Chairman of Banco Sabadell had a meeting in which the Chair of BBVA informed the Chairman of Banco Sabadell of BBVA’s strategic and financial interest in resuming the merger discussions with Banco Sabadell (by reference to the merger transaction discussed between BBVA and Banco Sabadell in 2020 without reaching an agreement), with a view to creating a leading bank, with greater scale and competitive capacity. On April 30, 2024 due to a media report regarding the abovementioned discussions between the Chair of BBVA and the Chairman of Banco Sabadell, BBVA published an inside information notice confirming that the Chairman of Banco Sabadell had been informed of BBVA’s board of directors’ interest in initiating negotiations with Banco Sabadell to explore a potential merger of BBVA and Banco Sabadell. On that same day, BBVA made an indicative proposal in writing to Banco Sabadell relating to a corporate transaction, consisting of the proposed combination of the BBVA Group and the Banco Sabadell Group, through a merger between Banco Sabadell and BBVA (which was published as an inside information notice of BBVA on May 1, 2024 and registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores, “CNMV”), with registry number 2232). On May 6, 2024, Banco Sabadell published an inside information notice registered with the CNMV, with registry number 2234, rejecting BBVA’s proposal.

See “Background of the Exchange Offer” in this offer to exchange/prospectus beginning on page 99 for more information.

Q.	Has Banco Sabadell or its board of directors made any recommendation regarding the exchange offer?

As of the date of this offer to exchange/prospectus, Banco Sabadell’s board of directors has not formally made any recommendation to its shareholders in connection with the exchange offer. However, Banco Sabadell’s respective Chairman and Chief Executive Officer have publicly manifested their opposition to the exchange offer. Under Spanish law, within ten calendar days after the start of the acceptance period, the board of directors of Banco Sabadell is required to issue and publish a detailed and justified report on the exchange offer that must contain, among other items, its comments for and against the exchange offer, disclosure on any agreement that may exist between Banco Sabadell and BBVA or the directors or shareholders thereof, or between any of them and the board members of Banco Sabadell in relation to the exchange offer, the opinion of Banco Sabadell’s directors with respect to the exchange offer, their intention to tender (or not) the Banco Sabadell shares that they directly or indirectly hold into the exchange offer and the existence and nature of any conflict of interest. The report must also contain the potential consequences of the exchange offer on, and the strategic plans of BBVA with respect to, Banco Sabadell, its employees and the location of its activity centers disclosed by BBVA in the offering documents published in Spain. Further, under Rule 14e-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Banco

Sabadell, no later than ten U.S. business days from the date the exchange offer is first published, sent or given, will need to disclose its position (or inability to take a position) with respect to the exchange offer.

Q.	What will I receive if I tender my Banco Sabadell shares and the exchange offer is completed?

If you tender, and do not withdraw, your Banco Sabadell shares into the exchange offer and the exchange offer is completed, you will receive one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares tendered. The treatment of fractional shares is described in the following question.

Q.	Will I receive fractional BBVA shares or a fraction of the exchange offer cash consideration?

With respect to the exchange offer cash consideration, tendering holders of Banco Sabadell shares that tender a number of Banco Sabadell shares that does not entitle them to receive at least one newly-issued BBVA share, or that entitles them to receive a whole number of newly-issued BBVA shares but have an excess number of Banco Sabadell shares that would entitle them to receive the above cash payment in lieu of a fractional BBVA share, will receive an amount in cash equal to €0.29 multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that they would otherwise be entitled to receive in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the exchange offer cash consideration.

Q.	If Banco Sabadell and/or BBVA pay any dividends before settlement of the exchange offer, will such dividend payment affect the consideration I will receive in exchange for my Banco Sabadell shares?

If Banco Sabadell makes any distribution of dividends, reserves or any other type of distribution to its shareholders (regardless of whether it is an ordinary, extraordinary, interim or complementary distribution) prior to the settlement of the exchange offer or, if applicable, after the settlement of the exchange offer but before the settlement of a subsequent squeeze-out transaction, the share exchange offered as consideration in the exchange offer or in such subsequent squeeze-out transaction, or both, as applicable, will be adjusted accordingly by an amount equal to the gross amount of the distribution per Banco Sabadell share. The adjustment will be made taking into account the weighted average price per BBVA share during the three-month period prior to the publication of BBVA’s announcement of its intention to make the exchange offer and the equivalent price per Banco Sabadell share resulting from the application of the original exchange ratio of 4.83, that is €10.24 per BBVA share and €2.12 per Banco Sabadell share. On October 1, 2024, Banco Sabadell paid a dividend of €0.08 per Banco Sabadell share and, as a result, the applicable exchange ratio was adjusted from the original exchange ratio of one newly-issued BBVA share for each 4.83 Banco Sabadell shares to one newly-issued BBVA share for each 5.0196 Banco Sabadell shares (which is the result of dividing €10.24 per BBVA share by €2.04 per ex-dividend Banco Sabadell share).

Q.	If I tender my Banco Sabadell shares into the exchange offer, what upcoming dividends of Banco Sabadell and BBVA will I receive?

If you tender, and do not withdraw, your Banco Sabadell shares into the exchange offer and the exchange offer is completed, you will receive BBVA shares in exchange for your Banco Sabadell shares. As a holder of BBVA shares you will be entitled to receive any dividends paid to BBVA shareholders following the settlement of the exchange offer. BBVA’s current dividend policy involves distributing between 40% and 50% of its consolidated net attributable profit annually, combining cash dividends and share buybacks. BBVA is committed to distributing capital in excess of what is required to maintain a 12% CET1 ratio (subject to any restrictions imposed by, and the approval of, relevant supervisory bodies and BBVA’s corporate bodies, as applicable).

If you do not participate in the exchange offer, you will continue to hold your Banco Sabadell shares and therefore you will continue to be entitled to receive any dividends paid on your Banco Sabadell shares by Banco Sabadell.

Q.	How do I tender my Banco Sabadell shares in the exchange offer?

Holders of Banco Sabadell shares who wish to tender their Banco Sabadell shares into the exchange offer must submit their declaration of acceptance in writing to the Spanish clearing system (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (“Iberclear”)) participant where their Banco Sabadell shares are deposited, either in person, by electronic means or by any other means permitted by such Iberclear participant.

Q.	What is the total consideration worth?

The equivalent cash consideration per Banco Sabadell share resulting from the application of the weighted average price per BBVA share in the three-month period before the publication of BBVA’s announcement of its intention to make the exchange offer to the exchange ratio, in accordance with Article 14.4 of Royal Decree 1066/2007 (the “Spanish Takeover Regulation”), is €2.12 per Banco Sabadell share. Such equivalent cash consideration is provided for illustrative purposes only. The price of the BBVA shares fluctuates and may be higher or lower than the equivalent cash consideration set forth above at the time Banco Sabadell shares are exchanged pursuant to the exchange offer.

Q.	Will I have to pay any fees or commissions for tendering my Banco Sabadell shares?

Holders of Banco Sabadell shares who tender their Banco Sabadell shares through BBVA, as agent bank, will not bear the brokerage expenses resulting from the participation of a member entity of the Spanish Stock Exchanges, nor Iberclear’s liquidation fees, nor, if applicable, fees resulting from contracting with the Spanish Stock Exchanges, which will be paid in full by BBVA.

If a member entity of the Spanish Stock Exchanges or an Iberclear participant (other than BBVA) intervenes on behalf of a holder of Banco Sabadell shares who tenders its Banco Sabadell shares into the exchange offer, all brokerage and other costs, including Iberclear’s liquidation fees and fees resulting from contracting with the Spanish Stock Exchanges, must be borne by such tendering holder. Under no circumstances will BBVA be responsible for any commissions and expenses that any depository and administrative entities may charge to holders of Banco Sabadell shares for the submission of any declaration of acceptance and the deposit of their respective Banco Sabadell shares.

The expenses incurred by BBVA in the acquisition of the Banco Sabadell shares and their respective settlement, including any expenses derived from the payment of any fractional shares, will be borne by BBVA.

Q.	How much time do I have to decide whether to tender?

A.	If you hold Banco Sabadell shares and would like to tender them into the exchange offer, you should follow the procedures described under “The Exchange Offer—Procedure for Tendering” in this offer to exchange/prospectus beginning on page 111.

Q.	When does the exchange offer expire?

A.	The exchange offer will expire at 17:59:59 p.m. Eastern time (23:59:59 p.m. Central European time) on the expiration date. The expiration date is currently , 2024, but this date will change if the exchange offer is extended.

Q.	Can the exchange offer be extended?

Yes. BBVA may extend the period of time in which the exchange offer is open one or more times in accordance with the provisions of article 23 of the Spanish Takeover Regulation, provided that such extension complies with U.S. securities laws, and, provided further that the acceptance period does not exceed 70 calendar days and that any extension is communicated in advance to the CNMV. The extension of the acceptance period, if any, must be announced at least three calendar days before the then-scheduled expiration date of the acceptance period, indicating the circumstances that motivate such extension. If BBVA extends the period of time during which the exchange offer is open, the exchange offer will expire at the latest time and date to which BBVA extends the exchange offer. The CNMV may also extend the exchange offer acceptance period at its own discretion under the circumstances set forth in the Spanish Takeover Regulation, including (i) following a supplement to the offering documents published (or that will be published) in Spain when the CNMV considers that the materiality of the information disclosed in such supplement makes the extension of the exchange offer appropriate; or (ii) in other cases where the CNMV deems such extension necessary, through a justified resolution and to the extent legally possible.

Q.	Can I withdraw any Banco Sabadell shares that I have tendered?

Holders of Banco Sabadell shares may withdraw their declarations of acceptance at any time prior to the last day of the acceptance period by submitting their declaration of withdrawal in writing to the Iberclear participant where their Banco Sabadell shares are deposited, either in person, by electronic means or by any other means permitted by such Iberclear participant. Pursuant to article 34 of the Spanish Takeover Regulation, any declaration of withdrawal subject to a condition will be null and void.

Q.	When is the exchange offer expected to be completed?

Completion of the exchange offer will take place on the settlement date, provided that each of the conditions set forth in “The Exchange Offer—Conditions to Completion of the Exchange Offer” has been satisfied or waived (to the extent permitted by law, including in accordance with any applicable timing limitations).

Q.	Has the exchange offer been subject to the ECB non-opposition?

Pursuant to the provisions of Law 10/2014, of June 26, on the regulation, supervision and solvency of credit institutions, and Royal Decree 84/2015, of February 13, implementing Law 10/2014, of June 26, on the regulation, supervision and solvency of credit institutions, the acquisition by BBVA of control of Banco Sabadell resulting from the exchange offer was subject to the duty of prior notification to the Bank of Spain and to the obtainment of the non-opposition by the ECB. The ECB’s non-opposition was obtained on September 5, 2024.

Q.	What are the conditions to the exchange offer?

In accordance with the provisions of articles 13 and 26 of the Spanish Takeover Regulation, the exchange offer is subject to the fulfillment of the following conditions:

In accordance with the provisions of article 13.2.b) of the Spanish Takeover Regulation, the acceptance of the exchange offer by at least a number of shares of Banco Sabadell representing 50.01% of its share capital (2,720,654,746 Banco Sabadell shares as of the date of this offer to exchange/prospectus).

ii.

In accordance with the provisions of article 13.2.d) of the Spanish Takeover Regulation, the approval by BBVA’s general shareholders’ meeting of the increase of its share capital through the issue of new BBVA shares with non-cash contributions in an amount which is sufficient to fully cover the consideration offered to the shareholders of Banco Sabadell pursuant to the exchange offer. This condition was satisfied on July 5, 2024.

iii.

In accordance with the provisions of article 26.1 of the Spanish Takeover Regulation, the authorization of the economic concentration resulting from the exchange offer by the Spanish antitrust authorities.

iv.

In accordance with the provisions of article 13.2.d) of the Spanish Takeover Regulation, the authorization of the indirect acquisition of control of Banco Sabadell’s banking subsidiary in the United Kingdom, TSB Bank PLC (“TSB”), by the Prudential Regulation Authority (“PRA”). This condition was satisfied on September 2, 2024.

For the exchange offer to be completed, each of these conditions must have been satisfied or waived (to the extent permitted by law, including in accordance with any applicable timing limitations). As of the date of this offer to exchange/prospectus, conditions (i) and (iii) above remain outstanding. BBVA does not intend to waive condition (i) above. Consequently, if at least a number of Banco Sabadell shares representing 50.01% of its share capital do not accept the exchange offer, the exchange offer will not be completed.

According to the Spanish Takeover Regulation, if the Spanish antitrust authorities declare the proposed exchange offer inappropriate before the end of the acceptance period, BBVA will be required to withdraw the exchange offer. In addition, pursuant to the Spanish Takeover Regulation, BBVA may, at its discretion, waive the condition referred to in (iii) above or withdraw the exchange offer if before the end of the acceptance period the Spanish antitrust authorities (i) approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition (in which case, BBVA will evaluate the expected consequences of such condition to determine whether to waive the condition and continue with completion of or withdraw the exchange offer) or (ii) have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer.

Q.	Do I need to do anything if I want to retain my Banco Sabadell shares?

A.	No. If you want to retain your Banco Sabadell shares, you do not need to take any action.

Q.	Do I need to vote at any meeting to approve the exchange offer?

A.	Your vote is not required in connection with the exchange offer. You simply need to tender your Banco Sabadell shares during the acceptance period, if you choose to do so.

Q.	Will tendered shares be subject to proration?

A.	No. Subject to the terms and conditions of the exchange offer, BBVA will acquire any and all Banco Sabadell shares validly tendered into, and not withdrawn from, the exchange offer.

Q.	If I do not participate in the exchange offer, will my Banco Sabadell shares continue to be listed on the Spanish Stock Exchanges? Can BBVA squeeze-out the holders of Banco Sabadell shares that do not tender into the exchange offer?

The exchange offer is not a delisting offer so if you do not participate in the exchange offer and the exchange offer is completed, you will continue to hold your Banco Sabadell shares and your Banco Sabadell shares will continue to be listed. However, if the requirements set forth in articles 116 of the Law 6/2023, of March 17, on the Securities Markets and Investment Services, as amended (Ley 6/2023, de 17 de marzo, de los Mercados de Valores y de los Servicios de Inversión, the “Spanish Securities Market Law”) and 47 of the Spanish Takeover Regulation are met, which would require that (i) the exchange offer is accepted by holders of Banco Sabadell shares representing at least 90% of the Banco Sabadell shares subject to the exchange offer; and (ii) following completion of the exchange offer, BBVA holds a number of Banco Sabadell shares representing at least 90% of the voting rights in Banco Sabadell’s share capital, BBVA will exercise its right to demand the squeeze-out of the remaining Banco Sabadell shares at the same consideration as offered pursuant to the exchange offer (adjusted, as the case may be, as described in this offer to exchange/prospectus). To this effect, within the three Spanish stock exchange business days following the publication of the results of the exchange offer on the website of the CNMV, BBVA will communicate to the CNMV and publicly announce whether or not the requirements to execute a squeeze-out transaction have been met. In that announcement, or within the two following Spanish stock exchange business days, BBVA will announce the date of the squeeze-out transaction. In accordance with article 48.4 of the Spanish Takeover Regulation, such date will be fixed between the 15^th and the 20^th Spanish business day following the date of such announcement. Such decision will be irrevocable. Upon settlement of such squeeze-out transaction, the Banco Sabadell shares will be automatically delisted from the Spanish Stock Exchanges.

Q.	Will there be a merger between BBVA and Banco Sabadell?

and Banco Sabadell’s respective boards of directors and approved by BBVA’s and Banco Sabadell’s respective shareholders, and its consummation would require the prior authorization of the Ministry of Economy, Trade and Business in accordance with the provisions of the twelfth additional provision of Law 10/2014, of June 26, on the regulation, supervision and solvency of credit institutions and related regulations. See “The Exchange Offer—Certain Consequences of the Exchange Offer—Squeeze-out and Merger”. If the intended merger is not consummated for any reason, BBVA will not pursue a delisting offer over the Banco Sabadell shares for at least 12 months following the settlement of the exchange offer.

While it is BBVA’s intention to effect a merger by absorption, BBVA is not obligated to consummate such a merger following completion of the exchange offer or to consummate it on the same terms as the exchange offer. As noted above, BBVA’s intention is to apply in any such merger an exchange ratio equivalent, as far as possible, to the consideration offered in the exchange offer. However, the exchange ratio applicable in any such merger must be validated by an independent expert and may ultimately differ from the consideration offered in the exchange offer. Further, any such merger would need BBVA’s and Banco Sabadell’s respective boards of directors to formulate a joint merger plan, which would need to be approved by BBVA’s and Banco Sabadell’s respective shareholders. The consummation of the merger would require the prior authorization of the Spanish Economy, Trade and Business Minister, following the issuance of related reports by certain regulators and authorities that will have previously issued favorable opinions with respect to the exchange offer. If any of the foregoing corporate approvals or the authorization from the Economy, Trade and Business Minister is not obtained, the merger will not be consummated. Following completion of the exchange offer, BBVA will be able to appoint the majority of the members of the board of directors of Banco Sabadell and exercise at least 50.01% of Banco Sabadell’s voting rights. BBVA is not aware of any Spanish precedent transaction where the authorization of a merger following the acquisition of control of a credit institution, as contemplated by this offer to exchange/prospectus has not been granted by the Spanish Economy, Trade and Business Minister. In light of the foregoing, BBVA considers that the scenario of not being able to consummate the intended merger is very remote. See “The Exchange Offer—Certain Consequences of the Exchange Offer—Squeeze-out and Merger”. For further information regarding BBVA’s plans with respect to Banco Sabadell if the intended merger is not consummated for any reason, please see “The Exchange Offer—Plans for Banco Sabadell after the Exchange Offer—Planned Corporate Restructuring Transactions of Any Kind”.

Q.	Will the BBVA shares to be delivered to the holders of the Banco Sabadell shares who tender their Banco Sabadell shares into the exchange offer be publicly listed on the Spanish Stock Exchanges?

Yes. BBVA will request the admission to trading of the newly-issued BBVA shares that the holders of the Banco Sabadell shares who tender, and do not withdraw, their Banco Sabadell shares into the exchange offer will receive in exchange for their Banco Sabadell shares if the exchange offer is completed, within five Spanish stock exchange business days from the registration of such BBVA shares in the registries of Iberclear. Such admission to trading is expected to take place as soon as possible thereafter.

Q.	Will I have appraisal rights in connection with the exchange offer?

A.	No. There are no appraisal or similar rights available to holders of Banco Sabadell shares in connection with the exchange offer.

Q.	How and where will the outcome of the exchange offer be announced?

In accordance with the provisions of article 36 of the Spanish Takeover Regulation, upon expiration of the acceptance period, and within a maximum period of seven Spanish stock exchange business days from that date, the governing bodies of the Spanish Stock Exchanges will publish the result of the exchange offer in the Official Quotation Bulletins, upon the terms and on the trading session expressly indicated by the CNMV.

Q.	What are the tax consequences if I participate in the exchange offer?

For more information on certain material Spanish and U.S. tax consequences of the exchange offer, see “The Exchange Offer—Spanish Tax Consequences for U.S. Shareholders” and “The Exchange Offer—Material U.S. Federal Income Tax Considerations for U.S. Holders” in this offer to exchange/prospectus beginning on pages 116 and 120, respectively. You should consult your tax advisor on the tax consequences to you of tendering your Banco Sabadell shares in the exchange offer.

Q.	Is BBVA’s financial condition relevant to my decision to tender my Banco Sabadell shares into the exchange offer?

Yes. If the exchange offer is completed, you will receive BBVA shares as consideration in the exchange offer. Consequently, you should consider BBVA’s financial condition before you decide to become one of BBVA’s shareholders through the exchange offer. The BBVA Group had consolidated assets of €759,534 million and €775,558 million as of June 30, 2024 and December 31, 2023, respectively, and net attributable profit/(loss) of €4,994 million and €8,019 million for the six months ended June 30, 2024 and the year ended December 31, 2023, respectively. In considering BBVA’s financial condition, you should also review the documents incorporated by reference in this offer to exchange/prospectus because they contain detailed business, financial and other information about us.

Q.	If BBVA acquires all of the Banco Sabadell shares in the exchange offer, what percentage of BBVA shares will former holders of Banco Sabadell shares own after completion of the exchange offer?

If all of the Banco Sabadell shares are validly tendered and exchanged, pursuant to the terms of the exchange offer, immediately after the exchange offer: (i) the former holders of Banco Sabadell shares will own approximately 16% of the share capital and voting rights of BBVA; and (ii) the current holders of BBVA shares will hold approximately 84% of the share capital and voting rights of BBVA.

Q.	If my Banco Sabadell shares are acquired in the exchange offer, how will my rights as a Banco Sabadell shareholder change?

If your Banco Sabadell shares are acquired in the exchange offer, you will become a holder of BBVA shares. The rights of a holder of BBVA shares will be governed by BBVA’s bylaws, its general shareholders’ meeting’s regulations and the Spanish corporation law (Texto Refundido de la Ley de Sociedades de Capital aprobado por el Real Decreto Legislativo 1/2010), as amended (the “Spanish Corporation Law”). For a summary of the material differences between the rights of holders of BBVA shares compared to the rights of holders of Banco Sabadell shares, see “Comparison of Rights of Holders of BBVA Shares and Banco Sabadell Shares” in this offer to exchange/prospectus beginning on page 153.

Q.	When will I receive my BBVA shares?

Under Spanish law, a number of procedural steps must be taken after the exchange offer is completed and before BBVA shares can be delivered. If the exchange offer is completed, BBVA expects that you will receive the BBVA shares you are entitled to receive pursuant to the exchange offer no later than the 14^th Spanish stock exchange business day following the expiration date and, if not possible within that timeframe, in any event, you will receive them no later than the 20^th Spanish stock exchange business day following the expiration date, in accordance with customary Spanish market practice. It is expected that the payment of cash in lieu of fractional BBVA shares will be made on the same date as the delivery of the BBVA shares.

Q.	What if the exchange offer is not completed?

A.	If the exchange offer is not completed you will continue to be the holder of your Banco Sabadell shares.

Q.	Can I tender less than all the Banco Sabadell shares that I own into the exchange offer?

A.	Yes. You may elect to tender all or a portion of the Banco Sabadell shares that you own into the exchange offer.

Q.	Where can I find out more information about BBVA?

A.	You can find out information about BBVA from the sources described under “Where You Can Find More Information” in this offer to exchange/prospectus.

Q.	Who can I call with questions?

If you have more questions about the exchange offer, you should contact Sodali & Co. at the following address, telephone number or email: 430 Park Avenue, 14^th Floor, New York, New York, 10022, United States of America; (800) 662-5200 (in North America) or +1 (203) 658-9400 (outside of North America); BBVA@info.sodali.com.

WHERE YOU CAN FIND MORE INFORMATION

BBVA files annual reports on Form 20-F with, and furnishes other reports and information on Form 6-K to, the SEC. The SEC maintains an Internet site at http://www.sec.gov that contains in electronic form the reports and other information that BBVA has electronically filed with, or furnished to, the SEC. BBVA maintains a website at https://shareholdersandinvestors.bbva.com.

With the exception of the reports specifically incorporated by reference in this document as set forth in “Incorporation of Certain Information by Reference”, material contained on or accessible through BBVA’s website is not incorporated into this document.

You may obtain a copy of BBVA’s reports at no cost to you from the SEC at the SEC’s website (http://www.sec.gov) or, with respect to reports incorporated by reference in this document, by writing or calling Sodali & Co. at the following address, telephone number or email:

Sodali & Co.

430 Park Avenue, 14^th Floor

New York, New York, 10022

United States of America

Telephone: (800) 662-5200 (in North America) or +1 (203) 658-9400 (outside of North America)

Email: BBVA@info.sodali.com

BBVA has filed with the SEC a registration statement on Form F-4 (the “Registration Statement”) to register under the Securities Act of 1933, as amended (the “Securities Act”), the offer and sale of BBVA shares pursuant to the U.S. tranche of the exchange offer. This offer to exchange/prospectus forms a part of that Registration Statement.

DOCUMENTS INCORPORATED BY REFERENCE ARE ALSO AVAILABLE FROM BBVA WITHOUT CHARGE UPON REQUEST TO SODALI & CO. IN ORDER TO ENSURE TIMELY DELIVERY OF ANY OF THESE DOCUMENTS, ANY REQUEST SHOULD BE SUBMITTED NO LATER THAN FIVE U.S. BUSINESS DAYS PRIOR TO THE THEN-SCHEDULED EXPIRATION DATE OF THE EXCHANGE OFFER. THIS DEADLINE IS CURRENTLY , 2024 BECAUSE THE EXPIRATION DATE OF THE EXCHANGE OFFER IS CURRENTLY , 2024 BUT THE ACTUAL DEADLINE WILL BE DIFFERENT IF THE EXCHANGE OFFER IS EXTENDED. IF YOU REQUEST ANY INCORPORATED DOCUMENTS FROM SODALI & CO., SODALI & CO. WILL RESPOND TO YOUR REQUEST WITHIN ONE U.S. BUSINESS DAY AFTER SODALI & CO. RECEIVES YOUR REQUEST, AND SEND YOU THE INCORPORATED DOCUMENTS BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS.

All information contained in this document relating to Banco Sabadell has been taken from publicly-available sources published by Banco Sabadell. Furthermore, any assumptions and/or estimates that BBVA has made relating to Banco Sabadell in connection with the exchange offer are based solely on publicly-available information. Information provided by either BBVA or Banco Sabadell does not constitute any representation, estimate or projection of the other.

BBVA has not authorized anyone to give any information or make any representation about the exchange offer that is different from, or in addition to, the information contained in this offer to exchange/prospectus or in any materials incorporated by reference into this offer to exchange/prospectus. The information contained in this offer to exchange/prospectus speaks only as of the date of this offer to exchange/prospectus unless the information specifically indicates that another date applies.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The rules of the SEC allow BBVA to “incorporate by reference” the information BBVA files with, or furnishes to, the SEC, which means:

•

incorporated documents are considered part of this offer to exchange/prospectus;

•

BBVA can disclose important information to you by referring you to those documents; and

•

information that BBVA files with, or furnishes to, the SEC in the future and incorporates by reference in this offer to exchange/prospectus will automatically update and supersede information in this offer to exchange/prospectus and information previously incorporated by reference in this offer to exchange/prospectus.

This means that you must look at all of the SEC filings that BBVA incorporates by reference to determine if any of the statements in this offer to exchange/prospectus or in any document previously incorporated by reference have been modified or superseded.

BBVA incorporates by reference the following documents:

•

BBVA’s annual report on Form 20-F for the year ended December 31, 2023 filed with the SEC on March 1, 2024 (the “2023 Form 20-F”) ;

•

BBVA’s report on Form 6-K containing certain information on BBVA’s financial results as of and for the six months ended June 30, 2024 and certain other updates, furnished to the SEC on July 30, 2024 (Accession No. 0000842180-24-000026) (the “BBVA First Half 2024 Results Form 6-K”); and

•

any filings made by BBVA with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, as well as any report on Form 6-K furnished to the SEC to the extent the Form 6-K expressly states that it is being incorporated by reference herein, on or after the date of this offer to exchange/prospectus and prior to the termination of the exchange offer under this offer to exchange/prospectus.

As you read the above documents, you may find inconsistencies in information from one document to another. If you find inconsistencies, you should rely on the statements made in the most recent document.

You may obtain a copy of these documents at no cost to you (other than exhibits not specifically incorporated by reference) from the SEC at the SEC’s website (http://www.sec.gov) or by writing or telephoning Sodali & Co. at the following address, telephone number or email:

Sodali & Co.

430 Park Avenue, 14^th Floor

New York, New York, 10022

United States of America

Telephone: (800) 662-5200 (in North America) or +1 (203) 658-9400 (outside of North America)

Email: BBVA@info.sodali.com

Upon your request, Sodali & Co. will provide to you without charge copies of any or all reports and documents described above that are incorporated by reference into this offer to exchange/prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference). Requests for such copies should be directed to Sodali & Co. at 430 Park Avenue, 14^th Floor, New York, New York, 10022, United States of America; (800) 662-5200 (in North America) or +1 (203) 658-9400 (outside of North America); BBVA@info.sodali.com. To obtain timely delivery of any of these documents, you must request them no later than five U.S. business days before the then-scheduled expiration date of the exchange offer. This deadline is currently , 2024 because the expiration date of the exchange offer is currently , 2024, but the actual deadline will be different if the exchange offer is extended.

BBVA has provided only the information contained in, or incorporated by reference into, this offer to exchange/prospectus in deciding whether or not to accept the exchange offer. BBVA has not authorized anyone to provide you with any information that is different from what is contained in, or incorporated by reference into, this offer to exchange/prospectus. The information contained in, or incorporated by reference into, this offer to exchange/prospectus is accurate only as of its date. You should not assume that such information is accurate as of any other date and neither the mailing of this offer to exchange/prospectus to you nor the issuance of BBVA shares in connection with the exchange offer shall create any implication to the contrary.

NOTE ON BANCO SABADELL INFORMATION

General

All information contained in this offer to exchange/prospectus relating to Banco Sabadell has been taken from publicly-available sources published by Banco Sabadell (including, in particular, its consolidated financial statements as of and for the years ended December 31, 2023, 2022 and 2021, its condensed consolidated interim financial statements as of and for the six months ended June 30, 2024, its annual reports as of and for the years ended December 31, 2023, 2022 and 2021, its consolidated interim directors’ report for the first six months of 2024, its second quarter 2024 quarterly financial report and its Euro Medium Term Note Program base prospectus dated May 14, 2024) other than the description of Banco Sabadell’s actions taken in response to BBVA’s proposals as set forth under “Background of the Exchange Offer”. Additionally, the information relating to Banco Sabadell included under “Comparison of Rights of Holders of BBVA Shares and Banco Sabadell Shares” summarizes certain provisions of the Banco Sabadell bylaws publicly available on Banco Sabadell’s website. BBVA was not involved in the preparation of such publicly-available information regarding Banco Sabadell and cannot verify such information. Such information is included herein in order to comply with regulatory requirements. To the extent permitted under applicable law, none of BBVA or any of its officers or directors assumes any responsibility for the accuracy or completeness of such information or for any failure by Banco Sabadell to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information, but which are unknown to BBVA. Furthermore, any assumptions and/or estimates that BBVA has made relating to Banco Sabadell in connection with the exchange offer are based solely on publicly-available information.

BBVA is not affiliated with Banco Sabadell, and BBVA has not had access to Banco Sabadell’s books and records. Therefore, non-public information concerning Banco Sabadell was not used by BBVA for the purpose of preparing this offer to exchange/prospectus. Pursuant to Rule 409 under the Securities Act, BBVA has requested that Banco Sabadell provide BBVA with certain information regarding the business, operations and financial condition of Banco Sabadell. BBVA will amend or supplement this offer to exchange/prospectus to provide any information BBVA receives from Banco Sabadell, if BBVA receives the information on a timely basis before the expiration time and considers it to be material, complete, reliable and appropriate. Banco Sabadell is subject to special legislation applicable to credit entities in general, the supervision, control and regulation of the ECB, and, as a listed company, the regulatory oversight of the CNMV. It is also subject to European market abuse regulation.

Financial Information

This offer to exchange/prospectus includes as Appendix I the consolidated financial statements of Banco Sabadell as of and for the years ended December 31, 2023, 2022 and 2021 and the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024, which comprise the consolidated balance sheets as of December 31, 2023, 2022 and 2021 and June 30, 2024, respectively, and the consolidated income statements, consolidated statements of recognized income and expenses, consolidated statements of total changes in equity and consolidated cash flow statements for the periods then ended and explanatory notes. The comparative financial information as of and for the year ended December 31, 2022 included in the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023 has been restated to take into account the implementation of IFRS 17. BBVA is not affiliated with Banco Sabadell and was not involved in the preparation of the consolidated financial statements of Banco Sabadell as of and for the years ended December 31, 2023, 2022 and 2021 or the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024.

Certain of the financial information relating to Banco Sabadell included in this offer to exchange/prospectus has been derived from the consolidated financial statements of Banco Sabadell as of and for the years ended December 31, 2023, 2022 and 2021 and from the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024, each included as Appendix I to this offer to exchange/prospectus. Such consolidated financial statements have not been audited under U.S. GAAS and are therefore not considered audited financial statements under SEC rules. Consequently, no audit report has been included herein

on such consolidated financial statements. However, as a listed company in Spain, Banco Sabadell is subject to ongoing reporting requirements under CNMV rules, including that its annual financial statements be audited under prevailing legislation regulating the audit of accounts in Spain.

Description of Certain Differences Between IFRS-EU and IFRS-IASB

Banco Sabadell prepares its consolidated financial statements in accordance with IFRS as adopted by the European Union (“EU”) (“IFRS-EU”) while BBVA’s financial statements are prepared in compliance with IFRS as issued by the International Accounting Standards Board (“IFRS-IASB”). Based on BBVA’s reading of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, included below is a summary of the main difference between IFRS-EU and IFRS-IASB as they relate to Banco Sabadell. Holders of Banco Sabadell shares must rely upon their own knowledge of Banco Sabadell before deciding whether to tender their Banco Sabadell shares. Holders of Banco Sabadell shares should consult their own professional advisors for an understanding of the differences between IFRS-EU and IFRS-IASB, and the way these differences could impact the financial information included in this offer to exchange/prospectus.

The description of the main difference between IFRS-EU and IFRS-IASB as they relate to Banco Sabadell included below should not be taken as an exhaustive description of all differences between IFRS-EU and IFRS-IASB.

Macro hedging accounting

Based on BBVA’s reading of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, the main difference between IFRS-EU and IFRS-IASB as they relate to Banco Sabadell relates to the accounting of macro hedging related to certain portfolios. Macro hedging refers to the practice of managing risk at the portfolio level rather than at the level of individual transactions or pairs of transactions, as is typical in traditional hedging approaches. Companies applying macro hedging accounting have to demonstrate the effectiveness of the hedges and follow a detailed process for documenting and testing their effectiveness.

This difference between IFRS-EU and IFRS-IASB emerged during the EU’s endorsement process of IAS 39 “Financial Instruments: Recognition and Measurement”, whereby the EU made specific carve-outs to account for the prepayment risk associated with these portfolios and treat such risk as interest rate risk. This carve-out is not contemplated under IFRS-IASB, where the approach to macro hedges is focused on traditional risks, such as interest rate risk, exchange rate risk or market price risk, with prepayment risk not falling under the definition and criteria set forth under IAS 39 “Financial Instruments: Recognition and Measurement”.

Based on BBVA’s reading of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, BBVA believes that Banco Sabadell is applying hedge accounting to the prepayment risk associated with a portfolio of core deposits and to a mortgage portfolio. The use of this carve-out is not expressly disclosed in the explanatory notes of such financial statements as it is compliant with IFRS-EU.

According to Note 12 to Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, the value adjustments on hedged instruments through macro hedges as of December 31, 2023 amounted to €(567) million and €(422) million for assets and liabilities, respectively. The impact (before taxes) of macro hedges on Banco Sabadell’s consolidated income statement for the year ended December 31, 2023 amounted to €(290) million and €576 million for hedged instruments and hedged items, respectively. These amounts include adjustments for all macro hedges and such adjustments may not comply with IFRS-IASB.

Given the absence of information in Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023 and Banco Sabadell’s condensed consolidated interim financial statements as of and for the six months ended June 30, 2024 regarding the extent of macro hedging accounting that could potentially fail to comply with IFRS-IASB, BBVA is not able to calculate the adjustments that would need to be applied to the consolidated financial information of Banco Sabadell as of any date or for any period in order to make such information compliant with IFRS-IASB (“harmonization adjustments”). Accordingly, BBVA has not made any harmonization adjustments to the consolidated financial information of Banco Sabadell as of any date or for any period to make such information compliant with IFRS-IASB.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements included in this offer to exchange/prospectus are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. BBVA also may make forward-looking statements in BBVA’s other documents filed with, or furnished to, the SEC that are incorporated by reference into this offer to exchange/prospectus. Forward-looking statements can be identified by the use of forward-looking terminology such as “believe”, “expect”, “estimate”, “forecast”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and “future” or by the use of similar expressions or variations on such expressions, or by the discussion of strategy or objectives. Forward-looking statements are based on current plans, estimates and projections, are not guarantees of future performance and are subject to inherent risks, uncertainties and other factors that could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements.

In particular, this offer to exchange/prospectus and certain documents incorporated by reference into this offer to exchange/prospectus include forward-looking statements or guidance regarding or relating but not limited to BBVA’s future financial position, plans and objectives management for future operations, results of operations, synergies, impairment loss, provisions, capital, leverage and other regulatory ratios, capital distributions, management objectives and/or strategic initiatives, commitments and targets (including, without limitation, environmental, social and governance commitments and targets), the outcome of legal and regulatory actions and proceedings and risk management, including BBVA’s potential exposure to various types of risk such as market risk, interest rate risk, currency risk and equity risk, and other statements that are not historical facts. For example, certain of the market risk disclosures are dependent on choices about key model characteristics, assumptions and estimates, and are subject to various limitations. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future.

BBVA has identified some of the risks inherent in forward-looking statements in “Item 3. Key Information—Risk Factors”, “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” of its 2023 Form 20-F. Other factors could also adversely affect BBVA’s results or the accuracy of forward-looking statements in this offer to exchange/prospectus and the documents incorporated by reference into this offer to exchange/prospectus, and you should not consider the factors discussed here or in such other documents (including the sections of BBVA’s 2023 Form 20-F listed above) to be a complete set of all potential risks or uncertainties. Important factors that could cause actual results to differ materially from those expressed or implied by forward-looking statements include, among others:

•

the deterioration of economic conditions or the alteration of the institutional environment of the countries in which BBVA operates, especially Spain, Mexico and Turkey, including any adverse developments, or the perception that such developments may occur, regarding credit quality, public debt sustainability, economic or fiscal policy and sovereign ratings, particularly Spain’s, among other factors;

•

the intensity of geopolitical and economic risks in recent years as a result of, among other factors, the tensions triggered by the armed conflict in the Middle East, the war between Ukraine and Russia, long-standing United States–China trade tensions, Brexit and the rise of populism in several regions of the world. Furthermore, there is the risk of a sharp growth slowdown in China, which could lead to an adverse GDP impact in many geographies;

•

changes or volatility in interest rates, foreign exchange rates, asset prices, equity markets, commodity prices (including energy prices), inflation or deflation and, in particular, as of the date of this offer to exchange/prospectus, the depreciation of the currencies of the non-euro geographical areas in which BBVA operates, high inflation, stagflation due to more intense or prolonged supply crises, high interest rates in most of the geographical areas where BBVA operates (which may impact default rates) and low real interest rates in Turkey (which may affect BBVA’s margins);

•

the increased turbulence in the banking sector since March 2023, in particular, following the liquidity and other problems experienced by certain banks in the United States and Switzerland, which have led to increased concerns over the volatility and quality of banks’ deposits and their exposure to rising interest rates, and have adversely affected the valuations of certain banks. BBVA has significant exposure to the global banking sector. In addition, certain actions by Swiss regulators in 2023 have led to increased uncertainty regarding the potential actions to be adopted by the relevant authorities in connection with a bank’s failure. Moreover, regulatory changes are expected in the EU and, particularly, in Spain, in connection with the ranking of claims upon a bank’s insolvency, providing a preference to claims of all depositors relative to ordinary unsecured claims, which may adversely affect the risk profile and cost of banks’ debt securities. Further, there could be changes to the deposit guarantee schemes in certain jurisdictions, which could lead to changes in customer behavior and how banks manage their deposits portfolio;

•

adverse developments in emerging economies, in particular Latin America and Turkey, including unfavorable political and economic developments, social instability and changes in governmental policies, including expropriation, nationalization, exchange controls or other limitations on the distribution or repatriation of dividends, international ownership legislation, tax policies, interest rate caps, fee caps and other policies affecting the banking sector, including the “liraization” strategy in Turkey (which seeks to increase the weight of Turkish lira-denominated assets and liabilities of the banking system);

•

in Spain, political, regulatory and economic uncertainties have increased since the July 2023 general elections and the elections in Catalonia in May 2024 and there is a risk that policies could be adopted that have an adverse impact on the economy or BBVA’s business;

•

downgrades in BBVA’s credit ratings or in sovereign credit ratings, particularly Spain’s credit ratings;

•

the monetary, interest rate and other policies of central banks, and the trade, economic and other policies of governments, in the EU, Spain, Mexico, Turkey, the United States and elsewhere, including the impact of still-prevailing high interest rates on the BBVA Group’s results of operations (including mark-to-market losses on securities portfolios, reduced demand for credit, increased funding costs and higher default rates) and the impact of any future interest-rate reductions on inflation;

•

adjustments in the real estate markets in the geographical areas in which BBVA operates, in particular in Spain, Mexico and Turkey;

•

the success of BBVA’s acquisitions and investments, divestitures, mergers, joint ventures and strategic alliances;

•

BBVA’s ability to complete the exchange offer and integrate Banco Sabadell successfully and unanticipated losses in connection therewith;

•

the effects of competition in the markets in which BBVA operates, which may be influenced by regulation or deregulation affecting BBVA or its competitors, and BBVA’s ability to implement technological advances;

•

BBVA’s ability to comply with various legal and regulatory regimes and the impact of applicable laws and regulations on BBVA’s operations, including capital, resolution, liquidity, provision and consumer protection requirements, and the increasing tax burden;

•

changes in consumer spending and savings habits, including changes in government policies which may influence spending, saving and investment decisions;

•

BBVA’s ability to continue to access sources of liquidity and funding, including public sources of liquidity such as the funding provided by the ECB under its programs, and BBVA’s ability to receive dividends and other funds from BBVA’s subsidiaries;

•

BBVA’s ability to hedge certain risks economically;

•

BBVA’s ability to address physical, regulatory, reputational, transition and business risks associated with climate change and emerging and developing environmental, social and governance (“ESG”) standards, including BBVA’s ability to meet any ESG expectations, targets or obligations and the cost thereof;

•

BBVA’s ability to make payments on certain substantial unfunded amounts relating to commitments with personnel;

•

the performance of BBVA’s international operations and BBVA’s ability to manage such operations;

•

weaknesses or failures in the BBVA Group’s internal or outsourced processes, systems (including information technology systems) and security;

•

weaknesses or failures of BBVA’s anti-money laundering or anti-terrorism programs, or of BBVA’s internal policies, procedures, systems and other mitigating measures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations;

•

security breaches, including cyber-attacks and identity theft;

•

the outcome of legal and regulatory actions and proceedings, both those to which the BBVA Group is currently exposed and any others which may arise in the future, including actions and proceedings related to former subsidiaries of the BBVA Group or in respect of which the BBVA Group may have indemnification obligations;

•

actions that are incompatible with BBVA’s ethics and compliance standards, and BBVA’s failure to timely detect or remedy any such actions;

•

uncertainty surrounding the integrity and continued existence of reference rates and the transition away from the Euro Interbank Offered Rate (EURIBOR), Euro OverNight Index Average (EONIA) and London Inter-bank Offered Rate (LIBOR) to new reference rates;

•

BBVA’s success in managing the risks involved in the foregoing, which depends, among other things, on the adequacy of BBVA’s internal risk models and BBVA’s ability to anticipate events that are not captured or fully accounted for in the models BBVA uses; and

•

force majeure and other events beyond BBVA’s control.

In addition to the above, BBVA has identified certain risks that are specific to the exchange offer, that could also cause actual results to differ materially from those expressed or implied by forward-looking statements. See “Risk Factors—Risks Relating to the Exchange Offer”. Furthermore, this offer to exchange/prospectus includes certain forward-looking statements of Banco Sabadell’s management, including under “Information about Banco Sabadell”. Such statements reflect only the views of Banco Sabadell’s management, have not been updated or verified by BBVA and are subject to similar risks and uncertainties as the other forward-looking statements included herein, mutatis mutandis, many of which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements. In addition, the forward-looking statements made in this offer to exchange/prospectus (or any particular document) speak only as of the date of this offer to exchange/prospectus (or any such particular document). BBVA does not intend to publicly update or revise these forward-looking statements to reflect events or circumstances after the date thereof, including, without limitation, changes in BBVA’s business, strategy, targets or expectations, including as a result of the occurrence of unanticipated events, and BBVA does not assume any responsibility to do so. You should, however, consult any further disclosures of a forward-looking nature BBVA may make in BBVA’s other documents filed with, or furnished to, the SEC that are incorporated by reference into this offer to exchange/prospectus.

The safe harbors for forward-looking statements under Section 27A of the Securities Act and Section 21E of the Exchange Act, added by the Private Securities Litigation Reform Act of 1995, do not apply to forward-looking statements made in connection with a tender offer.

SUMMARY

This summary highlights selected information from this offer to exchange/prospectus. It does not contain all the information that is important to you. Before you decide whether or not to tender your Banco Sabadell shares, you should read carefully this entire offer to exchange/prospectus as well as the documents that are incorporated by reference into or filed as exhibits to the Registration Statement of which this offer to exchange/prospectus forms a part. See “Where You Can Find More Information” and “Incorporation of Certain Information by Reference” in this offer to exchange/prospectus beginning on page 12 and page 13, respectively.

BBVA Group

The BBVA Group is a customer-centric global financial services group founded in 1857. Internationally diversified and with strengths in retail banking, asset management and wholesale banking, the BBVA Group is committed to offering a compelling digital proposition focused on customer experience. BBVA has a leadership position in the Spanish market, it is the largest financial institution in Mexico in terms of assets, it has leading franchises in South America, and it is the majority shareholder in Garanti BBVA, Turkey’s largest bank in terms of market capitalization. The BBVA Group had consolidated assets of €759,534 million and €775,558 million as of June 30, 2024 and December 31, 2023, respectively, and net attributable profit/(loss) of €4,994 million and €8,019 million for the six months ended June 30, 2024 and the year ended December 31, 2023, respectively.

Additional information about the BBVA Group is included in BBVA’s 2023 Form 20-F and BBVA First Half 2024 Results Form 6-K, which are incorporated by reference in this offer to exchange/prospectus.

BBVA’s principal executive offices are located at Calle Azul, 4, 28050 Madrid, Spain, and its telephone number at that location is (+34) 91-537-7000.

Banco Sabadell

Banco Sabadell and its consolidated subsidiaries compose the Banco Sabadell Group. Banco Sabadell was incorporated on December 31, 1881 in the town of Sabadell, near Barcelona for an unlimited term and conducts its business under the commercial name “Banco Sabadell”.

Banco Sabadell has its registered office in the city of Alicante, at Avenida Óscar Esplá nº 37, PC 03007, Spain (contact telephone number 0034 902 030 255) and is registered with the Commercial Registry of Alicante (Spain) under volume 4,070, book 1 and sheet A-156980.

Banco Sabadell is a Spanish company with legal status as a public limited company (sociedad anónima) and is governed by the Spanish Corporation Law. Banco Sabadell is subject to special legislation applicable to credit entities in general, the supervision, control and regulation of the ECB, and, as a listed company, the regulatory oversight of the CNMV.

The main activity carried out by the Banco Sabadell Group in the different jurisdictions in which it operates is banking, and fundamentally commercial banking through a wide range of products and services for large and medium-sized companies, small and medium-sized enterprises (“SMEs”), retailers and self-employed workers, professional groups, other individuals and bancassurance. The main customers of the Banco Sabadell Group are SMEs and individual clients in Spain, with a total customer base that is now six times larger than it was in 2008. As of December 31, 2023, the Banco Sabadell Group operated a total of 1,420 branches (1,178 in Spain). The Banco Sabadell Group’s retail banking activities are conducted primarily through this branch network.

Risk Factors (page 34)

An investment in BBVA shares involves risks. In considering whether or not to tender your Banco Sabadell shares in the exchange offer, you should carefully consider the information about these risks set forth under “Risk Factors” in this offer to exchange/prospectus beginning on page 34, together with the other information included or incorporated by reference into this offer to exchange/prospectus.

The Exchange Offer (page 104)

Exchange Offer

BBVA is undertaking the exchange offer pursuant to the offering documents published (or that will be published) in Spain and made available (or that will be made available) to all shareholders of Banco Sabadell, to acquire all of the issued and outstanding Banco Sabadell shares. The exchange offer will be addressed to U.S. holders of Banco Sabadell shares pursuant to this offer to exchange/prospectus.

Consideration

If the exchange offer is completed, you will receive one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares (adjusted, as the case may be, as described in this offer to exchange/prospectus) you tender into, and do not withdraw from, the exchange offer.

Fractional BBVA Shares

Exchange Offer Cash Consideration

Holders of Banco Sabadell shares will receive, in addition to the BBVA shares they are entitled to receive, €0.29 in cash for each 5.0196 Banco Sabadell shares tendered and not withdrawn. Tendering holders of Banco Sabadell shares that tender a number of Banco Sabadell shares that does not entitle them to receive at least one newly-issued BBVA share, or that entitles them to receive a whole number of newly-issued BBVA shares but have an excess number of Banco Sabadell shares that would entitle them to receive the above cash payment in lieu of a fractional BBVA share, will receive an amount in cash equal to €0.29 multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that they would otherwise be entitled to receive in

accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the exchange offer cash consideration.

Expiration Date

You may tender your Banco Sabadell shares into the exchange offer at any time prior to the expiration time, which is 17:59:59 p.m. Eastern time (23:59:59 p.m. Central European time) on the expiration date (which is currently , 2024). The exchange offer period may be extended as described below.

Extensions

BBVA may extend the period of time in which the exchange offer is open one or more times in accordance with the provisions of article 23 of the Spanish Takeover Regulation, provided that such extension complies with U.S. securities laws, and, provided further that the acceptance period does not exceed 70 calendar days and that any extension is communicated in advance to the CNMV. The extension of the acceptance period, if any, must be announced at least three calendar days before the then-scheduled expiration date of the acceptance period, indicating the circumstances that motivate such extension. The CNMV may also extend the exchange offer acceptance period at its own discretion under the circumstances set forth in the Spanish Takeover Regulation, including (i) following a supplement to the offering documents published (or that will be published) in Spain when the CNMV considers that the materiality of the information disclosed in such supplement makes the extension of the exchange offer appropriate; or (ii) in other cases where the CNMV deems such extension necessary, through a justified resolution and to the extent legally possible.

Conditions to Completion of the Exchange Offer

Completion of the exchange offer is subject to the conditions set forth in “The Exchange Offer—Conditions to Completion of the Exchange Offer” in this offer to exchange/prospectus beginning on page 107.

Procedure for Tendering

Withdrawal

For more information on the procedure for tendering, the timing of the exchange offer, extensions of the exchange offer and your rights to withdraw your Banco Sabadell shares from the exchange offer prior to the expiration time, see “The Exchange Offer” in this offer to exchange/prospectus beginning on page 104.

BBVA’s Reasons for the Proposed Exchange Offer (page 101)

In unanimously approving the exchange offer, BBVA’s board of directors considered a variety of factors in favor of the proposed exchange offer.

•

the combination of very complementary businesses, both in terms of geographical diversification and in terms of the positioning in different client segments in Spain; and

•

a combined group with ample solvency (CET1 above 12%) and a higher resilience to external shocks and a lower vulnerability through economic cycles due to increased diversification.

Additionally, BBVA believes that the intended merger, if completed, will have a positive impact on the clients and employees of both entities and society as a whole.

While it is BBVA’s intention to effect a merger by absorption, BBVA is not obligated to consummate such a merger following completion of the exchange offer or to consummate it on the same terms as the exchange offer. Further, BBVA may be unable to complete the merger. See “The Exchange Offer—Certain Consequences of the Exchange Offer—Squeeze-out and Merger”. For further information regarding BBVA’s plans with respect to Banco Sabadell if the intended merger is not consummated for any reason, please see “The Exchange Offer—Plans for Banco Sabadell after the Exchange Offer—Planned Corporate Restructuring Transactions of Any Kind”.

See “BBVA’s Reasons for the Proposed Exchange Offer” in this offer to exchange/prospectus beginning on page 101.

BBVA’s Interest in Banco Sabadell (page 130)

Neither BBVA, nor the directors of BBVA nor any of the companies within the BBVA Group, nor, to the best of BBVA’s knowledge and belief, any of the directors of the companies in the BBVA Group, currently holds any Banco Sabadell shares, nor any securities that may grant subscription or acquisition rights to Banco Sabadell shares, whose voting rights would be attributable to BBVA pursuant to article 5 of the Spanish Takeover Regulation.

Shareholding of BBVA’s Directors, Executive Officers and Their Affiliates (page 131)

As of October 11, 2024, the shareholding of BBVA’s directors, executive officers and their affiliates represented approximately 0.15% of the outstanding BBVA shares. BBVA’s board of directors proposed that the

shareholders of BBVA pass the relevant capital increase resolution necessary to issue the shares of BBVA to be issued in connection with the exchange offer. Such capital increase resolution was approved at an extraordinary general shareholders’ meeting on July 5, 2024, with shareholders representing 70.75% of the outstanding BBVA shares present at such meeting and 96.01% of such shareholders voting in favor.

Appraisal Rights (page 127)

The holders of Banco Sabadell shares are not entitled under Spanish law or otherwise to appraisal rights with respect to the exchange offer. For more information about appraisal rights of holders of Banco Sabadell shares, see “The Exchange Offer—Appraisal Rights” in this offer to exchange/prospectus beginning on page 127.

Prior Non-Opposition of the ECB (page 106)

Pursuant to the provisions of Law 10/2014, of June 26, 2014, on the regulation, supervision and solvency of credit institutions, and Royal Decree 84/2015, of February 13, 2015 implementing Law 10/2014, of June 26, 2014, on the regulation, supervision and solvency of credit institutions, the acquisition by BBVA of control of Banco Sabadell resulting from the exchange offer was subject to the duty of prior notification to the Bank of Spain and to the obtainment of the non-opposition by the ECB. The ECB’s non-opposition was obtained on September 5, 2024.

Conditions to Completion of the Exchange Offer (page 107)

Completion of the exchange offer is subject to the following conditions:

ii.

iii.

iv.

In accordance with the provisions of article 13.2.d) of the Spanish Takeover Regulation, the authorization of the indirect acquisition of control of Banco Sabadell’s banking subsidiary in the United Kingdom, TSB, by the PRA. This condition was satisfied on September 2, 2024.

the condition referred to in (iii) above or withdraw the exchange offer if before the end of the acceptance period the Spanish antitrust authorities (i) approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition (in which case, BBVA will evaluate the expected consequences of such condition to determine whether to waive the condition and continue with completion of or withdraw the exchange offer) or (ii) have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer. For additional information on condition (iii) above, see “The Exchange Offer—Antitrust Authorizations”.

Antitrust Authorizations (page 107)

The economic concentration resulting from completion of the exchange offer is subject to the authorization of the following antitrust authorities:

The Spanish antitrust authorities, in accordance with Law 15/2007, of July 3, on the defense of competition.

In accordance with the provisions of article 26.1 of the Spanish Takeover Regulation, the economic concentration resulting from the exchange offer is subject to the express or tacit authorization for the Spanish antitrust authorities with the following effects:

•

If before the end of the acceptance period the Spanish antitrust authorities do not object to completion of the exchange offer, this condition will be fully fulfilled.

•

If before the end of the acceptance period the Spanish antitrust authorities declare the proposed exchange offer inappropriate, BBVA must withdraw the exchange offer.

•

If before the end of the acceptance period the Spanish antitrust authorities subject their authorization to the fulfillment of any condition, BBVA may, but is not required to, withdraw the exchange offer.

•

If before the end of the acceptance period the Spanish antitrust authorities have not given their express or tacit authorization to the exchange offer, BBVA may, but is not required to, withdraw the exchange offer.

ii.

The Mexican antitrust authorities, in accordance with the Mexican Competition Law.

iii.

The U.S. antitrust authorities, in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The 30-day waiting period provided for under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on July 3, 2024 and, as a result, the economic concentration resulting from completion of the exchange offer is considered to be approved by the U.S. antitrust authorities.

iv.

The French antitrust authorities, in accordance with the provisions of the French Commercial Code. The French antitrust authorities authorized the economic concentration resulting from completion of the exchange offer on July 9, 2024.

The Portuguese antitrust authorities, in accordance with article 37 of Law 19/2012, of May 8. The Portuguese antitrust authorities authorized the economic concentration resulting from completion of the exchange offer on July 10, 2024.

vi.

The Moroccan antitrust authorities, in accordance with article 11.3 of Law 104-12, on free pricing and competition. The Moroccan antitrust authorities authorized the economic concentration resulting from completion of the exchange offer on July 24, 2024.

As of the date of this offer to exchange/prospectus, BBVA has requested the corresponding authorizations from the aforementioned competent antitrust authorities.

In addition, on May 28, 2024 the exchange offer was notified on a voluntary basis to the Competition and Markets Authority (the “CMA”), the UK’s antitrust authority. On June 7, 2024 the CMA confirmed that it had no further questions regarding the exchange offer.

However, as set forth under “The Exchange Offer—Conditions to Completion of the Exchange Offer”, completion of the exchange offer is conditioned upon obtaining the authorization from the Spanish antitrust authorities set forth in item (i) above. According to the Spanish Takeover Regulation, if the Spanish antitrust authorities declare the proposed exchange offer inappropriate before the end of the acceptance period, BBVA will be required to withdraw the exchange offer. In addition, pursuant to the Spanish Takeover Regulation, BBVA may, at its discretion, waive the condition referred to in (i) above or withdraw the exchange offer if before the end of the acceptance period the Spanish antitrust authorities (i) approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition (in which case, BBVA will evaluate the expected consequences of such condition to determine whether to waive the condition and continue with completion of or withdraw the exchange offer) or (ii) have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer.

As noted above, if by the end of the acceptance period the Spanish antitrust authorities have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer and all of the other conditions are satisfied or waived, BBVA may waive the condition and proceed with completion of the exchange offer or withdraw the exchange offer. In such a case, the Spanish antitrust authorities’ decision with respect to the economic concentration resulting from the exchange offer would be obtained after the end of the acceptance period. If BBVA decides to proceed with completion of the exchange offer without having received the Spanish antitrust authorities’ decision with respect to the economic concentration resulting from the exchange offer, BBVA would not be able to exercise the political rights attached to the shares of Banco Sabadell owned by BBVA until the Spanish antitrust authorities issue a decision. Once a decision is issued, BBVA will have to abide by such decision. If the Spanish antitrust authorities decide not to authorize the economic concentration resulting from the exchange offer, BBVA would be required to sell all or part of its stake in Banco Sabadell, on the terms set forth in the resolution of the Spanish antitrust authorities. If the Spanish antitrust authorities approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition, BBVA would be required, at its election, either (i) to fulfill the related conditions or (ii) to sell all or part of its stake in Banco Sabadell, on the terms set forth in the resolution of the Spanish antitrust authorities. The percentage of Banco Sabadell shares over which BBVA may not be able to exercise their respective political rights or that BBVA may be required to sell, and the timing for compliance, with any such requirement would be determined by the Spanish antitrust authorities.

Governmental and Regulatory Authorizations (page 109)

such regulated subsidiaries or affiliates of Banco Sabadell, which may require, in accordance with the applicable legislation in each case, obtaining the authorization or non-opposition of the competent regulatory supervisory bodies in Spain or in jurisdictions other than Spain, as applicable. As a result, according to the information available to BBVA, the authorization or non-opposition with respect to the indirect acquisition of control or significant shareholdings in regulated subsidiaries or affiliates of Banco Sabadell is subject to the prior notification to or the authorization or non-opposition of the following competent regulatory supervisory bodies:

The PRA in relation to the acquisition of indirect control of TSB, English banking subsidiary of Banco Sabadell, in accordance with the Financial Services and Markets Act 2000. This authorization was obtained on September 2, 2024.

ii.

The ECB in relation to the acquisition of indirect control of Sabadell Consumer Finance, S.A.U., Spanish banking subsidiary of Banco Sabadell, in accordance with Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions and Royal Decree 84/2015 of February 13, which develops Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions. The ECB’s non-opposition was obtained on September 5, 2024.

iii.

The ECB in relation to the acquisition of indirect control of, or the acquisition of significant shareholdings in, the following subsidiaries and affiliates of Banco Sabadell: TSB (United Kingdom), Banco Sabadell, S.A., Institución de Banca Múltiple (Mexico), Sabcapital, S.A. de C.V., SOFOM, E.R. (Mexico), Banco Atlántico (Bahamas) Bank & Trust Ltd. (in liquidation) (Bahamas) and Financiera Iberoamericana, S.A. (Cuba), in accordance with Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions and Royal Decree 84/2015 of February 13, which develops Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions. The ECB’s non-opposition was obtained on September 5, 2024.

iv.

The Bank of Spain in relation to the acquisition of indirect control of Paycomet, S.L., Spanish payment institution subsidiary of Banco Sabadell, in accordance with Royal Decree-Law 19/2018, of November 23, on payment services and other financial urgent measures, Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions and Royal Decree 84/2015 of February 13, which develops Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions. On July 23, 2024, the Bank of Spain confirmed its non-opposition to the acquisition of indirect control of Paycomet, S.L. by BBVA.

The CNMV in relation to the acquisition of indirect control of Urquijo Gestión, S.A.U. S.G.I.I.C, Spanish management company of collective investment institutions subsidiary of Banco Sabadell, in accordance with Law 35/2003, of November 4, on collective investment institutions. On September 26, 2024, the CNMV confirmed its non-opposition to the acquisition of indirect control of Urquijo Gestión, S.A.U. S.G.I.I.C by BBVA.

vi.

The Directorate-General of Insurance and Pension Funds in relation to the indirect acquisition of a significant shareholding in each of Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros and Bansabadell Vida, S.A. de Seguros y Reaseguros, Spanish insurance companies in which Banco Sabadell has a significant shareholding, in accordance with Law 20/2015, of July 14, on organization, supervision and solvency of the insurance and reinsurance undertakings. On October 7, 2024, the Directorate-General of Insurance and Pension Funds confirmed its non-opposition to the indirect acquisition of a significant shareholding in each of Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros and Bansabadell Vida, S.A. de Seguros y Reaseguros by BBVA.

vii.

Insurance and Pension Funds informing about the indirect acquisition of a significant stake in Bansabadell Pensiones E.F.G.P, S.A. and no express or tacit authorization from the Directorate-General for Insurance and Pension Funds is required thereafter.

viii.

The Directorate-General of Insurance and Pension Funds in relation to the indirect acquisition of control of Bansabadell Mediación, Operador de Banca-Seguros vinculado del Grupo Banco Sabadell, S.A., Spanish bank-assurance operator subsidiary of Banco Sabadell, in accordance with Royal Decree-law 3/2020, of February 4, on urgent measures by which various directives of the European Union in the field of public procurement in certain sectors are incorporated into the Spanish legal system; private insurance; pension plans and funds; in the tax field and tax litigation. On October 4, 2024, the Directorate-General of Insurance and Pension Funds confirmed its non-opposition to the indirect acquisition of control of Bansabadell Mediación, Operador de Banca-Seguros vinculado del Grupo Banco Sabadell, S.A. by BBVA.

ix.

The Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) in relation to the acquisition of indirect control of Banco Sabadell S.A., Institución de Banca Múltiple, Mexican multiple banking institution subsidiary of Banco Sabadell, in accordance with the Mexican Securities Market Law published in the Official Gazette on December 30, 2005, as amended, and applicable legislation.

The Central Bank of Morocco (Bank Al Maghrib) in relation to the indirect change of control of Banco Sabadell’s branch in Casablanca (Morocco).

xi.

The U.S. Financial Industry Regulatory Authority (“FINRA”) in relation to the acquisition of indirect control of Sabadell Securities USA, Inc., U.S. broker-dealer subsidiary of Banco Sabadell.

xii.

The Florida Division of Securities in relation to the acquisition of indirect control of Sabadell Securities USA, Inc., U.S. broker-dealer subsidiary of Banco Sabadell.

The exchange offer has also been notified to the European Commission pursuant to Regulation (EU) 2022/2560 of the European Parliament and of the Council of December 14, 2022, on foreign subsidies that distort the internal market. Completion of the exchange offer is not conditioned upon obtaining such authorization.

Certain Consequences of the Exchange Offer (page 127)

The acquisition of Banco Sabadell shares by BBVA pursuant to the exchange offer will reduce the number of holders of Banco Sabadell shares and the number of Banco Sabadell shares that might otherwise trade publicly and, depending on the number of Banco Sabadell shares acquired by BBVA pursuant to the exchange offer, could adversely affect the liquidity and market value of any remaining Banco Sabadell shares held by the public or result in their automatic delisting from the Spanish Stock Exchanges if BBVA obtains the percentage of voting rights required to exercise its squeeze-out right.

of the exchange offer, BBVA holds a number of Banco Sabadell shares representing at least 90% of the voting rights in Banco Sabadell’s share capital, BBVA will exercise its right to demand the squeeze-out of the remaining Banco Sabadell shares at the same consideration as offered pursuant to the exchange offer (adjusted, as the case may be, as described in this offer to exchange/prospectus). To this effect, within the three Spanish stock exchange business days following the publication of the results of the exchange offer on the website of the CNMV, BBVA will communicate to the CNMV and publicly announce whether or not the requirements to execute a squeeze-out transaction have been met. In that announcement, or within the two following Spanish stock exchange business days, BBVA will announce the date of the squeeze-out transaction. In accordance with article 48.4 of the Spanish Takeover Regulation, such date will be fixed between the 15^th and the 20^th Spanish business day following the date of such announcement. Such decision will be irrevocable. Upon settlement of such squeeze-out transaction, the Banco Sabadell shares will be automatically delisted from the Spanish Stock Exchanges.

Notwithstanding the above, if the exchange offer is completed, regardless of the percentage of Banco Sabadell shares acquired by BBVA pursuant to the exchange offer, BBVA intends to promote, as soon as possible after the settlement of the exchange offer, and irrespective of whether the thresholds provided for in articles 116 of the Spanish Securities Market Law and 47 of the Spanish Takeover Regulation for the exercise of the right of squeeze-out are met, a merger by absorption of Banco Sabadell by BBVA, with an exchange ratio equivalent, as far as possible, to the consideration offered in the exchange offer, subject to market conditions or other circumstances making it inadvisable to carry out such merger process or carry out such merger process on such terms. The exchange ratio of any such merger must be validated, on the basis of the fair value of the equity of the entities participating in the merger, by an independent expert appointed for such purpose by the relevant commercial registry, in accordance with applicable Spanish law, and may ultimately differ from the consideration offered in the exchange offer. A joint merger plan would need to be formulated by BBVA’s and Banco Sabadell’s respective boards of directors and approved by BBVA’s and Banco Sabadell’s respective shareholders, and its consummation would require the prior authorization of the Ministry of Economy, Trade and Business in accordance with the provisions of the twelfth additional provision of Law 10/2014, of June 26, on the regulation, supervision and solvency of credit institutions and related regulations. If the intended merger is not consummated for any reason, BBVA will not pursue a delisting offer over the Banco Sabadell shares for at least 12 months following the settlement of the exchange offer.

While it is BBVA’s intention to effect a merger by absorption, BBVA is not obligated to consummate such a merger following completion of the exchange offer or to consummate it on the same terms as the exchange offer. As noted above, BBVA’s intention is to apply in any such merger an exchange ratio equivalent, as far as possible, to the consideration offered in the exchange offer. However, the exchange ratio applicable in any such merger must be validated by an independent expert and may ultimately differ from the consideration offered in the exchange offer. Further, any such merger would need BBVA’s and Banco Sabadell’s respective boards of directors to formulate a joint merger plan, which would need to be approved by BBVA’s and Banco Sabadell’s respective shareholders. The consummation of the merger would require the prior authorization of the Spanish Economy, Trade and Business Minister, following the issuance of related reports by certain regulators and authorities that will have previously issued favorable opinions with respect to the exchange offer. If any of the foregoing corporate approvals or the authorization from the Economy, Trade and Business Minister is not obtained, the merger will not be consummated. Following completion of the exchange offer, BBVA will be able to appoint the majority of the members of the board of directors of Banco Sabadell and exercise at least 50.01% of Banco Sabadell’s voting rights. BBVA is not aware of any Spanish precedent transaction where the authorization of a merger following the acquisition of control of a credit institution, as contemplated by this offer to exchange/prospectus has not been granted by the Spanish Economy, Trade and Business Minister. See “The Exchange Offer—Certain Consequences of the Exchange Offer—Squeeze-out and Merger”. For further information regarding BBVA’s plans with respect to Banco Sabadell if the intended merger is not consummated for any reason, please see “The Exchange Offer—Plans for Banco Sabadell after the Exchange Offer—Planned Corporate Restructuring Transactions of Any Kind”.

Source and Amount of Funds (page 130)

The exchange offer is not conditioned upon any financing arrangements, and no funds have been borrowed for purposes of the exchange offer. BBVA will use general corporate funds to pay the exchange offer cash consideration and any additional cash requirements of the exchange offer.

Dividend Payments (page 115)

Spanish Tax Consequences for U.S. Shareholders (page 116)

As a general rule, no charge to Spanish tax (including Spanish Transfer Tax or Value Added Tax) will arise to Qualifying Shareholders (as defined in “The Exchange Offer—Spanish Tax Consequences for U.S. Shareholders” beginning on page 116) in respect of the exchange offer.

The ownership and disposition of BBVA shares by Qualifying Shareholders may entail Spanish tax implications. However, under certain conditions, dividends and capital gains obtained from BBVA shares by Qualifying Shareholders may benefit from the reduced rates and exemptions of the United States-Spain Treaty (as defined in “The Exchange Offer—Spanish Tax Consequences for U.S. Shareholders” beginning on page 116).

U.S. Federal Income Tax Consequences for U.S. Holders (page 120)

The U.S. federal income tax consequences of the exchange offer are discussed under “The Exchange Offer—Tax Consequences—Material U.S. Federal Income Tax Considerations for U.S. Holders”. The discussion of the material U.S. federal income tax consequences contained in this offer to exchange/prospectus is intended to provide only a general discussion and is not a complete analysis or description of all potential U.S. federal income tax consequences that are applicable to you in respect of the exchange offer, nor does it address any tax considerations arising under U.S. state or local or non-U.S. tax laws. You are urged to consult your tax adviser regarding the tax consequences of the exchange offer.

For more information about certain material Spanish and U.S. federal income tax consequences of the exchange offer with respect to the Banco Sabadell shares and of the ownership and disposition of the BBVA shares, see “The Exchange Offer—Material U.S. Federal Income Tax Considerations for U.S. Holders” in this offer to exchange/prospectus beginning on page 120.

Comparison of Rights of Holders of BBVA Shares and Banco Sabadell Shares (page 153)

If you tender into, and do not withdraw, your Banco Sabadell shares from the exchange offer and the exchange offer is completed, you will become a holder of BBVA shares. The rights of a holder of BBVA shares will be governed by BBVA’s bylaws, its general shareholders’ meeting’s regulations and the Spanish Corporation Law. See “Comparison of Rights of Holders of BBVA Shares and Banco Sabadell Shares” in this offer to exchange/prospectus beginning on page 153.

BBVA shares are traded on the Spanish Stock Exchanges, as well as on the LSE and Mexican Stock Exchange. BBVA ADSs are listed on the NYSE under the symbol “BBVA”.

BBVA ADSs (page 116)

If the exchange offer is completed, holders of Banco Sabadell shares who tender their Banco Sabadell shares into, and do not withdraw them from, the exchange offer, will receive BBVA shares. BBVA shares trade in the form of American Depositary Shares (“ADSs”) in the United States on the NYSE. Tendering Banco Sabadell shareholders who receive BBVA shares in the exchange offer may, subject to the provisions of the amended and restated deposit agreement dated June 29, 2007, among BBVA, the Bank of New York Mellon and the holders from time to time of BBVA ADSs, following the exchange offer deposit the BBVA shares they receive in the exchange offer with the depositary for such ADS facility and receive BBVA ADSs that are tradeable on the NYSE.

Unaudited Pro Forma Condensed Financial Information (page 49)

The unaudited pro forma condensed combined financial information (the “pro forma financial information”) included herein gives effect to completion of the exchange offer.

nor is it intended to project the financial position or future results of the combined group. In preparing the pro forma financial information included in this offer to exchange/prospectus BBVA did not have access to non-public information regarding Banco Sabadell. As a result, BBVA prepared the pro forma financial information using solely publicly-available information regarding Banco Sabadell, and financial information of BBVA. The adjustments included in the pro forma financial information solely include those that are factually supportable on the basis of the information that is publicly available to BBVA.

Comparative Market Price and Dividend Per Share Information (page 63)

BBVA shares are listed on the Spanish Stock Exchanges under the symbol “BBVA”. BBVA shares are also listed on the LSE under the symbol “BVA” and the Mexican Stock Exchange under the symbol “BBVA”. BBVA ADSs are listed on the NYSE under the symbol “BBVA”. Each BBVA ADS represents the right to receive one BBVA share. Banco Sabadell shares are listed on the Spanish Stock Exchanges under the symbol “SAB”.

The following table presents trading information for the securities on May 8, 2024, the last trading day before the publication of BBVA’s announcement of its intention to make the exchange offer, as reported on the Spanish Stock Exchanges.


Banco Sabadell Shares			BBVA Shares
High	Low	Close	High	Low	Close
€1.83	€1.79	€1.80	€10.43	€10.23	€10.29

The table below sets forth, for the periods indicated, the high and low closing prices of Banco Sabadell shares and BBVA shares as reported on the Spanish Stock Exchanges, respectively, as well as the any dividend payments made. The share prices included below have not been adjusted for the payment of any dividend payment made after their respective reported date.


	Banco Sabadell Shares						BBVA Shares
	High		Low		Dividends		High		Low		Dividends
First Quarter 2021	€	0.49	€	0.35		N/A	€	4.86	€	3.76		N/A
Second Quarter 2021	€	0.68	€	0.46		N/A	€	5.43	€	4.29		€0.059
Third Quarter 2021	€	0.73	€	0.51		N/A	€	5.91	€	4.91		N/A
Fourth Quarter 2021	€	0.73	€	0.55		N/A	€	6.28	€	4.70		€0.08
First Quarter 2022	€	0.94	€	0.59		N/A	€	6.06	€	4.49		N/A
Second Quarter 2022	€	0.86	€	0.68		€0.03	€	5.32	€	4.15		€0.23
Third Quarter 2022	€	0.79	€	0.60		N/A	€	4.99	€	4.00		N/A
Fourth Quarter 2022	€	0.91	€	0.70		€0.02	€	5.70	€	4.58		€0.12
First Quarter 2023	€	1.33	€	0.91		€0.02	€	7.45	€	5.78		N/A
Second Quarter 2023	€	1.08	€	0.88		N/A	€	7.03	€	6.12		€0.31
Third Quarter 2023	€	1.16	€	1.02		N/A	€	7.71	€	6.83		N/A
Fourth Quarter 2023	€	1.35	€	1.03		€0.03	€	8.70	€	7.39		€0.16
First Quarter 2024	€	1.46	€	1.11		N/A	€	11.04	€	8.00		N/A
Second Quarter 2024	€	1.94	€	1.40		€0.03	€	11.24	€	9.02		€0.39
Third Quarter 2024	€	2.04	€	1.71		N/A	€	10.20	€	8.62		N/A
Fourth Quarter 2024 (through October 11, 2024)	€	1.87	€	1.78	€	0.08	€	9.65	€	9.23	€	0.29

The value of the BBVA shares that will be delivered as consideration in the exchange offer is subject to change as a result of the fluctuation in the market price of the BBVA shares during the pendency of the exchange offer and thereafter, and therefore will likely be different from the prices set forth above at the time of settlement of the exchange offer. See “Risk Factors—Risks Relating to the Exchange Offer—Because the exchange ratio is fixed, the value of the BBVA shares you will receive as a result of the exchange offer is likely to fluctuate”. Holders of Banco Sabadell shares are encouraged to obtain market quotations for the BBVA shares and the Banco Sabadell shares prior to making a decision with respect to the exchange offer.

RISK FACTORS

In addition to the matters described under “Cautionary Statement Regarding Forward-Looking Statements” in this offer to exchange/prospectus beginning on page 17 and the risk factors contained in the 2023 Form 20-F and the BBVA First Half 2024 Results 6-K that are incorporated by reference into this offer to exchange/prospectus, you should carefully consider the following risk factors before deciding whether or not to tender your Banco Sabadell shares into the exchange offer. Each of the matters described in these risk factors could have a material adverse effect on the businesses, financial condition and/or results of operations of BBVA and Banco Sabadell individually or as affiliated companies and on the market price of the BBVA shares and the Banco Sabadell shares.

Risks Relating to the Exchange Offer

Completion of the exchange offer is subject to certain conditions precedent, which may not be satisfied or may only be satisfied subject to conditions.

As described in this offer to exchange/prospectus under “The Exchange Offer—Conditions to Completion of the Exchange Offer”, completion of the exchange offer is subject to the following conditions:

ii.

iii.

iv.

In accordance with the provisions of article 13.2.d) of the Spanish Takeover Regulation, the authorization of the indirect acquisition of control of Banco Sabadell’s banking subsidiary in the United Kingdom, TSB, by PRA. This condition was satisfied on September 2, 2024.

According to the Spanish Takeover Regulation, if the Spanish antitrust authorities declare the proposed exchange offer inappropriate before the end of the acceptance period, BBVA will be required to withdraw the exchange offer. BBVA can provide no assurances that all of the conditions to the exchange offer will be satisfied or that they will be satisfied in the time frame currently expected.

In addition, pursuant to the Spanish Takeover Regulation, BBVA may, at its discretion, waive the condition referred to in (iii) above or withdraw the exchange offer if before the end of the acceptance period the Spanish antitrust authorities (i) approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition ( in which case, BBVA will evaluate the expected consequences of such condition to determine whether to waive the condition and continue with completion of or withdraw the exchange offer) or (ii) have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer. If BBVA decides to proceed with completion of the exchange

offer despite any conditions imposed by the Spanish antitrust authorities, its plans with respect to Banco Sabadell following completion of the exchange offer may change as a result, and BBVA may not be able to fully realize the expected benefits and synergies expected to result from completion of the exchange offer.

Completion of the exchange offer is not conditioned on the obtainment of certain antitrust and regulatory approvals and authorizations; however, if such approvals and authorizations are not obtained, and the exchange offer is completed, the business, financial condition and results of operations of BBVA and Banco Sabadell may be adversely affected.

The economic concentration resulting from completion of the exchange offer is subject to the authorization of the following antitrust authorities:

The Spanish antitrust authorities, in accordance with Law 15/2007, of July 3, on the defense of competition.

•

If before the end of the acceptance period the Spanish antitrust authorities do not object to completion of the exchange offer, this condition will be fully fulfilled.

•

If before the end of the acceptance period the Spanish antitrust authorities declare the proposed exchange offer inappropriate, BBVA must withdraw the exchange offer.

•

ii.

The Mexican antitrust authorities, in accordance with the Mexican Competition Law.

iii.

The U.S. antitrust authorities, in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The 30-day waiting period provided for under the Hart-Scott-Rodino Antitrust Improvements

Act of 1976 expired on July 3, 2024 and, as a result, the economic concentration resulting from completion of the exchange offer is considered to be approved by the U.S. antitrust authorities.

iv.

vi.

As of the date of this offer to exchange/prospectus, BBVA has requested the corresponding authorizations from the aforementioned competent antitrust authorities.

In addition, on May 28, 2024 the exchange offer was notified on a voluntary basis to the CMA, the UK’s antitrust authority. On June 7, 2024 the CMA confirmed that it had no further questions regarding the exchange offer.

Additionally, according to the information available to BBVA, Banco Sabadell has control or significant shareholdings in regulated entities both in Spain and in other jurisdictions. The acquisition by BBVA of control of Banco Sabadell as a result of the exchange offer will involve the indirect acquisition of control or significant shareholdings in such regulated subsidiaries or affiliates of Banco Sabadell, which may require, in accordance with the applicable legislation in each case, obtaining the authorization or non-opposition of the competent regulatory supervisory bodies in Spain or in jurisdictions other than Spain, as applicable. As a result, according to the information available to BBVA, the authorization or non-opposition with respect to the indirect acquisition of control or significant shareholdings in regulated subsidiaries or affiliates of Banco Sabadell is subject to the prior notification to or the authorization or non-opposition of the following competent regulatory supervisory bodies:

ii.

iii.

(Mexico), Banco Atlántico (Bahamas) Bank & Trust Ltd. (in liquidation) (Bahamas) and Financiera Iberoamericana, S.A. (Cuba), in accordance with Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions and Royal Decree 84/2015 of February 13, which develops Law 10/2014 of June 26, on the regulation, supervision and solvency of credit institutions. The ECB’s non-opposition was obtained on September 5, 2024.

iv.

vi.

vii.

The Directorate-General of Insurance and Pension Funds in relation to the indirect acquisition of a significant shareholding in Bansabadell Pensiones, E.F.G.P, S.A., Spanish pension funds manager company in which Banco Sabadell has a significant shareholding, in accordance with Royal Legislative Decree 1/2002, of November 29, approving the consolidated text of the law of regulation of pension plans and funds. On June 4, 2024, BBVA submitted the required communication to the Directorate-General for Insurance and Pension Funds informing about the indirect acquisition of a significant stake in Bansabadell Pensiones E.F.G.P, S.A. and no express or tacit authorization from the Directorate-General for Insurance and Pension Funds is required thereafter.

viii.

ix.

The Central Bank of Morocco (Bank Al Maghrib) in relation to the indirect change of control of Banco Sabadell’s branch in Casablanca (Morocco).

xi.

The FINRA in relation to the acquisition of indirect control of Sabadell Securities USA, Inc., U.S. broker-dealer subsidiary of Banco Sabadell.

xii.

The Florida Division of Securities in relation to the acquisition of indirect control of Sabadell Securities USA, Inc., U.S. broker-dealer subsidiary of Banco Sabadell.

BBVA has notified or requested the corresponding authorizations or declarations of non-opposition from the aforementioned competent regulatory supervisory bodies, other than the authorization from FINRA, as explained under “The Exchange Offer—Governmental and Regulatory Authorizations”.

BBVA cannot provide any assurance that all required approvals or authorizations outstanding as of the date of this offer to exchange/prospectus will be obtained in a timely manner or at all. If any of the above governmental and regulatory approvals and authorizations are not obtained, and the exchange offer is completed, BBVA may be subject to fines or other administrative sanctions, may be required to divest the relevant subsidiary or affiliate, or material assets of such subsidiary or affiliate, for which the relevant authorization has not been obtained, may lose certain licenses required to continue to conduct such Banco Sabadell affiliate’s operations consistent with past practice or may not be able to vote the securities indirectly held by it of the affiliated entities.

Because the exchange ratio is fixed, the value of the BBVA shares you will receive as a result of the exchange offer is likely to fluctuate.

If you tender into, and do not withdraw your Banco Sabadell shares from, the exchange offer and the exchange offer is completed, you will receive one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares tendered. While the exchange ratio will be subject to the potential adjustments described under “The Exchange Offer—Dividend Payments”, the exchange ratio will not be adjusted to reflect any changes in the market prices of any of the securities of either company. As a result, and subject to the potential adjustments described under “The Exchange Offer—Dividend Payments”, you will receive a fixed number of newly-issued BBVA shares in connection with the exchange offer, and changes in the market prices of these securities will affect the value of what you will receive.

Since there will be no adjustment to the exchange ratio for changes in the market price of either the BBVA shares or the Banco Sabadell shares, the value of the BBVA shares to be delivered to holders of Banco Sabadell who tender their Banco Sabadell shares into the exchange offer could be considerably higher or lower than it was at the time the exchange ratio was determined. Changes in operations and prospects of BBVA or Banco Sabadell since that time, general market and economic conditions, and other factors both within and outside BBVA’s and Banco Sabadell’s control may significantly alter the relative value of the companies at the time the exchange offer is completed.

The market prices of the BBVA shares and the Banco Sabadell shares are likely to fluctuate before completion of the exchange offer and this will affect the value represented by the exchange ratio both in terms of

the Banco Sabadell shares tendered by you and what you will receive in exchange. The equivalent cash consideration per Banco Sabadell share resulting from the application of the weighted average price per BBVA share in the three-month period before the publication of BBVA’s announcement of its intention to make the exchange offer to the exchange ratio, in accordance with Article 14.4 of the Spanish Takeover Regulation, is €2.12 per Banco Sabadell share. Such equivalent cash consideration is provided for illustrative purposes only.

If the price of the BBVA shares declines, holders of Banco Sabadell shares could receive less value for their Banco Sabadell shares upon completion of the exchange offer than the value calculated on the date the exchange offer was announced, as of the date of the filing of this offer to exchange/prospectus or as of the date such holders of Banco Sabadell shares made their election and tendered their Banco Sabadell shares into the exchange offer.

The market prices of the BBVA shares and the Banco Sabadell shares are subject to general price fluctuations in the market for publicly-traded equity securities and have experienced significant volatility in the past. Market price variations in these securities could result from actual or investors’ perceptions of changes in the businesses, financial condition, results of operations or prospects of BBVA or Banco Sabadell prior to and/or following the exchange offer, regulatory considerations, legal proceedings, exchange rates, general market and economic conditions and other factors beyond the control of BBVA or Banco Sabadell. In addition, the ongoing businesses of Banco Sabadell and BBVA may be adversely affected by actions taken by Banco Sabadell or BBVA in connection with the exchange offer, including payment by the companies of certain costs relating to the exchange offer, including certain legal, accounting, financing and financial and other advisory fees. Changes in operations and prospects of BBVA or Banco Sabadell since the exchange ratio was determined, general market and economic conditions, and other factors both within and outside BBVA’s and Banco Sabadell’s control will not result in an adjustment of the exchange ratio.

In addition, a significant period of time may pass between the commencement of the exchange offer and the expiration date. Therefore, at the time you tender your Banco Sabadell shares pursuant to the exchange offer, you will not know the exact market value of the BBVA shares that you will receive if the exchange offer is completed.

Since BBVA did not have access to non-public information regarding Banco Sabadell, BBVA’s ability to accurately anticipate all losses, costs and other liabilities that may be incurred in connection with the exchange offer is necessarily limited. Additionally, any errors or omissions in the information publicly available to BBVA relating to Banco Sabadell may have affected BBVA’s analysis, estimations and determinations with respect to the exchange offer.

In deciding to make the exchange offer, evaluating the risks and merits of the exchange offer and determining the terms and conditions of the exchange offer, BBVA did not have access to non-public information regarding Banco Sabadell. BBVA has instead conducted its analysis on Banco Sabadell using solely publicly-available information, assuming the accuracy and material completeness thereof. The absence of access to non-public information regarding Banco Sabadell necessarily limits BBVA’s ability to accurately anticipate and evaluate the consequences of completing the exchange offer, including any losses, costs or other liabilities that may be incurred as a result thereof.

For example, without access to non-public information regarding Banco Sabadell, BBVA may have failed to discover liabilities, contingent or otherwise, or operating or other matters relating to Banco Sabadell’s business that are not disclosed in publicly-available information concerning Banco Sabadell. Any such undisclosed liabilities or matters could require significant effort and expense to address and could ultimately have an adverse effect on BBVA’s business, financial condition, results of operations and prospects.

Furthermore, completion of the exchange offer may constitute a breach or default under agreements or instruments of Banco Sabadell, or otherwise result in the acceleration of obligations (including, without

limitation, payment obligations) or changes to rights thereunder or the termination thereof. Banco Sabadell (and, the BBVA Group, given Banco Sabadell would then be a member of the BBVA Group) may incur liabilities relating to any such breach or default and may also be unable to replace a terminated agreement or instrument on comparable terms or at all, in the event such a replacement is deemed necessary. Depending on the importance of a terminated agreement or instrument to Banco Sabadell’s business, failure to replace that agreement or instrument on similar terms or at all may increase the costs to BBVA of operating Banco Sabadell’s business or prevent BBVA from operating part or all of Banco Sabadell’s business.

Additionally, while BBVA has assumed the accuracy and completeness of publicly-available information concerning Banco Sabadell, such information may contain errors or omissions. Since BBVA was not involved in the preparation of such information, it cannot give assurance that such information is accurate and complete. Any errors or omissions in the information publicly available to BBVA relating to Banco Sabadell may have affected BBVA’s analysis and estimations of the risks and merits of the exchange offer (including BBVA’s assumptions with respect to the future operations, profitability, asset quality and other matters relating to Banco Sabadell, including the anticipated synergies expected to result from the exchange offer), its decision to make the exchange offer and its determination of the terms and conditions of the exchange offer.

As a result of the foregoing, BBVA may not have anticipated all losses, costs and other liabilities that may be incurred in connection with the exchange offer if the exchange offer is completed or may have failed to accurately analyze or estimate the consequences of completing the exchange offer, either of which could have an adverse effect on the business, results of operations, financial condition or prospects of BBVA after completion of the exchange offer.

The omission from this offer to exchange/prospectus of certain non-public information regarding Banco Sabadell may make it more difficult for you to decide whether to tender your Banco Sabadell shares into the exchange offer.

The SEC’s Form F-4 sets out certain disclosure requirements regarding both BBVA and Banco Sabadell which must be provided in an offer to exchange/prospectus included in a registration statement on Form F-4. BBVA has included herein certain publicly-available information relating to Banco Sabadell in order to comply with regulatory requirements. However, not all of the information related to Banco Sabadell required by Form F-4 is publicly available. As contemplated by Rule 409 under the Securities Act, BBVA has requested that Banco Sabadell provide certain information relating to Banco Sabadell that is not publicly available. However, Banco Sabadell’s management has not cooperated with BBVA in the preparation of this offer to exchange/prospectus or provided such requested information to BBVA. Consequently, BBVA has relied on Rule 409 under the Securities Act to omit from this offer to exchange/prospectus certain information regarding Banco Sabadell otherwise required by Form F-4. For example, the historical consolidated financial statements of Banco Sabadell included in this offer to exchange/prospectus as Appendix I have been prepared in accordance with IFRS-EU and we cannot give assurance that such consolidated financial statements comply with IFRS-IASB standards. Such consolidated financial statements have not been audited under U.S. GAAS and are therefore not considered audited financial statements under SEC rules and no audit report has been included herein on such consolidated financial statements. Additionally, certain information required of Banco Sabadell by Form F-4 by reference to Form 20-F, including certain information required by Items 5 and 11 of Form 20-F, is not publicly available and is therefore not included in this offer to exchange/prospectus. BBVA will amend or supplement this offer to exchange/prospectus to provide any information BBVA receives from Banco Sabadell, if BBVA receives the information on a timely basis before the expiration time of the exchange offer and considers it to be material, complete, reliable and appropriate. As a result of the omission of certain information regarding Banco Sabadell from this offer to exchange/prospectus, it may be more difficult for holders of Banco Sabadell shares to decide whether to tender their Banco Sabadell shares into the exchange offer.

The pro forma financial information included herein is based on Banco Sabadell’s publicly-available information, and may not represent the actual historical financial information of the combined group as if the business combination had taken place.

In preparing the pro forma financial information included in this offer to exchange/prospectus BBVA did not have access to non-public information regarding Banco Sabadell. As a result, BBVA prepared the pro forma financial information using solely publicly-available information regarding Banco Sabadell and historical financial information of BBVA. The adjustments included in the pro forma financial information solely include those that are factually supportable on the basis of the information that is publicly available to BBVA. The unaudited pro forma adjustments included in the pro forma financial information, the value of the consideration that would be paid if the exchange offer were completed (i.e., the estimated value of the capital increase), the accounting allocation of the purchase price made in accordance with IFRS 3 as well as the estimated fair value of assets, liabilities and contingent liabilities to be acquired are preliminary and subject to change, since they have been calculated following a preliminary analysis based on publicly-available financial information for the year ended December 31, 2023 and for the six months ended June 30, 2024, as applicable. The pro forma financial information differs from information previously publicly disclosed by BBVA regarding the expected financial impacts of the exchange offer, which included prospective information and was prepared on the basis of estimates made by BBVA based on BBVA’s own experience in prior acquisitions and customary market practices and methodologies observed in similar transactions, whereas the pro forma financial information included herein has been prepared in compliance with applicable SEC rules.

Differences between the preliminary estimates included herein and the final acquisition accounting will likely occur, and these differences could be material. The differences, if any, could have a material impact on the accompanying pro forma financial information. In accordance with paragraphs 45 and B67 of IFRS 3 “Business Combinations”, it is possible to extend the valuation measurement period to one year from the date the transaction takes place.

Furthermore, given the absence of information in Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023 and Banco Sabadell’s condensed consolidated interim financial statements as of and for the six months ended June 30, 2024 regarding the extent of macro hedging accounting that could potentially fail to comply with IFRS-IASB, BBVA is not able to calculate the harmonization adjustments that would need to be applied to the consolidated financial information of Banco Sabadell as of any date or for any period in order to make such information compliant with IFRS-IASB. Accordingly, BBVA has not made any harmonization adjustments to the consolidated financial information of Banco Sabadell as of any date or for any period to make such information compliant with IFRS-IASB.

As a result of the foregoing, the accompanying pro forma financial information may not represent the actual historical financial information of the combined group as if the business combination had taken place.

BBVA may fail to fully realize the expected benefits and synergies of completing the exchange offer.

BBVA may fail to fully realize the expected benefits and synergies of completing the exchange offer, including the substantial cost synergies described below, in the time, manner or amounts currently expected as a result of, among other things, risks associated with the integration process, including BBVA’s inability to merge with Banco Sabadell.

Risks associated with the integration process

BBVA may fail to successfully consolidate or (if a merger is not completed) otherwise coordinate BBVA’s businesses with those of Banco Sabadell, rationalize duplicative administrative functions or benefit from anticipated lower funding costs. For example, if a merger is completed, the operational integration of Banco Sabadell into the BBVA Group (including the migration of Banco Sabadell’s IT system to BBVA) could prove to

be particularly difficult and complex, may substantially divert management’s time, attention and resources and may be more expensive, time consuming and resource intensive than anticipated. The difficulties that could be encountered include integrating personnel, operations and systems, coordinating the geographically dispersed organizations, distraction of management and employees from operations and changes in corporate culture, retaining existing customers and attracting new customers, maintaining business relationships and inefficiencies associated with the integration of the operations of the companies.

Failure to successfully integrate or otherwise coordinate the businesses and operations of BBVA and Banco Sabadell could result in the failure to realize some or all of the anticipated benefits from the transaction, including cost savings and other operating efficiencies, and could have an adverse effect on the business, results of operations, financial condition or prospects of BBVA and Banco Sabadell after completion of the exchange offer.

BBVA’s inability to merge with Banco Sabadell

BBVA is undertaking the exchange offer to acquire control of Banco Sabadell in order to be in a position to, subject to relevant approvals, integrate both businesses and create a stronger combined group through the merger of both companies, which BBVA expects to result in substantial cost synergies. BBVA has projected cost synergies of approximately €850 million per year before taxes for Spain and Mexico resulting from the intended merger, once they are fully realized.

If the exchange offer is completed, regardless of the percentage of Banco Sabadell shares acquired by BBVA pursuant to the exchange offer, BBVA intends to promote, as soon as possible after the settlement of the exchange offer, and irrespective of whether the thresholds provided for in articles 116 of the Spanish Securities Market Law and 47 of the Spanish Takeover Regulation for the exercise of the right of squeeze-out are met, a merger by absorption of Banco Sabadell by BBVA, with an exchange ratio equivalent, as far as possible, to the consideration offered in the exchange offer, subject to market conditions or other circumstances making it inadvisable to carry out such merger process or carry out such merger process on such terms. The consummation of the intended merger will require the formulation by BBVA and Banco Sabadell’s respective boards of directors of the joint plan of merger, the approval of such joint plan of merger by the respective shareholders of BBVA and Banco Sabadell, and the prior authorization of the Ministry of Economy, Trade and Business, and, accordingly, BBVA can provide no assurance that the intended merger will be consummated. See “The Exchange Offer—Certain Consequences of the Exchange Offer—Squeeze-out and Merger”.

If the intended merger is not consummated for any reason, BBVA believes that it is unlikely to achieve the full costs savings and other operating efficiencies or to realize the revenue and earnings growth that might otherwise be possible. However, BBVA believes that it will be able to capture the majority of the cost synergies that would be realized if the intended merger were consummated. This is because BBVA expects that, even if the merger is not consummated, it will still be able to centralize certain processes of Banco Sabadell in BBVA and to operate both banks from a joint IT platform with multi-bank functionality for all products, services and systems. Further, any savings or growth may occur more slowly than if the squeeze-out right were exercisable or the merger were completed.

The capital, leverage, liquidity, MREL and resolution profile of the combined group if the exchange offer is completed may be adversely affected.

Completion of the exchange offer may adversely affect the CET1 capital ratio, leverage, liquidity, MREL (as defined herein) or resolution profile of the BBVA Group. The estimated impact of the exchange offer on BBVA’s CET1 capital ratio, leverage, liquidity, MREL or resolution profile has been prepared by BBVA based on a number of assumptions and on publicly-available information relating to Banco Sabadell. See “—Since BBVA did not have access to non-public information regarding Banco Sabadell, BBVA’s ability to accurately anticipate all losses, costs and other liabilities that may be incurred in connection with the exchange offer is

necessarily limited. Additionally, any errors or omissions in the information publicly available to BBVA relating to Banco Sabadell may have affected BBVA’s analysis, estimations and determinations with respect to the exchange offer”. As a result, the actual CET1 capital ratio, leverage, liquidity, MREL or resolution profile of the BBVA Group following completion of the exchange offer may be different from BBVA’s estimates.

Completion of the exchange offer may also increase the actual or perceived systemic importance of BBVA within the Spanish financial system. If the relevant regulators were to impose additional capital, leverage, liquidity, MREL or resolution requirements on the BBVA Group following completion of the exchange offer or any other requirements or constraints on the structure or operations of the BBVA Group, BBVA may be required to raise additional capital instruments or MREL or take such actions as are necessary to comply with such constraints.

The prices of the BBVA shares and the Banco Sabadell shares may be adversely affected if the exchange offer is not completed. Additionally, if the exchange offer is not completed, the business operations of BBVA and Banco Sabadell may have been distorted without being able to realize any anticipated benefits from the exchange offer.

If the exchange offer is not completed, the prices of the BBVA shares and the Banco Sabadell shares may decline or otherwise be subject to fluctuations to the extent that the current market prices of BBVA shares and Banco Sabadell shares reflect a market assumption that the exchange offer will be completed. Additionally, matters relating to the exchange offer may have required substantial commitments of time and resources by BBVA’s and Banco Sabadell’s management. Also, if the exchange offer is not completed, BBVA and Banco Sabadell may experience negative reactions from the investment community and their respective customers, which could adversely affect BBVA’s and Banco Sabadell’s businesses.

If the exchange offer is not completed and Banco Sabadell’s board of directors seeks another merger, business combination or other transaction, holders of Banco Sabadell shares cannot be certain that Banco Sabadell will find a party willing to offer equivalent or more attractive consideration than the consideration that holders of Banco Sabadell shares would have received from BBVA in the exchange offer.

In addition, the failure to complete the exchange offer may result in negative publicity or affect BBVA’s and Banco Sabadell’s reputation in the investment community and may affect BBVA’s and Banco Sabadell’s relationship with employees, clients and other partners in the business community.

If the exchange offer is completed, the liquidity and market value of any Banco Sabadell shares not acquired by BBVA could be adversely affected. Further, BBVA may have the right to squeeze-out any remaining holders of Banco Sabadell shares.

The acquisition of Banco Sabadell shares by BBVA pursuant to the exchange offer will reduce the number of holders of Banco Sabadell shares and the number of Banco Sabadell shares that might otherwise trade publicly which, depending on the number of Banco Sabadell shares acquired by BBVA pursuant to the exchange offer, could adversely affect the liquidity and market value of any remaining Banco Sabadell shares held by the public or result in their automatic delisting from the Spanish Stock Exchanges if BBVA obtains the percentage of voting rights required to exercise its squeeze-out right.

Even if the Banco Sabadell shares continue to be listed on the Spanish Stock Exchanges, the number of Banco Sabadell shares that are publicly held by shareholders other than BBVA or its affiliates may be so small that the liquidity of such securities may be significantly reduced, there may no longer be an active trading market for the Banco Sabadell shares and their market value may be significantly affected. As a result of the foregoing, you should not assume that the Banco Sabadell shares will continue to be listed on the Spanish Stock Exchanges, or that there will be a liquid and active trading market or a continuation of current price levels for such securities after completion of the exchange offer.

In addition, if the requirements set forth in articles 116 of the Securities Market Law and 47 of the Spanish Takeover Regulation are met, which would require that (i) the exchange offer is accepted by holders of Banco Sabadell shares representing at least 90% of the Banco Sabadell shares subject to the exchange offer; and (ii) following completion of the exchange offer, BBVA holds a number of Banco Sabadell shares representing at least 90% of the voting rights in Banco Sabadell’s share capital, BBVA will exercise its right to demand the squeeze-out of the remaining Banco Sabadell shares at the same consideration as offered pursuant to the exchange offer (adjusted, as the case may be, as described in this offer to exchange/prospectus). To this effect, within the three Spanish stock exchange business days following the publication of the results of the exchange offer on the website of the CNMV, BBVA will communicate to the CNMV and publicly announce whether or not the requirements to execute a squeeze-out transaction have been met. In that announcement, or within the two following Spanish stock exchange business days, BBVA will announce the date of the squeeze-out transaction. In accordance with article 48.4 of the Spanish Takeover Regulation, such date will be fixed between the 15^th and the 20^th Spanish business day following the date of such announcement. Such decision will be irrevocable. Upon settlement of such squeeze-out transaction, the Banco Sabadell shares will be automatically delisted from the Spanish Stock Exchanges.

Uncertainties associated with the exchange offer may cause a loss of employees and may otherwise affect the future business and operations of BBVA and Banco Sabadell.

Uncertainty about the effect of the exchange offer on employees and customers may have an adverse effect on BBVA and Banco Sabadell. These uncertainties may impair the ability to retain and motivate key personnel until and after the exchange offer is completed and could cause customers, suppliers, licensees, partners and others that deal with Banco Sabadell or BBVA to defer entering into contracts with Banco Sabadell or BBVA or making other decisions concerning Banco Sabadell or BBVA or seek to change existing business relationships with Banco Sabadell or BBVA. With respect to the retention of key employees, BBVA is not aware of any retention plan in place to retain any of Banco Sabadell’s key employees. If key employees of Banco Sabadell depart because of uncertainty about their future roles, Banco Sabadell’s business following the exchange offer could be harmed.

BBVA has not negotiated the price or terms of the exchange offer with Banco Sabadell.

In evaluating the exchange offer, you should be aware that BBVA has not negotiated the price or terms of the exchange offer with Banco Sabadell and neither Banco Sabadell nor its board of directors has approved the exchange offer.

On April 17, 2024, the Chair of BBVA and the Chairman of Banco Sabadell had a meeting in which the Chair of BBVA informed the Chairman of Banco Sabadell of BBVA’s strategic and financial interest in resuming the merger discussions with Banco Sabadell (by reference to the merger transaction discussed between BBVA and Banco Sabadell in 2020 without reaching an agreement), with a view to creating a leading bank, with greater scale and competitive capacity. On April 30, 2024 due to a media report regarding the abovementioned discussions between the Chair of BBVA and the Chairman of Banco Sabadell, BBVA published an inside information notice confirming that the Chairman of Banco Sabadell had been informed of BBVA’s board of directors’ interest in initiating negotiations with Banco Sabadell to explore a potential merger of BBVA and Banco Sabadell. On that same day, BBVA made an indicative proposal in writing to Banco Sabadell relating to a corporate transaction, consisting of the proposed combination of the BBVA Group and the Banco Sabadell Group, through a merger between Banco Sabadell and BBVA (which was published as an inside information notice of BBVA on May 1, 2024 and registered with the CNMV with registry number 2232). On May 6, 2024, Banco Sabadell published an inside information notice registered with the CNMV with registry number 2234, rejecting BBVA’s proposal. Banco Sabadell has refused to negotiate with BBVA regarding its proposal.

Despite BBVA’s attempt to engage with Banco Sabadell’s board of directors and management in friendly discussions regarding a merger, Banco Sabadell’s board of directors and management have refused to engage in discussions with BBVA.

As of the date of this offer to exchange/prospectus, the board of directors of Banco Sabadell has not made any recommendation with respect to the exchange offer.

Banco Sabadell is a Spanish company and Spanish law governs the duties and obligations of Banco Sabadell’s board of directors. Under Spanish law, within ten calendar days after the start of the acceptance period, the board of directors of Banco Sabadell is required to issue and publish a detailed and justified report on the exchange offer that must contain, among other items, its comments for and against the exchange offer, disclosure on any agreement that may exist between Banco Sabadell and BBVA or the directors or shareholders thereof, or between any of them and the board members of Banco Sabadell in relation to the exchange offer, the opinion of Banco Sabadell’s directors with respect to the exchange offer, their intention to tender (or not) the Banco Sabadell shares that they directly or indirectly hold into the exchange offer and the existence and nature of any conflict of interest. The report must also contain the potential consequences of the exchange offer on, and the strategic plans of BBVA with respect to, Banco Sabadell, its employees and the location of its activity centers disclosed by BBVA in the offering documents published in Spain. Further, under Rule 14e-2 of the Securities Exchange Act, Banco Sabadell, no later than ten U.S. business days from the date the exchange offer is first published, sent or given, will need to disclose its position (or inability to take a position) with respect to the exchange offer.

BBVA may become the target of lawsuits in connection with the exchange offer and/or the regulatory and other actions taken in connection with the exchange offer, which could result in substantial costs.

Although no lawsuits have been brought against BBVA or its board of directors in connection with the exchange offer and/or the regulatory and other actions taken in connection with the exchange offer as of the date of this offer to exchange/prospectus, lawsuits may be brought against BBVA in connection with the exchange offer. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the exchange offer, then that injunction may delay or prevent the exchange offer from being completed.

BBVA is organized under the laws of Spain and the vast majority of its assets are, and most of its directors and officers reside, outside of the United States. As a result, it may not be possible for shareholders to enforce civil liability provisions of the securities laws of the United States against BBVA or BBVA’s officers and members of BBVA’s board of directors.

BBVA is organized under the laws of Spain. The vast majority of BBVA’s assets are located outside the United States, and most of BBVA’s directors and officers are residents of jurisdictions outside of the United States and the assets of such persons may be located outside of the United States. As a result, it may be difficult for investors to effect service within the United States upon BBVA and its directors or officers, or to enforce judgments obtained in U.S. courts against BBVA or such persons either inside or outside of the United States, or to enforce in U.S. courts judgments obtained against BBVA or such persons in courts in jurisdictions outside the United States, in any action predicated upon the civil liability provisions of the federal securities laws of the United States. There is no certainty that civil liabilities predicated solely upon the federal securities laws of the United States can be enforced in Spain, whether by original action or by seeking to enforce a judgment of U.S. courts. In addition, punitive damages awards in actions brought in the United States or elsewhere may be unenforceable in Spain.

The exchange of Banco Sabadell shares for BBVA shares pursuant to the exchange offer may be a taxable transaction for U.S. federal income tax purposes for U.S. Holders of Banco Sabadell shares.

The U.S. federal income tax consequences of the exchange offer to U.S. Holders depend on whether the exchange offer qualifies as (or as part of) a Reorganization (as defined in “The Exchange Offer—Material U.S. Federal Income Tax Considerations for U.S. Holders”). To qualify as (or as part of) a Reorganization, the

exchange offer must satisfy certain requirements, some of which are based on factual determinations and actions or events after completion of the exchange offer, including events that are not within the control of Banco Sabadell or BBVA. Therefore, no representation can be made as to whether the exchange offer will be a taxable transaction for U.S. federal income tax purposes. Completion of the exchange offer is not conditioned on the exchange offer qualifying as (or as part of) a Reorganization or on the receipt of an opinion of counsel to that effect. Due to the factual uncertainties described above, BBVA has not sought or received an opinion of counsel on the qualification of the exchange offer as (or as part of) a Reorganization. In addition, BBVA has not sought and will not seek any ruling from the U.S. Internal Revenue Service (the “IRS”) regarding any matters relating to the exchange offer, and as a result, even if BBVA were to take the position that the exchange offer qualifies as (or as part of) a Reorganization (if required to take a position), there can be no assurance that the IRS will not assert, or that a court would not sustain, a position that the exchange offer does not qualify as (or as part of) a Reorganization.

If the exchange offer does not qualify as a Reorganization, a U.S. Holder exchanging Banco Sabadell shares for BBVA shares pursuant to the exchange offer will recognize gain or loss, if any, in an amount equal to the difference between the sum of the fair market value of the BBVA shares and any cash received pursuant to the exchange offer, and the U.S. Holder’s tax basis in the Banco Sabadell shares exchanged, in each case determined in U.S. dollars.

Moreover, if Banco Sabadell is or was a passive foreign investment company (a “PFIC”) for any taxable year during which a U.S. Holder owned Banco Sabadell shares, an exchange by the U.S. Holder of Banco Sabadell shares for BBVA shares pursuant to the exchange offer could be taxable under the rules applicable to PFICs, even if the exchange offer qualifies as (or as part of) a Reorganization.

For further discussion, see “The Exchange Offer—Material U.S. Federal Income Tax Considerations for U.S. Holders” in this offer to exchange/prospectus.

U.S. Holders of Banco Sabadell shares should consult their tax advisers regarding the U.S. federal income tax consequences of the exchange offer, including in the event the exchange offer does not qualify as (or as part of) a Reorganization.

Completion of the exchange offer may result in certain tax consequences arising from a change of ownership of Banco Sabadell.

BBVA has had access only to publicly-available information concerning Banco Sabadell’s tax situation. Completion of the exchange offer may result in certain tax consequences arising from a change of ownership of the Banco Sabadell Group. The tax consequences of a change of ownership of a corporation are related, for instance, to (i) the ability to carry-over certain tax relief and other tax benefits, including, but not limited to, tax losses and tax credits incurred prior to completion of the exchange offer; or (ii) certain tax costs not normally associated with the ordinary course of business. Such other tax costs include, but are not limited to, stamp duties, land transfer taxes, franchise taxes and other levies.

Completion of the exchange offer may result in ratings organizations and/or securities analysts taking actions which may adversely affect BBVA’s business, financial condition and results of operations, as well as the market price of BBVA shares.

In connection with completion of the exchange offer, one or more of the main ratings agencies may reevaluate BBVA’s ratings. A downgrade may increase BBVA’s cost of borrowing, may negatively impact BBVA’s ability to raise additional debt capital, may negatively impact BBVA’s ability to successfully compete in the marketplace and may negatively impact the willingness of counterparties to deal with BBVA, each of which could have a material adverse effect on the business, financial condition and results of operations of BBVA and the market value of BBVA shares.

In addition, the trading market for BBVA shares depends in part on the research reports that third-party securities analysts publish about BBVA and its industry. In connection with completion of the exchange offer, one or more of these analysts could downgrade the BBVA shares or issue other negative commentary about BBVA or its industry, which could cause the trading price of BBVA shares to decline.

The trading price of BBVA shares may be affected by factors different from those affecting the price of Banco Sabadell shares.

Upon completion of the exchange offer, holders of Banco Sabadell shares that tender their Banco Sabadell shares into the exchange offer will become holders of BBVA shares. BBVA’s business differs from that of Banco Sabadell in various ways, including in the number and characteristics of the various markets in which they operate, and BBVA’s results of operations, as well as the trading price of the BBVA shares, may be affected by factors different from those affecting Banco Sabadell’s results of operations and the price of the Banco Sabadell shares.

Risks Relating to BBVA

You should read and consider the other risk factors specific to BBVA’s businesses that will also affect BBVA after completion of the exchange offer contained in the 2023 Form 20-F and the BBVA First Half 2024 Results Form 6-K that are incorporated by reference into this offer to exchange/prospectus.

Risks Relating to Banco Sabadell

Following completion of the exchange offer, BBVA will be exposed to other risk factors specific to Banco Sabadell or otherwise arising from the exchange offer.

Following completion of the exchange offer, BBVA will be exposed to other risk factors specific to Banco Sabadell’s business or otherwise arising from the exchange offer. These risks include the following, which have been extracted from Banco Sabadell’s publicly-available information:

Macroeconomic and Political Risks

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Unfavorable global economic conditions, and, in particular, in Spain, or any deterioration in the Spanish or general European financial systems.

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The Banco Sabadell Group’s loan portfolio and its overall business are highly concentrated in Spain and the UK, and therefore the Banco Sabadell Group is particularly exposed to any deterioration in the Spanish and UK economies.

Risks Relating to Banco Sabadell’s and the Banco Sabadell Group’s Business

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The Banco Sabadell Group is exposed to risk of loss from legal and regulatory claims.

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Banco Sabadell and the Banco Sabadell Group are subject to substantial regulation and regulatory and governmental oversight. Adverse regulatory developments or changes in government policy in any of the jurisdictions where the Banco Sabadell Group operates could have a material adverse effect on its business, financial condition, results of operations and prospects.

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Increasingly onerous capital requirements constitute one of Banco Sabadell’s main regulatory challenges. Increasing capital requirements may adversely affect Banco Sabadell’s profitability and create regulatory risk associated with the possibility of failure to maintain required capital levels.

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The Banco Sabadell Group is subject to rules and regulations regarding money laundering and the financing of terrorism which have become increasingly complex and detailed, require improved

systems and sophisticated monitoring and compliance personnel and have become the subject of enhanced government supervision.

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The Banco Sabadell Group’s business is significantly affected by credit and counterparty risk.

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Liquidity risk is inherent in the Banco Sabadell Group’s operations and volatility in global financial markets, particularly in the inter-bank and debt markets, which could materially adversely affect the Banco Sabadell Group’s liquidity position and credit volume.

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Any reduction in Banco Sabadell’s credit rating could increase its cost of funding, adversely affect its interest margins and make its ability to raise new funds or renew maturing debt more difficult.

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The Banco Sabadell Group is exposed to market fluctuations in the price of real estate in various ways.

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The Banco Sabadell Group’s business is subject to fluctuations in interest rates.

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The Banco Sabadell Group is exposed to sovereign debt risk and losses in the market value of the positions held in financial assets.

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The Banco Sabadell Group’s business is dependent on its ability to process a large number of transactions efficiently and accurately, and is therefore exposed to a variety of operational risks including those resulting from process error, system failure, inadequate customer services or the failure of telecommunications or information technology systems.

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The Banco Sabadell Group’s economic hedging may not prevent losses.

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The Banco Sabadell Group faces increasing consolidation of the competition in its business lines.

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The Banco Sabadell Group may generate less income from fee and other commission based transactions in the future.

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The Banco Sabadell Group relies on third parties and affiliates for important products and services.

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The Banco Sabadell Group is exposed to financial risks deriving from climate change.

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following pro forma financial information gives effect to completion of the exchange offer.

The pro forma financial information included herein is based on, and should be read in conjunction with, the historical financial statements and related notes of BBVA and Banco Sabadell for the applicable periods included in, or incorporated by reference into, as applicable, this offer to exchange/prospectus. The pro forma financial information presented herein has not been audited and is presented exclusively for illustrative purposes. Due to its nature, this information presents a hypothetical scenario and may not represent the actual financial position or results of the BBVA Group and/or the Banco Sabadell Group, and is not necessarily indicative of what the financial situation or results of BBVA would have been under a combined scenario with the Banco Sabadell Group as of June 30, 2024 for purposes of the consolidated pro forma balance sheet, or for the year ended December 31, 2023 and the six months ended June 30, 2024 for purposes of the pro forma income statements, as applicable, nor is it intended to project the financial position or future results of the combined group. In preparing the pro forma financial information included in this offer to exchange/prospectus BBVA did not have access to non-public information regarding Banco Sabadell. As a result, BBVA prepared the pro forma financial information using solely publicly-available information regarding Banco Sabadell, and financial information of BBVA.

Certain financial information included in this exchange offer/prospectus, including, without limitation, the pro forma financial information included herein, has been subject to rounding. As a result, figures shown as totals in tables or elsewhere in this exchange offer/prospectus may not compute due to rounding.

Purpose of Pro Forma Financial Information

The pro forma financial information has been prepared in accordance with Article 11 of Regulation S-X. Its purpose is to reflect the estimated impact of completion of the exchange offer under the assumption that 100% and 50.01%, respectively, of the Banco Sabadell shares are acquired in exchange for newly-issued BBVA shares according to the exchange ratio. See also “—Impact of Other Potential Scenarios in the Pro Forma Financial Information”.

The pro forma financial information includes (i) a combined unaudited condensed consolidated pro forma balance sheet of the BBVA Group as of June 30, 2024 which would result from the combination of the consolidated balance sheet of the Banco Sabadell Group and the consolidated balance sheet of the BBVA Group as of such date; and (ii) combined unaudited condensed consolidated pro forma income statements of the BBVA Group for the year ended December 31, 2023 and for the six months ended June 30, 2024, respectively, which would result from the combination of the consolidated income statement of the Banco Sabadell Group and the consolidated income statement of the BBVA Group for such periods, in each case assuming completion of the exchange offer, the acquisition of 100% and 50.01%, respectively, of the Banco Sabadell shares in exchange for newly-issued BBVA shares according to the exchange ratio, and the related change of control of Banco Sabadell, had occurred, with respect to the pro forma income statements, as of January 1, 2023, and with respect to the pro forma consolidated balance sheet, as of June 30, 2024.

Sources of Information

The pro forma financial information reflects the business combination of the BBVA Group and the Banco Sabadell Group using, exclusively, publicly-available information of Banco Sabadell as of and for the year ended December 31, 2023 (principally the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023 which are included in Appendix I hereto) and as of and for the six months ended June 30, 2024 (principally the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024 which are included in Appendix I hereto). Neither Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023 nor Banco Sabadell’s condensed consolidated interim financial statements as of and for the six months ended June 30, 2024 have been

audited under U.S. GAAS, and such financial statements are therefore not considered audited financial statements under SEC rules. Consequently, no audit report has been included herein on such consolidated financial statements. However, as a listed company in Spain, Banco Sabadell is subject to ongoing reporting requirements under CNMV rules, including that its annual financial statements be audited under prevailing legislation regulating the audit of accounts in Spain. The pro forma financial information has been prepared using the audited consolidated financial statements of BBVA as of and for the year ended December 31, 2023 and the unaudited condensed interim consolidated financial statements of BBVA as of and for the six months ended June 30, 2024 included in the 2023 Form 20-F and the BBVA First Half 2024 Results Form 6-K, respectively, each incorporated by reference herein.

Basis of Presentation

The pro forma financial information has been prepared on the basis of the historical consolidated financial information of each of BBVA and Banco Sabadell, which has been prepared, in the case of BBVA, in compliance with IFRS-IASB and, in the case of Banco Sabadell, in accordance with IFRS-EU. See “Note on Banco Sabadell Information—Description of Certain Differences Between IFRS-EU and IFRS-IASB”.

The pro forma financial information presented herein includes:

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A combined unaudited consolidated pro forma condensed balance sheet of the BBVA Group as of June 30, 2024, which has been prepared based on the unaudited consolidated balance sheets of each of BBVA and Banco Sabadell as of June 30, 2024 incorporating preliminary fair value adjustments assuming completion of the exchange offer, the acquisition of 100% and 50.01%, respectively, of the Banco Sabadell shares in exchange for newly-issued BBVA shares according to the exchange ratio, and the related change of control of Banco Sabadell, had occurred as of June 30, 2024.

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A combined unaudited consolidated pro forma condensed income statement of the BBVA Group for the six months ended June 30, 2024, which has been prepared based on the unaudited consolidated income statements of each of BBVA and Banco Sabadell for the six months ended June 30, 2024, assuming completion of the exchange offer, the acquisition of 100% and 50.01%, respectively, of the Banco Sabadell shares in exchange for newly-issued BBVA shares according to the exchange ratio, and the related change of control of Banco Sabadell, had occurred as of January 1, 2023.

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A combined unaudited consolidated pro forma condensed income statement of the BBVA Group for the year ended December 31, 2023, which has been prepared based on the audited consolidated income statements of each of BBVA and Banco Sabadell for the year ended December 31, 2023, assuming completion of the exchange offer, the acquisition of 100% and 50.01%, respectively, of the Banco Sabadell shares in exchange for newly-issued BBVA shares according to the exchange ratio, and the related change of control of Banco Sabadell, had occurred as of January 1, 2023.

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Accompanying explanatory notes describing the sources of information, assumptions and estimates for the preparation of the pro forma financial information.

For the preparation of the pro forma financial information of the combined group, IFRS 3 “Business Combinations” has been considered. Additionally, in order to complete such valuation and adjust the impacts of the business combination in accordance with paragraphs 45 and B67 of such standard, the standard establishes the possibility of extending the valuation measurement period to one year from the date the transaction takes place.

Assumptions and Estimates Used

The pro forma financial information reflects the acquisition by BBVA of Banco Sabadell assuming acceptance of the exchange offer by holders of Banco Sabadell shares representing 100% (irrespective of whether or not the merger is consummated) and 50.01% (without the merger being consummated), respectively, of Banco

Sabadell’s share capital in exchange for one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares (irrespective of whether or not the intended merger is consummated). The adjustments included in the pro forma financial information solely include those that are factually supportable on the basis of the information that is publicly available to BBVA. See “—Sources of Information” above.

The main assumptions and estimates used in the preparation of the pro forma financial information are the following:

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The outstanding shares of Banco Sabadell subject to the exchange offer are those outstanding as of June 30, 2024 (5,440 million Banco Sabadell shares).

•

BBVA’s capital increase is carried out in the proportion of one newly-issued BBVA share for each 5.0196 Banco Sabadell shares, without any further adjustment for any dividends paid. Therefore, the number of BBVA shares to be issued in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares is approximately 1,084 million BBVA shares and approximately 542 million BBVA shares, respectively. The acquisition costs of the business combination will be determined on the basis of the trading price of the BBVA shares delivered to holders of Banco Sabadell shares in accordance with the exchange ratio applicable upon completion of the exchange offer. The estimated value of such capital increase in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares amounts to approximately €10,136 million and €5,069 million, respectively, using a trading price of €9.35 per BBVA share (which corresponds to the price per BBVA share as of June 28, 2024, and which corresponds to a trading price of €1.863 per Banco Sabadell share upon application of the exchange ratio of one newly-issued BBVA share for each 5.0196 Banco Sabadell shares). See “—Impact of Other Potential Scenarios in the Pro Forma Financial Information—Sensitivity of Goodwill/(Negative Goodwill) to the Trading Price of the BBVA Shares” below.

•

Additionally, the exchange offer cash consideration is considered part of the pro forma adjustments, that is €314 million and €157 million in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares, respectively (€0.29 in cash for each 5.0196 shares of Banco Sabadell). For purposes of preparing the pro forma financial information as of June 30, 2024, the estimated value of the capital increase in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares amounts to approximately €10,450 million and €5,226 million, respectively.

•

On the other hand, the costs associated with the exchange offer or the cash payment corresponding to the settlement of any fractional shares have not been considered, since they are not considered material.

•

The pro forma financial information does not reflect any cost savings, financing synergies or restructuring costs arising or resulting from the integration of the operations of BBVA and Banco Sabadell that are expected to materialize in the future. Costs incurred as a result of any integration of the two entities will be accounted for when incurred.

•

No transactions or balances have been identified between BBVA and Banco Sabadell that could have a significant impact on the pro forma financial information, therefore no elimination or adjustment of such nature has been made.

•

The exchange offer has been treated as an acquisition, with BBVA as the accounting acquirer and Banco Sabadell as the accounting acquiree. Therefore, the adjustments include the elimination of Banco Sabadell’s equity and the impact of the estimated value of the consideration that would be paid if the exchange offer were completed (i.e., the estimated value of the capital increase).

•

The combined unaudited condensed consolidated pro forma income statement for the year ended December 31, 2023 and the combined unaudited condensed consolidated pro forma income statement for the six months ended June 30, 2024 were prepared considering the balance sheet adjustments calculated with the information available as of June 30, 2024. The result attributable to the owners of the parent reflected in the combined unaudited condensed consolidated pro forma balance sheet as of

June 30, 2024 does not coincide with the profit reflected in the combined unaudited condensed consolidated pro forma income statement for the six months ended June 30, 2024.

•

BBVA has not made any adjustments related to differences in accounting policies between BBVA and Banco Sabadell given that BBVA has only used publicly-available information relating to Banco Sabadell and BBVA cannot adequately evaluate the adjustments that would need to be made to eliminate such differences on the basis of such information. Additionally, given the absence of information in Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023 and Banco Sabadell’s condensed consolidated interim financial statements as of and for the six months ended June 30, 2024 regarding the extent of macro hedging accounting that could potentially fail to comply with IFRS-IASB, BBVA is not able to calculate the harmonization adjustments that would need to be applied to the consolidated financial information of Banco Sabadell as of any date or for any period in order to make such information compliant with IFRS-IASB. Accordingly, BBVA has not made any harmonization adjustments to the consolidated financial information of Banco Sabadell as of any date or for any period to make such information compliant with IFRS-IASB.

•

The exchange offer will generate certain legal, accounting and valuation costs and other professional fees, as well as other costs for the registration and issuance of shares, which will be recorded in accordance with IFRS 3 “Business Combinations”, IFRS 9 “Financial Instruments” and IAS 32 “Financial Instruments: Presentation”. As of the date of the preparation of the pro forma financial information, the majority of these costs had not been incurred, and, given that these costs are not estimated to be significant, such costs have not been taken into account in the preparation of the pro forma financial information.

The unaudited pro forma adjustments included in the pro forma financial information, the value of the consideration that would be paid if the exchange offer were completed (i.e., the estimated value of the capital increase), the accounting allocation of the purchase price made in accordance with IFRS 3 as well as the estimated fair value of assets, liabilities and contingent liabilities to be acquired are preliminary and subject to change, since they have been based exclusively on publicly-available financial information for the year ended December 31, 2023 and for the six months ended June 30, 2024. The pro forma financial information differs from information previously publicly disclosed by BBVA regarding the expected financial impacts of the exchange offer, which included prospective information and was prepared on the basis of estimates made by BBVA based on BBVA’s own experience in prior acquisitions and customary market practices and methodologies observed in similar transactions, whereas the pro forma financial information included herein has been prepared in compliance with applicable SEC rules. These estimates relate mainly to the valuation of loan portfolios, client relationships (including possible intangibles related to client deposits), investments, costs for terminating agreements with third parties, property and potential contingencies. For purposes of the preparation of the pro forma financial information, BBVA has used the book value of the relevant assets and liabilities as the best reference for these estimations in the absence of additional information, which is currently not available to BBVA. When the relevant information is available, final estimates of fair value could differ materially from those estimated in the pro forma financial information.

Differences between the preliminary estimates included herein and the final acquisition accounting will likely occur when the value of the consideration is determined once control of Banco Sabadell is acquired and the necessary valuation analysis to finalize the purchase price allocation exercise are performed and any necessary accounting changes and adjustments related to such acquisition of control are identified, and these differences could be material. The differences, if any, could have a material impact on the accompanying pro forma financial information. In accordance with paragraphs 45 and B67 of IFRS 3 “Business Combinations”, it is possible to extend the valuation measurement period to one year from the date the transaction takes place.

Main Adjustments to the Pro Forma Financial Information

The pro forma financial information presented below reflects the acquisition by BBVA of 100% and 50.01%, respectively, of Banco Sabadell shares in exchange for newly-issued BBVA shares and the exchange offer cash consideration, in accordance with the exchange ratio.

The assignment of the provisional purchase price implicit in the exchange ratio and included in the pro forma financial information is preliminary, is subject to subsequent adjustments as additional information becomes available and additional analyses are performed through completion of the exchange offer, and has been made solely with the aim of preparing the pro forma financial information presented below.

The pro forma financial information presented below includes a breakdown of the principal adjustments included based solely upon publicly-available information regarding Banco Sabadell corresponding to the year ended December 31, 2023 and the six months ended June 30, 2024, as applicable.

The adjustments included in the pro forma financial information solely include those that are factually supportable on the basis of the information that is publicly available to BBVA.

Combined Unaudited Condensed Consolidated Pro Forma Balance Sheet as of June 30, 2024

The table below presents the combined unaudited condensed consolidated pro forma balance sheet of the BBVA Group as of June 30, 2024, as if the exchange offer had been completed as of such date and assuming the acquisition by BBVA of 100% and 50.01%, respectively, of Banco Sabadell shares.


	BBVA June 30, 2024		Banco Sabadell June 30, 2024^(*)		Aggregated		Pro forma adjustments assuming acquisition of 100% of Banco Sabadell shares			Combined pro forma balance sheet assuming acquisition of 100% of Banco Sabadell shares		Pro forma adjustments assuming acquisition of 50.01% of Banco Sabadell shares			Combined pro forma balance sheet assuming acquisition of 50.01% of Banco Sabadell shares
	(€ million)
Cash, cash balances in central banks and other demand deposits		45,055		29,502		74,557		(2,421	)		72,136		(2,264	)		72,293
Financial assets held for trading		123,821		3,110		126,931					126,931					126,931
Financial assets at fair value through other comprehensive income		60,691		6,528		67,219					67,219					67,219
Financial assets at amortized cost (a)		481,213		190,489		671,702		(1,304	)		670,398		(1,304	)		670,398
Intangible assets		2,379		2,494		4,873		(2,395	)		2,479		(2,395	)		2,479
Of which goodwill ()		760		1,018		1,778		(1,018	)		759		(1,018	)		759
Of which other intangible assets (b)		1,620		1,476		3,096		(1,376	)		1,719		(1,376	)		1,719
Other assets (c)		46,375		12,205		58,580		813			59,393		813			59,393

Total assets		759,534		244,328		1,003,862		(5,306	)		998,556		(5,149	)		998,713


	BBVA June 30, 2024			Banco Sabadell June 30, 2024^(*)			Aggregated			Pro forma adjustments assuming acquisition of 100% of Banco Sabadell shares			Combined pro forma balance sheet assuming acquisition of 100% of Banco Sabadell shares			Pro forma adjustments assuming acquisition of 50.01% of Banco Sabadell shares			Combined pro forma balance sheet assuming acquisition of 50.01% of Banco Sabadell shares
	(€ million)
Financial liabilities held for trading		93,546			2,862			96,408						96,408						96,408
Financial liabilities at amortized cost (d)		565,752			225,027			790,779			(156	)		790,623			(156	)		790,623
Other liabilities (c) (e)		43,145			2,041			45,186			77			45,263			77			45,263

Total liabilities		702,443			229,930			932,373			(79	)		932,294			(79	)		932,294
Shareholders’ funds		69,656			14,820			84,476			(5,684	)		78,792			(11,087	)		73,389
Of which capital		2,824			680			3,504			(149	)		3,355			(414	)		3,090
Of which share premium		19,184			7,695			26,879			2,224			29,103			(2,735	)		24,144
Of which result attributable to owners of the parent during the period		4,994			791			5,785			(119	)		5,666			(455	)		5,330
Of which negative goodwill (badwill) recognized in results		—			—			—			672			672			336			336
Of which reserves and other components of shareholders’ funds		42,654			5,654			48,308			(7,640	)		40,669			(7,483	)		40,826
Accumulated other comprehensive income (loss)		(16,416	)		(457	)		(16,873	)		457			(16,416	)		457			(16,416	)
Minority interests		3,851			35			3,886						3,886			5,560			9,446

Total equity ()*		57,091			14,398			71,489			(5,227	)		66,262			(5,070	)		66,419
Total equity and total liabilities		759,534			244,328			1,003,862			(5,306	)		998,556			(5,149	)		998,713

(*)	Information subject to rounding given that Banco Sabadell’s publicly-available financial information is expressed in thousands of euros and the pro forma financial information is expressed in millions of euros.

(**)	Goodwill of Banco Sabadell:

The value of goodwill from previous business combinations broken down in the consolidated financial statements of Banco Sabadell as of and for the six months ended June 30, 2024 does not represent an identifiable asset that would be acquired upon completion of the exchange offer according to IFRS 3 “Business Combinations”. Accordingly, this value must be removed from the acquiring entity’s balance sheet before calculating the goodwill resulting from completion of the exchange offer. The negative adjustments made in the event of an acquisition of 100% and 50.01% of Banco Sabadell shares amount to €1,018 million.

(***)

Variation in total equity:

As described in this offer to exchange/prospectus, an exchange ratio of one newly-issued BBVA share for each 5.0196 Banco Sabadell shares has been established for the exchange offer (subject to adjustments, as the case may be, as described in this offer to exchange/prospectus). In the preparation of the pro forma financial information, the trading price of BBVA’s shares as of June 28, 2024 has been used as a main assumption in the determination of the cost of completing the exchange offer. See “—Impact of Other Potential Scenarios in the Pro Forma Financial Information—Sensitivity of Goodwill/(Negative Goodwill) to the Trading Price of the BBVA Shares” below.

Acquisition of 100% of Banco Sabadell shares

Considering the number of Banco Sabadell shares outstanding (5,440,221,447 shares, with a par value of €0.125 each), the maximum number of BBVA shares to be issued in exchange for Banco Sabadell shares, at the aforementioned exchange ratio, would be 1,083,795,810 BBVA shares, with a par value of €0.49 each.

Based on this maximum number of BBVA shares to be issued in the capital increase and on the trading price of BBVA shares as of June 30, 2024, the cost of completing the exchange offer would amount to €10,450 million. The actual cost will vary depending on the trading price of BBVA shares upon the settlement of the exchange offer.

The pro forma adjustments included in the combined unaudited condensed consolidated pro forma balance sheet reflect a capital increase of €531 million, which amount corresponds to the par value of the new BBVA shares to be issued, and an increase in share premium in the amount of €9,919 million, which represents the difference between such trading price and the par value of the BBVA shares to be issued. These adjustments have been recorded under shareholders’ funds (share capital and share premium) in the combined unaudited condensed consolidated pro forma balance sheet.

The pro forma adjustments also include the elimination of Banco Sabadell’s net equity attributable to Banco Sabadell as of June 30, 2024 in an amount of €13,928 million (after deducting the dividend paid on October 1, 2024 by Banco Sabadell for an amount of €435 million corresponding to €0.08 euros multiplied by 5,440 million Banco Sabadell shares) (affecting shareholders’ funds and accumulated other comprehensive income (loss)).

Based on financial information as of and for the six months ended June 30, 2024, and taking into account the pro forma adjustments described in this section, the difference between the consideration offered and total equity as of June 30, 2024 would provisionally result in negative goodwill (badwill) of €672 million reflected in the combined unaudited condensed consolidated pro forma income statement and as shown in the below table:


	June 30, 2024
	(€ million)
Estimated transaction cost		10,450
Estimated fair value of assets and liabilities acquired		11,122
Net equity attributable to Banco Sabadell		13,928
Estimated adjustments to fair value		(2,806	)

Resulting negative goodwill (badwill)		672

Additionally, (i) BBVA’s total equity has been adjusted due to the dividend paid by BBVA on October 10, 2024, amounting to €1,671 million (corresponding to €0.29 multiplied by 5,763 million BBVA shares) and (ii) cash, cash balances in central banks and other demand deposits has been adjusted by the dividends paid by BBVA and Banco Sabadell.

Acquisition of 50.01% of Banco Sabadell shares

Considering the number of Banco Sabadell shares outstanding (5,440,221,447 shares, with a par value of €0.125 each), the maximum number of BBVA shares to be issued in exchange for Banco Sabadell shares in a scenario where BBVA acquires 50.01% of Banco Sabadell shares, at the aforementioned exchange ratio, would be 542,006,285 BBVA shares, with a par value of €0.49 each.

Based on this maximum number of BBVA shares to be issued in the capital increase and on the trading price of BBVA shares as of June 30, 2024, the cost of completing the exchange offer would amount to €5,226 million. The actual cost will vary depending on the trading price of BBVA shares upon the settlement of the exchange offer.

The pro forma adjustments included in the combined unaudited condensed consolidated pro forma balance sheet reflect a capital increase of €266 million, which amount corresponds to the par value of the new BBVA shares to be issued, and an increase in share premium in the amount of €4,960 million, which represents the difference between such trading price and the par value of the BBVA shares to be issued. These adjustments have been recorded under shareholders’ funds (share capital and share premium) in the combined unaudited condensed consolidated pro forma balance sheet.

The pro forma adjustments also include the elimination of Banco Sabadell’s net equity attributable to Banco Sabadell as of June 30, 2024 in an amount of €13,928 million (after deducting the dividend paid on October 1, 2024 by Banco Sabadell for an amount of €435 million corresponding to €0.08 multiplied by 5,440 million Banco Sabadell shares) (affecting shareholders’ funds and accumulated other comprehensive income (loss)) and the recognition of minority interests equivalent to a 49.99% stake of Banco Sabadell for €5,560 million.

Based on financial information as of and for the six months ended June 30, 2024, and taking into account the pro forma adjustments described in this section, the difference between the consideration offered and total equity as of June 30, 2024 would provisionally result in negative goodwill (badwill) of €336 million reflected in the combined unaudited condensed consolidated pro forma income statement and as shown in the below table:


	June 30, 2024
	(€ million)
Estimated transaction cost		5,226
Minority interest recognition		5,560
Estimated fair value of assets and liabilities acquired		11,122
Net equity attributable to Banco Sabadell		13,928
Estimated adjustments to fair value		(2,806)

Resulting negative goodwill (badwill)		336

Notes on the pro forma adjustments to the combined unaudited condensed consolidated pro forma balance sheet as of June 30, 2024 for fair value:

(a)	Fixed-income portfolios (included under “Financial assets at amortized cost”):

Fixed-income portfolios at amortized cost include financial instruments that mostly correspond to level 1 in the fair value hierarchy, to the extent their fair value is directly observable in the market. Therefore, the adjustment made in the table above is based on the fair value broken down in the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024. The adjustment to financial assets at amortized cost in the event of an acquisition of 100% and 50.01% of Banco

Sabadell shares amounts to €(1,304) million. The fair value of these assets could fluctuate depending on the evolution of interest rates, the credit risk premium and any changes to the maturity of the instruments. Accordingly, the related adjustment ultimately made upon completion of the exchange offer could vary significantly.

(b)	Other intangible assets:

BBVA has estimated an adjustment of €(1,376) million to the value of other intangible assets in the event of an acquisition of 100% and 50.01% of Banco Sabadell shares, mainly related to software in use by Banco Sabadell in geographies in which BBVA already has a presence. The related adjustment ultimately made upon completion of the exchange offer could vary significantly once the necessary detailed analysis with respect to these assets is performed.

(c)	Tax impacts:

The adjustments described herein would result in corresponding tax impacts, calculated on the basis of the general corporate income tax rate currently in effect in Spain (30%). Broken down in the event of an acquisition of 100% and 50.01% of Banco Sabadell shares, the adjustment would be as follows: with respect to assets (included under “other assets”), fixed-income portfolio (€391 million), other intangible assets (€413 million) and legal contingencies (€9 million), and with respect to liabilities (included under “other liabilities”), own issuances of financial instruments (€(47) million).

(d)	Own issuances of financial instruments (included under “Financial liabilities at amortized cost”):

Own issuances of financial instruments include financial instruments that mostly correspond to level 1 in the fair value hierarchy, to the extent their fair value is directly observable in the market. Therefore, the adjustment made in the table above is based on the fair value broken down in the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024. The adjustment corresponding to debt issuances in the event of an acquisition of 100% and 50.01% of Banco Sabadell shares amounts to €(156) million. The fair value of these liabilities could fluctuate depending on the evolution of interest rates, the credit risk premium and any changes to the maturity of the instruments. Accordingly, the related adjustment ultimately made upon completion of the exchange offer could vary significantly.

(e)	Contingencies (included under “Other liabilities”)

The maximum amount of contingencies related to mortgage floor clauses, not covered by provisions, has been estimated at €30 million, as detailed in the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023, as updated information as of June 30, 2024 is not included in the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024.

Combined Unaudited Condensed Consolidated Pro Forma Income Statement for the six months ended June 30, 2024

The table below presents the combined unaudited condensed consolidated pro forma income statement of the BBVA Group for the six months ended June 30, 2024, as if the exchange offer had been completed as of January 1, 2023 and assuming the acquisition by BBVA of 100% and 50.01%, respectively, of Banco Sabadell shares.


	BBVA Six months ended June 30, 2024			Banco Sabadell Six months ended June 30, 2024 (*)			Aggregated			Pro forma adjustments assuming acquisition of 100% of Banco Sabadell shares			Combined pro forma income statement assuming acquisition of 100% of Banco Sabadell shares			Pro forma adjustments assuming acquisition of 50.01% of Banco Sabadell shares			Combined pro forma income statement assuming acquisition of 50.01% of Banco Sabadell shares
	(€ million)
Net interest income (a)		12,993			2,493			15,486			74			15,559			74			15,559
Results of entities valued by the equity method & dividend income		95			87			182						182						182
Net fees and commissions		3,842			674			4,516						4,516						4,516
NTI and exchange differences (net)		1,886			37			1,923						1,923						1,923
Other operating income and expenses from commercial and insurance activity		(1,371	)		(230	)		(1,601	)					(1,601	)					(1,601	)

Gross income		17,446			3,061			20,507			74			20,580			74			20,580
Administration and amortization expenses (b)		(6,859	)		(1,515	)		(8,374	)		118			(8,256	)		118			(8,256	)
Provisions or reversal of provisions		(38	)		0			(38	)					(38	)					(38	)
Impairment or reversal of impairment of financial assets not measured at fair value with changes in results and net gains or losses due to modification		(2,839	)		(361	)		(3,200	)					(3,200	)					(3,200	)
Negative goodwill (badwill) recognized in results		—			—			—						—						—
Other income (expenses)		71			(31	)		40						40						40

Profit (loss) before taxes from continuing operations		7,780			1,154			8,934			192			9,125			192			9,125
Tax expense or income related to profit or loss from continuing operations (c)		(2,525	)		(362	)		(2,887	)		(57	)		(2,944	)		(57	)		(2,944	)

Profit (loss)		5,255			792			6,047			134			6,181			134			6,181
Attributable to minority interests (non-controlling interests)		261			1			263						263			463			725

Attributable to the owners of the parent		4,994			791			5,785			134			5,919			(329	)		5,456

Additional Tier 1 securities adjustment		(189	)		(56	)		(245	)					(245	)					(217	)
Weighted-average number of shares		5,784									1,084			6,868			542			6,326
Basic and diluted earnings (losses) per share from continuing operations		0.83												0.83						0.83

(*)	Information subject to rounding given that Banco Sabadell’s publicly-available financial information is expressed in thousands of euros and the pro forma financial information is expressed in millions of euros.

(**)	The pro forma adjustments to the combined unaudited condensed consolidated pro forma income statement for the six months ended June 30, 2024 have been prepared considering the pro forma adjustments to the combined unaudited condensed consolidated pro forma balance sheet as of June 30, 2024.

Notes on the pro forma adjustments to the combined unaudited condensed consolidated pro forma income statement for the six months ended June 30, 2024:

(a)	Valuation of assets and liabilities recorded at amortized cost:

As a consequence of the change in the valuation of assets and liabilities recorded at amortized cost, the accrual of interest is impacted by the adjustments described in (a) and (d) above under “Notes on the pro forma adjustments to the combined unaudited condensed consolidated pro forma balance sheet as of June 30, 2024 for fair value”, resulting in higher or lower net interest income, as applicable.

(b)	Amortization:

The removal of software from the consolidated balance sheet would result in a lower amortization expense for the year.

(c)	Tax impacts:

The adjustments described above (other than negative goodwill (badwill)) would result in corresponding tax impacts, calculated on the basis of the general corporate income tax rate currently in effect in Spain (30%).

Combined Unaudited Condensed Consolidated Pro Forma Income Statement for the year ended December 31, 2023

The table below presents the combined unaudited condensed consolidated pro forma income statement of the BBVA Group for the year ended December 31, 2023, as if the exchange offer had been completed as of January 1, 2023 and assuming the acquisition by BBVA of 100% and 50.01%, respectively, of Banco Sabadell shares.


	BBVA Year ended Dec. 31, 2023			Banco Sabadell Year ended Dec. 31, 2023 (*)			Aggregated			Pro forma adjustments assuming acquisition of 100% of Banco Sabadell shares			Combined pro forma income statement assuming acquisition of 100% of Banco Sabadell shares			Pro forma adjustments assuming acquisition of 50.01% of Banco Sabadell shares			Combined pro forma income statement assuming acquisition of 50.01% of Banco Sabadell shares
	(€ million)
Net interest income (a)		23,089			4,723			27,812			147			27,959			147			27,959
Results of entities valued by the equity method & dividend income		144			131			275						275						275
Net fees and commissions		6,288			1,386			7,674						7,674						7,674
NTI and exchange differences (net)		2,183			68			2,251						2,251						2,251
Other operating income and expenses from commercial and insurance activity		(2,163	)		(447	)		(2,610	)					(2,610	)					(2,610	)

Gross income		29,542			5,862			35,404			147			35,551			147			35,551
Administration and amortization expenses (b)		(12,308	)		(3,015	)		(15,323	)		236			(15,087	)		236			(15,087	)
Provisions or reversal of provisions		(373	)		(6	)		(379	)					(379	)					(379	)
Impairment or reversal of impairment of financial assets not measured at fair value with changes in results and net gains or losses due to modification		(4,428	)		(824	)		(5,252	)					(5,252	)					(5,252	)
Negative goodwill (badwill) recognized in results (c)											672			672			336			336
Other income (expenses)		(13	)		(125	)		(138	)					(138	)					(138	)

Profit (loss) before taxes from continuing operations		12,419			1,891			14,310			1,055			15,365			719			15,029
Tax expense or income related to profit or loss from continuing operations (d)		(4,003	)		(557	)		(4,560	)		(115	)		(4,675	)		(115	)		(4,675	)

Profit (loss)		8,416			1,334			9,750			940			10,690			604			10,354
Attributable to minority interests (non-controlling interests)		397			1			398						398			801			1,199

Attributable to the owners of the parent		8,019			1,332			9,351			940			10,291			(197	)		9,154

Additional Tier 1 securities adjustment		(345	)		(115	)		(460	)					(460	)					(403	)
Weighted-average number of shares		5,954									1,084			7,038			542			6,496
Basic and diluted earnings (losses) per share from continuing operations (e)		1.29												1.40						1.35

(*)

Information subject to rounding given that Banco Sabadell’s publicly-available financial information is expressed in thousands of euros and the pro forma financial information is expressed in millions of euros.

(**)	The pro forma adjustments to the combined unaudited condensed consolidated pro forma income statement for the year ended December 31, 2023 have been prepared considering the pro forma adjustments to the combined unaudited condensed consolidated pro forma balance sheet as of June 30, 2024.

Notes on the pro forma adjustments to the combined unaudited condensed consolidated pro forma income statement for the year ended December 31, 2023:

(a)	Valuation of assets and liabilities recorded at amortized cost:

As a consequence of the change in the valuation of assets and liabilities recorded at amortized cost, the accrual of interest is impacted by adjustments similar to those described in (a) and (d) above under “Notes on the pro forma adjustments to the combined unaudited condensed consolidated pro forma balance sheet as of June 30, 2024 for fair value”, resulting in higher or lower net interest income, as applicable.

(b)	Amortization:

The removal of software from the consolidated balance sheet would result in a lower amortization expense for the year.

(c)	Negative goodwill (badwill) resulting from the exchange offer:

Based on financial information as of and for the six months ended June 30, 2024, and taking into account the pro forma adjustments described herein, the difference between the consideration offered and total equity as of June 30, 2024 would provisionally result in negative goodwill (badwill) of €672 million and €336 million in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares, respectively, in each case reflected in the combined unaudited condensed consolidated pro forma income statement.

The amount of goodwill at the time of completion of the exchange offer may differ, both in amount and in sign (i.e., positive or negative goodwill), depending on the trading price of the BBVA shares at such time, which will determine the value of the consideration paid in the context of the exchange offer, the evolution of the Banco Sabadell Group’s results of operations and assets, as well as changes in the value of Banco Sabadell’s assets and liabilities resulting from, among others, changes in market conditions.

(d)	Tax impacts:

(e)	Basic and diluted earnings (losses) per share from continuing operations:

For the calculation of the combined basic and diluted earnings (losses) per share from continuing operations, the negative goodwill (badwill) recognized in results has been taken into account. If excluded, the combined earnings (losses) per share from continuing operations would amount to €1.30 both in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares.

Impact of Other Potential Scenarios in the Pro Forma Financial Information

The description below contemplates the potential impact that other scenarios would have on the pro forma financial information.

Sensitivity of Goodwill/(Negative Goodwill) to the Trading Price of the BBVA Shares

The sensitivity of goodwill/(negative goodwill), estimated in accordance with the assumptions and information described above, to a positive or negative variation of €0.50 in the BBVA share price is approximately +/- €540 million.

•

Assuming a trading price of €10.24 per BBVA share (the weighted average price per BBVA share during the three-month period prior to the publication of BBVA’s announcement of its intention to make the exchange offer) and €2.04 per Banco Sabadell share (the equivalent price per Banco Sabadell share resulting from the application of the exchange ratio of 5.0196) and the exchange offer cash consideration, the goodwill resulting from completion of the exchange offer would be approximately €290 million and €145 million, in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares, respectively.

•

Assuming a trading price of €9,288 per BBVA share (corresponding to the closing price per BBVA share on October 11, 2024) and €1,850 per Banco Sabadell share (the equivalent price per Banco Sabadell share resulting from the application of the exchange ratio of 5.0196) and the exchange offer cash consideration, the negative goodwill (badwill) resulting from completion of the exchange offer would be approximately €741 million and €371 million, in the event of an acquisition of 100% and 50.01% of the Banco Sabadell shares, respectively.

COMPARATIVE MARKET PRICE AND DIVIDEND PER SHARE INFORMATION


Banco Sabadell Shares			BBVA Shares
High	Low	Close	High	Low	Close
€1.83	€1.79	€1.80	€10.43	€10.23	€10.29

The table below sets forth, for the periods indicated, the high and low closing prices of Banco Sabadell shares and BBVA shares as reported on the Spanish Stock Exchanges, respectively, as well as any dividend payments made. The share prices included below have not been adjusted for the payment of any dividend payment made after their respective reported date.


	Banco Sabadell Shares						BBVA Shares
	High		Low		Dividends		High		Low		Dividends
First Quarter 2021	€	0.49	€	0.35		N/A		€4.86		€3.76		N/A
Second Quarter 2021	€	0.68	€	0.46		N/A		€5.43		€4.29	€	0.059
Third Quarter 2021	€	0.73	€	0.51		N/A		€5.91		€4.91		N/A
Fourth Quarter 2021	€	0.73	€	0.55		N/A		€6.28		€4.70		€0.08
First Quarter 2022	€	0.94	€	0.59		N/A		€6.06		€4.49		N/A
Second Quarter 2022	€	0.86	€	0.68		€0.03		€5.32		€4.15		€0.23
Third Quarter 2022	€	0.79	€	0.60		N/A		€4.99		€4.00		N/A
Fourth Quarter 2022	€	0.91	€	0.70		€0.02		€5.70		€4.58		€0.12
First Quarter 2023	€	1.33	€	0.91		€0.02		€7.45		€5.78		N/A
Second Quarter 2023	€	1.08	€	0.88		N/A		€7.03		€6.12		€0.31
Third Quarter 2023	€	1.16	€	1.02		N/A		€7.71		€6.83		N/A
Fourth Quarter 2023	€	1.35	€	1.03		€0.03		€8.70		€7.39		€0.16
First Quarter 2024	€	1.46	€	1.11		N/A		€11.04		€8.00		N/A
Second Quarter 2024	€	1.94	€	1.40		€0.03		€11.24		€9.02		€0.39
Third Quarter 2024		€2.04		€1.71		N/A		€10.20		€8.62		N/A
Fourth Quarter 2024 (through October 11, 2024)		€1.87		€1.78		€0.08	€	9.65		€9.23		€0.29

INFORMATION ABOUT BBVA

Additional information about the BBVA Group is included in BBVA’s 2023 Form 20-F and BBVA First Half 2024 Results Form 6-K, which are incorporated by reference in this offer to exchange/prospectus.

As of June 30, 2024, the total number of outstanding BBVA shares and voting rights was 5,763,285,465.

There is no individual or legal entity that exercises control over BBVA pursuant to article 4 of the Securities Market Law.

BBVA’s Interest in Banco Sabadell

In the 12 months prior to the date of publication of BBVA’s announcement of its intention to make the exchange offer, neither BBVA, nor its directors, nor any of the companies within its group, nor, to the best of BBVA’s knowledge, any of the directors of the companies in its group, have carried out or agreed to carry out on its own account transactions involving shares of Banco Sabadell, or securities giving the right to subscribe or acquire shares of Banco Sabadell, whose voting rights would be attributable to BBVA pursuant to article 5 of the Spanish Takeover Regulation.

As BBVA is a credit institution that offers a full range of banking and investment and asset management services in the ordinary course of its business, the CNMV, further to BBVA’s request for authorization to continue to undertake certain transactions with clients in the ordinary course of business until completion of the exchange offer, has given it guidelines that generally prohibit the acquisition of Banco Sabadell shares by the BBVA Group for its own account, except for certain transactions of BBVA with respect to Banco Sabadell shares in relation to the execution, settlement or hedging of transactions with clients in the ordinary course of business, which would not trigger the consequences of article 32 of the Spanish Takeover Regulation. With respect to the exchange offer, BBVA understands that any such acquisition of Banco Sabadell shares will not trigger the consequences provided for in articles 32.3 and 32.4 of the Spanish Takeover Regulation, as such acquisitions are made in connection with the execution, settlement or hedging of transactions with clients in the ordinary course of business. The treatment granted by the CNMV to such transactions by BBVA over Banco Sabadell shares pursuant to BBVA’s request is based on the fact that they are made in the ordinary course of business, in accordance with past practice, and not for the purpose of acquiring Banco Sabadell shares or facilitating or influencing the exchange offer.

The exemptions granted by the CNMV are generally in line with exemptive relief from the provisions of Rule 14e-5 under the Exchange Act granted to BBVA by the SEC on May 29, 2024. Subject to certain exceptions, Rule 14e-5 under the Exchange Act prohibits a person making a tender offer for an equity security, as

well as such offeror’s dealer-manager, the advisers or affiliates of such offeror or dealer-manager and any person acting, directly or indirectly, in concert with such persons, from, directly or indirectly, purchasing or arranging to purchase any securities subject to a tender offer, or any securities immediately convertible into, exchangeable for or exercisable for such securities, except as part of such tender offer. This prohibition applies from the time of public announcement of the tender offer until the tender offer expires. The relief granted to BBVA by the SEC permits, subject to certain enumerated conditions set forth in the relief letter, BBVA, BBVA’s subsidiaries and their respective affiliates and separately identifiable departments to purchase or arrange to purchase Banco Sabadell Securities prior to and during the conduct of, but outside of, the exchange offer in the ordinary course of their businesses. Such purchases or arrangements to purchase may not be carried out for the purpose of promoting or otherwise facilitating the exchange offer or for the purpose of creating actual, or apparent, active trading in, or maintaining, or affecting the prices of the Banco Sabadell Securities. For a description of the trading activities included within the scope of the SEC’s relief, see “The Exchange Offer—Relief Requested from the SEC—Tender Offer Rules Exemptive Relief”.

BBVA, BBVA’s subsidiaries and their respective affiliates and separately identifiable departments intend to effect such purchases in the ordinary course of their businesses in accordance with the guidelines given by the CNMV and in reliance on the relief granted by the SEC, in each case subject to the conditions imposed by such regulators and otherwise in accordance with applicable law.

As of the date of this offer to exchange/prospectus, BBVA has not appointed any member of the board of directors or of the management of Banco Sabadell.

INFORMATION ABOUT BANCO SABADELL

All information contained in this section relating to Banco Sabadell has been taken from publicly-available sources published by Banco Sabadell (including, in particular, its consolidated financial statements as of and for the years ended December 31, 2023, 2022 and 2021, its condensed consolidated interim financial statements as of and for the six months ended June 30, 2024, its annual reports as of and for the years ended December 31, 2023, 2022 and 2021, its consolidated interim directors’ report for the first six months of 2024, its second quarter 2024 quarterly financial report and its Euro Medium Term Note Program base prospectus dated May 14, 2024). BBVA was not involved in the preparation of such publicly-available information regarding Banco Sabadell and cannot verify such information. Such information is included herein in order to comply with regulatory requirements. To the extent permitted under applicable law, none of BBVA or any of its officers or directors assumes any responsibility for the accuracy or completeness of such information or for any failure by Banco Sabadell to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information, but which are unknown to BBVA.

BBVA is not affiliated with Banco Sabadell, and BBVA has not had access to Banco Sabadell’s books and records. Therefore, non-public information concerning Banco Sabadell was not used by BBVA for the purpose of preparing this section. Pursuant to Rule 409 under the Securities Act, BBVA has requested that Banco Sabadell provide BBVA with certain information regarding the business, operations and financial condition of Banco Sabadell. BBVA will amend or supplement this offer to exchange/prospectus to provide any information BBVA receives from Banco Sabadell, if BBVA receives the information on a timely basis before the expiration time and considers it to be material, complete, reliable and appropriate.

Certain of the financial information relating to Banco Sabadell included in this offer to exchange/prospectus has been derived from the consolidated financial statements of Banco Sabadell as of and for the years ended December 31, 2023, 2022 and 2021 and the condensed consolidated interim financial statements of Banco Sabadell as of and for the six months ended June 30, 2024 included as Appendix I to this offer to exchange/prospectus. Such consolidated financial statements have not been audited under U.S. GAAS and are therefore not considered audited financial statements under SEC rules. Consequently, no audit report has been included herein on such consolidated financial statements. However, as a listed company in Spain, Banco Sabadell is subject to ongoing reporting requirements under CNMV rules, including that its annual financial statements be audited under prevailing legislation regulating the audit of accounts in Spain.

In this section, references to “Group”, “Sabadell Group”, “we”, “us”, refer to the Banco Sabadell Group or Banco Sabadell, as applicable, references to “management” refer to Banco Sabadell’s management and references to “expects”, “expectations” or similar terms refer to the expectations of Banco Sabadell’s management. References to the relevant publicly-available documents of Banco Sabadell from which the information relating to Banco Sabadell included below has been extracted are included solely for the benefit of the reader, and such documents are not incorporated by reference into this offer to exchange/prospectus.

I. Incorporation and Status

The information in this subsection has been extracted from page 136 of Banco Sabadell’s Euro Medium Term Note Program base prospectus dated May 14, 2024.

Banco Sabadell and its consolidated subsidiaries compose the Sabadell Group. Banco Sabadell was incorporated on December 31, 1881 in the town of Sabadell, near Barcelona for an unlimited term and conducts its business under the commercial name “Banco Sabadell”.

II. Description of Banco Sabadell

Overview

The information in this subsection has been extracted from page 137 of Banco Sabadell’s Euro Medium Term Note Program base prospectus dated May 14, 2024.

Banco Sabadell is one of the largest banks in Spain’s financial system, with total consolidated assets and total consolidated loans and advances to customers of €235,173 million and €152,260 million, respectively, as of December 31, 2023. Banco Sabadell is the controlling company of the Sabadell Group, which comprised, as of December 31, 2023, a total of 60 companies that the Sabadell Group fully consolidates. In addition, there were 22 associated companies.

The main activity carried out by the Group in the different jurisdictions in which it operates is banking, and fundamentally commercial banking through a wide range of products and services for large and medium-sized companies, SMEs, retailers and self-employed workers, professional groups, other individuals and bancassurance. The main customers of the Sabadell Group are SMEs and individual clients in Spain, with a total customer base that is now six times larger than it was in 2008. As of December 31, 2023, the Group operated a total of 1,420 branches (1,178 in Spain). The Group’s retail banking activities are conducted primarily through this branch network.

The Group’s primary source of liquidity is generated from its customer deposits. In addition, the Group has access to a variety of short and long-term funding sources in both the domestic and international markets as well as from the Eurosystem against eligible collateral. These funding programs provide the Group with a broad range of funding options, products, maturities and investors. Its total available pool of liquidity amounted to €58,558 million as of December 31, 2023.

The Sabadell Group operates in Spain through the following brands: SabadellHerrero (commercial banking in Asturias and León), SabadellGuipuzcoano (commercial banking in the Basque Country, Navarre and La Rioja), SabadellUrquijo Private Banking (private banking), Solbank (commercial banking in the Canary Islands, the Balearic Islands and in the southern and eastern coastal areas of mainland Spain) and SabadellGallego (commercial banking in Galicia). The brands are supported by a variety of distribution channels, including the Group’s extensive branch network, telephone (both fixed line and mobile) banking and internet banking. The Group believes its multi-brand and multi-platform model is supported by one of the most advanced and scalable IT platforms in Spain. The Sabadell Group also believes that its multi-brand and multi-channel market presence increases its appeal to existing and prospective customers and its state-of-the-art IT platform allows the Group to segment its customer base with a high degree of accuracy to best match its products and services to its customers’ needs.

For each of the years ended December 31, 2023 and 2022 the Group’s consolidated pre-provisions income (calculated as gross income less operating expenses and depreciation and amortization) was €2,847 million and €2,328 million, respectively, and its consolidated profit attributable to the Group was €1,332 million and €889 million, respectively.

Business Segments

The information in this subsection has been extracted from pages 138 to 144 of Banco Sabadell’s Euro Medium Term Note Program base prospectus dated May 14, 2024.

The Group employs a multi-brand strategy, targeting through each brand a specific customer base and/or geographic segment and building on the goodwill associated with those of its brands that have a long history in the Spanish banking sector. In 2015, Banco Sabadell unified the Sabadell Atlántico and SabadellCAM brands to strengthen its image, with “Sabadell” being the flagship brand that operates throughout most of the Spanish market. The Group’s main banking brands are Sabadell, SabadellHerrero, SabadellGuipuzcoano, SabadellUrquijo Private Banking, Solbank and SabadellGallego.

The Group is organized in the following business segments: Banking Business in Spain, Banking Business in the United Kingdom and Banking Business in Mexico. Banking Business in Spain, in turn, includes the Retail Banking, the Business Banking and the Corporate and Investment Banking business units.

Banking Business in Spain

Retail Banking

The Retail Banking business unit offers financial products and services to individual persons with a particular purpose. These include investment products and medium- and long-term finance, such as consumer loans, mortgages and leasing or rental services, as well as short-term finance. Funds come mainly from customer deposits and sight accounts, savings insurance, mutual funds and pension plans. The main services also include methods of payment such as cards and insurance products in their diverse modalities.

Business Banking

The Business Banking business unit offers financial products and services to legal and individual persons with a business purpose, serving all types of companies with a turnover of up to €200 million as well as the institutional sector. The products and services offered to companies are based on short and long-term financing solutions, cash surplus treasury solutions, products and services to guarantee the daily operation of collections and payments through any channel and geographic area, as well as risk hedging and insurance banking products.

Corporate and Investment Banking

The Corporate and Investment Banking business unit offers financial solutions and advisory services to large corporates and financial institutions in Spain and abroad, through branches throughout Spain and in 15 other countries.

Banking Business in the United Kingdom

TSB offers a wide range of retail banking services and products to individuals and small business banking customers in the UK, including personal loans, savings, accounts, mortgages and credit/debt cards. TSB has 5,426 employees and is a challenger bank for the future growth of Banco Sabadell in the UK. TSB has a clear strategy vis-a-vis retail clients and small companies with a very well defined products spectrum.

Banking Business in Mexico

As part of the internationalization process that commenced under the previous strategic framework, Banco Sabadell decided to focus on Mexico, a country representing a clear opportunity as an attractive market for the banking business. The Banking Business in Mexico is carried out through Banco Sabadell, S.A. Institución de Banca Múltiple (a Mexican bank) and SabCapital, S.A. de C.V., SOFOM, E.R. (a Mexican multi-purpose financial company).

Banking Business in Mexico comprises the following business lines: (i) Corporate Banking (with the focus on companies and major corporations) and (ii) Business Banking (which reproduces the Group’s original

business relationship model). During 2023, work was undertaken to create a Retail Banking business unit that will be rolled out in 2024, with a digital product aimed at gathering customer funds, offering attractive interest rates and the convenience of being able to withdraw funds at any time.

III. Operating and Financial Review

Key Factors Affecting Results of Operations

The information in this subsection has been extracted from pages 59 and 60 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023.

Monetary Policy

During 2023, the central banks of developed countries continued their cycle of interest rate hikes, although the pace was somewhat less intense than in 2022. It was only towards the end of the year that they considered that rates had reached sufficiently restrictive levels to keep inflation under control, at which point they indicated that the rate hike cycle might have reached its end.

In the Eurozone, the ECB implemented an unprecedented tightening of its monetary policy. Thus, it continued with the rate hike cycle that had begun in 2022 and ended the year with the deposit facility rate standing at a record high of 4.00%. In addition, the size of its balance sheet continued to shrink, due to the maturity of TLTRO III funding transactions and the beginning of the process to reduce its holdings of assets bought under its asset purchase program. Additionally, it announced that it would stop reinvesting a portion of maturing securities purchased under the pandemic emergency purchase program in the second half of 2024. Meanwhile, the ECB stopped remunerating banking institutions’ mandatory reserves.

In the United States, the Federal Reserve (Fed) continued to pursue its rate hike cycle, with official interest rates reaching a range of 5.25%-5.50% mid-year. At its last meeting of the year, the Fed signaled that the rate hike cycle had come to an end and that it would even begin discussions about future rate cuts, which provided additional support for the performance of various financial assets. In terms of balance sheet policy, its balance sheet reduction was interrupted following the financial instability triggered by the collapse of Silicon Valley Bank, as a result of which the Fed established new extraordinary funding facilities for the banking system. Nevertheless, once the event was resolved, the Fed continued its balance sheet reduction by electing not to reinvest maturing debt.

In the United Kingdom, the Bank of England (BoE) raised the base rate to 5.25%, after inflationary pressures intensified at the beginning of the year. In addition, it continued with the balance sheet reduction program, unwinding practically all of its corporate bond holdings (around £18 billion) and £93 billion of government debt acquired under the asset purchase facility. In the same vein, the BoE announced that it would continue to downsize its balance sheet and estimated a further reduction of 100 billion pounds of government debt holdings in the next tax year (October 2023—September 2024).

In Mexico, the central bank ended its rate hike cycle in the first half of the year with the official interest rate standing at 11.25% and kept it unchanged during the second half of 2023. Banxico has not yet begun to discuss possible rate cuts and continued to hold the opinion that inflation risks remained skewed to the upside. This stood in contrast with the situation of other Latin American countries, such as Brazil, Chile and Peru, where the central banks started to make rate cuts in the second half of the year. This was also the tone in China, where the authorities adopted monetary loosening measures, albeit cautiously, to support economic recovery. By contrast, benchmark interest rates were hiked sharply in Turkey, in a context of double-digit inflation.

Results of Operations

June 30, 2024 versus June 30, 2023

The information in this subsection has been extracted from pages 9 to 15 of Banco Sabadell’s second quarter 2024 quarterly financial report.


	1H 2023			1H 2024			Year-on-year change (%)
	(€ million, except %)
Net interest income		2,270			2,493			9.8
Net fees and commissions		697			674			(3.3	)

Core revenues		2,967			3,168			6.8
Net trading income and exchange differences		31			37			18.4
Income from equity method and dividends		72			87			20.6
Other operating income/expense		(261	)		(230	)		(11.9	)

Gross operating income		2,809			3,061			9.0
Operating expenses		(1,204	)		(1,266	)		5.2
Personnel expenses		(717	)		(744	)		3.8
Other general expenses		(487	)		(522	)		7.2
Amortization and depreciation		(274	)		(249	)		(9.0	)
Total costs		(1,478	)		(1,515	)		2.5

Pre-provisions income		1,331			1,546			16.1
Provisions for NPLs		(433	)		(333	)		(23.1	)
Provisions for other financial assets		(7	)		(28	)		—
Other impairments		(29	)		(29	)		1.2
Gains on sale and other results		(13	)		(2	)		(82.5	)

Profit before tax		849			1,154			35.9
Income tax		(285	)		(362	)		27.1
Minority interests		1			1			6.8

Attributable net profit		564			791			40.3

Net Interest Income

Net interest income amounted to €2,493 million as at the end of June 2024, growing by 9.8% year-on-year and by 2.5% in the quarter.

The year-on-year growth was mainly driven by higher loan yields and higher earnings on the fixed-income portfolio, underpinned by interest rates, all of which offset the higher costs of both deposits and wholesale funding, as well as reduced average volumes. In the quarter, it was driven by a higher customer margin, where credit yield growth was underpinned by portfolio repricing and larger volumes.

Customer Margin and Net Interest Margin

The customer margin improved by 29 basis points compared to the end of the second quarter of 2023 and by 9 basis points compared to the previous quarter, standing at 3.18%, driven by the increase in loan yields, which offset the higher year-on-year cost of deposits.

Similarly, the net interest margin as a percentage of average total assets rose by 22 basis points in the year and by 2 basis points in the quarter, reaching 2.10%.

Net Trading Income and Exchange Differences

As at the end of June 2024, this item came to a total of €37 million, increasing in year-on-year terms due to a larger contribution by TSB, but falling during the quarter, mainly due to reduced earnings on overall derivatives.

Net Fees and Commissions

Net fees and commissions amounted to €674 million as at the end of June 2024, representing a reduction of 3.3% year-on-year, mainly due to reduced service fees, particularly fees on payment cards and sight account, as well as reduced asset management fees, where it is worth mentioning fees on pensions funds and insurance brokerage.

In the quarter, they declined by 1.4%, affected by reduced fee income at TSB due to higher costs associated with cards.

Equity-accounted Income and Dividends

This item amounted to €87 million as at the end of June 2024, increasing compared to the end of June 2023, due to the increased contribution of the insurance business. In the quarter, there was a reduction due to a smaller contribution from insurance and fewer earnings in BS Capital investees.

Other Operating Income and Expenses

This item amounted to €(230) million as at the end of June 2024, compared to €(261) million at the end of the previous June. The positive balance variation is mainly explained by the €(76) million recognized in the previous year for the contribution to the Single Resolution Fund (SRF), which offset the negative balance variation caused by the recognition of a higher impact of the banking tax in 2024, which was €(192) million compared to €(156) million recognized in the previous year.

The positive quarterly balance variation is mainly explained by the recognition of the banking tax in the first quarter of the year.

Total Costs

Total costs came to €(1,515) million as at the end of June 2024, reflecting a year-on-year increase of 2.5%, due to both higher staff expenses and higher general expenses, which were counterbalanced by the reduction of amortizations/depreciations.

In quarterly terms, total costs rose by 1.7%, as a result of higher general expenses.

Core Results

Core results (net interest income + fees and commissions – total costs) followed a positive trend, standing at €1,652 million as at the end of June 2024, growing by 11.0% year-on-year and by 1.6% in the quarter, as a result of the good evolution of net interest income.

Provisions for Credit Losses and Other Impairments

This item amounted to €(389) million as at the end of June 2024, compared to €(468) million at the end of June 2023, representing a reduction of 16.9%, due to an improvement of credit provisions.

In the quarter, provisions were down by 13.2%, also due to fewer credit provisions, which neutralized the increase in real estate provisions (which included impairments due to branch closures) and the increase in litigation provisions.

This level of provisions reflects an improvement in the Group’s credit cost of risk, which dropped by 8 basis points in the quarter to stand at 33 basis points, as well as in the total cost of risk, which fell by 4 basis points in the quarter to stand at 46 basis points as at the end of June 2024.

Gains on Sale of Assets and Other Results

Gains on asset sales and other results improved in year on-year terms, as the previous year included higher levels of asset write-offs.

Net Profit

The Group’s net profit amounted to €791 million as at the end of June 2024, increasing by 40.3% year-on-year. In the quarter, this item grew by 56.8%.

Banking Business Spain: June 30, 2024 versus June 30, 2023

The information in this subsection has been extracted from page 28 of Banco Sabadell’s second quarter 2024 quarterly financial report.

Net profit as at the end of June 2024 amounted to €670 million, representing a year-on-year increase of 53.3%, mainly driven by the good evolution of net interest income and reduced provisions.

Net interest income amounted to €1,826 million as at the end of June 2024, growing by 16.1% year-on-year as a result of a higher credit yield and increased revenue from the fixed-income portfolio, underpinned by higher interest rates, all of which served to offset higher costs of both deposits and wholesale funding and reduced average volumes.

Net fees and commissions stood at €610 million, 3.9% less than at the end of June 2023, mainly due to reduced service fees, notably fees on payment cards and sight account, as well as the drop in asset management fees, particularly fees on pension funds and insurance brokerage.

Net trading income and exchange differences amounted to €8 million, representing a year-on-year reduction, mainly due to reduced earnings on overall derivatives.

Equity-accounted results and dividends showed year-on-year growth of 20.6%, due mainly to the increased contribution of the insurance business.

The positive balance variation in Other operating income and expenses is mainly explained by the €(76) million recognized in the previous year for the contribution to the Single Resolution Fund (SRF), which offset the negative balance variation caused by the recognition of a larger impact of the banking tax in 2024, which was €(192) million compared to €(156) million recognized in the previous year.

Total costs recorded a year-on-year increase of 3.6%, due to higher staff expenses and the increase in general expenses.

Provisions and impairments amounted to €(348) million, down by 19.1% year-on-year, due to an improvement in credit provisions.


	1H 2023			1H 2024			Year-on-year change (%)
	(€ million, except %)
Net interest income		1,573			1,826			16.1
Net fees and commissions		635			610			(3.9	)

Core revenues		2,208			2,436			10.3
Net trading income and exchange differences		26			8			(69.8	)
Income from equity method and dividends		72			87			20.6
Other operating income/expense		(232	)		(191	)		(17.3	)

Gross operating income		2,074			2,339			12.8
Operating expenses		(780	)		(817	)		4.8
Amortization and depreciation		(185	)		(183	)		(1.4	)
Total costs		(965	)		(1,000	)		3.6

Pre-provisions income		1,109			1,339			20.8
Total provisions and impairments		(430	)		(348	)		(19.1	)
Capital gains on sale of assets and other results		(12	)		0			(99.8	)

Profit before tax		666			991			48.8
Income tax		(228	)		(320	)		40.4
Minority interest		1			1			6.8

Attributable net profit		437			670			53.3

Banking Business United Kingdom: June 30, 2024 versus June 30, 2023

The information in this subsection has been extracted from page 29 of Banco Sabadell’s second quarter 2024 quarterly financial report.

Net profit amounted to €95 million as at the end of June 2024, representing a year-on-year reduction of 10.2% due to the decline of net interest income.

Net interest income came to a total of €562 million, less than in the first half of 2023, due to the higher cost of deposits and wholesale funding, and also due to reduced volumes, which offset the growth stemming from the higher credit yield. However, in quarter-on-quarter terms, net interest income reversed this trend and increased by 1.7%.

Net fees and commissions amounted to €54 million as at the end of June 2024, representing a year-on-year reduction of 7.0%, mainly due to lower payment card fees, which include an increase in costs.

Total costs amounted to €(449) million, falling by 3.2% year-on-year due to the reduction of amortizations/depreciations, which offset the increase in staff expenses.

Provisions and impairments amounted to €(28) million, representing an increase of €(5) million, due to the recognition of more provisions for litigation.


	1H 2023			1H 2024			Year-on-year change (%)
	(€ million, except %)
Net interest income		603			562			(6.8	)
Net fees and commissions		58			54			(7.0	)

Core revenues		661			615			(6.8	)
Net trading income and exchange differences		5			24			—
Income from equity method and dividends		0			0			—
Other operating income/expense		(20	)		(29	)		43.4

Gross operating income		646			611			(5.4	)
Operating expenses		(387	)		(391	)		0.8
Amortization and depreciation		(76	)		(58	)		(23.6	)
Total costs		(464	)		(449	)		(3.2	)

Pre-provisions income		183			162			(11.1	)
Total provisions and impairments		(23	)		(28	)		24.0
Gains on sale of assets and other results		0			1			—

Profit before tax		160			135			(15.9	)
Income tax		(55	)		(40	)		(27.1	)
Minority interest		0			0			—

Attributable net profit		106			95			(10.2	)

Banking Business Mexico: June 30, 2024 versus June 30, 2023

The information in this subsection has been extracted from page 30 of Banco Sabadell’s second quarter 2024 quarterly financial report.

Net profit as at the end of June 2024 amounted to €26 million, representing a year-on-year increase of 25.5%, mainly due to the increase in core revenues.

Net interest income came to €106 million, growing by 12.4% year-on-year, underpinned by the appreciation of the Mexican peso (in terms of average exchange rate), as at a constant exchange rate it increased by 6.3%, mainly due to larger volumes and a higher credit yield.

Net fees and commissions came to €10 million as at the end of June 2024, increasing by €6 million compared to the first half of the previous year due to higher levels of commercial activity.

Total costs amounted to €(67) million, reflecting year-on-year growth, mainly due to higher general expenses, particularly marketing costs.

Provisions and impairments amounted to €(13) million as at the end of June 2024, representing a year-on-year reduction of 14.6% due to fewer credit provisions.


	1H 2023			1H 2024			Year-on-year change (%)
	(€ million, except %)
Net interest income		94			106			12.4
Net fees and commissions		4			10			142.0

Core revenues		98			116			18.0
Net trading income and exchange differences		0			5			—
Income from equity method and dividends		0			0			—
Other operating income/expense		(10	)		(10	)		4.1

Gross operating income		89			111			25.2
Operating expenses		(37	)		(58	)		59.6
Amortization and depreciation		(12	)		(8	)		(33.0	)
Total costs		(49	)		(67	)		36.2

Pre-provisions income		40			44			11.7
Total provisions and impairments		(15	)		(13	)		(14.6	)
Gains on sale of assets and other results		(1	)		(3	)		107.6

Profit before tax		23			28			22.8
Income tax		(2	)		(2	)		(3.3	)
Minority interest		0			0			—

Attributable net profit		21			26			25.5

2023 versus 2022

The information in this subsection has been extracted from pages 72 to 76 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023. The comparative financial information as of and for the year ended December 31, 2022 included in Banco Sabadell’s annual report as of and for the year ended December 31, 2023 (and included below) has been restated to take into account the implementation of IFRS 17 (please see Note 1.4 to the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023).


	2023			2022			Year-on-year change (%)
	(€ million, except %)
Interest and similar income		8,659			4,989			73.6
Interest and similar expenses		(3,936	)		(1,190	)		230.8

Net interest income		4,723			3,799			24.3
Fees and commissions, net		1,386			1,490			(7.0	)

Core revenue		6,109			5,289			15.5
Gains or (-) losses on financial assets and liabilities and exchange differences		68			104			(34.0	)
Equity-accounted income and dividends		131			156			(15.6	)
Other operating income and expenses		(447	)		(337	)		32.5

Gross income		5,862			5,211			12.5
Operating expenses		(2,496	)		(2,337	)		6.8
Staff expenses		(1,495	)		(1,392	)		7.4
Other general administrative expenses		(1,002	)		(946	)		5.9
Depreciation and amortization		(519	)		(545	)		(4.8	)
Total costs		(3,015	)		(2,883	)		4.6
Memorandum item:
Recurrent costs		(2,982	)		(2,883	)		3.5
Non-recurrent costs		(33	)		—			—

Pre-provisions income		2,847			2,328			22.3
Provisions for loan losses		(813	)		(825	)		(1.5	)


	2023			2022			Year-on-year change (%)
	(€ million, except %)
Provisions for other financial assets		(18	)		(111	)		(84.1	)
Other provisions and impairments		(80	)		(96	)		(17.0	)
Capital gains on asset sales and other revenue		(46	)		(23	)		101.8

Profit/(loss) before tax		1,891			1,273			48.5
Corporation tax		(557	)		(373	)		49.3
Profit or loss attributed to minority interests		1			11			(86.8	)

Profit attributable to the Group		1,332			889			49.8

The average exchange rate used for the cumulative balance of TSB’s income statement is 0.8706 (0.8532 in 2022).

Net Interest Income

Net interest income followed a positive trend, reaching €4,723 million as at the end of 2023, representing year-on-year growth of 24.3%, mainly due to a higher credit yield and improved revenue from the fixed income portfolio, underpinned by higher interest rates, all of which served to offset higher costs of both funds and capital markets and the negative effect of the pound sterling’s depreciation.

Consequently, the net interest margin as a percentage of average total assets stood at 1.93% in 2023 (1.47% in 2022).

The breakdown of net interest income for the years 2023 and 2022, as well as the different components of total investment and funds, was as follows:


	2023								2022								Change						Effect
	Average balance		Profit/(loss)			Rate %			Average balance		Profit/(loss)			Rate %			Average balance			Profit/(loss)			Rate			Volume
	(€ thousands, except %)
Cash, central banks and credit institutions		42,117,993		1,476,738			3.51			53,538,412		208,485			0.39			(11,420,419	)		1,268,253			1,473,389			(205,136	)
Loans and advances to customers		153,978,221		5,839,767			3.79			157,870,419		3,965,858			2.51			(3,892,198	)		1,873,909			1,892,904			(18,995	)
Fixed-income portfolio		28,531,645		832,967			2.92			26,229,512		289,924			1.11			2,302,133			543,043			513,512			29,531

Subtotal		224,627,859		8,149,472			3.63			237,638,343		4,464,267			1.88			(13,010,484	)		3,685,205			3,879,805			(194,600	)
Equity portfolio		859,258		—			—			903,212		—			—			(43,954	)		—			—			—
Tangible and intangible assets		4,576,149		—			—			4,820,868		—			—			(244,719	)		—			—			—
Other assets		15,110,214		508,059			3.36			14,191,036		180,022			1.27			919,178			328,037			—			328,037

Total investment		245,173,480		8,657,531			3.53			257,553,459		4,644,289			1.80			(12,379,979	)		4,013,242			3,879,805			133,437
Central banks and credit institutions		31,484,501		(1,064,832	)		(3.38	)		48,310,994		8,713			0.02			(16,826,493	)		(1,073,545	)		(1,366,466	)		292,921
Customer deposits		160,564,046		(1,432,303	)		(0.89	)		162,393,140		(309,002	)		(0.19	)		(1,829,094	)		(1,123,301	)		(1,059,227	)		(64,074	)
Capital markets		26,379,723		(876,225	)		(3.32	)		22,304,397		(316,115	)		(1.42	)		4,075,326			(560,110	)		(452,311	)		(107,799	)

Subtotal		218,428,270		(3,373,360	)		(1.54	)		233,008,531		(616,404	)		(0.26	)		(14,580,261	)		(2,756,956	)		(2,878,004	)		121,048
Other liabilities		13,183,674		(560,954	)		(4.25	)		11,491,130		(229,160	)		(1.99	)		1,692,544			(331,794	)		—			(331,794	)
Own funds		13,561,536		—			—			13,053,798		—			—			507,738			—			—			—

Total funds		245,173,480		(3,934,314	)		(1.60	)		257,553,459		(845,564	)		(0.33	)		(12,379,979	)		(3,088,750	)		(2,878,004	)		(210,746	)

Average total assets		245,173,480		4,723,217			1.93			257,553,459		3,798,725			1.47			(12,379,979	)		924,492			1,001,801			(77,309	)

Financial income or expenses arising from the application of negative interest rates are recorded in line with the nature of the associated asset or liability. The credit institutions heading on the liabilities side includes negative interest rates applied to balances of credit institutions on the liabilities side, the most significant item being TLTRO III borrowing.

Gross Income

Net fees and commissions reached €1,386 million as at the end of 2023, representing a year-on-year reduction of 7.0%, which was mainly due to fewer service fees, as well as fewer asset management fees, particularly those charged on pension funds and insurance due to the change in the insurance product mix.

Gains/(losses) on financial assets and liabilities and exchange differences reached a total of €68 million, representing a reduction compared to the end of 2022, mainly due to reduced gains on trading derivatives.

Dividends received and earnings of companies consolidated under the equity method together amounted to €131 million, compared with €156 million in the previous year, as the latter included higher earnings from BSCapital investees.

Other operating income and expenses amounted to €(447) million, compared with €(337) million in 2022. This negative balance variation is mainly explained by the €(156) million paid for the new bank levy, booked in the first quarter of 2023, and by a larger contribution made to Banco Sabadell’s Deposit Guarantee Fund (€(132) million in 2023 compared to €(114) million in 2022), which was partially offset by the booking of a smaller contribution to the Single Resolution Fund (€(76) million in 2023 compared to €(100) million in 2022), given the reduction of the target calculated by the Single Resolution Board (SRB). It is also worth mentioning that 2022 was impacted by the recognition of €(57) million net, resulting from the agreement regarding the incidents that took place following the migration of TSB’s IT platform, which were partially offset with a tax-payable amount of €45 million (€32 million, net) due to insurance claim recoveries, with this item amounting to a total of €(25) million net, while in 2023, an additional €16 million of insurance claims were recognized.

Pre-provisions Income

Total costs stood at €3,015 million as at year-end 2023, impacted by €33 million of non-recurrent costs recorded in the fourth quarter related to TSB’s restructuring, which included €26 million of allocated provisions. Not including this impact, recurrent costs increased by 3.5% year-on-year due to both higher staff expenses and higher general expenses, particularly marketing and technology expenses, which offset the reduction of amortizations/redemptions.

The cost-to-income ratio for 2023 improved, standing at 42.6% compared to 44.9% in 2022.

Core results (net interest income + fees and commissions – recurrent costs) improved in the year, standing at €3,127 million as at 2023 year-end, having grown by 29.9% year-on-year as a result of the good evolution of net interest income.

Total provisions and impairments amounted to €(910) million as at the end of 2023, compared to €(1,032) million at the end of the previous year, representing a reduction of 11.8% thanks to fewer provisions for credit items, financial assets and real estate.

Capital gains on asset sales and other revenue amounted to €(46) million at the end of 2023. The year-on-year change is due to the recognition of higher IT asset write-offs.

Profit Attributable to the Group

After deducting corporation tax and minority interests, net profit attributable to the Group amounted to €1,332 million as at the end of 2023, representing strong year-on-year growth, mainly due to improved net interest income.

Banking Business Spain: 2023 versus 2022

The information in this subsection has been extracted from pages 89 and 90 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023. The comparative financial information as of and for the year ended December 31, 2022 included in Banco Sabadell’s annual report as of and for the year ended December 31, 2023 (and included below) has been restated to take into account the implementation of IFRS 17 (please see Note 1.4 to the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023).

Net profit as at the end of 2023 amounted to €1,093 million, representing a year-on-year increase of 41.8%, mainly driven by the good evolution of net interest income.

Net interest income amounted to €3,353 million as of the end of 2023, growing by 34.2% year-on-year, due to higher loan yields and improved fixed-income revenue, underpinned by higher interest rates, which offset the higher costs of funds and capital markets.

Net fees and commissions stood at €1,247 million, 7.2% less than at year-end 2022, mainly due to the drop in service fees and asset management fees, particularly fees on pension funds and insurance due to the change in the insurance product mix.

Gains/(losses) on financial assets and liabilities and exchange differences amounted to €45 million, which represents a reduction in year-on-year terms, mainly due to trading derivatives.

Other income and expenses were mainly impacted by the €(156) million bank levy paid in 2023.

Total costs recorded a year-on-year increase of 4.2%, due to higher staff expenses, including salary management in the wake of inflationary pressures, and to the increase in general expenses, particularly marketing and technology expenses.

Provisions and impairments amounted to €816 million, down by 11.2% year-on-year, due to the booking of fewer provisions for both loan losses and financial assets, and also due to the impairment of real estate assets.


	2023			2022			Year-on-year change (%)
	(€ million, except %)
Net interest income		3,353			2,499			34
Fees and commissions, net		1,247			1,344			(7.2	)

Core revenue		4,601			3,843			19.7
differences		45			95			(52.8	)
Equity-accounted income and dividends		131			156			(15.7	)
Other operating income and expenses		(404	)		(225	)		79.7

Gross income		4,372			3,869			13.0
Operating expenses, depreciation and amortization		(1,965	)		(1,887	)		4.2

Pre-provisions income		2,407			1,982			21.5
Provisions and impairments		(816	)		(920	)		(11.3	)
Capital gains on asset sales and other revenue		(27	)		(9	)		198.1

Profit/(loss) before tax		1,564			1,053			48.5
Corporation tax		(469	)		(270	)		73.6
Profit or loss attributed to minority interests		1			11			(87.1	)

Profit attributable to the Group		1,093			772			41.7

Banking Business United Kingdom: 2023 versus 2022

The information in this subsection has been extracted from pages 122 and 123 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023. The comparative financial information as of and for the year ended December 31, 2022 included in Banco Sabadell’s annual report as of and for the year ended December 31, 2023 (and included below) has been restated to take into account the implementation of IFRS 17 (please see Note 1.4 to the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023).

Net profit amounted to €195 million as at 2023 year-end, representing strong year-on-year growth, mainly on the strength of improved net interest income and reduced provisions. In addition, €16 million were recognized in 2023 for the collection of insurance compensation in connection with the IT migration, while 2022 included the recognition of €(57) million, net, derived from the migration related incidents.

Net interest income came to a total of €1,174 million, 2.0% more than in the previous year, mainly on the strength of a higher-yielding loan book due to higher interest rates and also due to the fixed-income portfolio, which offset the increased cost of funds and capital markets. At constant exchange rates, net interest income increased by 4.1%.

Net fees and commissions amounted to €124 million as at the end of 2023, representing a year-on-year reduction of 7.4%, due to a reduction in demand deposit fees. Total costs came to €(941) million, 3.5% higher year-on-year, impacted by the depreciation of the pound sterling. At constant exchange rates, costs increased by 5.6%, due to the booking of €(33) million of non-recurrent restructuring costs, the increase of recurrent costs being 1.9%, due both to higher staff expenses and to higher general expenses, mainly technology and marketing costs, which offset the reduction of amortizations/depreciations.

Provisions and impairments amounted to €75 million, falling by 278% year-on-year, mainly due to the reduced provisions for financial assets (conduct) in 2023.


	2023			2022			Year-on-year change (%)
	(€ million, except %)
Net interest income		1,174			1,151			2.0
Fees and commissions, net		124			134			(7.4	)

Core revenue		1,298			1,284			1.1
Gains or (-) losses on financial assets and liabilities and exchange differences		16			6			166.4
Equity-accounted income and dividends		—			—			—
Other operating income and expenses		(23	)		(95	)		(75.9	)

Gross income		1,291			1,195			8.0
Operating expenses, depreciation and amortization		(941	)		(909	)		3.6

Pre-provisions income		350			285			22.7
Provisions and impairments		(75	)		(104	)		(27.8	)
Capital gains on asset sales and other revenue		—			1			(113.2	)

Profit/(loss) before tax		274			182			50.8
Corporation tax		(80	)		(95	)		(16.2	)
Profit or loss attributed to minority interests		—			—			—

Profit attributable to the Group		195			87			123.9

The exchange rates applied to the income statement are GBP 0.8706 (average) in 2023 and 0.8532 (average) in 2022.

Banking Business Mexico: 2023 versus 2022

The information in this subsection has been extracted from pages 126 and 127 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023. The comparative financial information as of and for the year ended December 31, 2022 included in Banco Sabadell’s annual report as of and for the year ended December 31, 2023 (and included below) has been restated to take into account the implementation of IFRS 17 (please see Note 1.4 to the consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023).

Net profit as at 2023 year-end amounted to €44 million, representing year-on-year growth of 40.6%, supported by the appreciation of the Mexican peso. At constant exchange rates, this growth was 29.0%, mainly due to the good performance of net interest income.

Net interest income came to €196 million, growing by 31.2% year-on-year, or 19.0% at constant exchange rates, underpinned by higher yields on the loan book and higher revenue from fixed-income.

Net fees and commissions amounted to €15 million as at the end of 2023, increasing by €3 million compared to the previous year due to increased commercial activity. Total costs stood at €(108) million, representing growth of 25.8% compared to the previous year, affected by the appreciation of the Mexican peso. At constant exchange rates, costs increased by 14.1%, mainly due to higher general expenses, particularly marketing costs.

Provisions and impairments stood above the 2022 year-end figure, which included releases of several borrowers’ provisions.

Capital gains on asset sales and other revenue were more negative due to an increase in IT asset write-offs.


	2023			2022			Year-on-year change (%)
	(€ million, except %)
Net interest income		196			149			31.5
Fees and commissions, net		15			12			23.2

Core revenue		211			162			30.1
Gains or (-) losses on financial assets and liabilities and exchange differences		8			3			152.6
Equity-accounted income and dividends		—			—			—
Other operating income and expenses		(20	)		(17	)		—

Gross income		198			148			34.1
Operating expenses, depreciation and amortization		(108	)		(86	)		26.1

Pre-provisions income		90			62			45.1
Provisions and impairments		(19	)		(9	)		108.1
Capital gains on asset sales and other revenue		(19	)		(14	)		—

Profit/(loss) before tax		53			39			35.2
Corporation tax		(9	)		(8	)		9.4
Profit or loss attributed to minority interests		—			—			—

Profit attributable to the Group		44			31			41.8

2022 versus 2021

The information in this subsection has been extracted from pages 53 to 56 of Banco Sabadell’s annual report as of and for the year ended December 31, 2022.


	2022			2021			Year-on-year change (%)
	(€ million, except %)
Interest income		4,989			4,148			20.3
Interest expenses		(1,190	)		(722	)		64.8

Net interest income		3,799			3,425			10.9
Fees and commissions (net)		1,490			1,468			1.5

Core revenue		5,289			4,893			8.1
Gains or (-) losses on financial assets and liabilities and exchange differences		104			344			(69.9	)
Equity-accounted income and dividends		125			102			22.9
Other operating income and expenses		(337	)		(313	)		7.9

Gross income		5,180			5,026			3.1
Operating expenses		(2,337	)		(2,781	)		(15.9	)
Staff expenses		(1,392	)		(1,777	)		(21.7	)
Other general administrative expenses		(946	)		(1,004	)		(5.8	)
Depreciation and amortization		(545	)		(527	)		3.5
Total costs		(2,883	)		(3,307	)		(12.8	)
Memorandum item:
Recurrent costs		(2,883	)		(2,988	)		(3.5	)
Non-recurrent costs		—			(320	)		(100.0	)

Pre-provisions income		2,298			1,719			33.7
Provisions for loan losses		(825	)		(950	)		(13.2	)
Provisions for other financial assets		(111	)		(97	)		15.0
Other provisions and impairments		(96	)		(178	)		(46.1	)
Capital gains on asset sales and other revenue		(23	)		126			—

Profit/(loss) before tax		1,243			620			100.4
Corporation tax		(373	)		(81	)		359.2
Profit or loss attributed to minority interests		11			8			26.9

Profit attributable to the Group		859			530			61.9

The average exchange rate used for TSB’s income statement is 0.8532 (0.8594 in 2021).

Net Interest Income

Net interest income in 2022 amounted to €3,799 million, representing year-on-year growth of 10.9%, due to a higher-yielding loan book, improved fixed-income revenue, as well as strong growth of volumes, where it is particularly worth mentioning the growth of mortgages at TSB; all these facts served to offset the higher cost of capital markets.

Consequently, the net interest margin as a percentage of average total assets stood at 1.47% in 2022 (1.40% in 2021).

The breakdown of net interest income for the years 2022 and 2021, as well as the different components of total investment and funds, was as follows:


	2022								2021								Change						Effect
	Average balance		Profit/(loss)			Rate%			Average balance		Profit/(loss)			Rate%			Average balance			Profit/(loss)			Rate%			Volume			Days
	(€ thousands, except %)
Cash, central banks and credit institutions		53,538,412		208,485			0.39			48,693,390		(124,460	)		(0.26	)		4,845,022			332,945			333,136			(191	)		—
Loans and advances to customers		157,870,419		3,965,858			2.51			152,176,194		3,513,182			2.31			5,694,225			452,676			294,806			157,870			—
Fixed-income portfolio		26,229,512		289,924			1.11			24,991,737		154,224			0.62			1,237,775			135,700			122,946			12,754			—

Subtotal		237,638,343		4,464,267			1.88			225,861,321		3,542,946			1.57			11,777,022			921,321			750,888			170,433			—

Equity portfolio		903,212		—			—			1,044,020		—			—			(140,808	)		—			—			—			—
Property, plant and equipment and intangible assets		4,820,868		—			—			5,178,470		—			—			(357,602	)		—			—			—			—
Other assets		14,329,341		180,022			1.26			13,229,640		39,565			0.30			1,099,701			140,457			—			140,457			—

Total capital employed		257,691,764		4,644,289			1.80			245,313,451		3,582,511			1.46			12,378,313			1,061,778			750,888			310,890			—

Central banks and credit institutions		48,310,994		8,713			0.02			46,243,711		328,381			0.71			2,067,283			(319,668	)		(334,115	)		14,447			—
Customer deposits		162,393,140		(309,002	)		(0.19	)		154,609,681		(135,354	)		(0.09	)		7,783,459			(173,648	)		(139,206	)		(34,442	)		—
Capital markets		22,304,397		(316,115	)		(1.42	)		22,776,801		(265,876	)		(1.17	)		(472,404	)		(50,239	)		(46,445	)		(3,794	)		—

Subtotal		233,008,531		(616,404	)		(0.26	)		223,630,193		(72,849	)		(0.03	)		9,378,338			(543,555	)		(519,766	)		(23,789	)		—

Other liabilities		11,491,130		(229,160	)		(1.99	)		8,953,529		(84,206	)		(0.94	)		2,537,601			(144,954	)		—			(144,954	)		—
Own funds		13,192,103		—			—			12,729,729		—			—			462,374			—			—			—			—

Total funds		257,691,764		(845,564	)		(0.33	)		245,313,451		(157,055	)		(0.06	)		12,378,313			(688,509	)		(519,766	)		(168,743	)		—

Average total assets		257,691,764		3,798,725			1.47			245,313,451		3,425,456			1.40			12,378,313			373,269			231,122			142,147			—

Financial revenues or costs deriving from the application of negative interest rates are recognized as a function of the nature of the related asset or liability. The credit institutions line under liabilities refers to negative interest on the balance of liabilities with credit institutions, the most significant item being TLTRO III revenues.

Gross Income

Net fees and commissions amounted to €1,490 million as at the end of 2022, representing year-on-year growth of 1.5%, driven by service fees, where it is particularly worth mentioning the higher levels of card transactions and of banknote and foreign currency exchange, and also driven by fees related to risk transactions.

Gains/(losses) on financial assets and liabilities and exchange differences amounted to €104 million, while at the end of 2021 this item amounted to €344 million, as it mainly included €324 million of gains on sales from the amortized cost portfolio conducted to fund the second phase of the efficiency plan executed in Spain.

Dividends received and earnings of companies consolidated under the equity method together amounted to €125 million, compared with €102 million in 2021, after recognizing generally higher earnings from the insurance business.

Other operating income and expenses amounted to €(337) million, compared with €(313) million in 2021. Particularly worthy of note in this heading are the contributions to deposit guarantee schemes, amounting to €(129) million throughout the year (in line with the previous year), with Banco Sabadell’s individual contribution amounting to €(114) million, the contribution to the Single Resolution Fund of €(100) million (€(88) million in the previous year) and the payment corresponding to the tax on deposits of credit institutions (Impuesto sobre Depósitos de las Entidades de Crédito, IDEC) of €(35) million (€(33) million in the previous year). In addition, during this financial year it is worth noting the negative impact of €(57) million stemming from the fine received by TSB for the migration of its IT platform, which was partially offset with €45 million (gross) of insurance claims.

Pre-provisions Income

Total costs followed a positive trend, amounting to €2,883 million as at the end of 2022, representing a 12.8% reduction from the figure as at the end of 2021, which included €320 million of non-recurrent costs arising from the efficiency plans carried out in Spain and the United Kingdom. Not including this impact, recurrent costs fell by 3.5% year-on-year, driven by savings on staff expenses delivered by the efficiency plans and also by a reduction of general expenses.

The cost-to-income ratio stood at 45.1% in 2022, compared to 55.3% in 2021.

As at the end of 2022, core results (net interest income + fees and commissions – recurrent costs) amounted to €2,406 million, increasing by 26.3% year-on-year as a result of the steady growth of net interest income and fees and commissions, as well as the recorded reduction of costs.

Total provisions and impairments amounted to €1,032 million as at the end of 2022, compared to €1,225 million at the end of the previous year, representing a year-on-year reduction of 15.7% thanks to fewer credit provisions and the reduction of real estate provisions.

Gains on asset sales and other revenue amounted to €(23) million as at the end of 2022. The change from the end of the previous year is due to the fact that the previous year mainly included €83 million (gross) from the sale of the depository business and €42 million (gross) from the sale of the BanSabadell Renting business.

Profit Attributable to the Group

After deducting corporation tax and minority interests, net profit attributable to the Group amounted to €859 million as at the end of 2022, representing a year-on-year increase of 61.9% that is mainly the result of improved core revenue, cost savings and the booking of fewer provisions.

Banking Business Spain: 2022 versus 2021

The information in this subsection has been extracted from page 67 of Banco Sabadell’s annual report as of and for the year ended December 31, 2022.

Net profit as at the end of 2022 amounted to €740 million, representing sharp year-on-year growth, mainly as a result of the good performance of net interest income, the reduction of costs, and the booking of fewer provisions.

Net interest income amounted to €2,499 million as at 2022 year-end, growing by 8.6% year-on-year due to higher loan book yields, in turn supported by higher interest rates, the increased contribution of the ALCO portfolio and the good progression of volumes, which all served to offset higher costs in capital markets.

Net fees and commissions amounted to €1,344 million, 0.6% higher than at the end of 2021, due to the increase in service fees, on which topic it is particularly worth mentioning the increases in payment card usage and in the exchange of banknotes and foreign currency, and also due to the increased fees received on risk transactions.

Gains/(losses) on financial assets and liabilities and exchange differences amounted to €95 million, a reduction compared to the previous year, which included €323 million gained on sales from the ALCO portfolio (at amortized cost) executed to fund the second phase of the efficiency plan.

Equity-accounted results and dividends showed year-on-year growth of 22.5% due mainly to the increased contribution of the insurance business.

Other income and expenses were positively impacted by the insurance claim recoveries associated with TSB’s IT migration.

Total costs fell by 17.1% year-on-year, as the previous year included €301 million of non-recurrent costs related to the efficiency plan carried out. Not including this impact, costs decreased by 4.5% due to both lower staff expenses as a result of the cost savings delivered by the efficiency plans, and due to the recognition of lower general expenses.

Provisions and impairments amounted to €(920) million, down by 22.9% year-on-year, due to the booking of fewer provisions for both loan losses and real estate assets.

Gains on asset sales and other revenue showed a year-on-year reduction, as the previous year mainly included €83 million (gross) from the sale of the depository business and €42 million (gross) from the sale of the BanSabadell Renting business.


	2022			2021			Year-on-year change (%)
	(€ million, except %)
Net interest income		2,499			2,302			8.6
Fees and commissions (net)		1,344			1,336			0.6

Core revenue		3,843			3,638			5.6
Gains or (-) losses on financial assets and liabilities and exchange differences		95			342			(72.3	)
Equity-accounted income and dividends		125			102			22.9
Other operating income and expenses		(225	)		(269	)		(16.6	)

Gross income		3,837			3,812			0.7
Operating expenses and depreciation and amortization		(1,887	)		(2,276	)		(17.1	)

Pre-provisions income		1,951			1,536			27.0
Provisions and impairments		(920	)		(1,193	)		(22.9	)
Capital gains on asset sales and other revenue		(9	)		135			(106.9	)

Profit/(loss) before tax		1,021			478			113.7
Corporation tax		(270	)		(58	)		367.1
Profit or loss attributed to minority interests		11			8			26.9

Profit attributable to the Group		740			412			79.8

Banking Business United Kingdom: 2022 versus 2021

The information in this subsection has been extracted from page 86 of Banco Sabadell’s annual report as of and for the year ended December 31, 2022.

Net profit stood at €87 million as at 2022 year-end, impacted by €(57) million (net) stemming from the agreement to pay a fine to UK regulators for the incidents following the IT platform migration, recorded in the last quarter of 2022.

Net interest income totaled €1,151 million, 13.8% higher than the previous year, supported by the growth of mortgage volumes and the interest rate hikes.

Net fees and commissions increased by 11.0% year-on-year, mainly due to higher service fees, particularly card fees.

Total expenses stood at €(909) million, a year-on-year decrease of (3.5)%, as in the previous year this item had been impacted by €(19) million of non-recurrent costs as a result of the efficiency plan. Not including this impact, expenses decreased by -1.5%, due to both improved staff expenses and lower general expenses.

Provisions and impairment amounted to €104 million, increasing in year-on-year terms mainly due to the release of provisions in the previous year.

Corporation tax included an impact of €(15) million as at 2022 year-end, as a result of the effects on deferred tax assets following the review of the UK Bank Levy, which was reduced from 8% to 3%. On the other hand, €23 million were booked under the same item due to the corporation tax increase as at 2021 year-end.


	2022			2021			Year-on-year change (%)
	(€ million, except %)
Net interest income		1,151			1,011			13.8
Fees and commissions (net)		134			121			11.0

Core revenues		1,284			1,132			13.5
Gains or (-) losses on financial assets and liabilities and exchange differences		6			2			127.7
Equity-accounted income and dividends		—			—			—
Other operating income and expenses		(95	)		(33	)		186.4

Gross income		1,195			1,101			8.5
Operating expenses and depreciation and amortization		(909	)		(942	)		(3.5	)

Pre-provisions income		285			159			79.6
Provisions and impairments		(104	)		—			102,632.7
Gains on sale of assets and other revenue		1			(9	)		(108.7	)

Profit/(loss) before tax		182			150			21.5
Corporation tax		(95	)		(32	)		197.6
Profit or loss attributed to minority interests		—			—			—

Profit attributable to the Group		87			118			(26.2	)

Banking Business Mexico: 2022 versus 2021

The information in this subsection has been extracted from pages 88 and 89 of Banco Sabadell’s annual report as of and for the year ended December 31, 2022.

Net profit as at 2022 year-end amounted to €31 million, a strong year-on-year growth supported mainly by the improvement of net interest income and the reduction of provisions.

Net interest income amounted to €149 million, increasing by 32.4% year-on-year, due to the interest rate hike and the appreciation of the Mexican peso.

Net fees and commissions amounted to €12 million as at 2022 year-end, growing by €1 million relative to the previous year due to more commercial activity.

Total expenses amounted to €(86) million, thus falling by 3.5% year-on-year, mainly due to improved general expenses that offset the increase in amortizations and depreciations.

Provisions and impairment were below the previous year’s levels due to an improvement in the loan book, as well as payments received from single-name customers.

The item “Capital gains on asset sales and other revenue” includes write-offs of technology assets.


	2022			2021			Year-on-year change (%)
	(€ million, except %)
Net interest income		149			113			32.4
Fees and commissions (net)		12			11			17.2

Core revenues		162			123			31.1
Gains or (-) losses on financial assets and liabilities and exchange differences		3			—			3,921.7
Equity-accounted income and dividends		—			—			—
Other operating income and expenses		(17	)		(10	)		—

Gross income		148			114			30.2
Operating expenses and depreciation and amortization		(86	)		(89	)		(3.5	)

Pre-provisions income		62			24			154.3
Provisions and impairments		(9	)		(32	)		(73.0	)
Gains on sale of assets and other revenue		(14	)		—			—

Profit/(loss) before tax		39			(8	)		(577.2	)
Corporation tax		(8	)		9			(187.2	)
Profit or loss attributed to minority interests		—			—			—

Profit attributable to the Group		31			1			6,141.3

Liquidity and Capital Resources

Liquidity Management

The information in this subsection has been extracted from page 93 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-91. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.

Banco Sabadell’s liquidity management seeks to ensure funding for its business activity at an appropriate cost and term while minimizing liquidity risk. Banco Sabadell’s funding policy focuses on maintaining a balanced funding structure, based mainly on customer deposits, and it is supplemented with access to wholesale markets.

Funding Strategy and Evolution of Liquidity

The information in this subsection has been extracted from page 97 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-95. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.

The Group’s primary source of funding is customer deposits (mainly demand deposits and term deposits acquired through the branch network), supplemented with funding raised through interbank and capital markets in which Banco Sabadell has and regularly renews various short-term and long-term funding programs in order to achieve an adequate level of diversification by type of product, term and investor. Banco Sabadell maintains a diversified portfolio of liquid assets that are largely eligible as collateral in exchange for access to funding operations with the ECB.

The Group’s liquidity position remained at comfortable levels during the first half of 2024. During this period, the funding gap generated at the Group level was negative due to a greater increase in lending than in customer funds as a result of customers’ increased financing needs.

On-Balance Sheet Customer Funds

The information below has been extracted from page 98 of Banco Sabadell’s consolidated interim directors’ report for the first six months of 2024.

As at June 30, 2024, on-balance sheet customer funds amounted to €163,169 million, compared to €160,888 million as at the end of 2023, representing a 1.4% increase, where particular note should be taken of the increase of term deposits and demand deposits.

Demand deposit account balances amounted to €135,070 million, representing an increase of 0.6% compared to 2023 year-end. Customers’ term deposits amounted to €27,795 million, 8.6% above the figure recorded as at the end of 2023.

The information below has been extracted from page 97 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-95. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.

The tables below show Banco Sabadell’s on-balance sheet customer funds as of December 31, 2023 and 2022 by maturity:


	2023		3 months			6 months			12 months			>12 months			No maturity
	(€ million, except %)
Total on-balance sheet customer funds (*)		160,888		5.6	%		2.4	%		4.3	%		4.3	%		83.4	%
Term deposits and others		25,237		32.1	%		13.6	%		26.8	%		27.5	%		—
Sight accounts		134,243		—			—			—			—			100.0	%
Retail issues		1,408		53.8	%		30.9	%		14.7	%		0.6	%		—

(*)	Includes customer deposits (excl. repos) and other liabilities placed via the branch network: straight bonds issued by Banco Sabadell, commercial paper and others.


	2022		3 months			6 months			12 months			>12 months			No maturity
	(€ million, except %)
Total on-balance sheet customer funds (*)		164,140		3.9	%		1.1	%		1.9	%		3.2	%		89.9	%
Term deposits and others		15,690		39.5	%		8.2	%		19.3	%		33.0	%		—
Sight accounts		147,540		—			—			—			—			100.0	%
Retail issues		910		33.9	%		58.4	%		5.6	%		2.1	%		—

(*)	Includes customer deposits (excl. repos) and other liabilities placed via the branch network: straight bonds issued by Banco Sabadell, commercial paper and others.

2023

Due to rising interest rates in the financial markets, the weight of term deposits and other deposits in the composition of on-balance sheet customer funds has increased. Details of off-balance sheet customer funds managed by the Group and those sold but not under management are provided in Note 27. The Group’s deposits are sold through the business units/companies of the Group (Banking Business Spain, TSB and Mexico). In 2023, the funding gap has widened, with a sharper decline in lending than in customer funds, thus placing the Group’s Loan-to-Deposit (LtD) ratio at 94.0% as at 2023 year-end (95.6% as at 2022 year-end).

2022

The information below has been extracted from page 96 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2022, reproduced herein on page A-322. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2022.

Despite rising interest rates in financial markets, the composition of on-balance sheet customer funds remains the same. Details of off-balance sheet customer funds managed by the Group and those sold but not under management are provided in Note 27. The Group’s deposits are sold through the business units/companies of the Group (Banking Business Spain, TSB and Mexico). In 2022, the funding gap has widened, mainly due to a greater growth of customer funds than of lending items, thus placing the Group’s Loan-to-Deposit (LtD) ratio at 95.6% as at 2022 year-end (96.3% as at 2021 year-end).

Capital Markets

The information below has been extracted from page 26 of Banco Sabadell’s condensed consolidated interim financial statements as of and for the six months ended June 30, 2024, reproduced herein on page A-734. See also Schedule III to the condensed consolidated interim financial statements as of and for the six months ended June 30, 2024.

The level of funding in capital markets has remained stable. Banco Sabadell maintains a comfortable MREL (Minimum Requirement for own funds and Eligible Liabilities) level above the regulatory requirements. In the first half of the year, Banco Sabadell carried out four issues in the wholesale market for €2.75 billion and TSB carried out an additional issue for €500 million, managing the respective maturities in the capital markets.

The outstanding nominal balance of the Group’s funding in capital markets, by type of product, as at June 30, 2024 and December 31, 2023 is shown below:


	6/30/2024		12/31/2023
	(€ million)
Outstanding nominal balance		24,935		24,596
Covered bonds		10,369		10,975
Of which: TSB		3,158		3,164
Commercial paper and ECP		1		6
Senior debt		4,230		4,215
Senior non-preferred debt		4,530		4,425
Subordinated debt and preferred securities		4,065		3,565
Asset-backed securities		1,740		1,410
Of which: Sabadell Consumer Finance		371		494
Of which: TSB		591		—

The information below has been extracted from page 98 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-96. See also Note 4.4.3.1 and Schedule III to the consolidated financial statements as of and for the year ended December 31, 2023.

In 2023, the level of funding in capital markets has increased, with mortgage covered bonds being the item with the greatest net increase. Furthermore, in order to keep an adequate level of own funds and eligible liabilities above the applicable regulatory requirement or Minimum Requirement for own funds and Eligible Liabilities (“MREL”), senior non-preferred debt has also increased. The outstanding nominal balance of funding in capital markets, by type of product, as at December 31, 2023 and 2022, is shown below:


	2023		2022
	(€ million)
Outstanding nominal balance		24,596		22,077
Covered bonds		10,975		9,409
Of which: TSB Bank		3,164		1,409
Commercial paper and ECP		6		7
Senior debt		4,215		4,440
Senior non-preferred debt		4,425		3,505
Subordinated debt and preferred securities		3,565		3,465
Asset-backed securities		1,410		1,251
Of which: Sabadell Consumer Finance		494		—

The information below has been extracted from page 96 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2022, reproduced herein on page A-323. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2022.

The Group has a number of funding programs in operation in capital markets, with a view to diversifying its different funding sources. Specifically with regard to short-term funding, it has a corporate commercial paper program registered with the Spanish National Securities Market Commission (CNMV), and with regard to medium- and long-term funding, Banco Sabadell has a Euro Medium Term Notes (EMTN) program registered with the Irish Stock Exchange and a Base Prospectus of Non-Equity Securities registered with the CNMV.

The information below has been extracted from pages 98 and 99 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on pages A-95 and A-96. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.

In terms of short-term funding, as at year-end there was one commercial paper program in operation, which governs the issuance of such securities and is aimed at institutional and retail investors. The Banco Sabadell Commercial Paper Program for 2023, registered with Iberclear, has an issuance limit of €7 billion, which can be extended to €9 billion. As at December 31, 2023, the outstanding balance of the program was €1,383 million (net of commercial paper subscribed by Group companies), compared with €872 million as at December 31, 2022.

Regarding medium- and long-term funding, Banco Sabadell has the following programs in operation:

Program for the issuance of non-equity securities (“Fixed Income Program”) registered with the CNMV on November 16, 2023, with an issuance limit of €10 billion: this program regulates the issuance of straight, non-preferred or structured bonds and debentures, in addition to mortgage covered bonds and public sector covered bonds (European guaranteed bonds, also known as premium covered bonds) issued under Spanish law through the CNMV and aimed at institutional and retail investors, both domestic and foreign. As at December 31, 2023, the limit available for new issues under the Banco Sabadell Program for the issuance of non-equity securities for 2023 is €9.8 billion (as at 31 December 2022, the available limit under the Fixed Income Program for 2022 was €9.0 billion).

In 2023, Banco Sabadell carried out two public issues of mortgage covered bonds under the current Fixed Income Program amounting to a total of €1.2 billion.

Euro Medium Term Notes (“EMTN”) program, as detailed under the base prospectus dated May 14, 2024. This program allows senior debt and subordinated debt to be issued in various currencies, with a maximum limit of €20 billion.

In 2023, Banco Sabadell executed four issues under the EMTN program, amounting to a total of €2,750 million: one issue of senior preferred debt, two issues of senior non-preferred debt and one subordinated Tier 2 bond issue. Of the four issues, the senior preferred issue was in green format, amounting to €750 million.

Liquid Assets

In addition to these sources of funding, Banco Sabadell maintains a liquidity buffer in the form of liquid assets to meet potential liquidity needs:


	6/30/2024		12/31/2023
	(€ million)
Cash(*) + Net Interbank Position		24,716		25,036
Funds available in Bank of Spain facility		17,567		15,363
ECB eligible assets not pledged in facility		7,543		11,419
Other non-ECB eligible marketable assets (**)		6,931		6,740
Memorandum item:
Balance drawn from Bank of Spain facility (*)		—		5,000
Balance drawn from Bank of England Term Funding Scheme (**)		3,237		4,608

Total Liquid Assets Available		56,757		58,558

(*)	Excess reserves and Marginal Deposit Facility in Central Banks.

(**)	Market value, and after applying the Liquidity Coverage Ratio (LCR) haircut. Includes Fixed Income qualifying as a high quality liquid asset according to LCR (HQLA) and other marketable assets from different Group entities.

(***)

Correspond to TLTRO-III facility.

(****)

As at June 30, 2024, includes £2,735 million borrowed from the TFSME and £5 million borrowed from the ILTR (£4,000 million from the TFSME and £5 million from the ILTR as at December 31, 2023).

The information below has been extracted from page 100 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-98. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.


	2023		2022
	(€ million)
Cash(*) + Net Interbank Position		25,036		35,012
Funds available in Bank of Spain facility		15,363		7,788
ECB eligible assets not pledged in facility		11,419		6,010
Other non-ECB eligible marketable assets (**)		6,740		5,234
Memorandum item:
Balance drawn from Bank of Spain facility (*)		5,000		22,000
Balance drawn from Bank of England Term Funding Scheme (**)		4,608		6,201

Total Liquid Assets Available		58,558		54,044

(*)	Excess reserves and Marginal Deposit Facility in Central Banks.

(**)	Market value, and after applying the Liquidity Coverage Ratio (LCR) haircut. Includes Fixed Income qualifying as a high quality liquid asset according to LCR (HQLA) and other marketable assets from different Group entities.

(***)

Correspond to TLTRO-III facility.

(****)

As at year-end 2023, includes £4 billion to support Small and Medium-sized Enterprises (TFSME) and £5 million from the Indexed Long Term Repo (ILTR). As at year-end 2022, included £5 billion from the TFSME and £500 million from the ILTR.

Six months ended June 30, 2024

Compared to 2023 year-end, the Group’s first line of liquidity decreased in the first half of 2024 by €1,801 million. The balance of reserves and of the marginal deposit facility in central banks and the net interbank position showed a decline of €320 million in the first half of 2024, while ECB-eligible liquid assets decreased by €1,672 million, and the available non-ECB eligible assets increased by €191 million, the main reasons for these variations being a negative funding gap due to a greater increase in lending than in funds as a result of customers’ increased financing needs.

2023

With regard to 2023, the balance of reserves and marginal deposit facility in central banks and the net interbank position showed a decline of €9,976 million, while the volume of ECB eligible assets increased by €12,984 million and the available non-ECB eligible assets increased by €1,506 million in 2023, thus raising the first line of liquidity by €4,514 million in the year, with the funding gap and increased wholesale issues standing out as positive factors.

2022

The information below has been extracted from page 99 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2022, reproduced herein on page A-325. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2022.

In terms of 2022, the Group’s first line has remained stable over the year, increasing by €161 million. The balance of reserves and the marginal deposit facility in central banks, as well as the net interbank position, decreased by €8,177 million in 2022, while in the case of the volume of liquid assets deemed eligible by the ECB, its balance over the year 2022 increased by €7,842 million. These changes can be explained, not only by the reduction of assets’ valuations, but also by the early repayment of the funds borrowed under TLTRO III and by the fixed-income portfolio purchases made. Similarly, assets available and not deemed eligible by the ECB increased by €496 million in 2022, due mainly to the increase in available assets of foreign subsidiaries.

The information below has been extracted from page 28 of Banco Sabadell’s condensed consolidated interim financial statements as of and for the six months ended June 30, 2024, reproduced herein on page A-735. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.

It should be noted that the Group follows a decentralized liquidity management model. This model tends to limit the transfer of liquidity between the different subsidiaries involved in liquidity management, thereby limiting intra-group exposures, beyond any restrictions imposed by the local regulators of each subsidiary. Thus, the subsidiaries involved in liquidity management determine their liquidity position by considering only those assets in their possession that meet the eligibility, availability and liquidity criteria set forth both internally and in regulations in order to comply with regulatory minima.

Residual Maturity Periods

The information in this subsection has been extracted from pages 95 to 97 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on pages A-92 to A-94. See also Note 4.4.3.1 to the consolidated financial statements as of and for the year ended December 31, 2023.

The tables below show the breakdown, by contractual maturity, of certain pools of items on the consolidated balance sheet as of December 31, 2023 and 2022, under business-as-usual market conditions:


	2023
Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total
	(€ thousand)
Assets
Cash, balances at central banks and other demand deposits		2,879,139		26,518,399		575,341		1,972		64		1,630		206		—		9,102		29,985,853
Financial assets at fair value through other comprehensive income		—		28,056		69,236		791,454		560,553		518,426		302,223		1,132,974		2,682,438		6,085,359
Debt securities		—		28,056		69,236		791,454		560,553		518,426		302,223		1,132,974		2,682,438		6,085,359
Loans and advances		—		—		—		—		—		—		—		—		—		—
Customers		—		—		—		—		—		—		—		—		—		—
Financial assets at amortized cost		4,062,743		5,493,867		3,858,019		12,168,889		11,057,059		10,776,821		10,537,660		10,184,113		112,774,622		180,913,793
Debt securities		—		4,833		315,660		1,204,916		1,123,028		479,039		1,743,646		1,187,212		15,442,594		21,500,927
Loans and advances		4,062,743		5,489,034		3,542,359		10,963,974		9,934,031		10,297,782		8,794,014		8,996,901		97,332,028		159,412,866
Central banks		—		156,516		—		—		—		—		—		—		—		156,516
Credit institutions		1,411,422		445,014		732,541		2,114,438		1,666,642		573,056		56		9,210		43,572		6,995,951
Customers		2,651,321		4,887,504		2,809,818		8,988,540		8,267,389		9,724,726		8,793,958		8,987,691		97,149,452		152,260,399

Total assets		6,941,882		32,040,322		4,502,596		12,962,315		11,617,676		11,296,876		10,840,089		11,317,087		115,466,162		216,985,005

Liabilities
Financial liabilities at amortized cost		107,548,804		43,256,136		11,499,120		15,574,656		15,126,695		6,730,104		4,632,257		5,160,504		6,543,490		216,071,766
Deposits		101,442,894		42,529,331		9,538,402		13,218,907		12,300,947		2,453,941		1,103,014		750,550		609,211		183,947,196
Central banks		60,915		—		5,106,963		5,753		3,926,127		—		676,601		—		—		9,776,360
Credit institutions		1,039,225		4,678,234		816,081		2,817,579		2,263,510		1,306,692		254,561		171,991		492,311		13,840,183
Customers		100,342,754		37,851,097		3,615,358		10,395,575		6,111,309		1,147,249		171,852		578,559		116,900		160,330,653
Debt securities issued		16,214		693,854		1,951,456		2,340,622		2,816,403		4,270,058		3,525,049		4,406,209		5,771,418		25,791,284
Other financial liabilities		6,089,696		32,951		9,262		15,127		9,345		6,105		4,194		3,745		162,861		6,333,286

Total liabilities		107,548,804		43,256,136		11,499,120		15,574,656		15,126,695		6,730,104		4,632,257		5,160,504		6,543,490		216,071,766

Trading and Hedging derivatives
Receivable		—		50,823,146		11,328,791		28,452,907		14,570,051		10,892,738		7,921,211		9,074,442		33,210,726		166,274,013
Payable		—		30,233,517		10,838,943		29,856,672		20,222,682		11,930,292		8,979,495		7,146,036		40,908,171		160,115,808
Contingent risks
Financial guarantees		17,922		66,449		66,038		414,294		259,415		92,562		68,818		34,938		1,043,960		2,064,396


	2022
Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total
	(€ thousand)
Assets
Cash, balances at central banks and other demand deposits		3,681,237		37,009,112		563,743		18		1,043		51		1,206		—		3,986		41,260,395
Financial assets at fair value through other comprehensive income		—		124,536		86,954		855,454		777,596		582,648		196,407		244,104		2,754,993		5,622,692
Debt securities		—		124,536		86,954		855,454		777,596		582,648		196,407		244,104		2,754,993		5,622,692
Loans and advances		—		—		—		—		—		—		—		—		—		—
Customers		—		—		—		—		—		—		—		—		—		—
Financial assets at amortized cost		3,371,931		8,590,617		4,437,359		11,540,390		9,820,139		10,505,170		10,274,823		11,211,714		115,293,310		185,045,452
Debt securities		—		236,772		44,310		1,403,285		1,371,253		1,126,338		459,093		1,935,711		14,876,058		21,452,820
Loans and advances		3,371,932		8,353,845		4,393,049		10,137,104		8,448,886		9,378,833		9,815,730		9,276,002		100,417,252		163,592,632
Central banks		2,221		160,443		—		—		—		—		—		—		—		162,664
Credit institutions		978,063		2,341,986		428,487		753,460		131,473		83		175		34		66,525		4,700,287
Customers		2,391,648		5,851,416		3,964,561		9,383,645		8,317,413		9,378,751		9,815,555		9,275,968		100,350,726		158,729,681

Total assets		7,053,167		45,724,266		5,088,056		12,395,862		10,598,777		11,087,869		10,472,437		11,455,817		118,052,289		231,928,539

Liabilities
Financial liabilities at amortized cost		119,453,858		47,461,256		4,223,087		24,152,729		12,151,025		9,370,909		3,903,867		4,233,378		7,579,822		232,529,932
Deposits		113,012,257		47,375,927		2,719,435		22,548,986		7,666,937		6,556,190		650,136		1,855,757		907,897		203,293,522
Central banks		43,223		—		—		17,223,750		4,939,290		4,974,464		—		662,961		—		27,843,687
Credit institutions		843,529		7,506,691		901,048		714,986		329,534		136,998		160,605		117,597		662,402		11,373,390
Customers		112,125,507		39,869,236		1,818,387		4,610,250		2,398,113		1,444,728		489,531		1,075,199		245,495		164,076,445
Debt securities issued		6,213		66,725		1,486,936		1,590,320		4,477,376		2,807,926		3,248,767		2,371,575		6,521,711		22,577,549
Other financial liabilities		6,435,388		18,605		16,717		13,422		6,712		6,793		4,964		6,046		150,214		6,658,861

Total liabilities		119,453,858		47,461,256		4,223,087		24,152,729		12,151,025		9,370,909		3,903,867		4,233,378		7,579,822		232,529,932

Trading and Hedging derivatives
Receivable		—		46,863,268		9,509,600		24,047,648		22,014,057		9,609,213		9,828,147		7,123,277		33,292,235		162,287,446
Payable		—		34,864,873		10,226,762		22,347,484		25,943,323		10,464,426		9,068,820		7,440,695		40,138,871		160,495,254
Contingent risks
Financial guarantees		33,551		39,680		102,916		389,668		188,159		163,372		58,470		50,582		1,060,594		2,086,993

In this analysis, very short-term maturities traditionally represent funding requirements, as they include continuous maturities of short-term liabilities, which in typical banking activities see higher turnover rates than assets, but as they are continuously rolled over, they actually end up satisfying these requirements and at times even result in the growth of outstanding balances.

Furthermore, the Group’s funding capacity in capital markets is systematically checked to ensure it can meet its short-, medium- and long-term needs.

With regard to the information included in these tables, it is worth highlighting that they show the residual term to maturity of the asset and liability positions on the balance sheet, broken down into different time brackets.

The information provided is static and does not reflect foreseeable funding needs. It should also be noted that cash flow breakdowns in the parent company have not been deducted.

In order to present the contractual maturities of financial liabilities with certain particular characteristics, Banco Sabadell has taken the following approach:

•

Transactions are placed in different time brackets according to their contractual maturity date.

•

Demand liabilities are included in the “on demand” tranche, without taking into account their type (stable versus unstable).

•

There are also contingent commitments which could lead to changes in liquidity needs. These are fundamentally credit facilities with amounts undrawn by the borrowers as at the balance sheet date. The board of directors of Banco Sabadell also establishes limits in this regard for control purposes.

•

Balances related to financial guarantee contracts have been included for Banco Sabadell, allocating the maximum amount of the guarantee to the earliest period in which the guarantee can be called.

•

Funding in capital markets obtained through instruments that include clauses which could lead to accelerated repayment (puttables or instruments with clauses linked to a credit rating downgrade) is reduced in line with the Group’s financial liabilities. It is for this reason that the estimated impact on the parent company would not be significant.

•

As at December 31, 2023 and 2022, the Group had no instruments in addition to those regulated by master agreements associated with the arrangement of derivatives and repos/reverse repos.

•

The Group did not have any instruments which allow Banco Sabadell to decide whether to settle its financial liabilities using cash (or another financial asset) or through the submission of its own shares as at December 31, 2023 and 2022.

Research and Development, Patents and Licenses, Etc.

2023

The information below has been extracted from page 135 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023.

Activities within the Group in relation to technology have met the particular needs of each of the geographies in which it operates. For Spain, it is worth mentioning the acceleration that took place in the digital transformation, as well as the rollout of its catalogue of digital products, in addition to the creation of a new mobile app based on the latest market standards. It is also worth mentioning the improved resilience of the IT platform, with a new data center for disaster recovery with cloud-native capabilities. In TSB, efforts continued to focus on improving business capabilities. In Mexico, a new workplace model was put in place, based on the latest technology, improving productivity and efficiency.

2022

The information below has been extracted from page 96 of Banco Sabadell’s annual report as of and for the year ended December 31, 2022.

The Group’s technological activities continued to respond to the specific needs of each region, particularly the digital transformation in Spain, as well as the performance of the new IT platform and the rollout of the new

application development model. The main drivers for these improvements have been efficiency, quality and productivity. At TSB and Banco Sabadell Mexico, efforts continued to focus on improving business capabilities and achieving operational efficiency.

2021

The information below has been extracted from page 100 of Banco Sabadell’s annual report as of and for the year ended December 31, 2021.

The Group’s technological activities have responded to the particular needs of each geographic area, particularly in Spain, where digitalization, the strengthening of the new technological platform and the implementation of new working methods for employees stood out, while maintaining the search for efficiency and productivity. At TSB, efforts were focused on improving business capabilities and new channels of communication with customers.

Trend Information

Outlook for 2024

The information in this subsection has been extracted from page 69 of Banco Sabadell’s annual report as of and for the year ended December 31, 2023. This subsection includes forward-looking statements. Such statements reflect only the views of Banco Sabadell’s management, speak only as of the date they were made and have not been updated or verified by BBVA. As a result, readers are cautioned not to place undue reliance on the forward-looking statements included below, which are subject to risks and uncertainties that may make actual results differ materially from those expressed or implied by such forward-looking statements. See “Cautionary Statements Regarding Forward-looking Statements” beginning on page 16.

Global economic growth in 2024 is expected to be weak and below potential, affected by the impacts of tightened monetary policy. In terms of regions, the structural adjustments in China are expected to continue, while in the Eurozone, Germany’s weaker performance will contrast with the periphery countries that benefit from Next Generation EU funds. As for the United States, an economic slowdown is expected in 2024. By contrast, Mexico is expected to see a more pleasing growth dynamic than the United States, supported, to some extent, by nearshoring, a favorable labor market and the absence of financial imbalances.

It is expected that inflation will continue to gradually ease towards monetary policy targets, although these will not be achieved until the end of 2024 or beginning of 2025. Inflation dynamics will be largely determined by domestic factors, such as the job market, the real estate market and the fiscal policy of each country. Unstable supply conditions could generate new disruptions in production chains and new specific cost pressures.

In terms of economic policy, it is likely that central banks will cut interest rates as inflation moderates and gets closer to their targets, in order to avoid a further rebound of the real interest rate. Throughout this process, central banks could be forced to tolerate inflation rates somewhat higher than their targets, if that serves to avoid a potential financial crisis and significant recession.

In relation to the financial markets, it is expected that short-term government bond yields will gradually decline alongside official interest rate cuts. Long-term government bond yields are expected to remain relatively stable, despite weak economic growth and easing inflation, due to concerns about the fiscal situation, particularly in the United States. Corporate risk premiums could climb to levels higher than the average of the last few years. In relation to sovereign debt risk premiums in the European periphery, it is expected that these will remain at contained levels and in line with their respective ratings.

With regard to the currency market, it is anticipated that the U.S. dollar will gradually depreciate once further weakness in the U.S. economy becomes apparent and the Federal Reserve starts to cut interest rates in 2024.

Spain continues to outperform the rest of Europe in this environment. In this respect, the recovery of real household incomes stands out as a key tailwind, thanks to the favorable evolution of the labor market, higher wages and lower inflation. In addition, business investment has been supported by fewer supply chain issues, the Next Generation EU funds and tenders for public works associated with them, and by liquidity on corporate balance sheets.

In the financial environment, profitability in the banking sector is expected to moderate, as net interest income will provide less support, and asset quality is expected to deteriorate slightly. On the other hand, further progress is expected on the global regulatory framework for activities linked to cryptoassets and on central banks’ plans to issue digital currencies.

Critical Accounting Estimates

Judgements and Estimates

The information in this subsection has been extracted from page 21 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-19. See also Note 1.3 to the consolidated financial statements as of and for the year ended December 31, 2023.

The preparation of the consolidated annual financial statements requires certain accounting estimates to be made. It also requires management to use its best judgement in the process of applying the Group’s accounting policies. Such judgements and estimates may affect the value of assets and liabilities and the disclosure of contingent assets and contingent liabilities as at the date of the consolidated annual financial statements, as well as income and expenses in the year.

The main judgements and estimates relate to the following:

•

The accounting classification of financial assets according to their credit risk.

•

Impairment losses on certain financial assets and off-balance sheet exposures.

•

The assumptions used in actuarial calculations of liabilities and post-employment obligations.

•

The measurement of consolidated goodwill.

•

The useful life and impairment losses of tangible assets and other intangible assets.

•

The provisions and consideration of contingent liabilities.

•

The fair value of certain unquoted financial assets.

•

The fair value of real estate assets held on the balance sheet.

•

The recoverability of non-monetizable deferred tax assets and tax credits.

The estimates are based on the best knowledge available of current and foreseeable circumstances, taking into account the uncertainties stemming from the existing economic environment, consequently, the final results could differ from these estimates.

Accounting Principles and Policies and Measurement Criteria

The information in this subsection has been extracted from page 22 of Banco Sabadell’s consolidated financial statements as of and for the year ended December 31, 2023, reproduced herein on page A-20. See also Note 1.3 to the consolidated financial statements as of and for the year ended December 31, 2023.

The accounting principles and policies, as well as the most significant measurement criteria applied in preparing Banco Sabadell’s consolidated financial statements, are described in Note 1.3 to the consolidated

financial statements as of and for the year ended December 31, 2023. There are no cases in which accounting principles or measurement criteria have not been applied because of a significant effect on the Group’s consolidated annual financial statements for 2023.

IV. Quantitative and Qualitative Disclosure About Market Risk

For quantitative and qualitative disclosures about market risk, foreign exchange risk and other risks, see Notes 4.4 and 12 to Banco Sabadell’s consolidated financial statements as of and for the years ended December 31, 2023, 2022 and 2021 included herein.

BACKGROUND OF THE EXCHANGE OFFER

In 2020, BBVA and Banco Sabadell held discussions with respect to a potential merger of the two entities. The relevant merger discussions ended in November 2020 without reaching an agreement.

In 2024, BBVA’s senior management, including the executive board members, began to reconsider a potential merger with Banco Sabadell and believed that BBVA’s business in Spain could be enhanced through the strengthening of its local market position, complementing BBVA’s business segments with Banco Sabadell’s while achieving larger scale and significant synergies.

Beginning in March 2024, members of BBVA’s senior management contacted UBS Europe SE and JP Morgan SE as potential financial advisors regarding a potential transaction involving Banco Sabadell. UBS Europe SE and JP Morgan SE were formally engaged by BBVA as financial advisors in April 2024.

In April 2024, J&A Garrigues, S.L.P. and Davis Polk & Wardwell LLP were likewise engaged by BBVA as Spanish external counsel and U.S. external counsel, respectively.

On April 15, 2024, the Chair of BBVA contacted the Chairman of Banco Sabadell proposing a meeting between the two of them to update each other and discuss the alternatives they had considered in the past (by reference to the merger transaction discussed between BBVA and Banco Sabadell in 2020 without reaching an agreement).

Such meeting took place in Barcelona on April 17, 2024. During such meeting, the Chair of BBVA informed the Chairman of Banco Sabadell of BBVA’s strategic and financial interest in resuming the merger discussions with Banco Sabadell, with a view to creating a leading bank, with greater scale and competitive capacity, and highlighted the complementarity of the businesses of the two entities, the potential synergies and the positive financial impact arising from the intended merger. The Chair of BBVA also made reference to the more stable macroeconomic scenario and the significant progress achieved by Banco Sabadell in its performance and credit quality, all of which would permit a quicker merger process. Consequently, the Chair of BBVA expressed that BBVA was in a position to offer a merger on corporate and other terms similar to those offered in 2020 but at a significantly improved price.

Although the Chairman of Banco Sabadell conveyed to the Chair of BBVA that Banco Sabadell was focused on its project as a stand-alone entity, both Chairmen agreed to reconvene the following weekend when BBVA would deliver its formal merger proposal, once approved by BBVA’s board of directors at its meeting of April 18, 2024.

On April 18, 2024, the Chairman of Banco Sabadell sent a message to the Chair of BBVA reiterating Banco Sabadell’s initial preference to continue its project as a stand-alone entity. Nevertheless, the Chairman of Banco Sabadell proposed to meet on Sunday, April 21, 2024, in Barcelona, to discuss in more detail and provide Banco Sabadell’s initial feedback on the proposal. Later that same day, BBVA’s board of directors met to consider, among other matters, the potential merger with Banco Sabadell. At that meeting, the decision was taken to approve the terms of a potential merger. The Chair of BBVA sent the Chairman of Banco Sabadell a message on April 18, 2024, informing him of BBVA’s board of directors’ approval of the terms of the merger transaction and offered to anticipate to him the main terms of BBVA’s merger proposal.

On April 19, 2024, the Chairman of Banco Sabadell proposed to postpone the meeting initially scheduled for April 21, 2024, stating that he preferred to hold the meeting after both entities had presented their first quarter financial results. Thus, they subsequently rescheduled the meeting to April 30, 2024.

On April 30, 2024 due to a media report regarding the abovementioned discussions between the Chair of BBVA and the Chairman of Banco Sabadell, the Chairman of Banco Sabadell cancelled the meeting that was

scheduled for later that day. BBVA published an inside information notice confirming that the Chairman of Banco Sabadell had been informed of BBVA’s board of directors’ interest in initiating negotiations with Banco Sabadell to explore a potential merger of BBVA and Banco Sabadell. Due to the impossibility of delivering the proposal to the Chairman of Banco Sabadell in person, as intended by the Chair of BBVA, the latter elected to send the proposal via email, as well as by delivery, on that same date, informing the Chairman of Banco Sabadell that he would do so. Later that day, Banco Sabadell published an inside information notice confirming receipt of BBVA’s merger proposal.

On May 1, 2024, the Chair of BBVA contacted the Chairman of Banco Sabadell to inform him that BBVA planned to publish the full merger proposal made by BBVA to Banco Sabadell’s board of directors, which was published on that same day through an inside information notice together with a press release related to the merger proposal.

On May 5, 2024, the Chair of BBVA sent an email to the Chairman of Banco Sabadell indicating that BBVA had no room to improve the economic terms of its merger proposal.

On May 6, 2024, the Chairman of Banco Sabadell contacted the Chair of BBVA to inform him of Banco Sabadell’s board of directors decision to reject BBVA’s proposal, shortly before it was publicly announced.

On May 6, 2024, Banco Sabadell published an inside information notice rejecting BBVA’s proposal and attaching a press release to this effect.

On May 8, 2024, BBVA’s board of directors unanimously approved undertaking an exchange offer to acquire all of the issued and outstanding Banco Sabadell shares at an exchange ratio of one newly-issued BBVA share for each 4.83 Banco Sabadell shares (adjusted, as the case may be, as described in this offer to exchange/prospectus). BBVA’s board of directors also unanimously approved, in accordance with the provisions of article 14.5 of the Spanish Takeover Regulation, the calling of a general shareholders’ meeting to decide on the issue of the new BBVA shares to be offered as consideration pursuant to the exchange offer. On that same day, Banco Sabadell published an inside information notice disclosing that it had received the May 5, 2024 email from the Chair of BBVA informing Banco Sabadell that BBVA had no room to improve the economic terms of its merger proposal.

In the morning of May 9, 2024, the Chair of BBVA informed the Chairman of Banco Sabadell of BBVA’s board of directors’ decision to undertake the exchange offer, shortly before it was publicly announced through an inside information notice registered with the CNMV and published on the CNMV’s website on that same day.

On May 9, 2024 and June 25, 2024, RothschildCo España S.A. and Mediobanca - Banca di Credito Finanziario SpA, respectively, were formally engaged by BBVA as financial advisors in connection with the exchange offer and the intended merger with Banco Sabadell.

On July 5, 2024, BBVA’s extraordinary general shareholders’ meeting approved to authorize the increase of BBVA’s share capital in an amount of up to €551,906,524.05 through the issuance of up to 1,126,339,845 newly-issued BBVA shares to be offered to the holders of Banco Sabadell shares pursuant to the exchange offer. Such capital increase resolution was approved with shareholders representing 70.75% of the outstanding BBVA shares present at such meeting and 96.01% of such shareholders voting in favor. BBVA’s extraordinary general shareholders’ meeting also authorized BBVA’s board of directors to, either by itself or through a delegated body, execute, partially or in full, such share capital increase, in one or multiple times, for a period of one year from the date of the general shareholders’ meeting, and to establish the terms and conditions of such capital increase as deemed appropriate.

On October 1, 2024, Banco Sabadell paid a dividend of €0.08 per Banco Sabadell share and, as a result, the applicable exchange ratio was adjusted from the original exchange ratio of one newly-issued BBVA share for each 4.83 Banco Sabadell shares to one newly-issued BBVA share for each 5.0196 Banco Sabadell shares (which is the result of dividing €10.24 per BBVA share by €2.04 per ex-dividend Banco Sabadell share).

On October 10, 2024, BBVA paid a dividend of €0.29 per BBVA share and, as a result, BBVA increased the exchange offer consideration to one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares tendered and not withdrawn.

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BBVA’S REASONS FOR THE PROPOSED EXCHANGE OFFER

The board of directors of BBVA unanimously approved undertaking the exchange offer at a meeting held on May 8, 2024. In reaching its decision to approve these matters, BBVA’s board of directors consulted with BBVA’s management and its financial and legal advisors and considered a variety of factors, including, among others, the material factors described below. This summary of BBVA’s reasons for undertaking the exchange offer and the other information presented in this section are forward-looking statements and, therefore, should be read in light of the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in this offer to exchange/prospectus beginning on page 17 and the risks and uncertainties discussed under “Risk Factors” in this offer to exchange/prospectus beginning on page 34.

•

The achievement of a larger scale in a highly competitive sector, resulting in higher efficiency. Scale is essential in the financial sector in order to be able to meet increasing fixed costs associated with the investments in technology that will need to be made over the next few years in the face of changing client needs. The implementation of new technologies, such as artificial intelligence and machine learning, the management of technological risks, especially those related to the resilience or defense against external threats, such as cyberattacks, the adaptation to new rules and regulations that will arise precisely as a result of the evolution of these technologies, taking into account the requirements under new regulations (such as Regulation DORA2), will all be critical. These investments are necessary in order to continue with the digital transformation that the industry is facing and to compete with new operators and large technology companies that have lighter cost structures and more flexible value propositions in the most profitable businesses.

Following completion of the intended merger, the combined group would become the second largest financial institution in Spain with a loan market share close to 22% (13.8% BBVA and 8.1% Banco Sabadell, as of December 31, 2023), based on December 31, 2023 loan data from the Bank of Spain and BBVA internal estimates based on publicly-available financial disclosures from Banco Sabadell.

BBVA estimates that following completion of the intended merger, the combined group will have total assets above €1 trillion and more than 100 million customers worldwide.

•

The creation of a franchise that not only combines the financial results of BBVA, with an attributable profit of €8,019 million, a ROTE of 17%, an NPA ratio of 3.4% and a CET1 ratio of 12.7% (in each case, as of or for the year ended December 31, 2023, as applicable), and Banco Sabadell, which ended 2023 with an attributable profit of €1,332 million, a ROTE of 11.5%, an NPA ratio of 3.5% and a CET1 ratio of 13.2% as of or for such year, as applicable, to reach a pro forma 2023 ROTE of 16.5% and a pro forma CET1 ratio above 12%, but that is expected to capture substantial cost synergies, as further explained below.

•

The combination of very complementary businesses, both in terms of geographical diversification, which would increase BBVA’s Eurozone exposure by 4 percentage points, in terms of total assets, and by 9 percentage points, in terms of attributable profit, and in terms of the positioning in different client segments in Spain, where Banco Sabadell has more weight in SMEs (market share of 12.7%, compared to BBVA’s market share of 11.5%) and BBVA has more weight in the retail segment (market share of 14.7%, compared to Banco Sabadell’s market share of 6.3%, including mortgages and consumer loans) and in large enterprises, in each case, based on 2023 figures. This diversification would be beneficial for both BBVA’s and Banco Sabadell’s shareholders, as the combined group would have greater resilience to macroeconomic impacts.

Additionally, both entities have a clear strategic focus on digitization (65% of BBVA’s new clients in 2023 registered through digital channels, while 56% of Banco Sabadell’s clients registered through

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digital channels in 2023) and sustainability (BBVA channeled approximately €70 billion into sustainable businesses in 2023 and Banco Sabadell mobilized more than €15 billion in sustainable finance in 2023, in each case, according to their respective annual results presentation). The clients of Banco Sabadell will benefit from greater customer service derived from the advanced technological and digital capabilities of BBVA, which has been investing in technology to improve the user experience and offer personalized recommendations that will improve clients’ financial health for years. Additionally, after completion of the intended merger, Banco Sabadell’s clients will have not only a more comprehensive product and services offering but also better access to other international markets in the countries where BBVA is present, thereby expanding their opportunities for business and growth.

•

A combined group with ample solvency (CET1 above 12%) and a higher resilience to external shocks and a lower vulnerability through economic cycles due to increased diversification. The combined group will also have greater capacity to offer financing to individuals and companies. European regulators, in particular the ECB, have repeatedly pointed out that bank consolidation generates significant benefits at both the micro and macro level, improving banks’ solvency and efficiency through increased scale and greater revenue diversification. The intended merger would also create a more geographically diverse group, with a more balanced loan portfolio, with 47% of the portfolio in loans to retail customers (compared to 49% and 44% for BBVA and Banco Sabadell, respectively), 27% in loans to small and medium-sized companies (compared to 23% and 35% for BBVA and Banco Sabadell, respectively) and 12% in loans to corporate and investment banking customers (compared to 15% and 8% for BBVA and Banco Sabadell, respectively), based on publicly-available financial disclosures of BBVA and Banco Sabadell as of December 31, 2023.

•

Substantial cost synergies, which BBVA has projected at approximately €850 million per year before taxes for Spain and Mexico, once they are fully realized. The main items included in these projections are:

•

Estimated operating cost synergies of approximately €750 million upon full implementation, corresponding to approximately €450 million in overhead cost savings (administration and technology) and approximately €300 million in personnel cost synergies.

•

The estimate of the rationalization of the branch network in Spain has been limited to less than 10% of the combined network, equivalent to 300 of the approximately 870 branch offices identified in the combined group with a proximity of less than 500 meters.

•

Additionally, BBVA anticipates increased efficiency in central services in Spain and Mexico, as well as the incorporation of Banco Sabadell’s customers, operations, and incremental activity under BBVA’s technological network, systems and infrastructure. In the United Kingdom, BBVA does not anticipate any cost savings.

•

The implementation of these operational synergies is expected to take three years, with 25% materializing in the first year and reaching full implementation in the third and subsequent years.

•

The implementation of financing cost synergies, which are estimated to be approximately €100 million per year, and are expected to be materialized in accordance with the expected maturities of existing issuances.

To achieve these cost savings, BBVA expects to incur total restructuring costs of approximately €1,450 million before taxes, which would be recorded in the income statement in the first year. Additionally, BBVA will assume €70 million per year in the amortization of IT expenses for a period of five years, mainly from the amortization of capital expenditures.

BBVA may not be able to fully realize these expected synergies. See “Risk Factors—BBVA may fail to fully realize the expected benefits and synergies of completing the exchange offer”.

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If the exchange offer is accepted by all holders of Banco Sabadell shares, the exchange offer is estimated to have an impact on BBVA’s CET1 capital as of December 31, 2024 of approximately 38 basis points, regardless of whether Banco Sabadell is merged into BBVA. The impact of approximately -225 basis points from the consolidation of Banco Sabadell’s risk-weighted assets, -28 basis points from intangibles, -16 basis points from restructuring costs (net of taxes and dividends), and -34 basis points from deductions above regulatory requirements, would be partially offset by +273 basis points from negative goodwill (badwill) and from the capital increase (resulting from the exchange offer). In this sense, BBVA’s CET1 capital ratio is expected to remain comfortably above 12% at all times during the potential merger process, assuming the merger is completed by June 30, 2025.

In addition, BBVA believes that the intended merger, if completed, will have a positive impact on other stakeholders:

•

Clients of both entities will have access to a better value proposition, due to the complementary nature of the franchises, the wider product offering and the global reach of the combined group.

•

Employees of both entities will have access to new professional growth opportunities in a global entity. The business combination seeks to preserve the best talent and culture of both entities.

•

Finally, the creation of a combined group will also translate into more financing for society as a whole. BBVA estimates that the combined group will have an additional lending capacity of €5 billion per year to households and businesses in Spain. It will also have a greater direct contribution to society through increased taxes. The additional capacity to offer financing is expected to be obtained through a reduction in the cost of financing and the freeing up of resources currently used to comply with regulatory requirements.

While it is BBVA’s intention to effect a merger by absorption, BBVA is not obligated to consummate such a merger following completion of the exchange offer or to consummate it on the same terms as the exchange offer. Further, BBVA may be unable to complete the merger. See “The Exchange Offer—Certain Consequences of the Exchange Offer—Squeeze-out and Merger”. For further information regarding BBVA’s plans with respect to Banco Sabadell if the intended merger is not consummated for any reason, please see “The Exchange Offer—Plans for Banco Sabadell after the Exchange Offer—Planned Corporate Restructuring Transactions of Any Kind”.

Upon completion of the exchange offer, assuming 100% acceptance by holders of Banco Sabadell shares, Banco Sabadell’s shareholders will own approximately 16% of the share capital and voting rights of BBVA.

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THE EXCHANGE OFFER

The Exchange Offer

BBVA is undertaking the exchange offer pursuant to the offering documents published (or that will be published) in Spain and made available (or that will be made available) to all shareholders of Banco Sabadell, to acquire all of the issued and outstanding Banco Sabadell shares. The exchange offer is addressed to U.S. holders of Banco Sabadell shares pursuant to this offer to exchange/prospectus.

The distribution of this offer to exchange/prospectus and the making of the exchange offer may, in some jurisdictions, be restricted by applicable law. The exchange offer is not being made, directly or indirectly, in or into, and may not be accepted from within, any jurisdiction in which the making of the exchange offer or the acceptance thereof would not be in compliance with the laws of that jurisdiction. Persons who come into possession of this offer to exchange/prospectus should inform themselves of and observe these restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of that jurisdiction. BBVA does not assume any responsibility for any violation by any person of any of these restrictions.

Consideration

BBVA is offering to holders of Banco Sabadell shares one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares.

The term “exchange ratio” as used in this offer to exchange/prospectus means the exchange ratio of one newly-issued BBVA share for each 5.0196 Banco Sabadell shares (adjusted, as the case may be, as described below for any distribution of dividends, reserves or any other type of distribution to Banco Sabadell shareholders prior to the settlement date of the exchange offer), unless the context otherwise requires. The term “exchange offer cash consideration” as used in this offer to exchange/prospectus means an amount in cash equal to €0.29 for each 5.0196 Banco Sabadell shares (adjusted, as the case may be, as described below for any distribution of dividends, reserves or any other type of distribution to BBVA shareholders prior to the settlement date of the exchange offer).

As the consideration consists in part of newly-issued BBVA shares, BBVA’s board of directors, at the meeting at which it unanimously approved undertaking the exchange offer and in accordance with the provisions of article 14.5 of the Spanish Takeover Regulation, also approved the calling of a general shareholders’ meeting to decide on the issue of the new BBVA shares in the amount necessary to fully cover the share exchange. On July 5, 2024, BBVA’s extraordinary general shareholders’ meeting approved to authorize such capital increase, with shareholders representing 70.75% of the outstanding BBVA shares present at such meeting and 96.01% of such shareholders voting in favor. Pursuant to the provisions of article 14.2.c) of the Spanish Takeover Regulation, BBVA shall request the admission to trading of the newly-issued BBVA shares on the same markets on which its shares are currently listed, within the regulatory deadlines established.

With respect to the exchange offer cash consideration, tendering holders of Banco Sabadell shares that tender a number of Banco Sabadell shares that does not entitle them to receive at least one newly-issued BBVA share, or that entitles them to receive a whole number of newly-issued BBVA shares but have an excess number of Banco Sabadell shares that would entitle them to receive a cash payment in lieu of a fractional BBVA share, will receive an amount in cash equal to €0.29 multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that they would otherwise be entitled to receive in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the exchange offer cash consideration.

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For a comparison of the rights of holders of BBVA shares and Banco Sabadell shares, see “Comparison of Rights of Holders of BBVA Shares and Banco Sabadell Shares” in this offer to exchange/prospectus.

Timing of the Exchange Offer

The exchange offer will commence on , 2024 (the “commencement date”) and expire at 17:59:59 p.m. Eastern time (23:59:59 p.m. Central European time) on the expiration date.

The term “expiration date” as used in this offer to exchange/prospectus means the date on which the exchange offer will expire, which is currently , 2024, unless the exchange offer is extended, in which case the term “expiration date” means the latest time and date on which the exchange offer, as so extended, expires. The term “acceptance period” as used in this offer to exchange/prospectus means the period between the commencement date and the expiration date. Declarations of acceptance sent by holders of Banco Sabadell shares after the expiration date, or that are subject to any conditions, will not be valid and will not be taken into account for purposes of the exchange offer.

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Banco Sabadell shares tendered into the exchange offer may be withdrawn at any time prior to the last day of the acceptance period in accordance with the procedures described below under “—Procedure for Tendering—Withdrawal Rights”. Brokers and other securities intermediaries may set their own cut-off dates and times to receive instructions to withdraw Banco Sabadell shares that are earlier than the expiration date and time specified in this offer to exchange/prospectus. You should contact your broker or other securities intermediary to determine the cut-off date and time that applies to you.

Extension, Termination and Amendment

BBVA may extend the period of time in which the exchange offer is open one or more times in accordance with the provisions of article 23 of the Spanish Takeover Regulation, provided that such extension complies with U.S. securities laws, and, provided further that the acceptance period does not exceed 70 calendar days and that any extension is communicated in advance to the CNMV. The extension of the acceptance period, if any, must be announced at least three calendar days before the then-scheduled expiration date of the acceptance period, indicating the circumstances that motivate such extension. If BBVA extends the period of time during which the exchange offer is open, the exchange offer will expire at the latest time and date to which BBVA extends the exchange offer. The CNMV may also extend the exchange offer acceptance period at its own discretion under the circumstances set forth in the Spanish Takeover Regulation, including (i) following a supplement to the offering documents published (or that will be published) in Spain when the CNMV considers that the materiality of the information disclosed in such supplement makes the extension of the exchange offer appropriate; or (ii) in other cases where the CNMV deems such extension necessary, through a justified resolution and to the extent legally possible.

During any such extension, all Banco Sabadell shares validly tendered into, and not withdrawn from, the exchange offer prior to that date will remain subject to the exchange offer, subject to your right to withdraw your Banco Sabadell shares. You should read the discussion below under “—Procedure for Tendering—Withdrawal Rights” for more information about your ability to withdraw tendered shares.

Where required by applicable law and regulation, BBVA will publish a supplement prospectus if the exchange offer is extended, terminated, amended or delayed, as promptly as practicable.

BBVA will extend the exchange offer, to the extent required by the U.S. federal securities laws (including Rule 14e-1 under the Exchange Act), if BBVA:

•

makes a material change to the terms of the exchange offer;

•

makes a material change in the information concerning the exchange offer; or

•

waives a material condition of the exchange offer.

For purposes of the exchange offer, a “Spanish business day” means any day other than a Saturday, Sunday or a public holiday in Spain and shall consist of the time period from 12:01 a.m. through 12:00 (midnight) Central European Time; “Spanish stock exchange business day” means any day other than a Saturday, Sunday or other day on which the Spanish Stock Exchanges are closed; and “U.S. business day” means any day other than a Saturday, Sunday or federal holiday in the United States and shall consist of the time period from 12:01 a.m. through 12:00 (midnight) Eastern time.

Non-Opposition of the ECB

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Conditions to Completion of the Exchange Offer

In accordance with the provisions of articles 13 and 26 of the Spanish Takeover Regulation, completion of the exchange offer is subject to the fulfillment of the following conditions:

ii.

iii.

iv.

In accordance with the provisions of article 13.2.d) of the Spanish Takeover Regulation, the authorization of the indirect acquisition of control of Banco Sabadell’s banking subsidiary in the United Kingdom, TSB, by the PRA. This condition was satisfied on September 2, 2024.

Antitrust Authorizations

The economic concentration resulting from completion of the exchange offer is subject to the authorization of the following antitrust authorities:

The Spanish antitrust authorities, in accordance with Law 15/2007, of July 3, on the defense of competition.

•

If before the end of the acceptance period the Spanish antitrust authorities do not object to completion of the exchange offer, this condition will be fully fulfilled.

•

If before the end of the acceptance period the Spanish antitrust authorities declare the proposed exchange offer inappropriate, BBVA must withdraw the exchange offer.

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•

ii.

The Mexican antitrust authorities, in accordance with the Mexican Competition Law.

iii.

iv.

vi.

As of the date of this offer to exchange/prospectus, BBVA has requested the corresponding authorizations from the aforementioned competent antitrust authorities.

The relevant authorizations from the competent antitrust authorities set forth in items (iii) to (vi) above were obtained on the respective dates indicated therein, and completion of the exchange offer is not conditioned upon obtaining the relevant authorization from the Mexican antitrust authority set forth in item (ii) above. As a result, the exchange offer will be completed even if the Mexican antitrust authority does not authorize the economic concentration resulting from completion of the exchange offer or authorizes the economic concentration resulting from completion of the exchange offer subject to conditions (including a requirement to subsequently dispose of a material portion of the assets of Banco Sabadell’s banking affiliate in Mexico, which BBVA considers not to be material in the context of the exchange offer) or any such authorization has not been received by the expiration date. See “Risk Factors—Risks Relating to the Exchange Offer—Completion of the exchange offer is not conditioned on the obtainment of certain antitrust and regulatory approvals and authorizations; however, if such approvals and authorizations are not obtained, and the exchange offer is completed, the business, financial condition and results of operations of BBVA and Banco Sabadell may be adversely affected”.

However, as set forth under “Conditions to Completion of the Exchange Offer”, completion of the exchange offer is conditioned upon obtaining the authorization from the Spanish antitrust authorities set forth in item (i) above. According to the Spanish Takeover Regulation, if the Spanish antitrust authorities declare the proposed exchange offer inappropriate before the end of the acceptance period, BBVA will be required to withdraw the exchange offer. In addition, pursuant to the Spanish Takeover Regulation, BBVA may, at its discretion, waive the condition referred to in (i) above or withdraw the exchange offer if before the end of the acceptance period the Spanish antitrust authorities (i) approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition (in which case, BBVA will evaluate the expected consequences of such

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condition to determine whether to waive the condition and continue with completion of or withdraw the exchange offer) or (ii) have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer.

As noted above, if by the end of the acceptance period the Spanish antitrust authorities have not given their express (whether conditional or unconditional) or tacit authorization of the economic concentration resulting from the exchange offer and all of the other conditions are satisfied or waived, BBVA may waive the condition and proceed with completion of the exchange offer or withdraw the exchange offer. In such a case, the Spanish antitrust authorities’ decision with respect to the economic concentration resulting from the exchange offer would be obtained after the end of the acceptance period. If BBVA decides to proceed with completion of the exchange offer without having received the Spanish antitrust authorities’ decision with respect to the economic concentration resulting from the exchange offer, BBVA would not be able to exercise the political rights attached to the shares of Banco Sabadell owned by BBVA until the Spanish antitrust authorities issue a decision. Once a decision is issued, BBVA will have to abide by such decision. If the Spanish antitrust authorities decide not to authorize the economic concentration resulting from the exchange offer, BBVA would be required to sell all or part of its stake in Banco Sabadell, on the terms set forth in the resolution of the Spanish antitrust authorities. If the Spanish antitrust authorities approve the economic concentration resulting from the exchange offer subject to the fulfillment of any condition, BBVA would be required, at its election, either (i) to fulfill the related conditions or (ii) to sell all or part of its stake in Banco Sabadell, on the terms set forth in the resolution of the Spanish antitrust authorities. The percentage of Banco Sabadell shares over which BBVA may not be able to exercise their respective political rights or that BBVA may be required to sell, and the timing for compliance with any such requirement, would be determined by the Spanish antitrust authorities.

Governmental and Regulatory Authorizations

According to the information available to BBVA, Banco Sabadell has control or significant shareholdings in regulated entities both in Spain and in other jurisdictions. The acquisition by BBVA of control of Banco Sabadell as a result of the exchange offer will involve the indirect acquisition of control or significant shareholdings in such regulated subsidiaries or affiliates of Banco Sabadell, which may require, in accordance with the applicable legislation in each case, obtaining the authorization or non-opposition of the competent regulatory supervisory bodies in Spain or in jurisdictions other than Spain, as applicable. As a result, according to the information available to BBVA, the authorization or non-opposition with respect to the indirect acquisition of control or significant shareholdings in regulated subsidiaries or affiliates of Banco Sabadell is subject to the prior notification to or the authorization or non-opposition of the following competent regulatory supervisory bodies:

ii.

iii.

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iv.

vi.

vii.

viii.

ix.

The Central Bank of Morocco (Bank Al Maghrib) in relation to the indirect change of control of Banco Sabadell’s branch in Casablanca (Morocco).

xi.

The FINRA in relation to the acquisition of indirect control of Sabadell Securities USA, Inc., U.S. broker-dealer subsidiary of Banco Sabadell.

According to informal discussions between representatives of BBVA and FINRA in May 2024, BBVA understands that such application for authorization may only be submitted by Sabadell Securities USA,

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Inc. in accordance with applicable regulations and that if Sabadell Securities USA, Inc. fails to submit the application prior to the settlement of the exchange offer, BBVA would be required to cause Sabadell Securities USA, Inc. to submit the application as soon as practicable after the settlement of the exchange offer. As of the date of this offer to exchange/prospectus, BBVA is not aware that Sabadell Securities USA, Inc. has applied for or received authorization from FINRA.

If the exchange offer is completed without the prior filing of an application with FINRA, Sabadell Securities USA, Inc. may be subject to the sanctions regime established by FINRA under FINRA Rule 1017 and applicable FINRA Sanctions Guidelines, including the suspension and expulsion of Sabadell Securities USA, Inc. as a member of FINRA.

xii.

the Florida Division of Securities in relation to the acquisition of indirect control of Sabadell Securities USA, Inc., U.S. broker-dealer subsidiary of Banco Sabadell.

The relevant authorization or non-opposition from the competent regulatory supervisory bodies set forth in items (i) to (viii) above were obtained on the respective dates indicated therein, and completion of the exchange offer is not conditioned upon obtaining the relevant authorization or non-opposition from the competent regulatory supervisory bodies set forth in items (ix) to (xii) above. As a result, the exchange offer will be completed even if any of the regulatory supervisory bodies in items (ix) to (xii) above does not authorize the exchange or authorizes the exchange offer subject to conditions or any such authorization has not been received by the expiration date. See “Risk Factors—Risks Relating to the Exchange Offer—Completion of the exchange offer is not conditioned on the obtainment of certain antitrust and regulatory approvals and authorizations; however, if such approvals and authorizations are not obtained, and the exchange offer is completed, the business, financial condition and results of operations of BBVA and Banco Sabadell may be adversely affected”.

Procedure for Tendering

Upon settlement of the exchange offer, holders of Banco Sabadell shares who tender, and do not withdraw, their Banco Sabadell shares into the exchange offer will receive one newly-issued BBVA share and €0.29 in cash for each 5.0196 Banco Sabadell shares. The exchange offer cash consideration and the cash payment corresponding to any fractional BBVA shares that a tendering holder of Banco Sabadell shares would be entitled to receive in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus), as the case may be, will require the participation of an Iberclear participant.

As BBVA is a credit institution legally authorized to perform the functions of an agent and is a member entity of the Spanish Stock Exchanges and an Iberclear participant, BBVA will be responsible for intervening and settling the exchange offer, acting as the agent bank.

Holders of Banco Sabadell shares who wish to tender their Banco Sabadell shares into the exchange offer must submit their declaration of acceptance in writing to the Iberclear participant where their Banco Sabadell shares are deposited, either in person, by electronic means or by any other means permitted by such Iberclear participant. Holders of Banco Sabadell shares may tender all or part of their Banco Sabadell shares, from the first day of the acceptance period until the expiration date (both inclusive) and every declaration of acceptance must tender at least one Banco Sabadell share.

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In accordance with the provisions of article 34.2 of the Spanish Takeover Regulation, during the acceptance period, the depository entities receiving declarations of acceptance from holders of Banco Sabadell shares who tender their Banco Sabadell shares into the exchange offer, and do not withdraw them, will send to BBVA and the governing bodies of the Spanish Stock Exchanges all such declarations of acceptance on a daily basis.

Depository entities that have communicated joint declarations of acceptance of holders of Banco Sabadell shares which are subsequently withdrawn must submit new joint declarations modifying and substituting the previous declarations of acceptance.

Declarations of acceptance sent by holders of Banco Sabadell shares after the expiration date, or that are subject to any conditions, will not be valid and will not be taken into account for purposes of the exchange offer.

Declarations of acceptance shall be submitted by the relevant Iberclear participant to the agent bank, using the contact information set forth below:

Agent bank: Banco Bilbao Vizcaya Argentaria, S.A. (BIC: BBVAESMM)

Address: Plaza San Nicolás, 4, 48005 Bilbao

To the attention to: Alfonso Barandica

Email: bancoagente@bbva.com

BBVA and the governing bodies of the Spanish Stock Exchanges will provide the CNMV, upon request, with the information available to them regarding the declarations of acceptance received in the context of the exchange offer.

Upon termination of the acceptance period and within the period established in the operating instruction issued and published by the Spanish Stock Exchanges, all declarations of acceptance validly received in the context of the exchange offer will be sent by the Iberclear participants to the governing bodies of the Spanish Stock Exchanges, through the depository entities participating in Iberclear in which the corresponding Banco Sabadell shares are deposited, who will be responsible for collecting such declarations of acceptance in writing in person, by electronic means, or by any other means permitted by such Iberclear participant and will be responsible, in accordance with their records, for the ownership and possession of the Banco Sabadell shares to which such declarations of acceptance refer, as well as for the absence of charges and encumbrances or rights in favor of third parties that limit the voting or economic rights of such Banco Sabadell shares or their free transferability.

All declarations of acceptance submitted by holders of Banco Sabadell shares must be accompanied by sufficient documentation to enable the transfer of the corresponding Banco Sabadell shares to BBVA and must include all the information that the applicable regulations require for similar transactions, including, but not limited to: (i) full name or company name; (ii) address; and (iii) tax identification number or, in the case of holders of Banco Sabadell shares who are not residents of Spain and do not have a Spanish tax identification number, their passport or identification number, nationality and address.

All of the above refers to the declarations of acceptance submitted by holders of Banco Sabadell shares and the role of the depository entities and investment services entities that receive them from such holders. It does not affect, therefore, the subsequent information flows between the entities that receive them, the custodians and the Iberclear participants to carry out the necessary processes for the communication to the governing bodies of the Spanish Stock Exchange of any such declarations of acceptance.

Information regarding the declarations of acceptance from holders of Banco Sabadell shares received in connection with the exchange offer may be obtained in accordance with article 35.2 of the Spanish Takeover Regulation by interested parties during the acceptance period, upon request, at BBVA’s address, provided that the relevant holder of Banco Sabadell shares who requests such information provides a complete identification and all of the relevant information regarding its ownership of Banco Sabadell shares.

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You must follow the procedures described above in a timely manner in order to tender your Banco Sabadell shares into the exchange offer.

ALL HOLDERS WISHING TO TENDER THEIR BANCO SABADELL SHARES MUST ALLOW SUFFICIENT TIME FOR THE COMPLETION OF ALL REQUIRED STEPS DESCRIBED IN THIS OFFER TO EXCHANGE/PROSPECTUS BEFORE THE EXPIRATION TIME.

Withdrawal Rights

Announcement of the Results of the Exchange Offer

In accordance with the provisions of article 36 of the Spanish Takeover Regulation, upon expiration of the acceptance period, and within a maximum of seven Spanish stock exchange business days from that date, the governing bodies of the Spanish Stock Exchanges will publish the result of the exchange offer in the Official Quotation Bulletins, upon the terms and on the trading session expressly indicated by the CNMV.

Settlement and Delivery of Securities

No later than the first Spanish stock exchange business day following publication of the result of the exchange offer in the Official Quotation Bulletins, BBVA, as agent bank, will calculate the number of BBVA shares to be issued as consideration in the exchange offer, taking into account the number of Banco Sabadell shares validly tendered into, and not withdrawn from, the exchange offer.

Within two Spanish stock exchange business days following publication of the result of the exchange offer in the Official Quotation Bulletins, BBVA, as agent bank, will initiate, together with Iberclear, the necessary actions to make available to BBVA the Banco Sabadell shares validly tendered into, and not withdrawn from, the exchange offer for their effective exchange for newly-issued BBVA shares.

For these purposes, Iberclear will issue, within four Spanish stock exchange business days following publication of the result of the exchange offer in the Official Quotation Bulletins, a certificate certifying the number of Banco Sabadell shares made available to BBVA for the settlement of the exchange offer. Such certificate will be considered by BBVA as delivery of the Banco Sabadell shares tendered into the exchange offer for purposes of the share capital increase that BBVA will carry out to issue the BBVA shares offered as consideration in the exchange offer.

Execution of the Share Capital Increase

No later than three Spanish stock exchange business days following the date in which Iberclear issues the certificate certifying the number of Banco Sabadell shares tendered into the exchange offer, BBVA’s board of directors or, if applicable, any authorized person or persons, will proceed to execute the capital increase, and will agree to the delivery of the newly-issued BBVA shares to the holders of Banco Sabadell shares who validly tendered, and did not withdraw, their Banco Sabadell shares into the exchange offer, in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus).

The execution of the share capital increase will be communicated immediately through an other relevant information notice to be registered and filed with the CNMV and will be notarized and submitted for registration

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in the Bizkaia Commercial Registry, as promptly as possible, which is expected to take place no later than the third Spanish stock exchange business day following the execution of the share capital increase.

Registration of the Newly-Issued BBVA Shares with Iberclear and its Participating Entities

Once the corresponding deed of BBVA’s share capital increase is granted and registered in the Bizkaia Commercial Registry, a notarial testimony or authorized electronic copy of such deed will be presented to Iberclear, the governing bodies of the Spanish Stock Exchanges and the CNMV, for the registration of such newly-issued BBVA shares with Iberclear and its participating entities in the name of the former holders of Banco Sabadell shares in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus).

Iberclear and its participating entities will proceed to register the newly-issued BBVA shares as book entries in their corresponding accounting records in favor of the former holders of Banco Sabadell shares, as promptly as possible, which is expected to take place no later than the third Spanish stock exchange business day following the presentation to Iberclear of the deed of BBVA’s share capital increase.

On that same date, the newly-issued BBVA shares will be deposited in the Iberclear participants in which the tendering holders of Banco Sabadell shares had their Banco Sabadell shares deposited. Until the newly-issued BBVA shares are registered under the ownership of the holders of Banco Sabadell shares who validly tendered, and did not withdraw, their Banco Sabadell shares into the exchange offer, BBVA will provide each such holder, upon request in writing to the agent bank, a certificate certifying the subscription by such holder of the corresponding number of newly-issued BBVA shares.

The effective change of ownership of all Banco Sabadell shares validly tendered into, and not withdrawn from, the exchange offer in favor of BBVA will occur simultaneously with the registration in the registries of Iberclear and its participating entities of the newly-issued BBVA shares in the name of the holders of Banco Sabadell shares who validly tendered, and did not withdraw, their Banco Sabadell shares into the exchange offer.

The settlement of the exchange offer will take place upon registration of the ownership of the newly-issued BBVA shares for the benefit of the holders of Banco Sabadell shares who validly tendered, and did not withdraw, their Banco Sabadell shares into the exchange offer, in the accounting records of Iberclear and its participating entities. BBVA will notify the CNMV, by means of a communication of other relevant information, of the settlement of the exchange offer.

Delivery of Cash in Lieu of Fractional BBVA Shares

Holders of Banco Sabadell shares will receive the greatest whole number of BBVA shares which can be issued at the exchange ratio. BBVA has established a mechanism by which tendering holders of Banco Sabadell shares that tender a number of Banco Sabadell shares that does not entitle them to receive, at least, one newly-issued BBVA share, or that entitles them to receive a whole number of newly-issued BBVA shares but have an excess number of Banco Sabadell shares that would entitle them to receive a fraction of a BBVA share, will receive an amount in cash equal to the weighted average price per BBVA share during the 15 trading sessions prior to the expiration date (including the expiration date) multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that they would be entitled to receive. Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the cash to be received in lieu of any fractional shares.

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Delivery of Exchange Offer Cash Consideration

Holders of Banco Sabadell shares will receive, in addition to the BBVA shares they are entitled to receive, €0.29 in cash for each 5.0196 Banco Sabadell shares tendered and not withdrawn. Tendering holders of Banco Sabadell shares that tender a number of Banco Sabadell shares that does not entitle them to receive at least one newly-issued BBVA share, or that entitles them to receive a whole number of newly-issued BBVA shares but have an excess number of Banco Sabadell shares that would entitle them to receive a cash payment in lieu of a fractional BBVA share, will receive an amount in cash equal to €0.29 multiplied by the fraction of a BBVA share (rounded to the nearest hundredth with five one thousandths of a BBVA share being rounded upwards (e.g., 0.205 would be rounded to 0.21)) that they would otherwise be entitled to receive in accordance with the exchange ratio of 5.0196 (adjusted, as the case may be, as described in this offer to exchange/prospectus). Such amount in cash will be rounded to the nearest euro cent and, in the event of a half of a euro cent, to the immediately higher euro cent. Under no circumstances will interest be paid on the exchange offer cash consideration.

Dividend Payments

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For a description of Spanish and U.S. federal income tax consequences of these dividend payments for U.S. shareholders, see “—Spanish Tax Consequences for U.S. Shareholders” and “—Material U.S. Federal Income Tax Considerations for U.S. Holders” below.

The BBVA shares to be issued in connection with the exchange offer will have the same dividend, voting and other rights as the other currently outstanding BBVA shares.

BBVA ADSs

If the exchange offer is completed, holders of Banco Sabadell shares who tender their Banco Sabadell shares into, and do not withdraw them from, the exchange offer, will receive BBVA shares. BBVA shares trade in the form of ADSs in the United States on the NYSE. Tendering Banco Sabadell shareholders who receive BBVA shares in the exchange offer may, subject to the provisions of the amended and restated deposit agreement dated June 29, 2007, among BBVA, the Bank of New York Mellon (the “Depositary”) and the holders from time to time of BBVA ADSs (the “Deposit Agreement”), following the exchange offer deposit the BBVA shares they receive in the exchange offer with the depositary for such ADS facility and receive BBVA ADSs that are tradeable on the NYSE.

Pursuant to the terms of the Deposit Agreement, the Depositary may charge persons who deposit BBVA shares in exchange for BBVA ADSs up to U.S.$5.00 per 100 BBVA ADSs or portion thereof. In addition, such persons are responsible for the payment of any stock transfer or other taxes (including Spanish income taxes) and other governmental charges; cable, telex, facsimile transmission and delivery charged incurred at the request of persons depositing BBVA shares; and transfer, brokerage or registration fees for the registration of transfers of deposited BBVA shares on any applicable register, in each case payable in connection with the deposit of BBVA shares. Timing for the delivery for BBVA ADSs will depend upon the satisfaction of conditions for deposit of BBVA shares under the Deposit Agreement, including delivery of any required instructions and evidence of ownership and payment of the aforementioned fees, as well as the procedures used by any broker assisting the relevant holder with the exchange of BBVA shares for BBVA ADSs.

Spanish Tax Consequences for U.S. Shareholders

General

The description below summarizes certain material Spanish taxation considerations, is intended as a general guide and applies only to (i) holders exchanging their Banco Sabadell shares for BBVA shares and the exchange offer cash consideration pursuant to the exchange offer; and (ii) the ownership and disposition of BBVA shares received pursuant to the exchange offer. The description below is based on Spanish law currently in force, which is subject to change, even with retroactive effect.

The following description will apply to holders of Banco Sabadell shares (i) who are tax residents of the United States for the purposes of the Double Taxation and the Prevention of Fiscal Evasion treaty with respect to taxes on income, signed in Madrid on February 22, 1990, together with a related protocol signed on January 14, 2013 (the “United States-Spain Treaty”), and are fully entitled to its benefits, without any limitation; and (ii) do not carry on business activities through a permanent establishment (as defined in the United States-Spain Treaty) in Spain to which their BBVA shares or Banco Sabadell shares, as the case may be, are effectively connected, nor act through a non-cooperative jurisdiction for Spanish tax purposes (as defined in the Order HFP/115/2023, of February 9) (a “Qualifying Shareholder”).

This summary is not a complete analysis or description of all the possible tax consequences for holders of Banco Sabadell shares and the acquisition, ownership and disposition of BBVA shares and does not address all tax consequences that may be relevant to all categories of potential investors (such as pension funds, undertakings for collective investment, etc.), some of whom may be subject to special rules. In particular, this tax

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section does not address the Spanish tax consequences applicable to “look-through” entities (such as trusts or estates) that may be subject to the tax regime applicable to such non-Spanish entities under the Spanish Non-Resident Income Tax (“NRIT”) Law, holders who own an interest in BBVA shares representing 10% or more of BBVA’s share capital, individuals who acquire the BBVA shares by reason of employment or pension funds or collective investment in transferrable securities (“UCITS”). This summary is based on Spanish tax law, along with any administrative pronouncements, judicial decisions and the United States-Spain Treaty, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect.

Any holders of BBVA shares who do not fall within the above description of a “Qualifying Shareholder” or who are in any doubt as to their taxation position or obligations should consult their own professional advisors immediately.

This summary of certain material Spanish taxation considerations is for general information only and is not tax advice. Qualifying Shareholders are urged to consult their tax advisors with respect to the application of the Spanish tax law to their particular situations, as well as any tax consequences arising under the laws of any foreign or other taxing jurisdiction or under any applicable tax treaty.

Consequences of the Exchange Offer

As a general rule, the exchange offer may be treated as realizing a capital gain in Spain and should not trigger any Spanish taxation (including Spanish Transfer Tax or Value Added Tax) for Qualifying Shareholders with the resultant reporting obligations described below. Please also see “—Consequences of the Acquisition, Ownership and Disposition of BBVA Shares—Taxation of Capital Gains or Losses”.

Consequences of the Acquisition, Ownership and Disposition of BBVA Shares

Taxation of Dividends

As a general rule, dividends paid on BBVA shares to a Qualifying Shareholder will be subject to Spanish NRIT on the gross amount of the dividend, currently at a rate of 19%. Notwithstanding the above, the following exemptions or reduced rates may be applicable under Spanish tax law:

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U.S. Qualifying Shareholders may benefit from a 15% reduced rate of NRIT on the gross amount of the dividend, subject to providing BBVA’s paying agent before the tenth day following the end of the month in which the dividends are distributable, with evidence of the tax residence of the Qualifying Shareholder by means of a valid certificate of tax residence issued by the IRS stating that to their knowledge the Qualifying Shareholder is a tax resident subject to the United States-Spain Treaty (“Tax Treaty Certificates”). For Spanish tax purposes, such Tax Treaty Certificates are generally valid for one year from the date the corresponding certificate is issued.

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Qualifying Shareholders who do not provide the required documentation within the applicable time limits may alternatively be able to obtain a refund of the 4% difference between the domestic and the United States-Spain Treaty withholding tax rate by following the Standard Refund Procedure (as described below under “—Spanish Standard Refund Procedure”).

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Qualifying Shareholders will not be required to file a Spanish tax return in respect of dividends received on the BBVA shares from which NRIT is withheld as described in the preceding paragraphs.

Taxation of Share Premium Distribution

Any amount received as a consequence of a share premium distribution by companies listed on a regulated market under the Directive 2004/39/EC of April 21, such as BBVA, should reduce the acquisition cost of the

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BBVA shares in respect of such share premium received. Any share premium in excess of the basis is treated as a dividend for NRIT purposes, being taxed as described above.

Taxation of Pre-Emptive Rights

Distributions to a Qualifying Shareholder of pre-emptive rights to subscribe for new BBVA shares are not treated as income under NRIT. The exercise of such pre-emptive rights is not considered a taxable event under NRIT. The proceeds derived from a transfer of pre-emptive rights by a Qualifying Shareholder will be regarded as a capital gain and subject to Spanish NRIT in the manner described under “—Taxation of Capital Gains or Losses” below.

Taxation of Capital Gains or Losses

As a general rule, any capital gains derived from securities issued by Spanish tax resident companies (including the BBVA shares) are deemed to be a Spanish source of income and, therefore, taxable in Spain. For NRIT purposes, income obtained from the disposal of BBVA shares will be treated as capital gains. Capital gains obtained upon the transfer of BBVA shares by non-Spanish residents for tax purposes will be subject to NRIT at a general 19% rate. Capital gains or losses will be calculated separately for each transaction, and it is not possible to offset losses against capital gains.

However, under the United States-Spain Treaty, capital gains realized upon the disposition of BBVA shares will not be taxed in Spain if the Qualifying Shareholder is tax resident of the United States within the meaning of the United States-Spain Treaty.

Furthermore, capital gains derived from the disposition of BBVA shares on an official Spanish secondary stock market (such as the Madrid, Barcelona, Bilbao or Valencia Stock Exchanges) will be exempt from taxation in Spain if the corresponding Qualifying Shareholder is tax resident for the purposes of the corresponding treaty, as the case may be, provided the relevant treaty contains an “exchange of information” clause.

Qualifying Shareholders must submit a Spanish tax form (as of the date of this offer to exchange/prospectus, Form 210) between January 1 and 20 of the year following accrual of the capital gain in question. In particular, where any of the exemptions mentioned above applies, the seller will be obliged to file with the Spanish tax authorities the relevant Spanish tax form together with the certificate of tax residence in the United States for the purposes of the United States-Spain Treaty, duly issued by the IRS evidencing its entitlement to the exemption. For Spanish tax purposes, such Tax Treaty Certificates are generally valid for one year from the date the certificate is issued.

Spanish Standard Refund Procedure

According to Spanish Regulations on NRIT, approved by Royal Decree 1776/2004, of July 20 and the Order dated December 17, 2010, a refund for the amount withheld in excess of the United States-Spain Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, the Qualifying Shareholder is required to file:

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the applicable Spanish tax form (as of the date of this offer to exchange/prospectus, Form 210);

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the certificate of tax residence issued by the IRS stating that, to their knowledge, the U.S. Qualifying Shareholder is a tax resident of the United States within the meaning of the United States-Spain Treaty;

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documentary evidence that NRIT was withheld with respect to such non-Spanish tax resident shareholder; and

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documentary evidence of the bank account in which the excess amount withheld should be paid.

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For the purposes of this Spanish Standard Refund Procedure, a Qualifying Shareholder would need to file a Form 210 (together with the corresponding documentation) from February 1 following the year in which the NRIT was withheld, and up to the four-year period after the end of the corresponding filing period in which BBVA reported and paid such withholding taxes. The Spanish tax authorities may make the refund within the six months following the filing of the refund claim.

For further details, prospective Qualifying Shareholders should consult their tax advisors.

Wealth Tax

Unless an applicable convention for the avoidance of double taxation on wealth taxes provides otherwise (and the United States-Spain Treaty does not so provide), individual Qualifying Shareholders whose properties and rights that are located in Spain, or that can be exercised within the Spanish territory, exceed €700,000 would be subject to wealth tax at the applicable rates, ranging between 0.2% and 3.5%, without prejudice to any reductions which may apply. Therefore, such individuals should take into account the value of the BBVA shares they hold as of December 31 of the applicable year.

In accordance with Additional Provision 4 of the Wealth Tax Law 19/1991, of June 6, as amended by Law 11/2021 of July 9, non-resident taxpayers will be entitled to the application of specific regulations approved by the autonomous community where the greater value of the assets and rights they own is located and for which the tax is required, because these assets are located in Spain or the rights may be exercised in Spain.

In addition to wealth tax there is a temporary solidarity tax on major fortunes that applies to wealth of individuals in excess of €3,000,000 with rates from 1.7% to 3.5%. The amount of this tax can be deducted out of the quote of the wealth tax.

BBVA’s shareholders are advised to seek their own professional advice in relation to the wealth tax (including for any filing and disclosure obligations).

Qualifying Shareholders who are non-Spanish resident corporations are not subject to Spanish wealth tax.

Inheritance and Gift Tax

Unless an applicable convention for the avoidance of double taxation on inheritance or gift taxes provides otherwise (and the United States-Spain Treaty does not so provide), the transfer of BBVA shares to individuals by inheritance, legacy or donation shall be subject to the general rules of inheritance and gift tax in accordance with the applicable Spanish rules even if title passes outside Spain and neither the heir nor the beneficiary, as the case may be, is resident in Spain for tax purposes.

If no tax treaty is applicable, non-Spanish tax resident individuals who acquire ownership or other rights over BBVA shares by inheritance, gift or legacy will be subject to inheritance and gift tax in accordance with Spanish legislation. Non-Spanish tax resident individuals are subject to Spanish inheritance and gift tax according to the rules set forth in the relevant autonomous regions according to the law. As such, prospective shareholders should consult their tax advisers.

The effective tax rate, after application of all relevant factors, ranges between 0% and 81.6%.

Gifts granted to corporation Qualifying Shareholders are subject to NRIT at a 19% tax rate on the fair market value of the BBVA shares as a capital gain. However, the exemptions available under the United States-Spain Treaty, described in “—Taxation of Capital Gains or Losses” above, will be applicable to Qualifying Shareholders.

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Transfer Tax and VAT

Subscription, acquisition and transfers of BBVA shares are exempt from Transfer Tax and Value Added Tax. Additionally, no stamp duty or registration tax is levied as a result of such subscription, acquisition or transfers of BBVA shares.

Compliance

In certain circumstances, the Spanish tax authorities can impose penalties for failure to comply with the Spanish tax requirements referred to for Taxation of Capital Gains or Losses and Inheritance and Gift Tax above. Such penalties may in certain cases be based on the amount of tax payable.

Material U.S. Federal Income Tax Considerations for U.S. Holders

The following are material U.S. federal income tax consequences to the U.S. Holders described below of (i) exchanging their Banco Sabadell shares for BBVA shares (and possibly cash) pursuant to the exchange offer and (ii) the ownership and disposition of BBVA shares received by U.S. Holders pursuant to the exchange offer (or BBVA ADSs received in exchange for such BBVA shares), but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to participate in the exchange offer. BBVA ADSs are not being offered as consideration pursuant to the exchange offer. The discussion applies only to U.S. Holders that hold Banco Sabadell shares, and will hold BBVA shares or BBVA ADSs, as capital assets for U.S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances or tax consequences applicable to U.S. Holders subject to special rules, such as:

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financial institutions;

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insurance companies;

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dealers or electing traders in securities that use a mark-to-market method of tax accounting;

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persons that hold Banco Sabadell shares, or that will hold BBVA shares or BBVA ADSs, as part of a “straddle”, conversion transaction or integrated transaction;

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persons whose “functional currency” is not the U.S. dollar;

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tax exempt entities, “individual retirement accounts” or “Roth IRAs”;

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partnerships or other entities classified as partnerships for U.S. federal income tax purposes or partners therein;

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persons that own or are deemed to own, by vote or value, 5% or more of the shares of Banco Sabadell or BBVA;

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persons that acquired Banco Sabadell shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

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persons that hold Banco Sabadell shares, or that will hold BBVA shares or BBVA ADSs, in connection with a trade or business outside the United States.

If an entity that is classified as a partnership for U.S. federal income tax purposes owns Banco Sabadell shares or BBVA shares or BBVA ADSs, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Entities classified as partnerships for U.S. federal income tax purposes and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of exchanging Banco Sabadell shares for BBVA shares or BBVA ADSs pursuant to exchange offer and the ownership and disposition of BBVA shares or BBVA ADSs in their specific circumstances.

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The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions, final, temporary and proposed Treasury Regulations, and the income tax treaty between the United States and Spain (the “Treaty”), all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. This summary does not address alternative minimum or Medicare contribution tax considerations, the special tax accounting rules under Section 451(b) of the Code, or U.S. federal taxes other than those pertaining to U.S. federal income taxation (such as estate or gift taxes), nor does it address any aspects of U.S. state, local or non-U.S. taxation. U.S. Holders are urged to consult their tax advisers as to the U.S., Spanish and other tax consequences of participating in the exchange offer.

As used herein, a “U.S. Holder” is a person that is, for U.S. federal income tax purposes, a beneficial owner of Banco Sabadell shares (and after the exchange offer will be a beneficial owner of BBVA shares or BBVA ADSs) and:

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a citizen or individual resident of the United States;

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a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or

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an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

In general, a U.S. Holder that owns BBVA ADSs will be treated as the owner of the underlying BBVA shares represented by those BBVA ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges BBVA shares for BBVA ADSs representing those shares. BBVA ADSs are not being offered as consideration pursuant to the exchange offer.

Tax Consequences of the Exchange Offer

The U.S. federal income tax consequences of the exchange offer to U.S. Holders will depend on whether the exchange offer (either on its own or taken together with any related transaction treated as part of a plan of reorganization) qualifies as a reorganization within the meaning of Section 368(a) of the Code (a “Reorganization”). To qualify as a Reorganization, the exchange offer (either on its own or taken together with any related transaction treated as part of a plan of reorganization) must satisfy certain requirements, some of which are based on factual determinations and actions or events after completion of the exchange offer, including certain events that are not within the control of Banco Sabadell or BBVA. For example, the qualification of the exchange offer as (or as part of) a Reorganization of a particular type may depend on factors such as (i) whether holders of shares of Banco Sabadell representing at least 80% of the total combined voting power of all classes of stock of Banco Sabadell entitled to vote and at least 80% of the total number of shares of all other classes of stock of Banco Sabadell exchange their shares in consideration for BBVA shares; (ii) whether or not the exchange offer will be followed by a squeeze-out merger and the terms of such merger; and (iii) whether and to what extent cash (other than cash in lieu of fractional shares) will be paid by BBVA to holders of Banco Sabadell shares. Because of these and other factual uncertainties, which will not be known until or after the exchange offer is consummated, no representation can be made as to the U.S. federal income tax treatment of the exchange offer. Completion of the exchange offer is not conditioned on the exchange offer qualifying as (or as part of) a Reorganization or on the receipt of an opinion of counsel to that effect. Due to the factual uncertainties described above, BBVA has not sought or received an opinion of counsel on the qualification of the exchange offer (either on its own or taken together with any related transaction treated as part of a plan of reorganization) as a Reorganization. In addition, BBVA has not sought and will not seek any ruling from the IRS regarding any matters relating to the exchange offer, and as a result, even if BBVA were to take the position that the exchange offer (either on its own or taken together with any related transaction treated as part of a plan of reorganization) qualified as a Reorganization (if required to take a position), there can be no assurance that the IRS will not assert, or that a court would not sustain, a position that the exchange offer does not qualify as (or as part of) a Reorganization.

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In addition, to BBVA’s knowledge, Banco Sabadell has not taken a position in publicly available filings on whether or not it has been a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for any prior taxable year, and BBVA has not analyzed Banco Sabadell’s PFIC status for any taxable year. The following discussion assumes that Banco Sabadell is not a PFIC for its current taxable year, and was not a PFIC for any prior taxable year included, in whole or in part, in a U.S. Holder’s holding period for its Banco Sabadell shares. If Banco Sabadell is or was a PFIC for any taxable year included, in whole or in part, in a U.S. Holder’s holding period for its Banco Sabadell shares (generally even if Banco Sabadell ceased to be a PFIC in any subsequent tax year), and BBVA is not a PFIC in the taxable year in which the Reorganization occurs, then even if the exchange offer (either on its own or taken together with any related transaction treated as part of a plan of reorganization) qualifies as a Reorganization, a U.S. Holder could be required to recognize gain with respect to the exchange of its Banco Sabadell shares for BBVA shares, and such gain would be generally subject to tax in the manner described below under “—Consequences of the Ownership and Disposition of BBVA Shares or BBVA ADSs—Passive Foreign Investment Company Rules”. A U.S. Holder should consult its tax adviser regarding whether Banco Sabadell is or was a PFIC at any time during its holding period for the Banco Sabadell shares and the effect of the PFIC rules on the exchange of Banco Sabadell shares for BBVA shares pursuant to the exchange offer.

Tax Consequences if the Exchange Offer Qualifies as (or as part of) a Reorganization

Subject to the discussion in the preceding paragraph regarding the possible application of the PFIC rules and the discussions below regarding cash in lieu of fractional BBVA shares and cash payments in respect of a BBVA dividend, if the exchange offer (either on its own or taken together with any related transaction treated as part of a plan of reorganization) qualifies as a Reorganization, a U.S. Holder generally will not recognize gain or loss on the receipt of BBVA shares in exchange for Banco Sabadell shares. The aggregate tax basis in the BBVA shares that a U.S. Holder receives in the exchange offer (including any fractional shares deemed received, as described below) will equal the U.S. Holder’s aggregate adjusted tax basis in the Banco Sabadell shares surrendered in the exchange offer. A U.S. Holder’s holding period for the BBVA shares received in the exchange offer (including any fractional share deemed received, as described below) will include the U.S. Holder’s holding period of the Banco Sabadell shares surrendered in the exchange offer. If a U.S. Holder acquired different blocks of Banco Sabadell shares at different times or at different prices, the BBVA shares received will be allocated pro rata to each block of Banco Sabadell shares, and the tax basis and holding period of each block of BBVA shares received will be determined on a block-for-block basis depending on the tax basis and holding period of the block of Banco Sabadell shares exchanged for such block of BBVA shares. A U.S. Holder may be required to report certain information to the IRS on the U.S. Holder’s U.S. federal income tax return for the tax year in which the exchange occurs and to maintain certain records related to the exchange.

Cash in Lieu of Fractional BBVA Shares

If a U.S. Holder receives cash in lieu of a fractional BBVA share, the U.S. Holder generally will be treated as having received such fractional BBVA share pursuant to the exchange offer and then as having sold such fractional BBVA share for cash. As a result, provided that the redemption is not treated as “essentially equivalent to a dividend”, the U.S. Holder generally will recognize gain or loss equal to the difference between the amount of cash received and the tax basis allocated to the fractional BBVA share as set forth above, each as determined in U.S. dollars. Such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if, as of the completion date, the U.S. Holder’s holding period for such fractional BBVA share (including the holding period of Banco Sabadell shares exchanged therefor) exceeds one year. Long-term capital gains of non-corporate U.S. Holders generally are eligible for favorable rates of taxation. The deductibility of capital losses is subject to limitations.

Although in most cases the deemed redemption of fractional BBVA shares should not be treated as essentially equivalent to a dividend, each U.S. Holder should consult its tax adviser regarding the treatment of the deemed redemption taking into account the U.S. Holder’s particular circumstances, including whether the U.S. Holder owns (or is deemed to own) BBVA shares or BBVA ADSs before the exchange.

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Cash Payment in Respect of a BBVA Dividend

As described above in “—Dividend Payments—Upcoming Dividend Payments”, if BBVA makes any distribution of dividends, reserves or any other type of distribution to its shareholders prior to the settlement of the exchange offer, BBVA may make a cash payment to shareholders of Banco Sabadell that exchange their Banco Sabadell shares for BBVA shares. In that case, a U.S. holder will recognize gain (but not loss) in an amount equal to the lesser of: (i) the amount, if any, by which the sum of the cash and the fair market value of the BBVA shares received by such U.S. Holder exceeds such U.S. Holder’s adjusted tax basis in such U.S. Holder’s Banco Sabadell shares exchanged therefor; and (ii) the amount of cash received by such U.S. Holder (except with respect to cash received in lieu of a fractional BBVA share, as discussed above).

Tax Consequences if the Exchange Offer is a Taxable Transaction

If the exchange offer does not qualify as (or as part of) a Reorganization, the receipt of BBVA shares and cash (if any) in exchange for Banco Sabadell shares will be a taxable transaction for U.S. federal income tax purposes, in which case a U.S. Holder that exchanges Banco Sabadell shares for BBVA shares pursuant to the exchange offer generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the exchange and the U.S. Holder’s tax basis in the Banco Sabadell shares exchanged, in each case determined in U.S. dollars. The amount realized on the exchange will be the sum of the fair market value of the BBVA shares received in the exchange (including as a result of an adjustment to the exchange ratio, as described above in “—Dividend Payments—Upcoming Dividend Payments”) and any cash received (including any cash received in consideration for fractional BBVA shares or as described in “—Dividend Payments—Upcoming Dividend Payments”), each determined in U.S. dollars. A U.S. Holder will have a tax basis in the BBVA shares received in the exchange equal to their fair market value on the date of the exchange, and its holding period with respect to such BBVA shares received will begin on the day after the date of the exchange. If a U.S. Holder acquired different blocks of Banco Sabadell shares at different times or at different prices, gain or loss will be determined separately for each such block. Subject to the discussion above regarding the potential application of the PFIC rules, such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if, as of the completion date, the U.S. Holder’s holding period for its Banco Sabadell shares exceeds one year. Long-term capital gains of non-corporate U.S. Holders generally are eligible for favorable rates of taxation. The deductibility of capital losses is subject to limitations.

Foreign Tax Credits

Gain or loss, if any, resulting from the exchange offer generally will be U.S. source for foreign tax credit purposes. Under certain Treasury regulations, a U.S. Holder generally will be precluded from claiming a foreign tax credit with respect to Spanish income taxes (if any) on gains from the receipt of BBVA shares and/or cash as part of the exchange offer. However, the IRS released notices that provide relief from certain of the provisions of these Treasury regulations (including the limitation described in the preceding sentence) for taxable years ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance). Even if these Treasury regulations do not prohibit a U.S. Holder from claiming a foreign tax credit with respect to Spanish income taxes (if any) on gains from the receipt of BBVA shares and/or cash as part of the exchange offer, other limitations under the foreign tax credit rules may preclude a U.S. Holder from claiming a foreign tax credit with respect to such Spanish taxes. If a U.S. Holder is precluded from claiming a foreign tax credit, it is possible that any Spanish taxes on such gains may either be deductible or reduce the amount realized in connection with the exchange.)

Receipt of Foreign Currency

If a U.S. Holder receives cash and the payment is made in euros, the amount realized will be the U.S. dollar value of the payment received, translated at the spot rate of exchange on the date of the exchange. On the settlement date, the U.S. Holder will recognize U.S.-source foreign currency gain or loss (taxable as ordinary

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income or loss) equal to the difference (if any) between the U.S. dollar value of the amount received based on the exchange rates in effect on the date of the exchange and the settlement date. However, if the Banco Sabadell shares are traded on an established securities market and are exchanged by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), the amount realized will be based on the exchange rate in effect on the settlement date, and no exchange gain or loss will be recognized at that time. U.S. Holders should consult their tax advisers regarding the treatment of foreign currency gain or loss, if any, on any euros received that are converted into U.S. dollars on a date subsequent to receipt.

Consequences of the Ownership and Disposition of BBVA Shares or BBVA ADSs

The following discussions under “—Taxation of Distributions” and “—Sale or Other Taxable Disposition of BBVA Shares or BBVA ADSs” are subject to the discussion under “—Passive Foreign Investment Company Rules” below.

Taxation of Distributions

The amount of any distributions, before reduction for any Spanish income tax withheld by BBVA or its paying agent, paid with respect to BBVA shares or BBVA ADSs (other than certain pro rata distributions of BBVA’s capital stock or rights to subscribe for shares of its capital stock) will be includible in the income of a U.S. Holder as ordinary dividend income, to the extent paid out of BBVA’s current or accumulated earnings and profits as determined in accordance with U.S. federal income tax principles. Because BBVA does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of such dividends will be treated as foreign-source dividend income and will not be eligible for the “dividends received deduction” generally allowed to U.S. corporations under the Code. Subject to applicable limitations, dividends paid to non-corporate U.S. Holders may be taxable at favorable rates applicable to long-term capital gains. Non-corporate U.S. Holders should consult their tax advisers to determine the availability of these favorable rates in their particular circumstances.

The amount of a dividend distribution will equal the U.S. dollar value of the euros received, calculated by reference to the exchange rate in effect on the date such distribution is received (which, for U.S. Holders of BBVA ADSs, will be the date such distribution is received by the depositary), whether or not the distribution is in fact converted into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. If the dividend is not converted into U.S. dollars on the date of receipt, a U.S. Holder may have foreign currency gain or loss on the conversion date. In general, any foreign currency gain or loss will be U.S.-source ordinary gain or loss.

Subject to applicable limitations that vary depending upon a U.S. Holder’s circumstances, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability for any non-refundable Spanish NRIT taxes withheld by BBVA or its paying agent at a rate not exceeding the rate the U.S. Holder is entitled to under Spanish domestic law or the Treaty. Spanish taxes withheld in excess of the rate applicable under Spanish domestic law or the Treaty or that are otherwise refundable under Spanish law will not be eligible for credit against a U.S. Holder U.S. federal income tax liability. See “Spanish Tax Consequences for U.S. Shareholders—Consequences of the Acquisition, Ownership and Disposition of BBVA Shares—Spanish Standard Refund Procedure” above for a discussion of how to obtain the Treaty rate. The rules governing foreign tax credits are complex. For example, under applicable Treasury regulations, in the absence of an election to apply the benefits of an applicable income tax treaty, in order to be creditable, foreign income tax rules must be consistent with certain U.S. federal income tax principles, and we have not determined whether the Spanish income tax system meets these requirements. However, the IRS released notices that indicate that the Treasury Department and the IRS are considering amendments to these Treasury regulations and provide relief from certain of their provisions for taxable years ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance). U.S. Holders should consult their tax

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advisers regarding the availability of foreign tax credits in their particular circumstances. In lieu of claiming a foreign tax credit, U.S. Holders may elect to deduct all otherwise creditable non-U.S. taxes paid or accrued in a taxable year (including any Spanish income withholding tax) in computing their taxable income, subject to generally applicable limitations under U.S. federal income tax law.

Sale and Other Disposition of BBVA Shares or BBVA ADSs

Gain or loss realized by a U.S. Holder on a sale or other disposition of BBVA shares or BBVA ADSs will be subject to U.S. federal income tax as capital gain or loss in an amount equal to the difference between the U.S. Holder’s tax basis in the BBVA shares or BBVA ADSs and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will be long-term capital gain or loss if the U.S. Holder held the BBVA shares or BBVA ADSs for more than one year at the time of disposition. The deductibility of capital losses is subject to limitations. Gain or loss, if any, will generally be U.S. source for foreign tax credit purposes. Under certain Treasury regulations, a U.S. Holder generally will be precluded from claiming a foreign tax credit with respect to Spanish income taxes on gains from dispositions of BBVA shares or BBVA ADSs. However, as discussed above under “—Taxation of Distributions”, the IRS released notices that provide relief from certain of the provisions of these Treasury regulations (including the limitation described in the preceding sentence) for taxable years ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance). Even if these Treasury regulations do not prohibit a U.S. Holder from claiming a foreign tax credit with respect to Spanish income taxes on disposition gains, other limitations under the foreign tax credit rules may preclude a U.S. Holder from claiming a foreign tax credit with respect to such Spanish taxes. If a U.S. Holder is precluded from claiming a foreign tax credit, it is possible that any Spanish taxes on disposition gains may either be deductible or reduce the amount realized on the disposition.

Passive Foreign Investment Company Rules

BBVA’s PFIC status for any taxable year will depend in large part on its qualification as an active bank under certain proposed Treasury regulations, which are proposed to be effective for taxable years beginning after December 31, 1994 (the “Proposed Regulations”) and upon which taxpayers are currently permitted to rely. However, because there can be no assurance that the Proposed Regulations will be finalized in their current form, and because PFIC status depends upon the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that BBVA was not, or will not be, a PFIC for any taxable year.

In general, if BBVA were treated as a PFIC for any taxable year during a U.S. Holder’s holding period of BBVA shares or BBVA ADSs, BBVA will generally continue to be a PFIC with respect to the U.S. Holder for any subsequent taxable year, even if BBVA ceases to be a PFIC in any future taxable year. In that case, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the BBVA shares or BBVA ADSs would be allocated ratably over the U.S. Holder’s holding period for the BBVA shares or BBVA ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before BBVA became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for ordinary income of taxpayers of the U.S. Holder’s type for such taxable year, and an interest charge would be imposed on the resulting tax liability for such taxable year. Similar rules would apply to distributions received by a U.S. Holder in any taxable year in respect of the BBVA shares or BBVA ADSs to the extent in excess of 125% of the average of the annual distributions on the BBVA shares or BBVA ADSs received by the U.S. Holder during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available (including a mark-to-market election for any taxable year in which BBVA is a PFIC if the BBVA shares or BBVA ADSs, as applicable, are “marketable stock”, or a “deemed sale” election in the event that BBVA is a PFIC for any taxable year but ceases to be a PFIC thereafter). U.S. Holders should consult their tax advisers regarding whether, if BBVA is or becomes a PFIC, any of these elections would be available and, if so, what the consequences of the alternative treatments would be in the U.S. Holders’ particular circumstances.

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Additionally, if a U.S. Holder owns any BBVA shares or BBVA ADSs during any year in which BBVA is a PFIC, such U.S. Holder would be required to file annual returns, subject to certain exceptions. Furthermore, if BBVA is a PFIC for any taxable year in which it makes a distribution or the prior taxable year, the favorable tax rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.

In addition, if (i) the exchange offer qualifies as (or as part of) a Reorganization; (ii) BBVA is a PFIC for the taxable year in which the Reorganization occurs; and (iii) Banco Sabadell was treated as a PFIC with respect to a U.S. Holder who exchanges Banco Sabadell shares for BBVA shares pursuant to the exchange offer, for purposes of applying the foregoing rules, the period during which BBVA is a PFIC will generally include the portion of the U.S. Holder’s holding period during which Banco Sabadell was treated as a PFIC.

U.S. Holders should consult their tax advisers regarding the potential application of the PFIC rules to their ownership of BBVA shares or BBVA ADSs.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) a U.S. Holder is an exempt recipient (and establishes that status if required to do so); or (ii) in the case of backup withholding, a U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

This discussion of the material U.S. federal income tax consequences of the exchange offer to U.S. Holders is not intended to be, and should not be construed as, tax advice. U.S. Holders should consult their tax advisers with respect to the application of U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the U.S. federal estate or gift tax rules, or under the laws of any state, local, non-U.S. or other taxing jurisdiction or under any applicable tax treaty.

Brokerage Commissions

If your Banco Sabadell shares are tendered into the exchange offer by your broker or other securities intermediary, you will be responsible for any fees or commissions they may charge you in connection with such tender. Finally, you will be responsible for all governmental charges and taxes payable in connection with tendering your Banco Sabadell shares.

Listing of BBVA Shares

Spanish Stock Exchanges, London and Mexican Stock Exchanges

It is expected that the newly-issued BBVA shares will be admitted to trading on the Spanish Stock Exchanges within a maximum period of five Spanish stock exchange business days from the registration of such shares as book entries in Iberclear and its participating entities.

BBVA undertakes to make its best efforts to execute the share capital increase, the settlement of the exchange offer and the subsequent admission to trading on the Spanish Stock Exchanges of the newly-issued BBVA shares, as promptly as possible, which is expected to take place within a maximum period of 20 Spanish stock exchange business days following the publication of the result of the exchange offer. Any delay, including the reasons for such delay, will be communicated by BBVA through a relevant information notice.

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NYSE

BBVA ADSs are listed on the NYSE under the symbol “BBVA”. Each BBVA ADS represents the right to receive one BBVA share. Please also see “—BBVA ADSs” in this offer to exchange/prospectus.

Appraisal Rights

The holders of Banco Sabadell shares are not entitled under Spanish law or otherwise to appraisal rights with respect to the exchange offer.

Certain Legal and Regulatory Matters

Except as otherwise disclosed herein, BBVA is not aware of any other material regulatory approvals or other regulatory actions required for completion of the exchange offer. Should any such approval or other action be required, BBVA currently contemplates that such approval or other action will be sought.

Certain Consequences of the Exchange Offer

Trading in BBVA Shares During and After the Exchange Offer

Following completion of the exchange offer, Banco Sabadell shares not tendered into the exchange offer will continue to trade on the Spanish Stock Exchanges. However, if the requirements set forth in articles 116 of the Securities Market Law and 47 of the Spanish Takeover Regulation are met, then BBVA will exercise its right to demand the squeeze-out of the remaining Banco Sabadell shares at the same consideration as offered pursuant to the exchange offer (adjusted, as the case may be, as described in this offer to exchange/prospectus). See “—Squeeze-out and Merger” below.

Reduced Liquidity

Squeeze-out and Merger

If the requirements set forth in articles 116 of the Securities Market Law and 47 of the Spanish Takeover Regulation are met, which would require that (i) the exchange offer is accepted by holders of Banco Sabadell shares representing at least 90% of the Banco Sabadell shares subject to the exchange offer; and (ii) following completion of the exchange offer, BBVA holds a number of Banco Sabadell shares representing at least 90% of the voting rights in Banco Sabadell’s share capital, BBVA will exercise its right to demand the squeeze-out of the remaining Banco Sabadell shares at the same consideration as offered pursuant to the exchange offer (adjusted, as the case may be, as described in this offer to exchange/prospectus). To this effect, within the three Spanish stock exchange business days following the publication of the results of the exchange offer on the website of the CNMV, BBVA will communicate to the CNMV and publicly announce whether or not the requirements to execute a squeeze-out transaction have been met. In that announcement, or within the two following Spanish stock exchange business days, BBVA will announce the date of the squeeze-out transaction. In accordance with article 48.4 of the Spanish Takeover Regulation, such date will be fixed between the 15^th and the 20^th Spanish business day following the date of such announcement. Such decision will be irrevocable. Upon settlement of such squeeze-out transaction, the Banco Sabadell shares will be automatically delisted from the Spanish Stock Exchanges.

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The execution of the squeeze-out transaction resulting from the exercise of the aforementioned right shall give rise, in accordance with article 48 of the Spanish Takeover Regulation and related provisions, to the delisting of the shares of Banco Sabadell from the Spanish Stock Exchanges. Such delisting shall be effective as from the settlement of the squeeze-out transaction.

The exchange ratio of any such merger must be validated, on the basis of the fair value of the equity of the entities participating in the merger, by an independent expert appointed for such purpose by the relevant commercial registry, in accordance with applicable Spanish law. Pursuant to Spanish law, the directors of each of the merging companies must apply to the commercial registrar corresponding to their registered office (the Commercial Registry of Bizkaia, in the case of BBVA, and the Commercial Registry of Alicante, in the case of Banco Sabadell) for the appointment of an independent expert to issue separate reports on the proposed merger or the directors of the merging companies may decide to jointly request that the commercial registrar of the absorbing company (i.e., the Commercial Registry of Bizkaia, as BBVA would be the absorbing company) appoint a single expert to prepare a single report. Given that following completion of the exchange offer, BBVA will be able to appoint the majority of the members of the board of directors of Banco Sabadell, BBVA expects to have a single independent expert appointed for the validation of the exchange ratio.

In its report, the independent expert must, in particular, explain the methods followed by the directors to establish the share exchange ratio, assess the appropriateness of such methods (stating the values to which they lead, the relative importance attributed to these methods and any relevant special valuation difficulties) and state whether or not the established exchange ratio is justified. This report must be made available to the shareholders of BBVA and Banco Sabadell at least one month before the respective general shareholders’ meeting at which the merger will be submitted for approval.

In order to consummate such merger, the following approvals or authorizations would need to be obtained:

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The formulation by BBVA and Banco Sabadell’s respective boards of directors of the joint plan of merger. The joint plan of merger will be negotiated between the directors of BBVA and Banco Sabadell and will seek the best interest of the two entities. As a result, and taking into account that following completion of the exchange offer BBVA will be able to appoint the majority of the members of the board of directors of Banco Sabadell, BBVA expects that the joint plan of merger will be approved by BBVA’s and Banco Sabadell’s respective boards of directors.

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The approval by Banco Sabadell shareholders of the joint plan of merger. Taking into account that following completion of the exchange offer, BBVA will be able to exercise at least 50.01% of Banco Sabadell’s voting rights, BBVA expects that Banco Sabadell’s shareholders will approve the joint plan of merger.

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The approval by BBVA’s shareholders of the joint plan of merger. Taking into account that, on July 5, 2024, BBVA’s extraordinary general shareholders’ meeting already approved to authorize the increase of BBVA’s share capital in an amount of up to €551,906,524.05 through the issuance of up to 1,126,339,845 newly-issued BBVA shares to be offered to the holders of Banco Sabadell shares pursuant to the exchange offer, with shareholders representing 70.75% of the outstanding BBVA shares present at such meeting and 96.01% of such shareholders voting in favor, BBVA expects that its shareholders will approve the joint plan of merger.

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•

The prior authorization of the Ministry of Economy, Trade and Business in accordance with the provisions of the twelfth additional provision of Law 10/2014, of June 26, on the regulation, supervision and solvency of credit institutions and related regulations, which would be a condition to the approval of the joint plan of merger referred to above. BBVA intends to seek the authorization of the Ministry of Economy, Trade and Business of the intended merger through a written submission to the General Secretary of the Treasury and International Finance, which is part of such Ministry, as promptly as practicable following any formulation by BBVA’s and Banco Sabadell’s respective boards of directors of the joint plan of merger. Following BBVA’s submission, the Ministry of Economy, Trade and Business’ professional staff would be required under applicable law to consider such submission, together with the related reports required to be issued following such submission by certain regulators and authorities, including the ECB, the CNMV, the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offenses (the “SEPBLAC”) and the Directorate General of Insurance and Pension Funds (the “DGSFP”), among others, with respect to the merger, based on a technical review and analysis of the intended merger. The Spanish antitrust authorities would not issue a separate report as they would already have approved the economic concentration resulting from the exchange offer, but the report issued by the Spanish antitrust authorities in the context of the exchange offer would also be considered by the Ministry of Economy, Trade and Business’ professional staff in conducting its technical analysis and review of the intended merger. The Ministry’s final decision whether to approve the intended merger must be reasoned and take into account such technical review and analysis by the Ministry’s professional staff, and is required to be made through a public ministerial order. Such decision must be adopted by the Spanish Economy, Trade and Business Minister within six months of receipt of BBVA’s written submission to the General Secretary of the Treasury and International Finance, or when the required documentation is completed, and, in any case, within 12 months of such receipt.

The current Spanish Economy, Trade and Business Minister, Mr. Carlos Cuerpo, initially stated on May 10, 2024, the day following announcement of BBVA’s decision to undertake the exchange offer, his opposition to the intended merger, and he has made similar public statements thereafter, including following BBVA’s receipt of certain antitrust authorizations and regulatory approvals (including the ECB’s non-opposition) in connection with the exchange offer. Such statements, however, have been made prior to the submission by BBVA to the Ministry of Economy, Trade and Business of a written application for approval of the intended merger, and therefore prior to the issuance by the ECB, the CNMV, the SEPBLAC and the DGSFP of their reports with respect to the merger and prior to the technical review and analysis of the intended merger by the Ministry of Economy, Trade and Business’ professional staff.

BBVA expects that the ECB, the CNMV, the SEPBLAC and the DGSFP will issue reports without objections in connection with the intended merger, in part because these authorities will at such time already have issued relevant approvals in connection with the exchange offer. Finally, BBVA is not aware of any Spanish precedent transaction where the authorization of a merger following the acquisition of control of a credit institution, as contemplated by this offer to exchange/prospectus has not been granted by the Spanish Economy, Trade and Business Minister.

In light of the foregoing, BBVA considers that the scenario of not being able to consummate the intended merger is very remote.

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respective shareholders. The consummation of the merger would require the prior authorization of the Spanish Economy, Trade and Business Minister, following the issuance of related reports by certain regulators and authorities that will have previously issued favorable opinions with respect to the exchange offer. If any of the foregoing corporate approvals or the authorization from the Economy, Trade and Business Minister is not obtained, the merger will not be consummated. For further information regarding BBVA’s plans with respect to Banco Sabadell if the intended merger is not consummated for any reason, please see “—Plans for Banco Sabadell after the Exchange Offer—Planned Corporate Restructuring Transactions of Any Kind”.

Fees and Expenses

In accordance with the provisions of article 33.5 of the Spanish Takeover Regulation, if the exchange offer is terminated, all declarations of acceptance submitted in connection with the exchange offer will become null and void and all expenses incurred by the tendering holders of Banco Sabadell shares in the submission of such declarations of acceptance will be borne by BBVA. In accordance with article 39.1 of the Spanish Takeover Regulation, if the exchange offer is not completed, the entities or persons that received the declarations of acceptance on behalf of BBVA will be required to return the documents accrediting the ownership of the corresponding Banco Sabadell shares to tendering holders. All expenses incurred as a result thereof will be borne by BBVA.

Source and Amount of Funds

BBVA’s Interest in Banco Sabadell

In the 12 months prior to the date of this offer to exchange/prospectus, neither BBVA, nor its directors, nor any of the companies within its group, nor, to the best of BBVA’s knowledge, any of the directors of the companies in its group, have carried out or agreed to carry out on its own account transactions involving shares

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of Banco Sabadell, or securities giving the right to subscribe or acquire shares of Banco Sabadell, whose voting rights would be attributable to BBVA pursuant to article 5 of the Spanish Takeover Regulation.

As of the date of this offer to exchange/prospectus, BBVA has not appointed any member of the board of directors or of the management of Banco Sabadell.

Shareholding of BBVA’s Directors, Executive Officers and Their Affiliates

As of October 11, 2024 the shareholding of BBVA’s directors, executive officers and their affiliates represented approximately 0.15% of the outstanding BBVA shares. BBVA’s board of directors proposed that the shareholders of BBVA pass the relevant capital increase resolution necessary to issue the shares of BBVA to be issued in connection with the exchange offer. Such capital increase resolution was approved at an extraordinary general shareholders’ meeting on July 5, 2024, with shareholders representing 70.75% of the outstanding BBVA shares present at such meeting and 96.01% of such shareholders voting in favor.

Purpose of the Exchange Offer

Plans for Banco Sabadell after the Exchange Offer

Strategic Plans and Intentions Regarding Future Activities and Location of the Banco Sabadell Group

If the exchange offer is completed, regardless of the percentage of Banco Sabadell shares acquired by BBVA pursuant to the exchange offer, BBVA intends to promote, as soon as possible after the settlement of the exchange offer, and irrespective of whether the thresholds provided for in articles 116 of the Spanish Securities Market Law and 47 of the Spanish Takeover Regulation for the exercise of the right of squeeze-out are met, a merger by absorption of Banco Sabadell by BBVA with an exchange ratio equivalent, as far as possible, to the consideration offered in the exchange offer, subject to market conditions or other circumstances making it inadvisable to carry out such merger process or carry out such merger process on such terms. BBVA estimates that the intended merger would be consummated in a period of between six to eight months from the settlement of the exchange offer. If the merger is consummated, BBVA will implement an integration process whereby Banco Sabadell’s knowledge, roots and identity are respected.

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BBVA will maintain its ties and commitment to the territories, especially those in which Banco Sabadell has a greater presence, such as Catalonia and the Valencian Community. In addition, after the intended merger, if completed, BBVA intends, among other measures to:

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Maintain two corporate centers, one in the current Banco Sabadell corporate headquarter in Sant Cugat del Vallès (Barcelona) and the other one in the current BBVA corporate headquarter in Madrid.

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Use the Banco Sabadell brand, together with the BBVA brand, in those territories or businesses in which it may have a relevant commercial interest.

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Maintain Banco Sabadell’s risk management model in small and medium-sized companies. In fact, BBVA intends to maintain the working capital lines of all small and medium-sized companies for at least 12 months, except in the case of companies that suffer financial deterioration.

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Reinforce Barcelona’s role as a European “hub” for innovative companies. BBVA and Banco Sabadell have business units specialized in helping newly-created companies with a large innovative component, commonly known as “start-ups”, to scale their businesses through financial services and debt (BBVA Spark and BStartup, respectively). The main purpose of these business units is to provide integral financial support to these companies in all phases of their growth. BBVA intends to reinforce Barcelona’s role as a European “hub” for innovative companies through the combination of these initiatives, which will increase their presence in this city, as well as the promotion of events such as “4 Years from Now” or “BBVA Spark Summit”, which will contribute to positioning Barcelona as a city of reference in the technological ecosystem and a pole of attraction for companies and investors from all over Europe.

In addition, according to publicly-available information, Banco Sabadell has signed various commercial agreements with Zurich (regarding the distribution of insurance and pension products), Amundi (for asset management products), BNP Paribas (for depositary and custody services) and ALD Automotive (for auto-renting products). BBVA has estimated, on the basis of publicly-available information, the potential cost of terminating these relationships and commercial agreements. In doing so, BBVA has considered potential financial penalties derived from a change of control under agreements with respect to pension, insurance and payment products, as well as corresponding adjustments to fair value of the existing interests in any such arrangement, and BBVA has not considered the possible buyout of any such interest by any of the parties thereto.

BBVA’s intention, once it has all necessary information to make a sufficiently informed decision, is to analyze the best option for the distribution of these products and services, which will take place after one-on-one negotiations with each of these providers with the aim of choosing the best alternative from a strategic point of view and of value creation for all shareholders and clients.

Strategic Plans and Intentions Regarding Job Retention and Any Major Changes in Working Conditions

Following completion of the exchange offer, BBVA intends to implement an integration process that, regarding personnel decisions, will seek to promote and preserve the best talent and culture of both entities. BBVA recognizes that both its own personnel and that of Banco Sabadell constitute their respective greatest assets, with talent management being a fundamental priority for maintaining the combined group’s competitive advantage.

In relation to the personnel synergies expected as a result of the intended merger, if completed, BBVA expects to adjust the workforce of both entities, for which purpose it will carry out a strategic and objective evaluation of the business, activities, job positions and working conditions of Banco Sabadell after completion of the exchange offer. As a result of that review, BBVA will analyze which changes will enable it to avoid unnecessary duplications of job functions, to improve operational efficiency and to optimize corporate resources. Presently, BBVA intends to form an integration committee with representatives from both entities, with the objective of designing the best integration process seeking to maximize the talent of both entities.

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BBVA will initiate a consultation process with the workers’ representatives in order to minimize the impact of the adjustment, prioritizing, as much as possible, voluntary departures and relocations. Likewise, during the consultation period with the workers’ representatives, BBVA plans to initiate negotiations in order to align the human resources policies of both entities, which could imply changes to the working conditions of employees and executives of Banco Sabadell.

Plans Regarding the Use or Disposal of Assets of Banco Sabadell and Expected Variations in its Net Financial Debt

As a result of the intended merger, BBVA may choose to make some adjustment or optimization involving the sale or disposal of any one or more of Banco Sabadell’s assets. While BBVA does not currently have any such plan (except with respect to the estimated rationalization of the branch network in Spain of less than 10% of the combined network, equivalent to 300 of the approximately 870 branch offices identified in the combined group with a proximity of less than 500 meters), these options are expected to be analyzed in any event after completion of the exchange offer.

Apart from the foregoing, BBVA does not have any plans regarding Banco Sabadell’s net debt position, other than to renew Banco Sabadell’s wholesale funding instruments on the best terms possible, in accordance with the expected maturities of existing issuances.

Plans Regarding the Issuance of Securities of Any Kind by Banco Sabadell and the Banco Sabadell Group

BBVA does not plan to promote the issuance of new securities by Banco Sabadell and the Banco Sabadell Group, except for transactions related to ordinary regulatory capital and liquidity management of a banking entity and its regulated subsidiaries in the ordinary course of business.

Planned Corporate Restructuring Transactions of Any Kind

Intended Merger

In addition to the above, following completion of the exchange offer, BBVA intends to carry out a detailed review of the corporate structure of Banco Sabadell and its affiliates in order to analyze the advisability of carrying out a restructuring to simplify and optimize it, taking into account Banco Sabadell’s position within the BBVA Group.

Failure to Consummate Intended Merger

As described above, BBVA intends to promote a merger by absorption of Banco Sabadell by BBVA. Any such merger would need BBVA’s and Banco Sabadell’s respective boards of directors to formulate a joint merger plan, which would need to be approved by BBVA’s and Banco Sabadell’s respective shareholders. The consummation of the merger would require the prior authorization of the Spanish Economy, Trade and Business Minister, following the issuance of related reports by certain regulators and authorities that will have previously

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issued favorable opinions with respect to the exchange offer. If any of the foregoing corporate approvals or the authorization from the Economy, Trade and Business Minister is not obtained, the merger will not be consummated.

Based on analysis of the information available as of the date of this offer to exchange/prospectus, BBVA believes that, if the intended merger is not consummated for any reason:

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the exchange offer would continue to present attractive opportunities for efficiency and operational improvements for both banks, generating the majority of the expected cost synergies, with a time lag for full implementation of between one and two years from the settlement of the exchange offer; and

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the restructuring plan in Spain would be focused primarily on corporate centers and senior management, with relatively fewer branch offices expected to be closed across the branch network of Banco Sabadell (although BBVA has not quantified precisely the scope of branch closures in Spain in the event the intended merger is not consummated). If the intended merger were not consummated, expectations with respect to Mexico and the United Kingdom would be the same as if the intended merger were consummated.

The solvency of both BBVA and Banco Sabadell if the intended merger were not consummated is expected to permit both banks to maintain their current dividend policies. See “—Plans Regarding Dividend Policy”. As a result, BBVA does not intend to seek to modify Banco Sabadell’s current dividend policy, regardless of its ownership stake in Banco Sabadell. Similarly, BBVA expects to maintain its own dividend policy upon completion of the exchange offer, regardless of its ownership stake in Banco Sabadell and regardless of whether the intended merger is consummated.

The commercial strategy proposed to be carried out by Banco Sabadell is expected to be, in any event, a continuation of its current commercial strategy, except with both banks operating in a coordinated manner and with the operational improvements derived from forming part of a larger and more international banking group. Notwithstanding the foregoing, the development of the segments and business lines in which Banco Sabadell already has solid positions would continue to be incentivized.

Additionally, BBVA expects to enter into all necessary agreements with Banco Sabadell to facilitate their collaboration and the integration of their technological capabilities (through a complex process whose implementation would require additional time) in the areas in which operational improvements and efficiencies are possible. BBVA would also expect to enter into agreements with Banco Sabadell to allow their respective clients, particularly in the area of corporate banking, to enjoy the benefits of an increased global footprint, giving them access to a broader range of services and products, as well as to new opportunities for growth and development in global markets.

The geographical and business diversification of the BBVA Group would also improve regardless of whether the intended merger is consummated and regardless of BBVA’s ownership stake in Banco Sabadell following completion of the exchange offer. Finally, BBVA expects that Banco Sabadell, as part of the BBVA Group, would also benefit from increased access to debt markets, allowing for financing synergies.

The integration process would be less demanding in a scenario in which the intended merger is not consummated, and BBVA expects that in such a scenario, regardless of its ownership stake in Banco Sabadell following completion of the exchange offer, there would be fewer disposals of assets of Banco Sabadell (including in Banco Sabadell’s commercial network) than if the intended merger were consummated.

With respect to any other matters discussed under “—Plans for Banco Sabadell after the Exchange Offer” which have not been specifically addressed herein, BBVA does not expect its plans with respect to Banco Sabadell in the event of failing to consummate the intended merger to differ significantly from its expected plans with respect to Banco Sabadell if the merger is consummated.

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The foregoing analysis is based solely on publicly-available information regarding Banco Sabadell. As a result, any hypothesis and/or assumption included herein or used in making the statements made herein will need to be evaluated once BBVA, following completion of the exchange offer and the acquisition of control of Banco Sabadell, is able to review in detail complete information about Banco Sabadell.

All actions and decisions with respect to the above will be taken in compliance with applicable laws and in such a way that respects the minority shareholders of Banco Sabadell following completion of the exchange offer.

Plans Regarding Dividend Policy

Banco Sabadell has a dividend policy with a payout ratio of between 40% and 60% of net attributable profit. On May 6, 2024, Banco Sabadell made public its commitment to distribute to its shareholders, on an ongoing basis, any excess capital above what is required to maintain a 13% CET1 ratio (pro forma Basel 4). On July 23, 2024 Banco Sabadell made public its decision to set the 2024 payout ratio at 60% of its net attributable profit. BBVA has no plans to modify the dividend policy of Banco Sabadell after completion of the exchange offer.

During the last two fiscal years, remuneration for Banco Sabadell shareholders has consisted partly of cash and partly of share repurchases.

Moreover, BBVA will maintain its current dividend policy, which involves distributing between 40% and 50% of its consolidated net attributable profit annually, combining cash dividends and buybacks, and will remain committed to distributing any capital in excess of what is required to maintain a 12% CET1 ratio (subject to any restrictions imposed by, and the approval of, relevant supervisory bodies and BBVA’s corporate bodies, as applicable). This policy is typically implemented through the distribution of an interim dividend for the year (typically paid in October of each year) and a complementary dividend (payable after the end of each fiscal year in April of the following year after the approval by BBVA’s general shareholders’ meeting), that may combine cash distributions and share buybacks, all subject to the authorizations and approvals applicable at any given time.

Plans Regarding the Structure, Composition, and Functioning of the Management Bodies of Banco Sabadell and the Banco Sabadell Group; Plans Regarding the Appointment of Members to These Bodies by BBVA

BBVA intends to reflect the controlling interest it may achieve after completion of the exchange offer in the composition of the management, administration and control bodies of Banco Sabadell by appointing a number of directors corresponding to that controlling interest. BBVA also intends to reflect the controlling interest in the composition of the committees of the board of directors of Banco Sabadell to the extent legally possible.

In this regard, as long as Banco Sabadell remains a listed company controlled by BBVA, BBVA intends to reduce the size of Banco Sabadell’s board of directors to an appropriate number of members taking into account the circumstances after completion of the exchange offer, which in no event will be less than five members (amending, if necessary, Banco Sabadell’s bylaws to reduce the minimum number of members of the board of directors, which is currently comprised of 11 members).

As long as Banco Sabadell remains a listed company controlled by BBVA, BBVA shall ensure that Banco Sabadell maintains the number of independent directors necessary to comply with applicable legislation and the recommendations on good corporate governance of listed companies, in particular, with regard to the appointment of independent directors.

If Banco Sabadell’s shares are delisted from the Spanish Stock Exchanges as a result of the exercise of the squeeze-out right provided for in article 47 of the Spanish Takeover Regulation, BBVA will carry out the changes deemed appropriate to adapt the board of directors of Banco Sabadell to that of an unlisted company, subject to compliance with the regulations to which Banco Sabadell is subject as a credit institution.

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Plans Regarding Amendments to Banco Sabadell’s Bylaws

BBVA does not plan to amend Banco Sabadell’s bylaws, except for amendments that may be necessary to implement, to the extent applicable, the modification of the composition of Banco Sabadell’s board of directors particularly if the Banco Sabadell shares are delisted from the Spanish Stock Exchanges as a result of the consummation of a squeeze-out transaction.

Regulation

The ECB (together with the Bank of Spain through the Single Supervisory Mechanism) is BBVA’s and Banco Sabadell’s primary prudential regulator, and it will continue to be the primary prudential regulator of each of BBVA and Banco Sabadell in Spain after completion of the exchange offer.

Relief Requested from the SEC

Tender Offer Rules Exemptive Relief

BBVA has requested that the SEC provide exemptive relief from the provisions of Rule 14e-5 under the Exchange Act to permit BBVA to conduct certain trading activities in the Banco Sabadell shares prior to and during the conduct of, but outside of, the exchange offer. Subject to certain exceptions, Rule 14e-5 under the Exchange Act prohibits a person making a tender offer for an equity security, as well as such offeror’s dealer-manager, the advisers or affiliates of such offeror or dealer-manager and any person acting, directly or indirectly, in concert with such persons, from, directly or indirectly, purchasing or arranging to purchase any securities subject to a tender offer, or any securities immediately convertible into, exchangeable for or exercisable for such securities, except as part of such tender offer. This prohibition applies from the time of public announcement of the tender offer until the tender offer expires.

The SEC granted BBVA relief pursuant to BBVA’s request on May 29, 2024. Such relief permits, subject to certain enumerated conditions set forth in the relief letter, BBVA, BBVA’s subsidiaries and their respective affiliates and separately identifiable departments (collectively, the BBVA Prospective Purchasers) to purchase or arrange to purchase Banco Sabadell shares, and various derivatives related to such securities (collectively, Banco Sabadell Securities) prior to and during the conduct of, but outside of, the exchange offer in the ordinary course of their businesses. Such purchases or arrangements to purchase may not be carried out for the purpose of promoting or otherwise facilitating the exchange offer or for the purpose of creating actual, or apparent, active trading in, or maintaining, or affecting the prices of the Banco Sabadell Securities.

The ordinary-course trading activities included within the scope of the SEC’s relief from the provisions of Rule 14e-5 under the Exchange Act include (1) purchasing and selling Banco Sabadell Securities as part of the BBVA Prospective Purchasers’ ordinary course prime brokerage, portfolio and asset management activities and, except with respect to Banco Sabadell shares, as principal for their own accounts; (2) principal facilitation and unsolicited brokerage transactions involving purchases of Banco Sabadell Securities to facilitate or in response to customer orders, including clearance and settlement of these transactions (including buy-ins); (3) creation, trading and redemption of derivative products (including futures, forwards, options, repurchase agreements, warrants, swaps, cash-settled derivatives, debentures or similar instruments) and structured products (including structured notes, structured deposits, unit links or similar instruments), the performance of which is determined with reference to Banco Sabadell Securities or any index or basket of which they form a part; (4) hedging and covering activities, including dynamic hedging, short sales and other forms of hedging and covering; (5) index arbitrage activities; (6) program trades on behalf of clients, other than BBVA and Banco Sabadell; (7) stock borrowing and lending in Banco Sabadell Securities; (8) purchasing Banco Sabadell shares for purposes of delivering such securities upon exercise of call options or warrants or buying Banco Sabadell Securities in respect of the exercise of put options or warrants in connection with the activities described in (4) and (7) above; (9) buying and selling shares or units in collective investment schemes operated by any of the BBVA Prospective Purchasers, or by their associates, to clients of such BBVA Prospective Purchasers where the schemes in

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question may hold, acquire, or dispose of interests in Banco Sabadell Securities; (10) acting as trustee, nominee, or custodian for client positions in Banco Sabadell Securities (including executing instructions to liquidate the assets in a trust which may include Banco Sabadell Securities, and distributing the proceeds in accordance with the applicable law and contract), or for any other security mentioned in this list; (11) acting as executor or personal representative for a deceased client whose portfolio includes Banco Sabadell Securities (including executing instructions to liquidate the assets in an estate which may include Banco Sabadell Securities, and distributing the proceeds in accordance with the applicable law and contract); and (12) lending to clients and accepting a portfolio of securities including Banco Sabadell Securities as collateral for such loan.

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DESCRIPTION OF BBVA SHARES

The following summary of material considerations concerning the share capital of BBVA briefly describes certain material provisions of BBVA’s bylaws (estatutos) and Spanish law relating to the share capital of BBVA. Because it is a summary, it is not meant to be complete, is qualified by reference to the applicable Spanish laws and BBVA’s bylaws and does not contain all the information that may be important to you. Copies of BBVA’s bylaws are included as an exhibit to the Registration Statement of which this offer to exchange/prospectus forms a part.

General

All rights and obligations of BBVA’s shareholders are contained in BBVA’s bylaws and in Spanish law. In addition, pursuant to Royal Decree 84/2015 of February 13, implementing Law 10/2014, amendments of the bylaws of a bank are subject to notice or prior authorization of the Bank of Spain. Other requirements to amend BBVA’s bylaws are discussed under “—Attendance and Voting at Shareholders’ Meeting”.

As of the date of this offer to exchange/prospectus BBVA’s paid-in share capital is €2,824,009,877.85, represented by 5,763,285,465 BBVA shares (5,763,285,465 voting rights) with a par value of €0.49 per unit, all of them of the same class and series, fully subscribed and paid-up and represented through the book-entry trading system held by Iberclear and its participating entities.

At the ordinary general shareholders’ meeting of BBVA, held on March 18, 2022, BBVA’s shareholders delegated to BBVA’s board of directors the authority to issue up to 3,333,943,290 new BBVA shares (equal to half of BBVA’s share capital on March 18, 2022, the date of the authorization). The board of directors is authorized to exclude preemptive rights, in whole or in part, pursuant to the applicable provisions of the Spanish Corporation Law. The power to exclude preemptive rights is limited, such that the nominal amount of any share capital increases resolved or effectively carried out with the exclusion of preemptive subscription rights in use of this authority and those that may be resolved or carried out to cover the conversion of convertible issuances that may equally be made with the exclusion of preemptive subscription rights in use of the authority described below may not exceed the nominal maximum overall amount of 10% of BBVA’s share capital at the date of the authorization (equal to 666,788,658 new BBVA shares). The board of directors’ authorization to issue new BBVA shares expires on March 18, 2027. As of the date of this offer to exchange/prospectus, BBVA’s board of directors has not exercised this authorization.

In addition, at the ordinary general shareholders’ meeting of BBVA, held on March 18, 2022, BBVA’s shareholders delegated to BBVA’s board of directors, for a period of five years, the authority to issue securities convertible into newly issued BBVA shares other than contingent convertible securities (“CoCos”) up to the maximum overall amount of €6,000,000,000 or its equivalent in any other currency, delegating in turn the power to exclude preemptive subscription rights. However, this power is limited, such that the nominal amount of any share capital increases resolved or effectively carried out to cover the conversion of convertible issuances that may equally be made with the exclusion of preemptive subscription rights in use of this authority and those capital increases that may be resolved or carried out with the exclusion of preemptive subscription rights in use of the authority described above may not exceed the nominal maximum overall amount of 10% of BBVA’s share capital as of the date of the authorization (equivalent to 666,788,658 new BBVA shares). The board of directors’ authorization to issue securities convertible into newly-issued BBVA shares other than CoCos expires on March 18, 2027. As of the date of this offer to exchange/prospectus, BBVA’s board of directors has not exercised this authorization.

Finally, at the ordinary general shareholders’ meeting of BBVA, held on April 20, 2021, BBVA’s shareholders delegated to BBVA’s board of directors, for a period of five years, the authority to issue securities convertible into newly-issued BBVA shares whose conversion is contingent and which is intended to meet regulatory requirements for their eligibility as capital instruments, in accordance with the solvency regulations

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applicable from time to time (CoCos), up to the maximum overall amount of €8,000,000,000 or its equivalent in any other currency. BBVA’s board of directors is authorized to exclude preemptive rights, in whole or in part, pursuant to the applicable provisions of the Spanish Corporation Law. The board of directors’ authorization to issue securities convertible into newly-issued BBVA shares expires on April 20, 2026.

At the annual general shareholders’ meeting of BBVA, held on March 15, 2024, BBVA’s shareholders approved a reduction of BBVA’s share capital by up to 10% of BBVA’s share capital as of the date of such resolution, corresponding to 583,794,038 BBVA shares, with a nominal value of €0.49 each, subject to obtaining, where appropriate, the corresponding regulatory authorizations. On May 24, 2024, BBVA announced the partial execution of this share capital reduction resolution, through the reduction of BBVA’s share capital by €36,580,908.35 and the consequent redemption of 74,654,915 shares of €0.49 par value each acquired by BBVA pursuant to a share buyback program scheme and held as treasury shares.

Non-residents of Spain may hold and vote BBVA shares subject to the general restrictions set forth below. See “—Exchange Controls and Restrictions on Foreign Investments” and “—Restrictions on Acquisitions of BBVA Shares”.

Registry and BBVA’s Object and Purpose

BBVA is registered with the Commercial Registry of Bizkaia (Spain). Its registration number at the Commercial Registry of Bizkaia is volume 2,083, Company section folio 1, sheet BI-17-A, 1st entry. Its corporate purpose is to carry out all kinds of activities, operations, acts, contracts and services within the banking business or directly or indirectly related to it, which are permitted or not prohibited by the provisions in force and supplementary activities. Its corporate purpose also includes the acquisition, possession, use and disposal of securities, public offering of acquisition and sale of securities, as well as all types of holdings in any entity or company. BBVA’s corporate purpose is contained in Article 3 of BBVA’s bylaws.

Attendance and Voting at Shareholders’ Meetings

Each ordinary share entitles the shareholder to one vote. BBVA shares that are not paid-up in full are not entitled to vote, or to receive distributions of dividends or preemptive subscription rights. As of the date of the 2023 Form 20-F, all BBVA shares were fully paid-up.

Any BBVA share may be voted by proxy. Any shareholder who is entitled to attend a general shareholders’ meeting may be represented at such general shareholders’ meeting by another person, who need not necessarily be a shareholder. Proxies are valid for ordinary (also referred to as “annual”) general shareholders’ meetings and extraordinary general shareholders’ meetings and, except with respect to general powers of attorney, must be granted specifically with respect to each general shareholders’ meeting. A single shareholder may not be represented at a general shareholders’ meeting by more than one proxy, except under the circumstances provided in the law for intermediary entities. BBVA’s bylaws do not contain provisions related to cumulative voting.

Shareholders’ Meetings

Pursuant to BBVA’s bylaws and to the Spanish Corporation Law, general meetings of shareholders of BBVA may be ordinary or extraordinary.

Pursuant to the Spanish Corporation Law, ordinary general shareholders’ meetings shall necessarily be held within the first six months of each fiscal year, at which shareholders are requested to approve the annual accounts of the previous fiscal year, the corporate management for the previous fiscal year and the application of BBVA’s net income or loss. Other matters may also be voted on by shareholders during the ordinary general shareholders’ meetings if such items are included on the agenda or are allowed by law. Any other meetings of shareholders are

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considered to be extraordinary general shareholders’ meetings. Extraordinary general shareholders’ meetings may be called from time to time by BBVA’s board of directors at its discretion. BBVA’s board of directors will call extraordinary general shareholders’ meetings when (i) it believes such meetings to be necessary or advisable for BBVA’s interests; (ii) required by law or BBVA’s bylaws; or (iii) requested by shareholders representing at least 3% of BBVA’s share capital.

Shareholders representing at least 3% of BBVA’s share capital have the right to request the publication of a supplemental notice including one or more additional agenda items to the ordinary general shareholders’ meeting and to add new resolution proposals to the agenda of any general shareholders’ meeting, within the first five days following the publication of the agenda.

A universal shareholders’ meeting, at which 100% of the share capital is present or duly represented, is considered valid even if no notice of such meeting was given, and, with unanimous agreement, shareholders may consider any matter at such a meeting.

Convening Notice

According to BBVA’s bylaws and the Spanish Corporation Law, notices of all general shareholders’ meetings must be published (i) in the Official Gazette of the Commercial Registry (Boletín Oficial del Registro Mercantil) or in a widely circulated newspaper in Spain; (ii) on BBVA’s webpage; and (iii) on the webpage of the CNMV, at least one month prior to the date of the meeting or with the minimum prior notice period required by the Spanish Corporation Law from time to time. The notice must indicate the date, time and place of the meeting on the first convening and all the matters to be considered at the meeting, along with other information required by the Spanish Corporation Law. The notice may also include the date on which the meeting should be held on the second convening. At least 24 hours must elapse between the meeting on the first convening and the meeting on the second convening.

Place of Meeting

Notwithstanding legal provisions relating to universal general meetings and in accordance with BBVA’s bylaws, general shareholders’ meetings must be held in Bilbao, Spain, where BBVA has its registered office, on the date indicated in the convening notice. A universal shareholders’ meeting, at which 100% of the share capital is present or duly represented, may take place anywhere in the world.

Right of Attendance

The owners of 500 or more BBVA shares which are duly registered in the book-entry record for BBVA shares at least five days prior to the date of the general shareholders’ meeting and who continue to hold such shares until the date of the meeting are entitled to attend. The holders of fewer than 500 BBVA shares may aggregate their shares by proxy to represent at least 500 BBVA shares and appoint a representative for the meeting.

Quorums

Under BBVA’s bylaws and the Spanish Corporation Law, except as set forth below, general shareholders’ meetings will be duly constituted on the first convening if BBVA shareholders holding at least 25% of the voting share capital are present or represented by proxy. On the second convening of a general shareholders’ meeting, there is no quorum requirement.

Notwithstanding the above, according to the Spanish Corporation Law certain special events require a quorum of shareholders, present or represented by proxy, holding at least 50% of the voting share capital on first convening of the general shareholders’ meeting and no less than 25% of the voting share capital on the second

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convening of the general shareholders’ meeting. Those special events include the adoption of resolutions concerning the following: (i) increases or decreases in capital; (ii) in general, any modification of the bylaws; (iii) issuances of bonds (not applicable to BBVA except with respect to convertible bonds); (iv) limitation or suppression of the preemptive rights to subscribe for new shares; and (v) transformations, mergers, spin-offs and assignments of assets and liabilities.

Additionally, BBVA’s bylaws also require the presence, in person or represented by proxy, of two-thirds of the voting share capital on first convening or 60% of the voting share capital on the second convening, at general shareholders’ meetings in order to adopt resolutions that concern: (i) the change of the corporate purpose; (ii) the transformation of BBVA’s legal status; (iii) a full spin-off; (iv) the dissolution of BBVA; or (v) the amendment of the second paragraph of Article 25 of BBVA’s bylaws, which establishes this stricter quorum requirement.

Under Spanish law, the rights of shareholders may only be changed by an amendment to the bylaws that complies with the requirements described herein and under “—Attendance and Voting at Shareholders’ Meetings”.

Adoption of Resolutions and Majorities

Subject to the higher vote requirements described in the following paragraphs, the adoption of resolutions requires a simple majority vote at the general shareholders’ meeting, meaning that a resolution is adopted when the favorable votes exceed the votes against the adoption of the resolution.

The adoption of resolutions concerning the following: (i) increases or decreases in capital; (ii) in general, any modification of the bylaws; (iii) issuances of bonds (not applicable to BBVA except with respect to convertible bonds); (iv) limitation or suppression of the preemptive rights to subscribe for new shares; and (v) transformations, mergers, spin-offs and assignments of assets and liabilities, shall require the favorable vote of (a) a majority of the share capital present or represented at the meeting if such share capital present or represented exceeds 50% of the total share capital; or (b) if the share capital present or represented by proxy on the second convening constitutes less than 50% but more than 25% of the total share capital, the approval of two-thirds of the share capital present or represented by proxy at such meeting. In addition, the adoption of resolutions that require special quorums according to BBVA’s bylaws require a favorable vote of a majority of the share capital present or represented.

Validly adopted resolutions are binding on all the shareholders, including those who were absent, dissented or abstained from voting.

Any resolution adopted at the general shareholders’ meeting that is contrary to Spanish law, to BBVA’s bylaws or to the general shareholders’ meeting’s regulations, or that are deemed detrimental to BBVA’s interests to the benefit of one or more shareholders or third parties can be contested. Any director, any third party who proves a legitimate interest, and any shareholder who acquired such status before the resolution was adopted, as long as they represent at least 0.1% of the share capital of BBVA, may contest corporate resolutions. If the resolution is contrary to public order, it can be contested by any director, third party or any shareholder, even if he or she acquired such status after the resolution was adopted.

Appointment of Directors

Pursuant to BBVA’s bylaws, BBVA’s board of directors includes a minimum of five and a maximum of 15 directors who are elected by the general shareholders’ meeting (other than as described in the following paragraph regarding co-opted directors). Directors are appointed for a term of three years and may be re-elected one or more times for successive terms not exceeding three years.

Under the Spanish Corporation Law, in the event of a vacancy on BBVA’s board of directors, a shareholder or group of shareholders that owns an aggregate number of BBVA shares equal to or greater than the result of

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dividing the total capital stock by the number of directors on BBVA’s board of directors, has the right to appoint a corresponding proportion of the directors (rounded down to the nearest whole number) to the board of directors. Shareholders who exercise the right to appoint directors in accordance with the above may not vote on the appointment of other directors to BBVA’s board of directors. Under the Spanish Corporation Law, BBVA’s board of directors may also designate directors by interim appointment to fill vacancies (co-option). If a director has been co-opted, such director will have a term of office ending on the first general shareholders’ meeting held following such co-option. The general shareholders’ meeting may then ratify such director’s appointment for the term of office remaining of the director whose vacancy has been covered through co-option, or appoint such director for the term of office established under BBVA’s bylaws (currently, three years).

Under Spanish law, any new directors shall comply with the suitability criteria set forth in, among other applicable legislation, Law 10/2014, Royal Decree 84/2015, of February 13 and Bank of Spain Circular 2/2016, of February 2.

Preemptive Rights

Pursuant to the Spanish Corporation Law, shareholders have preemptive rights to subscribe for (i) new BBVA shares issued in the context of a capital increase involving cash contributions (except where the capital increase is due to the conversion of convertible securities into BBVA shares, the absorption of another company, or the absorption of all or part of the assets of another company by means of a spin-off of such company); and (ii) securities which are convertible into BBVA shares.

These preemptive rights may be completely or partially excluded in certain circumstances in accordance with the Spanish Corporation Law, following a resolution passed at the general shareholders’ meeting (which may, for example, authorize the board of directors to exclude preemptive rights). BBVA reserves the right to propose to the general shareholders’ meeting that such preemptive rights be completely or partially excluded in any future issuance of new BBVA shares or securities which are convertible into BBVA shares.

Dividends and Distributions

Shareholders have the right to participate in the distribution of corporate earnings. Pursuant to BBVA’s bylaws, dividends may be paid in cash or in kind.

Once the requirements under Spanish law and BBVA’s bylaws are satisfied, dividends may be distributed and charged to the year’s profit or unrestricted reserves, provided that the value of BBVA’s total net assets is not, or as a result of such dividend would not be, less than BBVA’s share capital. In addition, BBVA must take into account any applicable capital adequacy requirements and any recommendations on payment of dividends, and any other required authorization or restriction that may be applicable. Capital adequacy requirements are applied on both a consolidated and individual basis. See “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements, MREL and Resolution” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital” of the 2023 Form 20-F.

On November 18, 2021, BBVA communicated that its board of directors agreed to establish a dividend policy consisting of an annual distribution of between 40% and 50% of BBVA’s consolidated net attributable profit annually, compared to the previous policy of distributing between 35% and 40%. This policy will be implemented through the distribution of an interim dividend for the year and a final dividend, with the possibility of combining cash distributions with share buybacks, all subject to the relevant authorizations and approvals applicable at any given time. For additional information, see “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends” and “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends” of the 2023 Form 20-F.

“Final” dividends for a year are proposed by the board of directors to be approved by the annual general shareholders’ meeting following the end of the year to which they relate. Additionally, BBVA’s board of

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directors may approve the payment of “interim” dividends on account of the year’s end profits following the fulfillment of certain requirements under Spanish law, which payment is endorsed by the annual general shareholders’ meeting. Interim and final dividends are payable to shareholders of record on the record date for the dividend payment. Any unclaimed cash dividends revert to BBVA five years after declaration.

In addition, upon a liquidation, BBVA’s shareholders have the right to participate in the distribution of any net assets.

Form and Transfer

BBVA shares are registered in book-entry form and are indivisible. Joint holders must nominate one person to exercise their rights as shareholders, though joint holders are jointly and severally (solidariamente) liable for all obligations arising from their status as shareholders.

Iberclear maintains the central registry of BBVA shares which reflects (i) one or several proprietary accounts which show the balances of the participating entities’ (entidades participantes) proprietary accounts; (ii) one or several general third-party accounts that show the overall balances that the participating entities hold for third parties; (iii) individual accounts opened in the name of the owner, either an individual or legal person; and (iv) individual special accounts of financial intermediaries which use the optional procedure of settlement of orders. Each participating entity, in turn, maintains the detailed records of the owners of the shares held in their general third-party accounts.

Transfers of BBVA shares quoted on the Spanish Stock Exchanges must be made by book-entry registry or delivery of evidence of title to the buyer, through or with the participation of a member of the Spanish Stock Exchanges that is an authorized broker or dealer. Transfers of BBVA shares may also be subject to certain fees and expenses.

Reporting Requirements

As BBVA shares are listed on the Spanish Stock Exchanges, the acquisition or disposition of BBVA shares by BBVA shareholders must be reported within four Spanish business days of the acquisition or disposition to BBVA and the CNMV where:

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in the case of an acquisition, the acquisition results in that person or group holding 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of BBVA’s total voting rights; or

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in the case of a disposal, the disposition reduces shares held by a person or group below a threshold of 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of BBVA’s total voting rights.

The reporting requirements apply not only to the purchase or transfer of shares, but also to those transactions in which, without a purchase or transfer, the proportion of voting rights of an individual or legal entity reaches, exceeds or falls below the threshold that triggers the obligation to report as a consequence of a change in the total number of voting rights of BBVA on the basis of the information reported to the CNMV and disclosed by it.

Regardless of the actual ownership of the shares, any individual or legal entity with a right to acquire, transfer or exercise voting rights granted by the shares, and any individual or legal entity who owns, acquires or transfers, whether directly or indirectly, other securities or financial instruments which grant a right to acquire shares with voting rights, will also have an obligation to notify the company and the CNMV of the holding of a significant stake in accordance with applicable Spanish regulations. In addition, cash settled instruments creating long positions on underlying listed shares (such as BBVA’s) shall be disclosed if the specified shareholding

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thresholds are reached or exceeded. Cash holdings and holdings derived from financial instruments shall be aggregated for disclosure purposes. A disclosure exemption for shareholding positions held by financial entities in their trading books as a result of the securities administration and custody services rendered by such financial entities is available pursuant to Article 33.2 of the Spanish Royal Decree 1362/2007. In the event that the individual or legal entity entering into the relevant transaction is a non-Spanish resident, notice must also be given to the Spanish Registry of Foreign Investments (Registro de Inversiones Exteriores) of the Ministry of Industry, Trade and Tourism (Ministerio de Industria, Comercio y Turismo). See “—Exchange Controls and Restrictions on Foreign Investment” for additional information, including on certain temporary measures which have been adopted in connection with foreign direct investments.

In the case of individuals or legal entities resident in jurisdictions designated as tax havens or in countries or territories levying no taxes or with which Spain has no effective exchange of tax information, the threshold that triggers the obligation to disclose the acquisition or disposition of shares is reduced to 1% (and successive multiples of 1%).

Additionally, since BBVA is a credit entity, any person who intends to acquire a significant participation in BBVA’s share capital must comply with certain obligations imposed by the Bank of Spain. See “—Restrictions on Acquisitions of BBVA Shares”.

Requirements Applicable to Purchases by BBVA and its Directors and Senior Managers

Acquisition of Own Shares

Article 77.1 of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms establishes that a credit institution (such as BBVA) shall obtain the prior permission from its competent authority (the ECB in the case of BBVA) in order to repurchase its own shares.

Additionally, BBVA is required to report to the CNMV any acquisition by BBVA or any of its affiliates, of BBVA’s own shares which, together with all other acquisitions since the last notification, reaches or exceeds 1% of BBVA’s share capital (irrespective of whether any own shares have been sold in the same period). In such circumstances, the notification must be made within four Spanish business days and include the number of shares acquired since the last notification (detailed by transaction), the number of shares sold (detailed by transaction) and the resulting net holding of treasury shares.

On January 30, 2024, and in relation with the shareholders’ ordinary distribution for 2023, BBVA announced its intention to execute a €781 million share buy-back program, subject to obtaining the corresponding regulatory authorizations and to the communication of the specific terms and conditions of the share buy-back program before its execution.

Acquisition of Shares by BBVA Directors and Senior Managers

Each member of BBVA’s board of directors, as well as persons closely associated to them, shall notify BBVA and the CNMV of every transaction conducted on their own account relating to BBVA shares or debt instruments issued by BBVA or to derivatives or other financial instruments linked thereto, according to Article 19 of Regulation (EU) n.º 596/2014, of the European Parliament and of the Council, of April 16, 2014, on market abuse, within three Spanish business days after the date of the transaction.

Senior managers of BBVA, as well as persons closely associated to them, are also subject to the abovementioned reporting rules.

Net Short Positions

In accordance with Regulation (EU) No. 236/2012 of the European Parliament and of the Council of March 14, 2012 on short selling and certain aspects of credit default swaps (as further supplemented by several

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delegated regulations regulating technical aspects necessary for its effective enforceability and to ensure compliance with its provisions), net short positions on shares listed on the Spanish Stock Exchanges (including BBVA shares) equal to, or in excess of, 0.2% of the relevant entity’s share capital and any increases or reductions thereof by 0.1% are required to be disclosed to the CNMV. If the net short position reaches 0.5%, and also at every 0.1% above that, the CNMV will disclose the net short position to the public.

In response to COVID-19, on March 16, 2020, the European Securities and Markets Authority (“ESMA”) lowered the aforementioned threshold from 0.2% to 0.1%, requiring net short position holders to report positions of 0.1% and above. This measure was renewed on September 18, 2020 and on December 17, 2020 until March 19, 2021. The European Commission adopted the decision to permanently lower the threshold from 0.2% to 0.1% on September 27, 2021, which decision was published in the Official Journal on January 11, 2022. Additionally, in line with other European supervisors, on March 16, 2020, the CNMV banned net short positions in shares admitted to trading to Spanish trading venues for which the CNMV is the competent authority as well as to all related instruments relevant for the calculation of the net short position. The CNMV ban became ineffective on May 18, 2020.

The notification or disclosure mentioned above shall be made not later than at 15:30 (CET) on the trading day following the day when the relevant threshold was reached, exceeded or fallen below.

Notification is mandatory even if the same position has already been notified to the CNMV in compliance with transparency obligations previously in force.

The information to be disclosed is set out in Table 1 of Annex I of Delegated Regulation 826/2012, according to the format approved as Annex II of such Regulation. The information will be published, where appropriate, on a web page operated or supervised by the CNMV.

Moreover, pursuant to Regulation 236/2012, where the CNMV considers that (i) there are adverse events or developments that constitute a serious threat to financial stability or to market confidence (for example, serious financial, monetary or budgetary problems, which may lead to financial instability or unusual volatility causing significant downward spirals in any financial instrument); and (ii) the measure is necessary and will not be disproportionately detrimental to the efficiency of financial markets in view of the advantages sought, it may, following consultation with the ESMA, take any one or more of the following measures:

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impose additional notification obligations by either (a) reducing the thresholds for the notification of net short positions in relation to one or several specific financial instruments; and/or (b) requesting the parties involved in the lending of a specific financial instrument to notify any change in the fees requested for such lending; and

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restrict short selling activity by either prohibiting or imposing conditions on short selling.

In addition, according to Regulation 236/2012, where the price of a financial instrument has fallen significantly during a single day in relation to the closing price on the previous trading day (10.0% or more in the case of a liquid share such as a BBVA share), the CNMV may prohibit or restrict short selling of financial instruments for a period not exceeding the end of the trading day following the trading day on which the fall in price occurs.

Finally, Regulation 236/2012 also vests powers to ESMA in order to take measures similar to the ones described above in exceptional circumstances, when the purpose of these measures is to deal with a threat affecting several EU member states and the competent authorities of these member states have not taken adequate measures to address it.

Change of Control Provisions and Tender Offers

Certain antitrust regulations may delay, defer or prevent a change of control of BBVA in the event of a merger, acquisition or corporate restructuring. In Spain, the application of both Spanish and European antitrust

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regulations requires that prior notice of domestic or cross-border merger transactions be given in order to obtain a “non-opposition” ruling from antitrust authorities.

Spanish regulation of takeover bids may also delay, defer or prevent a change of control of BBVA or any of its subsidiaries in the event of a merger, acquisition or corporate restructuring. Act 6/2023, of March 17, on the Securities Markets and Investment Services and the Spanish Takeover Regulation set forth the Spanish rules governing takeover bids. In particular:

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a bidder must make a tender offer in respect of 100% of the issued share capital of a target company if:

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it acquires an interest in shares which (taken together with shares in which persons acting in concert with it are interested) carry 30% or more of the voting rights of the target company. If this threshold is reached by an acquiring shareholder due to a variation of the total number of voting rights of a target company which has issued loyalty shares in the terms described in article 527 ter et seq. of the Spanish Corporation Law, the acquiring shareholder is entitled not to make such tender offer in case it sells the shares necessary to fall below such 30% threshold in the subsequent three months, such acquiring shareholder waives its loyalty voting rights exceeding such 30% threshold or obtains a waiver issued by the CNMV;

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it acquires an interest in shares which (taken together with shares in which persons acting in concert with it are interested) carry less than 30% of the voting rights but enable the bidder to appoint a majority of the members of the target company’s board of directors; or

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it held 30% or more but less than 50% of the voting rights of the target company on the date the law came into force, and subsequently:

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acquires, within 12 months, an additional interest in shares which carries 5% or more of such voting rights;

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acquires an additional interest in shares so that the bidder’s aggregate interest carries 50% or more of such voting rights; or

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acquires an additional interest in shares which enables the bidder to appoint a majority of the members of the target company’s board of directors;

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if a bidder’s actions do not fall into the categories described above, such acquisition may qualify as an “a priori” or partial tender offer (i.e., in respect of less than 100% of the issued share capital of a target company), in which case such bidder would not be required to make a tender offer in respect of 100% of the issued share capital of a target company;

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the board of directors of a target company is exempt from the rule prohibiting certain board interference with a tender offer (the “passivity rule”), provided that (i) it has been authorized by the general shareholders’ meeting to take action or enter into a transaction which could disrupt the offer; or (ii) it has been released from the passivity rule by the general shareholders’ meeting vis-à-vis bidders that are not domiciled in Spain and whose boards of directors are not subject to an equivalent passivity rule;

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defensive measures included in a listed company’s bylaws and transfer and voting restrictions included in agreements among a listed company’s shareholders will remain in place whenever the company is the target of a tender offer unless the general shareholders’ meeting resolves otherwise (in which case any shareholders whose rights are diluted or otherwise adversely affected may be entitled to compensation); and

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if as a result of a tender offer in respect of 100% of the issued share capital of a target company the bidder acquires an interest in shares representing at least 90% of the voting rights of the target company and the offer has been accepted by investors representing at least 90% of the voting rights of the target company (provided such voting rights are distinct from those already held by the bidder), the

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bidder may force the holders of the remaining share capital of the company to sell their shares. The minority holders shall also have the right to force the bidder to acquire their shares under these same circumstances.

As further described below in “—Restrictions on Acquisitions of BBVA Shares”, since BBVA is a bank, it is necessary to obtain approval from the Bank of Spain in order to acquire a number of shares considered to be a significant participation under Law 10/2014. Also, any agreement that contemplates BBVA’s merger with another credit entity requires the authorization of the Ministry of Economic Affairs and Digital Transformation (Ministerio de Asuntos Económicos y Transformación Digital). This could delay, defer or prevent a change of control of BBVA or any of its subsidiaries that are credit entities in the event of a merger.

Exchange Controls and Restrictions on Foreign Investments

Exchange Controls

In 1991, Spain adopted the EU Standards for free movement of capital and services. As a result, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation as to amount, subject to applicable taxes. See “Item 10. Additional Information—Taxation” of the 2023 Form 20-F.

Pursuant to Royal Decree 664/1999, of April 23 (repealed by RD 571/2023), on the Applicable rules to Foreign Investments, foreign investors may freely invest in shares of Spanish companies except in the case they fall within the scope of article 7 bis of Law 19/2003, enacted in March 2020, Sole Transitional Provision of Royal Decree-Law 34/2020, of November 17 (as amended by article 62 of Royal Decree-Law 20/2022, of December 27), or-only with respect to investments in the defense sector-article 11 of Royal Decree 664/1999, of April 23. For information on certain additional regulation applicable to foreign direct investments, see “—Restrictions on Foreign Investments” below. Likewise, Royal Decree 664/1999, of April 23, and Law 19/2003, on exchange controls and foreign transactions, required notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy Affairs and Digital Transformation for administrative statistical and economical purposes. Shares in listed Spanish companies acquired or held by foreign investors needed to be reported to the Spanish Registry of Foreign Investments by the depositary bank or relevant Iberclear member. When a foreign investor acquires shares that are subject to the reporting requirements of the CNMV regarding significant stakes, notice must be given directly by the foreign investor to the relevant authorities.

The Spanish Government approved Royal Decree 571/2023, of July 4, on foreign investments (the “New Spanish FDI Regulations”), which repeals Royal Decree 664/1999 and develops Law 19/2003. The New Spanish FDI Regulations came into force on September 1, 2023, and their provisions apply to FDI (as defined below) filings submitted from that date onwards (ongoing FDI filings as of such date are governed by the former regulations). Royal Decree 571/2023 was further developed by Order ECM 57/2024, of January 29, setting forth the templates for the declarations in foreign investments.

These new Spanish FDI Regulations set out: (i) post-closing notification obligations for foreign investments in Spain for statistical purposes; (ii) post-closing notification obligations for Spanish investments in foreign countries for statistical purposes; and (iii) most significantly, amended and developed rules for Spanish FDIs screening mechanisms (“Screening Mechanisms”), under which the closing of specific FDIs requires prior authorization through both EU-law based general FDI screening, regulated in article 7 bis of Law 19/2003 (“General FDI Screening Mechanism”), and sector-specific screening (which applies to activities directly related to Spanish National Defense, the acquisition of real estate for diplomatic purposes by non-EU member states and investments in activities directly related to weapons, cartridges, pyrotechnic items and civil use explosives or other material to be used by the State Security Forces and Bodies), which is a new mechanism.

These Screening Mechanisms do not prohibit foreign investments in Spain; rather, they are mandatory authorization procedures to be carried out prior to closing specific transactions. In particular, the General FDI

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Screening Mechanism brings the Spanish screening framework in line with that set out in the EU laws, in particular, Regulation (EU) 2019/452, which allows EU member states to adopt mechanisms to screen FDIs in the EU. The banking activity itself is not expressly mentioned in the FDI sectors subject to the General FDI Screening Mechanism, which are the following: Critical infrastructure, Critical and dual-use technologies, Key technologies for industrial leadership and training, technologies developed pursuant to projects or programs of particular interest to Spain, supply of critical inputs, sectors with access to or control to sensitive information and Media.

Moreover, investments by foreigners domiciled in enumerated tax haven jurisdictions, under Royal Decree 1080/1991, are subject to special reporting requirements.

Restrictions on Foreign Investments

Exchange controls and foreign investments are regulated under Law 19/2003, of July 4 (“Law 19/2003”), as amended pursuant to Royal Decree-Law 8/2020, of March 17, Royal Decree-Law 11/2020, of March 31 and Royal Decree-Law 34/2020, of November 17. Foreign investments are generally liberalized unless they fall within the scope of article 7 bis of Law 19/2003, enacted in March 2020, Sole Transitional Provision of Royal Decree-Law 34/2020, of November 17, or-only with respect to investments in the defense sector-article 11 of Royal Decree 664/1999 (repealed by RD 571/2023), of April 23.

Article 7 bis of Law 19/2003 establishes a screening mechanism for certain investments made by non-EU and non-EFTA residents (“foreign investors”), based on public order, public health and public security reasons (the “Screening Mechanism”). The Screening Mechanism aligns part of the Spanish foreign investment legal framework with Regulation (EU) 2019/452 of March 19, 2019 establishing a framework for the screening of foreign direct investments into the EU. Certain provisions of Regulation (EU) 2019/452-such as the list of sectors affecting public order and public security or the definition of state-owned enterprises and other similar investors-are mirrored in the regulations establishing the Screening Mechanism.

In addition, and according to Sole Transitional Provision of Royal Decree-Law 34/2020, of November 17 (as amended first by article 4 of Royal Decree-Law 27/2021, of November 23, and ultimately by article 62 of Royal Decree-Law 20/2022, of December 27), effective November 19, 2020 and until December 31, 2024, the following persons will also be deemed to be foreign investors, provided they invest in listed companies or the investment value exceeds €500 million for investments in private – non-listed – companies:

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EU and European Free Trade Association (“EFTA”) residents in countries other than Spain; and

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Spanish residents beneficially owned by EU or EFTA residents in countries other than Spain, that is, those in which an EU or EFTA resident other than in Spain ultimately owns or controls more than 25% of the share capital or voting rights of, or otherwise exercises control over, the Spanish resident.

Foreign direct investments (“FDI”) are:

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investments that result in a foreign investor reaching a stake of at least 10% of the share capital of a Spanish company; and

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any corporate transaction, business action or legal transaction which confers control of a Spanish company.

Not all foreign direct investments are subject to the Screening Mechanism. Investors are subject to the Screening Mechanism only if they qualify as FDI and the investment is made in one of the critical sectors mentioned in article 7 bis of Law 19/2003, is made pursuant to what is foreseen in Sole Transitional Provision of Royal Decree-Law 34/2020, of November 17, or-only where the investor is a Non-UE or non-EFTA investor-by investors that meet certain subjective criteria regardless of the business of the target.

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Foreign direct investments by the following “foreign investors” are also subject to the Screening Mechanism, regardless of the business of the target:

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Investors directly or indirectly controlled by the government, including state bodies or armed forces, of a non-EU/EFTA country.

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Investors that have already made an investment affecting national security, public order or public health in another EU member state, including an investment in any of the abovementioned sectors.

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Investors subject to ongoing judicial or administrative proceedings for engaging in illegal or criminal activities.

Foreign direct investments by the following non-EU and non-EFTA investors are also subject to the Screening Mechanism, regardless of the business of the target:

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Investors directly or indirectly controlled by a non-EU and non-EFTA government, including state bodies, armed forces or sovereign wealth funds; the possibility of exercising decisive influence as a result of an agreement or through the ownership of shares or interests in another person (directly or indirectly) is deemed to constitute “control” for these purposes.

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Investors that have already made an investment affecting national security, public order or public health in another EU member state, including an investment in any of the abovementioned sectors.

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If there is a serious risk that the investor engages in illegal or criminal activities affecting national security, public order or public health in Spain.

Foreign direct investments described above shall be subject to prior administrative authorization granted by the relevant Spanish Authority, in accordance with the administrative conditions established.

In addition to the above, pursuant to Council Regulation (EU) 2022/318 of February 25, 2022, it shall be prohibited to sell euro denominated transferable securities issued after April 12, 2022 or units in collective investment undertakings providing exposure to such securities, to any Russian national or natural person residing in Russia or any legal person, entity or body established in Russia. This restriction shall not apply to nationals of an EU member state or natural persons having a temporary or permanent residence permit in an EU Member State.

See also “—Restrictions on Acquisitions of BBVA Shares” below.

Restrictions on Acquisitions of BBVA Shares

BBVA’s bylaws do not provide any restrictions on the ownership of BBVA shares. Because BBVA is a Spanish bank, however, the acquisition or disposition of a significant participation of BBVA shares is subject to certain restrictions. Such restrictions may impede a potential acquirer’s ability to acquire BBVA shares and gain control of BBVA. See also “—Exchange Controls and Restrictions on Foreign Investments”.

Pursuant to Law 10/2014, any individual or corporation, acting alone or in concert with others, intending to directly or indirectly acquire a significant holding in a Spanish financial institution (as defined in Article 16 of Law 10/2014) or to directly or indirectly increase its holding in such way that either the percentage of voting rights or of capital owned were equal to or more than any of the thresholds of 20%, 30% or 50%, or by virtue of the acquisition, might take control over the financial institution, must first notify the Bank of Spain. For the purpose of Law 10/2014, a significant participation is considered to be 10% of the outstanding share capital or voting rights of a financial institution or a lower percentage if such holding allows for the exercise of a significant influence. Secondary legislation will specify when “significant influence” exists; in any case, according to Royal Decree 84/2015, of February 13, the capacity to appoint or dismiss a board member will be considered “significant influence”.

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The Bank of Spain will be responsible for evaluating the proposed transaction, in accordance with the terms established by Law 10/2014 (as stated in Article 18.1 of Law 10/2014) with a view to guaranteeing the sound and prudent operation of the target financial institution. The Bank of Spain will then submit a proposal to the ECB, which will be in charge of deciding upon the proposed transaction in the term of 60 Spanish business days after the date on which the notification was received.

Any acquisition made without such prior notification, or conducted before 60 Spanish business days have elapsed since the date of such notification, or made in circumstances where the ECB has objected, will produce the following results:

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the acquired shares will have no voting rights;

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if considered appropriate, the target bank may be taken over by the relevant regulator or its directors replaced in accordance with Title III of Law 10/2014; and

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a sanction may be imposed under Title IV of Law 10/2014.

Any individual or institution that intends to sell its significant participation in a bank or reduce its participation below the abovementioned percentages, or which, because of such sale, will lose control of the entity, must give prior notice to the Bank of Spain, indicating the amount it intends to sell and the period in which the transaction is to be executed. Non-compliance with this requirement may result in sanctions.

Furthermore, pursuant to Law 10/2014, any natural or legal person, or such persons acting in concert, who has acquired, directly or indirectly, a holding in a Spanish bank so that the proportion of the voting rights or of the capital held reaches or exceeds 5%, must immediately notify in writing the Bank of Spain and the relevant Spanish bank, indicating the size of the acquired holding.

Lastly, Law 19/2003, of July 4, on the legal regime of capital circulation and overseas economic transactions (Ley 19/2003, de 4 de julio, sobre régimen jurídico de los movimientos de capitales y de las transacciones económicas con el exterior), as amended, among others, pursuant to Royal Decree-law 8/2020, of March 17, Royal Decree-law 11/2020, of March 31, Royal Decree-law 34/2020, of November 17 and Royal Decree-law 20/2022 of December 27, stipulates the suspension of the liberalization regime of foreign direct investment in Spain for investments made by non-residents in the EU or in the EFTA in Spanish entities of certain sectors, where the resulting stake of the relevant investor is at least 10% of the share capital of the corresponding Spanish entity, or whereby as a consequence of the relevant transaction the investor effectively acquires control of the relevant Spanish entity. This suspension applies to investments made in certain sectors (the banking and finance sector not being specifically included), to investments whereby the foreign investor is directly or indirectly controlled by a third-country government or public body, as well as if the Spanish government considers that the relevant investment may affect public safety, public order or public health, and is subject to certain limitations and simplifications. This suspension implies that none of the aforementioned investments may be made without Spanish governmental authorization and will apply until the Spanish Council of Ministers lifts such suspension. Moreover, Royal Decree-law 20/2022, of December 27, has extended the regime of suspension of liberalization of certain foreign direct investments in Spain regulated in paragraphs 2 and 5 of Article 7 bis of Law 19/2003, of July 4, 2003, until December 31, 2024, to foreign direct investments in companies listed in Spain, or in unlisted companies if the value of the investment in Spain exceeds €500 million, made by residents of other countries of the EU and the EFTA.

Shareholders’ Agreements

The Spanish Securities Market Law and the Spanish Corporation Law require parties to disclose certain types of shareholders’ agreements that affect the exercise of voting rights at a general shareholders’ meeting or contain restrictions or conditions on the transferability of shares or bonds that are convertible or exchangeable into shares. If any shareholders enter into such agreements with respect to BBVA’s shares, they must disclose the

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execution, amendment or extension of such agreements to BBVA and the CNMV and file such agreements with the appropriate Commercial Registry. Failure to comply with these disclosure obligations renders any such shareholders’ agreement unenforceable and constitutes a material infringement of the Spanish Securities Market Law. In particular, a shareholders’ agreement will have no effect with respect to the regulation of the right to vote in general shareholders’ meetings and restrictions or conditions on the free transferability of shares and bonds convertible into shares until such time as the aforementioned disclosure and filing are made.

Upon request by the interested parties, the CNMV may waive the requirement to disclose and file a shareholder’s agreement when making the shareholders’ agreement public could cause harm to the affected company.

Payment of Taxes

Holders of BBVA shares are responsible for any taxes or other governmental charges payable on their BBVA shares, including any taxes payable on transfer. The paying agent or the transfer agent, as the case may be, may, and upon instruction from BBVA, will:

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refuse to effect any registration of transfer of such BBVA shares or any split-up or combination thereof until such payment is made; or

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withhold or deduct from any distributions on such BBVA shares or sell for the account of the holder thereof any part or all of such BBVA shares (after attempting by reasonable means to notify such holder prior to such sale), and apply, after deduction for its reasonable expenses incurred in connection therewith, the net proceeds of any such sale in payment of such tax or other governmental charge, the holder of such BBVA shares remaining liable for any deficiency.

Exercise of Spanish Bail-in Power and Other Resolution Tools

BBVA shares (including those represented by BBVA ADSs) may be subject to the exercise of the Spanish Bail-in Power (as defined in the 2023 Form 20-F) by the Spanish Resolution Authority (as defined in the 2023 Form 20-F), which may include and result in any of the following, or some combination thereof, among others: (i) the cancellation of such securities; (ii) the transfer of such securities to creditors of BBVA; (iii) the conversion of other securities or obligations of BBVA into BBVA shares thereby diluting the shareholding of the holders of BBVA shares; and (iv) the variation of the terms of such securities or the rights of the holders thereunder, including to give effect to the exercise of the Spanish Bail-in Power by the Spanish Resolution Authority. See “Item 3. Key Information—Risk Factors—Regulatory, Tax, Compliance and Reporting Risks—The Group is subject to a comprehensive regulatory and supervisory framework, including resolution regulations, which could have a material adverse effect on its business, financial condition and results of operations” and “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements, MREL and Resolution” in the 2023 Form 20-F.

Non-Voting, Redeemable and Privileged Shares

BBVA’s bylaws authorize BBVA to issue ordinary, non-voting, redeemable and privileged shares. As of the date of this offer to exchange/prospectus, BBVA has no non-voting, redeemable or privileged shares outstanding. The provisions of BBVA’s bylaws relating to such shares are described below.

Privileged Shares

BBVA may issue shares that confer some privilege over BBVA shares under legally established terms and conditions, complying with the formalities prescribed for amending BBVA’s bylaws.

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Redeemable Shares

BBVA may issue shares that are redeemable at BBVA’s or the holders’ request, or both, for a nominal amount no greater than one quarter of BBVA’s share capital. Redemption of any such shares may only occur according to the terms set forth when they are issued. If the redemption right was attributed exclusively to us, BBVA may not enforce it until three years have elapsed since the issue. Redeemable shares must be fully paid-up at the time of their subscription.

The redemption of redeemable shares must be charged to earnings or to free reserves or be made with the proceeds of a new share issuance made under a resolution from the general shareholders’ meeting or, as the case may be, from the board of directors, for the purpose of financing the redemption transaction. If the redemption of these shares is charged to earnings or to free reserves, BBVA must set up a reserve for the amount of the nominal value of the shares redeemed. If the redemption is not charged to earnings or free reserves or made with the proceeds of the issuance of new shares, it may only be carried out under the requirements established for the reduction of share capital by refunding contributions.

Non-Voting Shares

BBVA may issue shares with no voting rights within legally established limits. Holders of such shares are entitled to receive a minimum fixed or variable annual dividend, as resolved by the general shareholders’ meeting and/or the board of directors at the time of deciding to issue the shares. In addition, the right of non-voting shares to accumulate unpaid dividends whenever funds to pay dividends are not available, any preemptive subscription rights associated with non-voting shares, and the ability of holders of non-voting shares to recover voting rights must be established at the time of deciding to issue the shares. Once the minimum dividend has been agreed upon, holders of non-voting shares will be entitled to the same dividend as holders of BBVA shares.

Certain Other Provisions Regarding Shareholders’ Rights

BBVA’s bylaws do not contain any provisions relating to sinking funds or potential liability of shareholders to further capital calls by us.

Certain Powers of BBVA’s Board of Directors

Provisions regarding directors are generally contained in BBVA’s bylaws. In addition, BBVA’s board of directors’ regulations govern the internal procedures and operation of BBVA’s board of directors and its committees and directors’ rights and duties.

BBVA’s board of directors’ regulations prohibit a director from deliberating or voting on resolutions or decisions in which he or she or a related party may have a direct or indirect conflict of interest (unless such decisions are related to the appointment or removal of positions on the management body). BBVA’s board of directors’ regulations require that directors resign from their position upon reaching 75 years of age by submitting their resignation at the first meeting of the board of directors to be held after the general shareholders’ meeting approving the accounts for the financial year in which they reach said age. Directors are not required to hold BBVA shares in order to be appointed as such.

Information about directors’ compensation, including remuneration in shares, is included under “Item 6. Directors, Senior Management and Employees—Compensation” in the 2023 Form 20-F.

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COMPARISON OF RIGHTS OF HOLDERS OF BBVA SHARES AND BANCO SABADELL SHARES

BBVA is a public limited company organized under the laws of Spain and is governed by the Spanish Corporation Law. As BBVA is a company organized under the laws of Spain, the rights of holders of BBVA shares are governed by Spanish law and by BBVA’s bylaws (estatutos). See “Description of BBVA Shares” in this offer to exchange/prospectus for more information about the BBVA shares.

Similarly, Banco Sabadell is a public limited company organized under the laws of Spain and is governed by the Spanish Corporation Law. As Banco Sabadell is a company organized under the laws of Spain, the rights of holders of Banco Sabadell shares are governed by Spanish law and by Banco Sabadell’s bylaws (estatutos).

Set forth below is a discussion of the material differences between the rights of holders of BBVA shares and the rights of holders of Banco Sabadell shares as of the date of this offer to exchange/prospectus. The following discussion is qualified in its entirety by reference to the Spanish Corporation Law, the Spanish Securities Market Law, the bylaws of BBVA and the bylaws of Banco Sabadell. The information relating to Banco Sabadell included below summarizes certain provisions of the Banco Sabadell bylaws publicly available on Banco Sabadell’s website.


Banco Sabadell		BBVA

Share Capital

Banco Sabadell has a share capital of €680,027,680.875, represented by 5,440,221,447 Banco Sabadell shares, with a par value of €0.125 each, all of such shares being of the same class and series, fully-subscribed and paid-up, represented by book entries.		BBVA has a share capital of €2,824,009,877.85, represented by 5,763,285,465 BBVA shares, with a par value of €0.49 each, all of such shares being of the same class and series, fully-subscribed and paid-up, represented by book entries.

Authorized Capital Stock

The board of directors of Banco Sabadell has the faculty to execute cash capital increases of Banco Sabadell in up to the maximum amount established by law, which may be executed from time to time by its board of directors within five years from the date of the resolution.		On March 18, 2022, at the general shareholders’ meeting of BBVA held in Bizkaia, Spain, the shareholders of BBVA resolved to delegate in the board of directors of BBVA the faculty to execute cash capital increases of BBVA in up to 50% of the outstanding BBVA shares at the time of the resolution, which may be executed from time to time by its board of directors within five years from the date of the resolution. In addition, on July 5, 2024 at the extraordinary general shareholders’ meeting of BBVA held in Bizkaia, Spain, the shareholders of BBVA approved a capital increase of up to 50% of the outstanding BBVA shares at the time of the resolution for the issuance of BBVA shares to the holders of Banco Sabadell shares. The general shareholders’ meeting resolution expressly provided for the possibility of incomplete subscription in the event that the maximum amount of 1,126,339,845 new BBVA shares, of €0.49 par value each, to be issued cannot be fully-subscribed and paid-up, specifying that in such an event the share capital will be increased to the extent appropriate. The general shareholders’ meeting resolution authorized the board of directors

153


		of BBVA (i) to establish the conditions of the capital increase as to all matters not provided for by the general shareholders’ meeting, which includes the determination of the number of BBVA shares within that limit by which the capital would be increased; (ii) to effect the amendment of Article 5 of BBVA’s bylaws, to conform it to the new amount of share capital and the resulting number of BBVA shares; and (iii) to delegate such authority to the BBVA executive committee.

Voting Rights

Banco Sabadell’s bylaws set forth that every 1,000 Banco Sabadell shares entitle the relevant holder to one vote at Banco Sabadell’s general shareholders’ meeting. Currently, 5,440,221 voting rights correspond to the 5,440,221,447 Banco Sabadell shares issued by Banco Sabadell.		BBVA’s bylaws set forth that each BBVA share entitles the holder to one vote at BBVA’s general shareholders’ meeting. Currently, 5,763,285,465 voting rights correspond to the 5,763,285,465 BBVA shares.

Reinforced Quorum at the General Shareholders’ Meeting

Reinforced quorums included in Banco Sabadell’s bylaws follow those established by the Spanish Corporation Law. In order for the general shareholders’ meeting to validly resolve on an increase or reduction of share capital, or on any other amendment of Banco Sabadell’s bylaws, on an issue of bonds, the elimination or limitation of pre-emptive rights in respect of new Banco Sabadell shares, alteration of legal form, merger or spin-off or the global transfer of assets and liabilities, it shall be necessary that at the relevant general shareholders’ meeting a quorum of shareholders representing 50% of the voting capital, if the meeting is held on first call, or a quorum of shareholders representing 25% of the voting capital, if the meeting is held on second call.		In addition to the reinforced quorums established by the Spanish Corporation Law, BBVA’s bylaws set forth that in order to adopt resolutions regarding any changes to the corporate purpose, transformations, total spin-off, dissolution of BBVA and any amendment to the article of BBVA’s bylaws regulating this reinforced quorum, a quorum of 2/3 of the voting capital, if the meeting is held on first call, and of 60% of the voting capital, if the meeting is held on second call, is required.

Attendance and Voting at General Shareholders’ Meetings

According to Banco Sabadell’s bylaws, only holders of 1,000 or more Banco Sabadell shares who have their Banco Sabadell shares duly registered in the appropriate records at least five days prior to the day on which the general shareholders’ meeting is to be held, may attend and vote at such general shareholders’ meeting.		According to BBVA’s bylaws, only holders of 500 or more BBVA shares who have their BBVA shares duly registered in the appropriate records at least five days prior to the day on which the general shareholders’ meeting is to be held, may attend and vote at such general shareholders’ meeting.

Board of Directors

*Size of Board of Directors*

Banco Sabadell’s bylaws provide that the minimum number of directors is 11 and that the maximum is 15. Banco Sabadell’s board of directors currently consists of 14 directors.		BBVA’s bylaws provide that the minimum number of directors is five and that the maximum is 15. BBVA’s board of directors currently consists of 15 directors.

154



*Term*
According to Banco Sabadell’s bylaws, the term of office for members of the board of directors is four years. Additionally, the board of directors may propose to the general shareholders’ meeting the appointment as “Honorary Directors” of those directors who have ceased to hold office due to their age or who do not voluntarily stand for re-election. The “Honorary Directors”, if convened, may attend the meetings of the board of directors, with voice but without voting rights.		According to BBVA’s bylaws, the term of office for members of the board of directors is three years. In any event, the directors will resign from their position upon reaching 75 years of age in accordance with the board of directors’ regulations.

*Chairman of the Board of Directors*

The chairman of the board of directors shall be a non-executive director.		If the chairman of the board of directors is an executive director, the board of directors, with the abstention of the executive directors, must appoint a lead director from among the independent directors.

*Board Committees*

Banco Sabadell’s bylaws set forth that the board of directors must set up, at least, the following committees: (i) strategy and sustainability committee; (ii) credit delegated committee; (iii) audit and control committee; (iv) appointments and corporate governance committee; (v) remuneration committee; and (vi) risks committee.		BBVA’s board of directors’ regulations set forth that the board of directors will set up the following committees: (i) audit committee; (ii) appointments and corporate governance committee; (iii) remuneration committee; (iv) risk and compliance committee; and (v) technology and cybersecurity committee.

155

VALIDITY OF SECURITIES

J&A Garrigues, S.L.P., BBVA’s Spanish counsel, is delivering an opinion regarding the validity of the BBVA shares under Spanish law.

EXPERTS

The consolidated financial statements of BBVA included in the 2023 Form 20-F as of and for the years ended December 31, 2023 and 2022, and the effectiveness of BBVA’s internal control over financial reporting as of December 31, 2023 have been audited by Ernst & Young, S.L., independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated by reference herein. Such consolidated financial statements and BBVA’s management assessment of the effectiveness of internal control over financial reporting as of December 31, 2023 are incorporated by reference herein in reliance upon such reports given on the authority of such firm as experts in auditing and accounting.

The consolidated financial statements of BBVA as of and for the year ended December 31, 2021 have been incorporated by reference herein in reliance upon the report of KPMG Auditores, S.L., independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

ENFORCEABILITY OF CIVIL LIABILITIES

BBVA is a public limited company (sociedad anónima) organized under the laws of Spain. Substantially all of its directors and executive officers, and certain of the experts named in this document, are not residents of the United States. The vast majority of BBVA’s assets and most of its directors and officers are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons with respect to matters arising under the Securities Act or to enforce against them judgments of courts of the United States predicated upon civil liability under the Securities Act. BBVA is advised by its Spanish legal counsel that there is doubt as to the enforceability in Spain in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities predicated solely upon the securities laws of the United States.

156

APPENDIX I

CONSOLIDATED FINANCIAL STATEMENTS OF BANCO DE SABADELL, S.A.


	Page
Consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2023		A-3

Consolidated Balance Sheets of Banco Sabadell Group as at December 31, 2023 and 2022		A-4

Consolidated Income Statements of Banco Sabadell Group for the years ended December 31, 2023 and 2022		A-7

Consolidated Statements of Recognized Income and Expenses of Banco Sabadell Group for the years ended December 31, 2023 and 2022		A-9

Consolidated Statements of Total Changes in Equity of Banco Sabadell Group for the years ended December 31, 2023 and 2022		A-10

Consolidated Cash Flow Statements of Banco Sabadell Group for the years ended December 31, 2023 and 2022		A-12

Notes to the financial statements of Banco Sabadell Group for the year ended December 31, 2023		A-14

Consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2022		A-231

Consolidated Balance Sheets of Banco Sabadell Group as at December 31, 2022 and 2021		A-232

Consolidated Income Statements of Banco Sabadell Group for the years ended December 31, 2022 and 2021		A-235

Consolidated Statements of Recognized Income and Expenses of Banco Sabadell Group for the years ended December 31, 2022 and 2021		A-237

Consolidated Statements of Total Changes in Equity of Banco Sabadell Group for the years ended December 31, 2022 and 2021		A-238

Consolidated Cash Flow Statements of Banco Sabadell Group for the years ended December 31, 2022 and 2021		A-240

Notes to the financial statements of Banco Sabadell Group for the year ended December 31, 2022		A-242

Consolidated financial statements of Banco Sabadell as of and for the year ended December 31, 2021		A-469

Consolidated Balance Sheets of Banco Sabadell Group as at December 31, 2021 and 2020		A-470

Consolidated Income Statements of Banco Sabadell Group for the years ended December 31, 2021 and 2020		A-473

Consolidated Statements of Recognized Income and Expenses of Banco Sabadell Group for the years ended December 31, 2021 and 2020		A-475

Consolidated Statements of Total Changes in Equity of Banco Sabadell Group for the years ended December 31, 2021 and 2020		A-476

Consolidated Cash Flow Statements of Banco Sabadell Group for the years ended December 31, 2021 and 2020		A-478

Notes to the financial statements of Banco Sabadell Group for the year ended December 31, 2021		A-480

A-1


	Page
Condensed consolidated interim financial statements of Banco Sabadell as of and for the six-month period ended June 30, 2024		A-709

Condensed Consolidated Balance Sheets of Banco Sabadell Group as at June 30, 2024 and December 31, 2023		A-710

Condensed Consolidated Income Statements of Banco Sabadell Group for the six-month periods ended June 30, 2024 and 2023		A-713

Condensed Consolidated Statements of Recognized Income and Expenses of Banco Sabadell Group for the six-month periods ended June 30, 2024 and 2023		A-715

Condensed Consolidated Statements of Total Changes in Equity of Banco Sabadell Group for the six-month periods ended June 30, 2024 and 2023		A-716

Condensed Consolidated Cash Flow Statements of Banco Sabadell Group for the six-month periods ended June 30, 2024 and 2023		A-718

Explanatory notes to the condensed consolidated interim financial statements of Banco Sabadell Group for the six-month period ended June 30, 2024		A-720

A-2

Consolidated financial statements of

Banco Sabadell

as of and for the year ended

December 31, 2023

Financial statements prepared and made public by Banco Sabadell, S.A. Banco Bilbao Vizcaya Argentaria, S.A. is not affiliated with Banco Sabadell, S.A. and was not involved in the preparation of these financial statements.

A-3

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2023 and 2022


Thousand euro
Assets	Note	2023	*2022 ()**
Cash, cash balances at central banks and other demand deposits ()**	7	29,985,853	41,260,395
Financial assets held for trading		2,706,489	4,017,253
Derivatives	10	2,563,994	3,600,122
Equity instruments		—	—
Debt securities	8	142,495	417,131
Loans and advances		—	—
Central banks		—	—
Credit institutions		—	—
Customers		—	—
Memorandum item: loaned or pledged as security with sale or pledging rights		1,915	93,000
Non-trading financial assets mandatorily at fair value through profit or loss		153,178	77,421
Equity instruments	9	52,336	23,145
Debt securities	8	65,744	54,276
Loans and advances	11	35,098	—
Central banks		—	—
Credit institutions		—	—
Customers		35,098	—
Memorandum item: loaned or pledged as security with sale or pledging rights		—	—
Financial assets designated at fair value through profit or loss		—	—
Debt securities		—	—
Loans and advances		—	—
Central banks		—	—
Credit institutions		—	—
Customers		—	—
Memorandum item: loaned or pledged as security with sale or pledging rights		—	—
Financial assets at fair value through other comprehensive income		6,269,297	5,802,264
Equity instruments	9	183,938	179,572
Debt securities	8	6,085,359	5,622,692
Loans and advances		—	—
Central banks		—	—
Credit institutions		—	—
Customers		—	—
Memorandum item: loaned or pledged as security with sale or pledging rights		557,303	1,977,469
Financial assets at amortised cost		180,913,793	185,045,452
Debt securities	8	21,500,927	21,452,820
Loans and advances	11	159,412,866	163,592,632
Central banks		156,516	162,664
Credit institutions		6,995,951	4,700,287
Customers		152,260,399	158,729,681
Memorandum item: loaned or pledged as security with sale or pledging rights		5,996,602	6,542,504
Derivatives – Hedge accounting	12	2,424,598	3,072,091
Fair value changes of the hedged items in portfolio hedge of interest rate risk	12	(567,608)	(1,545,607)
Investments in joint ventures and associates	14	462,756	376,940
Joint ventures		—	—
Associates		462,756	376,940
Assets under insurance or reinsurance contracts		—	—
Tangible assets	15	2,296,704	2,581,791
Property, plant and equipment		2,067,106	2,282,049
For own use		2,058,058	2,272,705
Leased out under operating leases		9,048	9,344
Investment properties		229,598	299,742
Of which: leased out under operating leases		229,598	281,707
Memorandum item: acquired through finance leases		872,305	897,903
Intangible assets	16	2,483,074	2,484,162
Goodwill		1,018,311	1,026,810
Other intangible assets		1,464,763	1,457,352
Tax assets		6,837,820	6,851,068
Current tax assets		452,289	206,561
Deferred tax assets	39	6,385,531	6,644,507
Other assets	17	436,123	479,680
Insurance contracts linked to pensions		80,693	89,729
Inventories		62,344	93,835
Rest of other assets		293,086	296,116
Non-current assets and disposal groups classified as held for sale	13	770,878	738,313
TOTAL ASSETS		235,172,955	251,241,223

(*) Shown for comparative purposes only (see Note 1.4).

(**) See details in the consolidated cash flow statement of the Group.

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated balance sheet as at 31 December 2023.

A-4

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2023 and 2022


Thousand euro
Liabilities	Note	2023	*2022 ()**
Financial liabilities held for trading		2,867,459	3,598,483
Derivatives	10	2,530,086	3,374,036
Short positions		337,373	224,447
Deposits		—	—
Central banks		—	—
Credit institutions		—	—
Customers		—	—
Debt securities issued		—	—
Other financial liabilities		—	—
Financial liabilities designated at fair value through profit or loss		—	—
Deposits		—	—
Central banks		—	—
Credit institutions		—	—
Customers		—	—
Debt securities issued		—	—
Other financial liabilities		—	—
Memorandum item: subordinated liabilities		—	—
Financial liabilities at amortised cost		216,071,766	232,529,932
Deposits		183,947,196	203,293,522
Central banks	18	9,776,360	27,843,687
Credit institutions	18	13,840,183	11,373,390
Customers	19	160,330,653	164,076,445
Debt securities issued	20	25,791,284	22,577,549
Other financial liabilities	21	6,333,286	6,658,861
Memorandum item: subordinated liabilities		3,607,858	3,477,976
Derivatives – Hedge accounting	12	1,171,957	1,242,470
Fair value changes of the hedged items in portfolio hedge of interest rate risk	12	(422,347)	(959,106)

Liabilities under insurance or reinsurance contracts		—	—
Provisions	22	536,092	644,509
Pensions and other post employment defined benefit obligations		58,308	63,384
Other long term employee benefits		69	170
Pending legal issues and tax litigation		60,550	89,850
Commitments and guarantees given		165,376	176,823
Other provisions		251,789	314,282
Tax liabilities		332,951	226,711
Current tax liabilities		217,981	112,994
Deferred tax liabilities	39	114,970	113,717
Share capital repayable on demand		—	—
Other liabilities	17	722,524	872,108
Liabilities included in disposal groups classified as held for sale	13	13,347	—
TOTAL LIABILITIES		221,293,749	238,155,107

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated balance sheet as at 31 December 2023.

A-5

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2023 and 2022


Thousand euro
Equity	Note	2023	*2022 ()**
Shareholders’ equity	23	14,343,946	13,635,172
Capital		680,028	703,371
Paid up capital		680,028	703,371
Unpaid capital which has been called up		—	—
Memorandum item: capital not called up		—	—
Share premium		7,695,227	7,899,227
Equity instruments issued other than capital		—	—
Equity component of compound financial instruments		—	—
Other equity instruments issued		—	—
Other equity		21,268	21,548
Retained earnings		6,401,782	5,859,520
Revaluation reserves		—	—
Other reserves		(1,584,816)	(1,602,079)
Reserves or accumulated losses of investments in joint ventures and associates		54,836	(72,449)
Other		(1,639,652)	(1,529,630)
(-) Treasury shares		(39,621)	(23,767)
Profit or loss attributable to owners of the parent		1,332,181	889,392
(-) Interim dividends		(162,103)	(112,040)
Accumulated other comprehensive income	24	(498,953)	(583,400)
Items that will not be reclassified to profit or loss		(30,596)	(29,125)
Actuarial gains or (-) losses on defined benefit pension plans		(3,313)	(1,969)
Non-current assets and disposal groups classified as held for sale		—	—
Share of other recognised income and expense of investments in joint ventures and associates		—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income		(27,283)	(27,156)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—	—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—	—
Items that may be reclassified to profit or loss		(468,357)	(554,275)
Hedge of net investments in foreign operations [effective portion]		77,997	119,348
Foreign currency translation		(384,086)	(476,030)
Hedging derivatives. Cash flow hedges reserve [effective portion]		(49,215)	(64,224)
Fair value changes of debt instruments measured at fair value through other comprehensive income		(145,732)	(180,199)
Hedging instruments [not designated elements]		—	—
Non-current assets and disposal groups classified as held for sale		—	—
Share of other recognised income and expense of investments in joint ventures and associates		32,679	46,830
Minority interests [Non-controlling interests]	25	34,213	34,344
Accumulated other comprehensive income		—	—
Other items		34,213	34,344
TOTAL EQUITY		13,879,206	13,086,116
TOTAL EQUITY AND TOTAL LIABILITIES		235,172,955	251,241,223

Memorandum item: off-balance sheet exposures

Loan commitments given	26	27,035,812	27,460,615
Financial guarantees given	26	2,064,396	2,086,993
Other commitments given	26	7,942,724	9,674,382

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated balance sheet as at 31 December 2023.

A-6

Consolidated income statements of Banco Sabadell Group

For the years ended 31 December 2023 and 2022


Thousand euro
	Note	2023	*2022 ()**
Interest income	28	8,658,756	4,988,603
Financial assets at fair value through other comprehensive income		134,309	68,608
Financial assets at amortised cost		7,771,231	4,499,843
Other interest income		753,216	420,152
(Interest expenses)	28	(3,935,538)	(1,189,877)
(Expenses on share capital repayable on demand)		—	—
Net interest income	28	4,723,218	3,798,726
Dividend income		8,413	2,609
Profit or loss of entities accounted for using the equity method	14	122,807	152,917
Fee and commission income	29	1,671,213	1,742,311
(Fee and commission expenses)	29	(285,055)	(252,103)
Gains or (-) losses on financial assets and liabilities, net	30	169,473	231,612
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		23,250	13,227
Financial assets at amortised cost		15,939	(9,190)
Other financial assets and liabilities		7,311	22,417
Gains or (-) losses on financial assets and liabilities held for trading, net		122,249	204,691
Reclassification of financial assets from fair value through other comprehensive income		—	—
Reclassification of financial assets from amortised cost		—	—
Other gains or (-) losses		122,249	204,691
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net		11,781	(4,157)
Reclassification of financial assets from fair value through other comprehensive income		—	—
Reclassification of financial assets from amortised cost		—	—
Other gains or (-) losses		11,781	(4,157)
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net		—	—
Gains or (-) losses from hedge accounting, net		12,193	17,851
Exchange differences [gain or (-) loss], net	30	(101,093)	(127,971)
Other operating income	31	91,184	121,554
(Other operating expenses)	32	(538,228)	(458,867)
Income from assets under insurance or reinsurance contracts		—	—
(Expenses on liabilities under insurance or reinsurance contracts)		—	—
Gross income		5,861,932	5,210,788

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated income statement for 2023.

A-7

Consolidated income statements of Banco Sabadell Group

For the years ended 31 December 2023 and 2022


Thousand euro
	Note	2023	*2022 ()**
(Administrative expenses)		(2,496,362)	(2,337,415)
(Staff expenses)	33	(1,494,644)	(1,391,608)
(Other administrative expenses)	33	(1,001,718)	(945,807)
(Depreciation and amortisation)	15, 16	(518,965)	(545,091)
(Provisions or (-) reversal of provisions)	22	(6,290)	(96,821)
(Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains)	34	(824,393)	(839,579)
(Financial assets at fair value through other comprehensive income)		852	(182)
(Financial assets at amortised cost)		(825,245)	(839,397)
Profit/(loss) on operating activities		2,015,922	1,391,882
(Impairment or (-) reversal of impairment of investments in joint ventures and associates)		—	(12,200)
(Impairment or (-) reversal of impairment on non-financial assets)	35	(25,845)	(61,116)
(Tangible assets)		(11,526)	(37,098)
(Intangible assets)		—	—
(Other)		(14,319)	(24,018)
Gains or (-) losses on derecognition of non-financial assets, net	36	(39,344)	(17,369)
Negative goodwill recognised in profit or loss		—	—
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	37	(59,955)	(27,801)
Profit or (-) loss before tax from continuing operations		1,890,778	1,273,396
(Tax expense or (-) income related to profit or loss from continuing operations)	39	(557,175)	(373,256)
Profit or (-) loss after tax from continuing operations		1,333,603	900,140
Profit or (-) loss after tax from discontinued operations		—	—
PROFIT OR (-) LOSS FOR THE YEAR		1,333,603	900,140
Attributable to minority interest [non-controlling interests]	25	1,422	10,748
Attributable to owners of the parent		1,332,181	889,392

Earnings (or loss) per share (euros)	3	0.23	0.14
Basic (euros)		0.23	0.14
Diluted (euros)		0.23	0.14

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated income statement for 2023.

A-8

Consolidated statements of recognised income and expenses of Banco Sabadell

Group

For the years ended 31 December 2023 and 2022


Thousand euro
	Note	2023	*2022 ()**
Profit or loss for the year		1,333,603	900,140
Other comprehensive income	24	84,447	(305,826)
Items that will not be reclassified to profit or loss		(1,471)	12,633
Actuarial gains or (-) losses on defined benefit pension plans		(1,919)	(4,123)
Non-current assets and disposal groups held for sale		—	—
Share of other recognised income and expense of investments in joint ventures and associates		—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income		1,250	17,114
Gains or (-) losses from hedge accounting of equity instruments at fair value through other comprehensive income, net		—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—	—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—	—
Income tax relating to items that will not be reclassified		(802)	(358)
Items that may be reclassified to profit or loss		85,918	(318,459)
Hedge of net investments in foreign operations [effective portion]		(41,351)	(38,393)
Valuation gains or (-) losses taken to equity		(41,351)	(38,393)
Transferred to profit or loss			—
Other reclassifications			—
Foreign currency translation		91,944	5,238
Translation gains or (-) losses taken to equity		91,944	5,238
Transferred to profit or loss		—	—
Other reclassifications		—	—
Cash flow hedges [effective portion]		22,291	(52,125)
Valuation gains or (-) losses taken to equity		(74,571)	(26,671)
Transferred to profit or loss		95,129	(25,493)
Transferred to initial carrying amount of hedged items		1,733	39
Other reclassifications		—	—
Hedging instruments [not designated elements]		—	—
Valuation gains or (-) losses taken to equity		—	—
Transferred to profit or loss		—	—
Other reclassifications		—	—
Debt instruments at fair value through other comprehensive income		48,733	(230,451)
Valuation gains or (-) losses taken to equity		53,041	(207,699)
Transferred to profit or loss		(4,308)	(22,752)
Other reclassifications		—	—
Non-current assets and disposal groups held for sale		—
Valuation gains or (-) losses taken to equity		—	—
Transferred to profit or loss		—	—
Other reclassifications		—	—
Share of other recognised income and expense of investments in joint ventures and associates		(14,151)	(82,768)

Income tax relating to items that may be reclassified to profit or (-) loss		(21,548)	80,040
Total comprehensive income for the year		1,418,050	594,314
Attributable to minority interest [non-controlling interests]		1,422	10,748
Attributable to owners of the parent		1,416,628	583,566

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated statement of recognised income and expenses for 2023.

A-9

Consolidated statements of total changes in equity of Banco Sabadell Group

For the years ended 31 December 2023 and 2022


Thousand euro
Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests: Other items		Total
*Closing balance 31/12/2022 ()**		703,371		7,899,227		—		21,548		5,859,520		—		(1,365,777)		(23,767)		858,642		(112,040)		(650,647)		—		34,344		13,224,421
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies (see Note 1.4)		—		—		—		—		—		—		(236,302)		—		30,750		—		67,247		—		—		(138,305)
Opening balance 01/01/2023		703,371		7,899,227		—		21,548		5,859,520		—		(1,602,079)		(23,767)		889,392		(112,040)		(583,400)		—		34,344		13,086,116
Total comprehensive income for the period		—		—		—		—		—		—		—		—		1,332,181		—		84,447		—		1,422		1,418,050
Other equity changes		(23,343)		(204,000)		—		(280)		542,262		—		17,263		(15,854)		(889,392)		(50,063)		—		—		(1,553)		(624,960)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
issued
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction (see Note 23)		(23,343)		(204,000)		—		—		—		—		23,343		204,000		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		(111,645)		—		—		—		—		(162,103)		—		—		—		(273,748)
Purchase of treasury shares		—		—		—		—		—		—		—		(276,200)		—		—		—		—		—		(276,200)
Sale or cancellation of treasury shares		—		—		—		—		—		—		3,477		56,346		—		—		—		—		—		59,823
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity		—		—		—		—		777,352		—		—		—		(889,392)		112,040		—		—		—		—
Equity increase or (-) decrease resulting from business		—		—		—		—		—		—		—		—		—		—		—		—		—		—
combinations
Share based payments		—		—		—		(280)		—		—		—		—		—		—		—		—		—		(280)
Other increase or (-) decrease in equity		—		—		—		—		(123,445)		—		(9,557)		—		—		—		—		—		(1,553)		(134,555)
Closing balance 31/12/2023		680,028		7,695,227		—		21,268		6,401,782		—		(1,584,816)		(39,621)		1,332,181		(162,103)		(498,953)		—		34,213		13,879,206

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated statement of total changes in equity for 2023.

(*) Correspond to balances included in the Consolidated annual financial statements for 2022 signed off by the directors of Banco de Sabadell, S.A.

A-10

Consolidated statements of total changes in equity of Banco Sabadell Group

For the years ended 31 December 2023 and 2022


Thousand euro
Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests: Other items		Total
*Closing balance 31/12/2021 ()**		703,371		7,899,227		—		19,108		5,441,185		—		(1,201,701)		(34,523)		530,238		—		(385,604)		—		24,980		12,996,281
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies (see Note 1.4)		—		—		—		—		—		—		(236,302)		—		—		—		108,030		—		—		(128,272)
Opening balance 01/01/2022		703,371		7,899,227		—		19,108		5,441,185		—		(1,438,003)		(34,523)		530,238		—		(277,574)		—		24,980		12,868,009
Total comprehensive income for the period		—		—		—		—		—		—		—		—		889,392		—		(305,826)		—		10,748		594,314
Other equity changes		—		—		—		2,440		418,335		—		(164,076)		10,756		(530,238)		(112,040)		—		—		(1,384)		(376,207)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		(168,809)		—		—				—		(112,040)		—		—		—		(280,849)
Purchase of treasury shares		—		—		—		—		—		—		—		(86,457)		—		—		—		—		—		(86,457)
Sale or cancellation of treasury shares		—		—		—		—		—		—		4,537		97,213		—		—		—		—		—		101,750
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity								—		530,238		—		—		—		(530,238)		—		—		—		—		—
Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Share based payments		—		—		—		2,440		—		—		—		—		—		—		—		—		—		2,440
Other increase or (-) decrease in equity		—		—		—		—		56,906		—		(168,613)		—		—		—		—		—		(1,384)		(113,091)
Closing balance 31/12/2022		703,371		7,899,227		—		21,548		5,859,520		—		(1,602,079)		(23,767)		889,392		(112,040)		(583,400)		—		34,344		13,086,116
Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated statement of total changes in equity for 2023.

(*) Correspond to balances included in the Consolidated annual financial statements for 2021 signed off by the directors of Banco de Sabadell, S.A.

A-11

Consolidated cash flow statements of Banco Sabadell Group

For the years ended 31 December 2023 and 2022


Thousand euro
	Note	2023	*2022 ()**
Cash flows from operating activities		(10,523,303)	(6,627,920)
Profit or loss for the year		1,333,603	900,140
Adjustments to obtain cash flows from operating activities		1,912,593	1,823,371
Depreciation and amortisation		518,965	545,091
Other adjustments		1,393,628	1,278,280
Net increase/decrease in operating assets		3,764,543	(8,795,849)
Financial assets held for trading		1,310,764	(2,045,624)
Non-trading financial assets mandatorily at fair value through profit or loss		(75,756)	2,137
Financial assets designated at fair value through profit or loss		—	—
Financial assets at fair value through other comprehensive income		(431,840)	914,235
Financial assets at amortised cost		3,146,531	(7,063,285)
Other operating assets		(185,156)	(603,312)
Net increase/decrease in operating liabilities		(17,125,186)	(488,059)
Financial liabilities held for trading		(731,024)	2,218,585
Financial liabilities designated at fair value through profit or loss		—	—
Financial liabilities at amortised cost		(16,558,167)	(1,899,289)
Other operating liabilities		164,005	(807,355)
Cash payments or refunds of income taxes		(408,856)	(67,523)
Cash flows from investing activities		(163,020)	(64,796)
Payments		(533,861)	(435,324)
Tangible assets	15	(236,420)	(238,939)
Intangible assets	16	(296,085)	(194,638)
Investments in joint ventures and associates	14	(1,356)	(1,747)
Subsidiaries and other business units		—	—
Non-current assets and liabilities classified as held for sale		—	—
Other payments related to investing activities		—	—
Collections		370,841	370,528
Tangible assets		122,648	96,547
Intangible assets		—	—
Investments in joint ventures and associates	14	28,669	210,300
Subsidiaries and other business units		—	—
Non-current assets and liabilities classified as held for sale		219,524	63,681
Other collections related to investing activities		—	—

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated cash flow statement for 2023.

A-12

Consolidated cash flow statements of Banco Sabadell Group

For the years ended 31 December 2023 and 2022


Thousand euro
	Note	2023	*2022 ()**
Cash flows from financing activities		(617,001)	(1,236,880)

Payments		(1,676,824)	(1,338,630)

Dividends		(273,748)	(280,849)

Subordinated liabilities	4	(900,000)	(750,000)

Redemption of own equity instruments		—	—

Acquisition of own equity instruments		(276,200)	(86,457)

Other payments related to financing activities		(226,876)	(221,324)

Collections		1,059,823	101,750

Subordinated liabilities		1,000,000	—

Issuance of own equity instruments		—	—

Disposal of own equity instruments		59,823	101,750

Other collections related to financing activities		—	—
Effect of changes in foreign exchange rates		28,782	(23,205)

Net increase (decrease) in cash and cash equivalents		(11,274,542)	(7,952,801)

Cash and cash equivalents at the beginning of the year	7	41,260,395	49,213,196

Cash and cash equivalents at the end of the year	7	29,985,853	41,260,395
Memorandum item
CASH FLOWS CORRESPONDING TO:

Interest received		6,082,345	4,869,638

Interest paid		1,943,749	1,029,597

Dividends received		8,413	2,609

COMPONENTS OF CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

Cash on hand	7	726,122	686,258

Cash equivalents in central banks	7	28,566,694	39,236,780

Other demand deposits	7	693,037	1,337,357

Other financial assets		—	—

Less: bank overdrafts repayable on demand		—	—
TOTAL CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR		29,985,853	41,260,395

Of which: held by Group entities but not available for the Group		—	—

(*) Shown for comparative purposes only (see Note 1.4).

Notes 1 to 43 and accompanying Schedules I to V form an integral part of the consolidated cash flow statement for 2023.

A-13

Consolidated report of Banco Sabadell Group for the year ended 31 December 2023

Note 1 – Activity, accounting policies and practices

1.1 Activity

Banco de Sabadell, S.A. (hereinafter also referred to as Banco Sabadell, the Bank, the Institution, or the Company), with tax identification number (NIF) A08000143 and with registered office in Alicante, Avenida Óscar Esplá, 37, engages in banking business and is subject to the standards and regulations governing banking institutions operating in Spain. The supervision of Banco Sabadell on a consolidated basis is performed by the European Central Bank (ECB).

The Institution is entered in the Companies Register of Alicante under Volume 4070, Folio 1, Sheet A-156980 and in the Bank of Spain’s Official Register of Credit Institutions under code number 0081. The Legal Entity Identifier (LEI) of Banco de Sabadell, S.A. is SI5RG2M0WQQLZCXKRM20.

The Articles of Association and other public information can be viewed both at the Bank’s registered office and on its website (www.grupbancsabadell.com).

The Bank is the parent company of a corporate group of entities (see Note 2 and Schedule I) whose activity it controls directly or indirectly and which comprise, together with the Bank, Banco Sabadell Group (hereinafter, the Group).

1.2 Basis of presentation and changes in accounting regulations

The Group’s consolidated annual financial statements for 2023 have been prepared in accordance with the International Financial Reporting Standards adopted by the European Union (EU-IFRS) applicable at the end of 2023, taking into account Bank of Spain (BoS) Circular 4/2017 of 27 November as well as other provisions of the financial reporting regulations applicable to the Group and considering the formatting and mark-up requirements established in Commission Delegated Regulation EU 2019/815, in order to fairly present the Group’s equity and consolidated financial situation as at 31 December 2023 and the results of its operations, recognised income and expenses, changes in equity and cash flows (all consolidated) in 2023.

The consolidated annual financial statements have been prepared based on the accounting records kept by the Bank and each of the other entities in the Group, and include adjustments and reclassifications necessary to ensure the harmonisation of the accounting principles and policies and the measurement criteria applied by the Group, which are described in this note.

The information included in these consolidated annual financial statements is the responsibility of the directors of the Group’s parent company. The Group’s consolidated annual financial statements for 2023 were signed off by the directors of Banco Sabadell at a meeting of the Board of Directors on 22 February 2024 and will be submitted to shareholders at the Annual General Meeting for approval. It is expected that the shareholders will approve the accounts without significant changes.

Except as otherwise indicated, these consolidated annual financial statements are expressed in thousands of euros. In order to show the amounts in thousands of euros, the accounting balances have been subject to rounding; for this reason, some of the amounts appearing in certain tables may not be the exact arithmetic sum of the preceding figures.

A-14

Standards and interpretations issued by the International Accounting Standards Board (IASB) that entered into force in 2023

In 2023, the standards and interpretations adopted by the European Union, together with their amendments, which have been applied by the Group due to their entry into force or their early application, are the following:



Standards		Titles
IFRS 17		Insurance contracts
Amendment to IFRS 17		Initial application of IFRS 17 and IFRS 9: Comparative information
Amendments to IAS 1 and IFRS Practice Statement 2		Disclosure of accounting policies
Amendments to IAS 8		Definition of accounting estimates
Amendments to IAS 12		- Deferred tax related to assets and liabilities arising from a single transaction
		- International tax reform – Pillar Two Model Rules

Except for the impact arising from the adoption of IFRS 17 (see section on Adoption of IFRS 17 “Insurance contracts” in this note and Note 1.4), the application of the aforesaid standards has had no significant effects on these consolidated annual financial statements.

Adoption of IFRS 17 “Insurance contracts”

IFRS 17 came into effect on 1 January 2023, replacing IFRS 4, and modified the set of accounting requirements for the recognition, measurement, presentation and disclosure of insurance contracts. The objective of IFRS 17 is to ensure that entities provide relevant information that faithfully represents those contracts.

In accordance with this standard, insurance contracts combine components of financial instruments and service contracts. In addition, many insurance contracts generate cash flows with substantial variability over a long period. In order to provide useful information about these features, IFRS 17:

–

combines the current measurement of future cash flows with the revenue recognised throughout the period during which the services established in the contracts are provided;

–

presents results for services provided separately from the financial expenses and income relating to these contracts; and

–

requires entities to decide whether to recognise the entirety of their financial income and expenses relating to insurance contracts in profit and loss, or whether to recognise part of these results in equity.

Furthermore, in 2020 some amendments to IFRS 17 were incorporated, designed to reduce implementation costs by simplifying some requirements of this standard, make financial performance easier to explain and ease transition by deferring the effective date of the standard to 1 January 2023 and by reducing the requirements to apply the standard for the first time.

The initial application of this standard basically affects the amount at which insurance undertakings associated with the Group that are controlled by Zürich Seguros (i.e. BanSabadell Vida, S.A. de Seguros y Reaseguros, BanSabadell Seguros Generales and S.A. de Seguros y Reaseguros) are recognised.

The application of IFRS 17 requires restatement of comparative information, the transition date for this standard being 1 January 2022. In this respect, the initial application of IFRS 17 has produced a reduction of the Group’s equity of 128 million euros as at 1 January 2022 and of 138 million euros as at 31 December 2022.

A-15

The main quantitative impacts of the initial application of IFRS 17 on the information set out in the financial statements for the financial year 2022 are set out below:

–	The reconciliation between the Group’s consolidated balance sheet as at 31 December 2021 published in the consolidated annual financial statements for the financial year 2021 and the opening consolidated balance sheet as at 1 January 2022 restated under IFRS 17 criteria is as follows:

Million euro

Published balance

31/12/2021

IFRS 17 impact

Restated balance

01/01/2023

Total assets

251,947

(128)

251,819

Of which:

Investments in joint ventures and associates

639

(128)

511

Total liabilities

238,951

—

238,951

Total equity

12,996

(128)

12,868

Of which:

Other reserves

(1,202)

(236)

(1,438)

Accumulated other comprehensive income

(386)

108

(278)

–	The reconciliation between the Group’s consolidated balance sheet as at 31 December 2022 published in the consolidated annual financial statements for the financial year 2022 and the Group’s consolidated balance sheet as at 31 December 2022 restated under IFRS 17 criteria is as follows:

Million euro

Published balance
31/12/2022

IFRS 17 impact

Restated balance
31/12/2022

Total assets

251,379

(138)

251,241

Of which:

Investments in joint ventures and associates

515

(138)

377

Total liabilities

238,155

—

238,155

Total equity

13,224

(138)

13,086

Of which:

Other reserves

(1,366)

(236)

(1,602)

Profit or loss attributable to owners of the parent

859

890

Accumulated other comprehensive income

(651)

(584)

–

The reconciliation between the Group’s consolidated recognised income and expenses as at 31 December 2022 published in the consolidated annual financial statements for the financial year 2022 and the Group’s consolidated recognised income and expenses as at 31 December 2022 restated under IFRS 17 criteria is as follows:

Million euro

Published balance
31/12/2022

IFRS 17 impact

Restated balance
31/12/2022

Profit or loss for the year

869

900

Of which:

Profit or loss of entities accounted for using the equity method

122

153

Other comprehensive income

(265)

(41)

(306)

Of which:

Share of other recognised income and expense of investments in joint ventures and associates

(42)

(41)

(83)

The entry into force of IFRS 17 has not had any significant impact on the classification and recognition of the Group’s other assets and liabilities.

A-16

Amendment to IFRS 17 “Initial application of IFRS 17 and IFRS 9: Comparative Information”

This narrow-scope amendment aims to provide insurance undertakings with an option relating to the presentation of comparative information about financial assets in order to avoid accounting mismatches between financial assets and insurance contract liabilities in the aforesaid comparative information at the date of initial application of IFRS 9 and IFRS 17.

Amendments to IAS 1 and IFRS Practice Statement 2 “Disclosure of accounting policies”

These amendments aim to help institutions to improve accounting policy disclosures so that they provide more useful information in their annual financial statements.

On one hand, the amendments to IAS 1 require institutions to disclose their material accounting policy information rather than their significant accounting policies, clarifying that accounting policy information that relates to immaterial transactions, other events or conditions is immaterial and need not be disclosed. On the other hand, the amendments to Practice Statement 2, on making materiality judgements, provide guidance on how to apply the concept of materiality to accounting policy disclosures.

Amendments to IAS 8 “Definition of accounting estimates”

These amendments define “accounting estimates” as monetary amounts in financial statements that are subject to measurement uncertainty; they also provide guidance on how to distinguish between changes in accounting estimates and changes in accounting policies. That distinction is important because changes in accounting estimates are applied prospectively, whereas changes in accounting policies are generally applied retrospectively. In particular, the amendments clarify that a change in accounting estimates that results from new information or new developments is not the correction of a prior period error.

Amendments to IAS 12 “Deferred tax related to assets and liabilities arising from a single transaction”

These amendments introduce an exception to the initial recognition exemption provided in IAS 12 for situations in which a single transaction gives rise to equal deductible and taxable temporary differences. These amendments apply to transactions that occur on or after the beginning of the earliest comparative period presented.

Amendments to IAS 12 “International tax reform – Pillar Two Model Rules”

These amendments aim to respond the concerns raised by various stakeholders regarding the potential implications for the accounting of deferred taxes arising from the international tax reform of the Organisation for Economic Co-operation and Development (OECD). The OECD published the Pillar Two Model Rules in December 2021 to ensure that large multinational enterprises would be subject to a minimum tax rate of 15%.

Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union establishes a top-up tax through a system of two interlocked rules, together referred to as the GloBE or Pillar Two rules, promoted by the OECD and designed to ensure that where the effective tax rate of a multinational enterprise in a given jurisdiction is below 15%, an additional top-up tax will be collected. Member States should bring into force the laws, regulations and administrative provisions necessary to comply with this Directive. As at 31 December 2023, Spain had not approved applicable legislation in this regard, the United Kingdom being the only material region to have passed substantial legislation in relation to the OECD’s tax reform.

The amendments to IAS 12 introduce a mandatory temporary exception to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules to ensure consistency in the financial statements while easing into the implementation of the rules. This mandatory exception has been applied by the Group. In addition, these amendments introduce disclosure requirements to help investors better understand the exposure to income taxes arising from the Pillar Two rules before the regulations in each jurisdiction come into effect.

An analysis was carried out based on the information available and it is estimated that the impact on the Group of the international tax reform will not be significant.

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Standards and interpretations issued by the IASB not yet in force

As at 31 December 2023, the most significant standards and interpretations that have been published by the IASB but which have not been applied when preparing these consolidated annual financial statements, either because their effective date is subsequent to the date thereof or because they have not yet been endorsed by the European Union, are as follows:



Standards and Interpretations	Title	Mandatory for years beginning:
Approved for application in the EU
Amendments to IFRS 16	Lease liabilities in sale and leaseback	1 January 2024
	transactions
Amendments to IAS 1	Presentation of financial statements:	1 January 2024
	- Classification of liabilities as current or non-current
	- Non-current liabilities with covenants

Not approved for application in the EU
Amendments to IAS 7 and IFRS 7	Supplier finance arrangements	1 January 2024
Amendments to IAS 21	Lack of exchangeability	1 January 2025

The Group has carried out an assessment of the impacts resulting from these standards and decided not to exercise its option to adopt early, where possible. It is also estimated that the adoption of the amendments issued by the IASB not yet in effect will not have a significant impact for the Group.

Approved for application in the EU

Amendments to IFRS 16 “Lease liabilities in sale and leaseback transactions”

These amendments specify the requirements that a seller-lessee must use to measure the lease liability arising from a sale and leaseback transaction to ensure that the seller-lessee does not recognise any gain or loss related to the right of use that it retains.

The amendments to IFRS 16 will be applied retrospectively, with early application permitted.

Amendments to IAS 1 “Presentation of financial statements”

Classification of liabilities as current or non-current

These amendments are designed to make clear how institutions should classify debts and other liabilities as current and non-current, in particular liabilities with no fixed maturity and those that may be converted to equity. Earlier application of these amendments is permitted.

Non-current liabilities with covenants

The purpose of these amendments is to clarify how the conditions agreed in a loan (the “covenants”) affect the classification of that loan as either a current or a non-current liability according to whether those conditions must be complied with before or after the date of the financial statements. These amendments change the “Classification of liabilities as current or non-current” and defer their effective date to 1 January 2024. Earlier application of these amendments is permitted.

Not approved for application in the EU

Amendments to IAS 7 and IFRS 7 “Supplier finance arrangements”

The purpose of these amendments is to require institutions to provide additional breakdowns of their supplier finance arrangements. To that end, new requirements have been developed to ensure that information is provided to users of financial statements that allows them to assess how supplier finance arrangements affect the Institution’s cash flows and liabilities, and to understand the impact of those supplier finance arrangements on the Institution’s exposure to liquidity risk and how it might be affected if the arrangements were no longer in effect.

Earlier application of these amendments is permitted. If they are applied to a period prior to the date of mandatory application, the Institution must indicate this.

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Amendments to IAS 21 “Lack of exchangeability”

These amendments aim to require institutions to apply a consistent approach in assessing whether a currency can be exchanged into another currency and, when it cannot, in determining the exchange rate to use and the disclosures to provide.

Earlier application of these amendments is permitted. If they are applied to a period prior to the date of mandatory application, the Institution must indicate this.

Judgements and estimates

The preparation of the consolidated annual financial statements requires certain accounting estimates to be made. It also requires Management to use its best judgement in the process of applying the Group’s accounting policies. Such judgements and estimates may affect the value of assets and liabilities and the disclosure of contingent assets and contingent liabilities as at the date of the consolidated annual financial statements, as well as income and expenses in the year.

The main judgements and estimates relate to the following:

–

The accounting classification of financial assets according to their credit risk (see Notes 1.3.4, 8 and 11).

–

Impairment losses on certain financial assets and off-balance sheet exposures (see Notes 1.3.4, 8, 11 and 26).

–

The assumptions used in actuarial calculations of liabilities and post-employment obligations (see Notes 1.3.17 and 22).

–

The measurement of consolidated goodwill (see Notes 1.3.12 and 16).

–

The useful life and impairment losses of tangible assets and other intangible assets (see Notes 1.3.10, 1.3.11, 1.3.12, 15 and 16).

–

The provisions and consideration of contingent liabilities (see Notes 1.3.16 and 22).

–

The fair value of certain unquoted financial assets (see Notes 1.3.3 and 6).

–

The fair value of real estate assets held on the balance sheet (see Notes 1.3.9, 1.3.10, 1.3.13 and 6).

–

The recoverability of non-monetisable deferred tax assets and tax credits (see Notes 1.3.20 and 39).

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1.3 Accounting principles and policies and measurement criteria

The accounting principles and policies, as well as the most significant measurement criteria applied in preparing these consolidated annual financial statements, are described below. There are no cases in which accounting principles or measurement criteria have not been applied because of a significant effect on the Group’s consolidated annual financial statements for 2023.

1.3.1 Consolidation principles

In the consolidation process, a distinction is drawn between subsidiaries, joint ventures, associates and structured entities.

Subsidiaries

Subsidiaries are entities over which the Group has control. This occurs when the Group is exposed, or has rights, to variable returns as a result of its involvement with the investee and when it has the ability to influence those returns through its power over the investee.

For control to exist, the following criteria must be met:

–

Power: an investor has power over an investee when that investor has existing rights which give them with the ability to direct the significant activities, i.e. those that significantly affect the investee’s returns.

–

Returns: an investor is exposed, or has rights, to variable returns due to their involvement with the investee when the returns obtained from such involvement have the potential to vary as a result of the investee’s economic performance. The investor’s returns can be only positive, only negative, or both positive and negative.

–

Relationship between power and returns: an investor controls an investee if the investor not only has power over the investee and is exposed, or has rights, to variable returns due to their involvement with the investee, but also has the ability to use that power to influence the returns obtained due to their involvement with the investee.

When the Group takes control of a subsidiary, it applies the acquisition method provided for in the regulations governing business combinations (see Note 1.3.2) except in the case of acquisitions of an asset or a group of assets.

The financial statements of subsidiaries are consolidated with the Bank’s financial statements using the full consolidation method.

The third-party ownership of the Group’s consolidated equity is shown in the heading “Non-controlling interests” of the consolidated balance sheet and the part of the profit or loss for the year attributable to these interests is presented under the heading “Profit or loss for the year - Attributable to minority interest [non-controlling interests]” in the consolidated income statement.

Joint ventures

These are entities subject to joint control agreements whereby decisions on significant activities are made unanimously by the entities which share control.

Investments in joint ventures are accounted for by the equity method, i.e. by the fraction of equity represented by the share held in their capital stock, after taking account of any dividends received from them and any other equity disposals.

The Group has not held investments in joint ventures in 2023 and 2022.

Associates

Associates are entities over which the Group exerts significant influence, which generally, although not exclusively, takes the form of a direct or indirect interest representing 20% or more of the investee’s voting rights.

In the consolidated annual financial statements, associates are accounted for using the equity method.

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associate on the date of its initial recognition. Similarly, when the Group has an interest in an associate that is an investment entity, it may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate to its subsidiaries. This election is made separately for each investment entity associate, at the later of the date on which (a) the associate is initially recognised, (b) the associate becomes an investment entity, or (c) the associate or first becomes a parent of a group of entities.

Structured entities

A structured entity is an entity that has been designed so that voting or other similar rights are not the dominant factor in deciding who controls the entity.

Where the Group holds an interest in an entity, or where it incorporates an entity, in order to transfer risks or for any other purposes, or to allow customers access to certain investments, it determines whether there is control over the entity based on that provided in regulations, as described above, in order to consequently determine whether it should be subject to consolidation. Specifically, the following factors, among others, are considered:

–

Analysis of the influence of the Group over the significant activities of the entity that could have an influence on the amount of its returns.

–

Implicit or explicit commitments of the Group to provide financial support to the entity.

–

Identification of the entity’s manager and analysis of the remuneration scheme.

–

Existence of removal rights (possibility of dismissing managers).

–

Significant exposure of the Group to the variable returns on the entity’s assets.

These entities include those known as ‘asset securitisation funds’, which are consolidated in cases where, based on the above analysis, it is determined that the Group has maintained control. For these operations, financial support agreements commonly used in securitisation markets are generally in place, and there are no commitments to provide any financial support that goes significantly beyond what has been contractually agreed. By reason of the foregoing, it is considered that, for the majority of the Group’s securitisations, the securitised assets cannot be derecognised and the securities issued by securitisation funds are recognised as liabilities on the consolidated balance sheet.

Schedule II provides details of the Group’s structured entities.

In all cases, the results generated by companies forming part of the Group during a given year are consolidated considering only those relating to the period spanning from the acquisition date to year-end. Similarly, the results generated by companies disposed of during the year are consolidated considering only those relating to the period spanning from the start of the year to the disposal date.

In the consolidation process, all material balances and transactions between the companies forming part of the Group have been eliminated, in the proportion corresponding to them based on the method of consolidation applied.

Financial and insurance institutions, both subsidiaries and associates, regardless of the country in which they are located, are subject to supervision and regulation by various bodies. The laws in effect in the various jurisdictions, along with the need to meet certain minimum capital requirements and the performance of supervisory activities, are circumstances that could affect the ability of these institutions to transfer funds in the form of cash, dividends, loans or advances.

Note 2 includes information on the most significant acquisitions and disposals that have taken place during the year. Significant disclosures regarding the Group’s companies are provided in Schedule I.

1.3.2 Business combinations

A business combination is a transaction, or any other event, through which the Group obtains control of one or more businesses. Business combinations are accounted for using the acquisition method.

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as the fair value, on the acquisition date, of the assets delivered, the liabilities incurred against the former owners of the acquired business and the equity instruments issued, if any, by the acquirer.

The Group then recognises goodwill in the consolidated annual financial statements if on the acquisition date there is a positive difference between:

–

the sum of the consideration paid plus the amount of all minority interests and the fair value of prior interests held in the acquired business; and

–

the fair value of recognised assets and liabilities.

If the difference is negative, it is recorded under the heading “Negative goodwill recognised in profit or loss” in the consolidated income statement.

In cases where the consideration amount depends on future events, any contingent consideration is recognised as part of the consideration paid and measured at fair value on the acquisition date. The costs associated with the transaction do not form part of the cost of the business combination for these purposes.

If the cost of the business combination or the fair value assigned to the acquiree’s assets, liabilities or contingent liabilities cannot be conclusively determined, the initial accounting of the business combination will be considered provisional. In any event, the process should be completed within a maximum of one year from the acquisition date and effective as of that date.

Minority interests in the acquiree are measured on the basis of the proportional percentage of its identified net assets. All purchases and disposals of these minority interests are accounted for as capital transactions when they do not result in a change of control. No profit or loss is recognised in the consolidated income statement and the initially recognised goodwill is not re-measured. Any difference between the consideration paid or received and the decrease or increase in minority interests, respectively, is recognised in reserves.

With regard to non-monetary contributions of businesses to associates or joint ventures in which there is a loss of control over these businesses, the Group’s accounting policy is to record the full profit or loss in the consolidated income statement, recognising any remaining interest held at its fair value.

1.3.3 Classification and measurement of financial instruments and recognition of changes arising in their subsequent measurement

In general, all financial instruments are initially recognised at fair value (see definition in Note 6) which, unless evidence to the contrary is available, coincides with the transaction price. For financial instruments not recognised at fair value through profit or loss, the fair value is adjusted by either adding or deducting the transaction costs directly attributable to their acquisition or issuance. In the case of financial instruments at fair value through profit or loss, the directly attributable transaction costs are recognised immediately in the consolidated income statement. As a general rule, conventional purchases and sales of financial assets are recognised at the settlement date.

Changes in the value of financial instruments originating from the accrual of interest and similar items are recorded in the consolidated income statement, under the headings “Interest income” or “Interest expenses”, as applicable. Dividends received from other companies are recognised in the consolidated income statement for the year in which the right to receive them is originated.

Instruments which form part of a hedging relationship are treated in accordance with regulations applicable to hedge accounting.

Changes in measurements occurring subsequent to initial recognition for reasons other than those mentioned above are treated according to the classification of financial assets and financial liabilities for the purposes of their measurement. In the case of financial assets, classification is generally based on the following aspects:

–

The business model under which they are managed, and

–

Their contractual cash flow characteristics.

Business model

A business model refers to the way in which financial assets are managed in order to generate cash flows. The business model is determined by considering the way in which groups of financial assets are managed together to achieve a particular objective. Therefore, the business model does not depend on the Group’s intentions for an individual instrument, rather, it is determined for a group of instruments.

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The business models used by the Group are indicated here below:

–

Business model whose objective is to hold financial assets in order to collect contractual cash flows: under this model, financial assets are managed in order to collect their particular contractual cash flows, rather than to obtain an overall return by both holding and selling assets. The above notwithstanding, assets can be disposed of prior to maturity in certain circumstances. Sales that may be consistent with a business model whose objective is to hold assets in order to collect contractual cash flows include sales that are infrequent or insignificant in value, sales of assets close to maturity, sales triggered by an increase in credit risk and sales carried out to manage credit concentration risk.

–

Business model whose objective is to sell financial assets.

–

Business model that combines the two objectives above (hold financial assets in order to collect contractual cash flows and sell financial assets): this business model typically involves greater frequency and value of sales because such sales are integral to achieving the business model’s objective.

Contractual cash flow characteristics of financial assets

Financial assets should initially be classified in one of the following two categories:

–

Those whose contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

–

All other financial assets.

For the purposes of this classification, the principal of a financial asset is its fair value at initial recognition, which could change over the life of the financial asset; for example, if there are repayments of principal. Interest is understood as the sum of consideration for the time value of money, for lending and structural costs, and for the credit risk associated with the principal amount outstanding during a particular period of time, plus a profit margin.

If a financial asset contains contractual terms that could change the timing or amount of cash flows, the Group will estimate the cash flows that could arise before and after the change and determine whether these are solely payments of principal and interest (SPPI) on the principal amount outstanding.

The most significant judgements used in this evaluation are indicated here below:

–

Modified time value of money: in order to determine whether the interest rate of a transaction incorporates any consideration other than that linked to the passage of time, transactions that present a difference between the tenor of the benchmark interest rate and the reset frequency of that interest rate are analysed, considering a tolerance threshold, in order to determine whether the instrument’s contractual (undiscounted) cash flows could be significantly different from the contractual (undiscounted) benchmark cash flows of a financial instrument whose time value of money element was not modified. At present, tolerance thresholds of 10% and 5%, respectively, are used for the differences in each tenor and for the analysis of cumulative cash flows over the life of the financial asset.

–

Contractual terms that change the timing or amount of cash flows: an analysis is carried out to determine whether any contractual terms exist that could change the timing or amount of contractual cash flows from the financial asset:

•

Clauses for conversion to equity shares: clauses that include a conversion-to-equity option and the loss of the right to claim contractual cash flows in the event the principal amount is reduced due to insufficient funds. Contracts that include this option will automatically fail the SPPI test.

•

Existence of the option to prepay or extend the financial instrument, or extend the contractual term, and possible residual compensation: a financial asset will fulfil the SPPI test requirements if it includes a contractual option that permits the issuer (or debtor) to prepay a debt instrument or to put back a debt instrument before maturity and the prepayment amount substantially represents unpaid amounts of principal and interest outstanding, which may include reasonable additional compensation for the early termination of the contract.

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•

Financial assets with interest rates linked to environmental, social or governance targets (ESG-linked features): these financial assets provide general funding at a contractual interest rate that is adjusted depending on the borrower achieving pre-determined ESG targets that are specific to the borrower, the purpose of the adjustment being to incentivise the achievement of those targets. The key consideration here is whether the resulting cash flows reflect a return for risk that is unrelated to a basic lending arrangement. Thus, if the adjustment linked to ESG targets does not introduce compensation for risks that is inconsistent with a basic lending arrangement, then it is considered that the financial asset has contractual cash flows that are compatible with a basic lending arrangement. In addition, for this type of financial asset, the nature of the ESG-linked feature is taken into account, such as a contingent event, which is considered to be an indicator in assessing whether the contractual cash flows consist solely of payments of principal and interest.

•

Other clauses that could change the timing or amount of cash flows: clauses that could alter contractual cash flows as a result of changes in credit risk are considered to pass the SPPI test.

–

Leverage: financial assets with leverage (i.e. those in which the contractual cash flow variability increases, such that they do not have the same economic characteristics as the interest rate on the principal amount of the transaction) fail the SPPI test.

–

Contractually linked financial instruments: the cash flows arising from these types of financial instruments are considered to consist solely of payments of principal and interest on the principal amount outstanding provided that:

•

the contractual terms of the tranche being assessed for classification (without looking through to the underlying pool of financial instruments) give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding;

•

the underlying pool of financial instruments comprises instruments whose contractual cash flows are solely payments of principal and interest on the principal amount outstanding; and

•

the exposure to credit risk corresponding to the tranche being assessed is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments.

–

Non-recourse financial assets: in the case of debt instruments that are primarily repaid with cash flows from specified assets or projects and for which there is no personal liability for the holder, an assessment is made of the underlying assets or cash flows to determine whether the contractual cash flows of the instrument are payments of principal and interest on the principal amount outstanding.

For cases in which a financial asset characteristic is inconsistent with a basic lending arrangement (i.e. if one of the asset’s characteristics gives rise to contractual cash flows other than payments of principal and interest on the principal amount outstanding), the significance and probability of occurrence is assessed to determine whether that characteristic should be taken into account in the SPPI test:

–

To determine the significance of a financial asset characteristic, the impact that it could have on contractual cash flows is estimated. The impact is not considered significant (de minimis effect) if it is estimated that the change in expected cash flows will be below the tolerance thresholds indicated previously.

–

If an instrument’s characteristic could have a significant effect on the contractual cash flows but would only affect the instrument’s contractual cash flows upon occurrence of an event that is very unlikely to occur, that characteristic will not be taken into account to determine whether the contractual cash flows of the instrument are solely payments of principal and interest on the principal amount outstanding.

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Portfolios of financial instruments classified for the purpose of their measurement

Financial assets and financial liabilities are classified, for the purpose of their measurement, into the following portfolios, based on the aspects described above:

Financial assets at amortised cost

This category includes financial assets that meet the following two conditions:

–

They are managed with a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

–

Their contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

This category comprises investments associated with typical lending activities, such as amounts loaned to customers withdrawn in cash and not yet repaid, deposits placed with other institutions, regardless of the legal arrangements under which the funds were provided, debt securities which meet the two conditions indicated above, as well as debts incurred by purchasers of goods or users of services forming part of the Group’s business.

Following their initial recognition, financial assets classified in this category are measured at amortised cost, which should be understood as the acquisition cost adjusted to account for repayments of principal and the portion recognised in the consolidated income statement, using the effective interest rate method, of the difference between the initial cost and the corresponding repayment value at maturity. In addition, the amortised cost is decreased by any reduction in value due to impairment recognised directly as a decrease in the value of the asset or through an allowance or offsetting item of the same value.

The effective interest rate is the discount rate that exactly equals the value of a financial instrument to the estimated cash flows over the expected life of the instrument, on the basis of its contractual terms, such as early repayment options, but without taking into account expected credit losses. For fixed-rate financial instruments, the effective interest rate coincides with the contractual interest rate set at the time of their acquisition, considering, where appropriate, the fees, transaction costs, premiums or discounts which, because of their nature, may be likened to an interest rate. In the case of floating-rate financial instruments, the effective interest rate coincides with the rate of return in respect of all applicable concepts until the date of the first scheduled benchmark rate revision.

Financial assets at fair value through other comprehensive income

This category includes financial assets that meet the following two conditions:

–

They are managed with a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

–

The contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

These financial assets primarily correspond to debt securities.

Furthermore, the Group may opt, at initial recognition and irrevocably, to include in the portfolio of financial assets at fair value through other comprehensive income investments in equity instruments that should not be classified as held for trading and which would otherwise be classified as financial assets mandatorily at fair value through profit or loss. This option is exercised on an instrument-by-instrument basis.

Income and expenses from financial assets at fair value through other comprehensive income are recognised in accordance with the following criteria:

–

Interest accrued or, where applicable, dividends accrued are recognised in the consolidated income statement.

–

Exchange differences are recognised in the consolidated income statement when they relate to monetary financial assets, or through other comprehensive income when they relate to non-monetary financial assets.

–

Losses due to impairment of debt instruments, or gains due to their subsequent recovery, are recognised in the consolidated income statement.

–

Other changes in value are recognised through other comprehensive income.

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When a debt instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, the fair value change recognised under the heading “Accumulated other comprehensive income” of the consolidated statement of equity is reclassified to the consolidated income statement. However, when an equity instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, this amount is not reclassified to the consolidated income statement, but rather to reserves.

Financial assets at fair value through profit or loss

A financial asset is classified in the portfolio of financial assets at fair value through profit or loss whenever the business model used by the Group for its management or its contractual cash flow characteristics make it inadvisable to classify it into any of the other portfolios described above.

This portfolio is in turn subdivided into:

–

Financial assets held for trading

Financial assets held for trading are those which have been acquired for the purpose of realising them in the near term, or which form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. Financial assets held for trading also include derivative instruments that do not meet the definition of a financial guarantee contract and which have not been designated as hedging instruments.

–

Non-trading financial assets mandatorily at fair value through profit or loss

All other financial assets mandatorily at fair value through profit or loss are classified in this portfolio.

Fair value changes are directly recognised in the consolidated income statement, making a distinction, in the case of non-derivative instruments, between the portion attributable to returns accrued on the instrument, which are recognised either as “Interest income”, applying the effective interest rate method, or as dividends, depending on their nature, and the remaining portion, which is recognised as gains or (-) losses on financial assets and liabilities under the corresponding heading.

In 2023 and 2022, no reclassifications took place between the portfolios in which financial assets are recognised for the purpose of their measurement.

Financial liabilities held for trading

Financial liabilities held for trading include financial liabilities that have been issued for the purpose of repurchasing them in the near term, or which form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. They also include short positions arising from the outright sale of assets acquired in reverse repurchase agreements, borrowed in securities lending or received as collateral with sale rights, as well as derivative instruments that do not meet the definition of a financial guarantee contract and which have not been designated as hedging instruments.

Fair value changes are directly recognised in the consolidated income statement, making a distinction, in the case of non-derivative instruments, between the portion attributable to returns accrued on the instrument, which are recognised as interest applying the effective interest rate method, and the remaining portion, which is recognised as gains or (-) losses on financial assets and liabilities under the corresponding heading.

Financial liabilities at amortised cost

Financial liabilities at amortised cost are financial liabilities that cannot be classified into any of the above categories and which relate to the typical deposit-taking activity of a financial institution, irrespective of their substance and maturity.

In particular, this category includes capital qualifying as a financial liability, i.e. financial instruments issued by the Group which, given their legal classification as capital, do not meet the requirements to be classified as consolidated equity for accounting purposes. These are essentially issued shares that do not carry voting rights and whose return is calculated based on a fixed or variable rate of interest.

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Following initial recognition they are measured at amortised cost applying the same criteria as those applicable to financial assets at amortised cost, recognising the interest accrued, calculated using the effective interest rate method, in the consolidated income statement. However, if the Group has discretionary powers with regard to the payment of coupons associated with the financial instruments issued and classified as financial liabilities, the Group’s accounting policy is to recognise them in consolidated reserves.

Hybrid financial instruments

Hybrid financial instruments are those that combine a non-derivative host contract and a financial derivative, known as an ‘embedded derivative’, which cannot be transferred separately, nor does it have a different counterparty, and which results in some of the cash flows of the hybrid instrument varying in a similar way to the cash flows that would exist if the derivative were considered separately.

Generally, when the host contract of a hybrid financial instrument is a financial asset, the embedded derivative is not separated and the measurement rules are applied to the hybrid financial instrument as a whole.

When the host contract of a hybrid financial instrument is a financial liability, the embedded derivatives of that contract are accounted for separately if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, if a separate financial instrument with the same terms as the embedded derivative would meet the definition of a derivative instrument, and if the hybrid contract is not fully measured at fair value through profit or loss.

Most of the hybrid financial instruments issued by the Group are instruments whose payments of principal and/or interest are indexed to specific equity instruments (generally, shares of listed companies), to a basket of shares, to stock market indices (such as IBEX and NYSE), or to a basket of stock market indices.

The fair value of the Group’s financial instruments as at 31 December 2023 and 2022 is indicated in Note 6.

1.3.4 Impairment of financial assets

A financial asset or a credit exposure is considered to be impaired when there is objective evidence that one or more events have occurred whose direct or combined effect gives rise to:

–

In the case of debt instruments, including loans and debt securities, a negative impact on future cash flows estimated at the time the transaction was executed, due to the materialisation of credit risk.

–

In the case of off-balance sheet exposures that carry credit risk, expected inflows that are lower than the contractual cash flows due if the holder of a loan commitment draws down the loan or, in the case of financial guarantees given, inflows that are lower than the payments scheduled to be made.

–

In the case of investments in joint ventures and associates, a situation in which their carrying amount cannot be recovered.

1.3.4.1 Debt instruments and off-balance sheet exposures

Impairment losses on debt instruments and other off-balance sheet credit exposures are recognised as an expense in the consolidated income statement for the year in which the impairment is estimated. The recoveries of any previously recognised losses are also recognised in the consolidated income statement for the year in which the impairment is eliminated or reduced.

The impairment of financial assets is calculated based on the type of instrument and other circumstances that could affect it, after taking into account any effective guarantees received. For debt instruments measured at amortised cost, the Group recognises both allowances, when loan loss provisions are allocated to absorb impairment losses, as well as direct write-offs, when the probability of recovery is considered to be remote. For debt instruments at fair value through other comprehensive income, impairment losses are recognised in the consolidated income statement, with a balancing entry under the heading “Accumulated other comprehensive income” on the consolidated statement of equity. Impairment allowances for off-balance sheet exposures are recognised on the liabilities side of the consolidated balance sheet as a provision.

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For risks classified as stage 3 (see section “Definition of classification categories” in this note), accrued interest is recognised in the consolidated income statement by applying the effective interest rate to its amortised cost adjusted to account for any impairment allowances.

To determine impairment losses, the Group monitors borrowers individually, at least those who are significant borrowers, and collectively, for groups of financial assets with similar credit risk characteristics that reflect borrowers’ ability to satisfy their outstanding payments.

The Group has policies, methods and procedures in place to estimate the losses that it may incur as a result of its credit risks, due to both insolvency attributable to counterparties and country risk. These policies, methods and procedures are applied when granting, assessing and arranging debt instruments and off-balance sheet exposures, when identifying their possible impairment and, where applicable, when calculating the amounts necessary to cover these expected losses.

1.3.4.1.1 Accounting classification on the basis of credit risk attributable to insolvency

The Group has established criteria that allow borrowers showing a significant increase in credit risk, vulnerabilities or objective evidence of impairment to be identified and classified on the basis of their credit risk.

The following sections describe the classification principles and methodology used by the Group.

Definition of classification categories

Credit exposures and off-balance sheet exposures are both classified, on the basis of their credit risk, into the following stages:

–

Stage 1: standard exposures, i.e. transactions whose risk profile has not changed since they were granted and for which there are no doubts as to the fulfilment of repayment commitments in accordance with the contractually agreed terms.

–

Stage 2: standard exposures under special monitoring, i.e. transactions which, although they do not meet the criteria to be classified individually as stage 3 or write-offs, show significant increases in credit risk (SICR) since initial recognition. This category includes, among other transactions, those in which there are amounts more than 30 days past due, with the exception of non-recourse factoring, for which a threshold of more than 60 days is applied (the amount of non-recourse factoring transactions with arrears of between 30 and 60 days represented 28 million euros as at year-end 2023 and 55 million euros as at year-end 2022), as well as refinanced and restructured transactions not classified as stage 3 until they are classified into a lower risk category once they meet the established requirements for modifying their classification.

–

Stage 3: doubtful or non-performing exposures are transactions for which there are reasonable doubts as to their repayment in full in accordance with the contractually agreed terms. This category comprises debt instruments, matured or otherwise, which do not meet the conditions for classification into the write-offs category but for which there are reasonable doubts as to their repayment in full (principal and interest) by the borrower, as well as off-balance sheet exposures whose payment by the Group is likely but whose recovery is doubtful:

•

As a result of borrower arrears: all transactions, without exception, with any amount of principal, interest or contractually agreed expenses more than 90 days past due, unless they should be classified as write-offs. This category also includes debt transactions and guarantees given classified as non-performing due to the pulling effect (more than 20% of the exposures of one obligor are more than 90 days past due).

•

For reasons other than borrower arrears: transactions which do not meet the conditions for classification as write-offs or stage 3 as a result of borrower arrears, but for which there are reasonable doubts as to the likelihood of obtaining the estimated cash flows of the transaction, as well as off-balance sheet exposures not classified as stage 3 as a result of borrower arrears whose payment by the Group is likely but whose recovery is doubtful. This category includes transactions that were classified as stage 3 as a result of borrower arrears and which will be maintained, for a 3-month probation period, in the stage 3 category for reasons other than borrower arrears.

The accounting definition of stage 3 is in line with the definition used in the Group’s credit risk management activities.

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–

Write-off:

The Group derecognises from the consolidated balance sheet transactions for which the possibility of full or partial recovery is concluded to be remote following an individual assessment. This also includes transactions which, despite not being in any of the previous situations, are undergoing a manifest and irreversible deterioration of their solvency.

The remaining amounts of transactions with portions that have been derecognised (‘partial derecognition’), either because of the termination of the Group’s debt collection rights (‘definitive loss’) – for reasons such as debt remissions or debt reductions – or because they are considered irrecoverable even though debt collection rights have not been terminated (‘write-downs’), will be fully classified in the corresponding category on the basis of their credit risk.

In the above situations, Banco Sabadell Group derecognises write-offs along with their associated provisions from the consolidated balance sheet, notwithstanding any actions that may be taken to collect payment until no more rights to collect payment exist, whether due to time-barring, debt remission, or for any other reasons.

Purchased or originated credit-impaired transactions

The expected credit loss on purchased or originated credit-impaired assets will not form part of the loss allowance or the gross carrying amount on initial recognition. When a transaction is purchased or originated with credit impairment, the loss allowance will be equal to the cumulative changes in lifetime expected credit losses since initial recognition. Interest income on these assets will be calculated by applying the credit-adjusted effective interest rate to the amortised cost of the financial asset.

Degree of alignment between the stage 3 accounting category and the prudential definition of default

The prudential definition of default adopted by the Group bases materiality thresholds and the counting of days past due on regulatory technical standard EBA/RTS/2016/06 and all other conditions on guidelines EBA/GL/2016/07.

In general, all contracts impaired from an accounting standpoint are also considered impaired for prudential purposes, except where they are impaired by reason of the accounting definition of default but where the past-due amounts are equal to or below a materiality threshold (exposures of 100 euros for the retail segment and of 500 euros for the non-retail segment, and where 1% of the total exposures are past-due for both cases).

Notwithstanding the foregoing, the prudential definition is generally more conservative than the accounting definition. The key differing aspects are set out hereafter:

–

Under the prudential definition, the number of days in default are counted from the moment the first past-due amount goes above the materiality threshold. The counting cannot be restarted or reduced until the borrower has paid all past-due amounts or until the past-due amounts fall back below the materiality thresholds. Under the accounting definition, a FIFO criterion can be applied to past-due amounts when there have been partial repayments, enabling the number of days past due to be reduced for that reason.

–

Under the prudential definition, a 3-month probation period exists for all amounts in default, while a 12-month probation period is used for amounts in default classified as refinancing. Under the accounting definition, the 3-month period applies only to amounts classified as stage 3 as a result of borrower arrears, while the 12-month period applies only to amounts classified as stage 3 that correspond to refinancing.

–

In terms of unlikely-to-pay amounts in default (for reasons other than borrower arrears), there are explicit criteria defined at the prudential level, which are additional to those applied at the accounting level.

Transaction classification criteria

The Group applies various criteria to classify borrowers and transactions into different categories based on their credit risk. These include:

–

Automatic criteria;

–

Criteria based on indicators (triggers); and

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–

Specific criteria for refinancing.

The automatic factors and specific classification criteria for refinancing make up what the Institution refers to as the classification and cure algorithm and are applied to the entire portfolio.

Furthermore, to enable an early identification of any significant increase in credit risk or vulnerabilities, or any transaction impairment, the Group establishes different triggers for significant and non-significant borrowers. The details for each borrower group are described in the sections on “Individual assessment” and “Collective assessment”, respectively. In particular, non-significant borrowers are assessed by means of a process which aims to identify any significant increase in credit risk since the transaction was first approved and which could result in losses greater than those incurred on other similar transactions classified as stage 1. For significant borrowers, on the other hand, there is an automated system of triggers in place that generates a series of alerts, which serve to indicate, during a borrower’s assessment, that a decision needs to be made with regard to their classification.

As a result of the application of these criteria, the Group either classifies its borrowers as stage 2 or 3 or keeps them in stage 1.

Individual assessment

The Group has established a significance threshold in terms of exposure, which is used to classify certain borrowers as significant, meaning that their risks need to be assessed individually.

The thresholds at the customer level used to classify borrowers as significant have been set at 10 million euros for customers classified in stage 1 or 2, and at 5 million euros for customers classified in stage 3. These thresholds comprise amounts drawn, amounts available and guarantees.

Exposures of more than 1 million euros of borrowers within the Top 10 main risk groups classified in stage 3, identified on an annual basis, are also considered individually. Exceptionally, and with the sole purpose of classifying and more precisely impairing transactions, borrowers whose exposures are not above the significance threshold but who nevertheless belong to a group in which the individual assessment of its components is based on consolidated data may also be assessed individually.

To assess significant borrowers’ transactions, a system of triggers is established. These triggers identify any significant increase in credit risk, as well as any signs of impairment.

A team of expert risk analysts carries out the individual assessment of borrowers, reviewing each transaction and assigning it the corresponding accounting classification.

The system of triggers for significant borrowers is automated and takes into account the particular characteristics of segments that perform differently within the loan portfolio, with specific triggers in place for certain segments. In any event, the system of triggers does not automatically or individually classify borrowers. Instead, it brings forward the due date for assessment of the borrower by an analyst and prompts decision-making with regard to their classification. The main aspects identified by the system of triggers are listed here below:

Stage 2 triggers:

•

Adverse changes in the financial situation, such as a significant increase in levels of leverage or a sharp drop in turnover or equity.

•

Adverse changes in the economy or market indicators, such as a significant fall in share prices or a reduction in the price of debt issues.

•

Significant fall in the internal credit rating of the borrower.

•

Significant increase in credit risk of other transactions of the same borrower, or in entities associated with the borrower’s risk group.

•

For transactions secured with collateral, significant decline in the value of the collateral received.

Stage 3 triggers:

•

Negative EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), significant decrease in EBITDA, in turnover, or in general, in the borrower’s recurrent cash flows.

•

Increase in the borrower’s leverage ratios.

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•

Negative equity or equity reduction as a result of the borrower suffering equity losses of 50% or more in the past year.

•

Existence of an internal or external credit rating showing that the borrower is in arrears.

The Group carries out an annual review of the reasonableness of its thresholds and of the credit risk captured in the individual assessments carried out using these thresholds.

Collective assessment

For borrowers who have been classed below the significant borrower threshold and who, in addition, have not been classified as stage 2 or 3 by the automatic classification algorithm, there is a process in place to identify transactions that show a significant increase in credit risk compared to when the transaction was approved, and which could give rise to greater losses than those incurred on other similar transactions classified as stage 1.

For transactions of borrowers that are assessed collectively, the Group has a statistical model that applies to all geographies except for the UK (TSB) and which allows it to determine the Probability of Default (PD) term structure and, therefore, the residual lifetime PD of a contract (or the PD from a given moment in time up to the maturity of the transaction), based on different characteristics:

–

Systemic: macroeconomic characteristics shared by all exposures.

–

Cross-cutting: aspects that remain stable over time and which are shared by a group of transactions, such as the shared effect of lending policies in effect at the time the transaction was approved, or the transaction’s approval channel.

–

Idiosyncratic: aspects specific to each transaction or borrower.

With this specification, it is possible to measure the annualised residual lifetime PD of a transaction under the conditions that existed at the time the transaction was approved (or originated), or under the conditions existing at the time the provision is calculated.

A statistical model is used that estimates significant increase in credit risk for borrowers and transactions subject to collective assessment models. The estimate is made using a logistic regression that considers, as explanatory variables, the ratio and the absolute increase between the annualised lifetime PD under the economic and idiosyncratic circumstances at the time the provision is calculated and the annualised residual lifetime PD under the circumstances that existed at the time the transaction was approved, along with other defining variables of the borrower or exposure. For this model, thresholds for the increase in annualised lifetime PD, requiring stage 2 classification, have been calibrated using historical data with the aim of maximising efficient and early detection of arrears at 30 days, refinancings and defaults, thereby maximising risk discrimination among borrowers and/or transactions classified as stage 1 and 2.

The thresholds for significant increase in credit risk vary according to the portfolio, business size, product and level of PD upon approval, requiring higher relative increases if the PD upon approval is low.

Exceptionally, these thresholds are not applicable at certain low levels of current PD where there is practically no indication of significant increase in credit risk over a 6-month horizon (Low Credit Risk Exemption); these levels will vary according to the portfolio/segment and have been calibrated using historical data. The current PD thresholds to identify the population exempt from significant increases in credit risk have been calibrated differently for each of the portfolios under the collective model perimeter, i.e. companies differentiated by size, mortgages and consumer loans.

In any case, as a general criterion and in addition to those described previously, borrowers included in the watchlist identified by the risk function (list of high-risk borrowers) and all transactions that have a current

12-month PD above a given threshold that varies according to portfolio/segment and is statistically calibrated, are reclassified to stage 2. Similarly, all transactions with a current 12-month PD above a particular threshold, which varies according to portfolio/segment, are reclassified to stage 3.

In the case of TSB, the methodology for classification to stage 2 uses the multiplier of lifetime PD upon approval relative to current lifetime PD as an input, complemented with an absolute increase in PD calculated specifically for each portfolio. Both of these thresholds must be reached in order for an exposure to be reclassified to stage 2. In 2023 and 2022, the threshold for the multiplier of current PD relative to PD upon approval ranges from 1 (there is no increase of PD upon approval relative to current PD) to 3 (an increase of two times the PD upon approval), while absolute thresholds have ranged from 10 to 770 basis points in both years, with the exception of overdrafts, which only use an absolute threshold of 400 basis points.

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Refinancing and restructuring transactions

Credit risk management policies and procedures applied by the Group ensure that borrowers are carefully monitored, identifying cases where provisions need to be allocated as there is evidence that their solvency is declining (see Note 4). To this end, the Group allocates loan loss provisions for the transactions that require them given the borrower’s circumstances, before formally executing any refinancing/restructuring transactions, which should be understood as follows:

–

Refinancing transaction: transaction which, irrespective of the borrower or guarantees involved, is approved or used for economic or legal reasons related to the current or foreseeable financial difficulties of the borrower (or borrowers) to repay one or more transactions approved by the Group and granted to the borrower (or borrowers) or to another company or companies belonging to its group, or to bring outstanding payments fully or partially up to date, with a view to making it easier for holders of refinanced transactions to repay their debt (principal and interest) when they are unable, or will predictably soon be unable, to honour their payment obligations in good time and in the manner agreed.

–

Restructured transaction: transaction in which, for economic or legal reasons related to the current or foreseeable financial difficulties of the borrower (or borrowers), the financial terms and conditions are modified to make it easier for them to repay their debt (principal and interest) when they are unable, or will predictably soon be unable, to honour their payment obligations in good time and in the manner agreed, even when such a modification is already provided for in the contract. In any case, transactions in which the debt is written down or assets are received to reduce the debt, or transactions whose terms are modified to extend the term to maturity, or to amend the repayment schedule so as to the reduce repayment instalment amounts in the short term or reduce their payment frequency, or to establish or extend the grace period for the repayment of principal, interest, or both, are all considered restructured transactions, except where it can be proven that the terms are being modified for reasons other than borrowers’ financial difficulties and that the modified terms are analogous to those that would be applied in the market, on the date of such modification, to transactions with a similar risk profile.

If a transaction is classified in a particular risk category, refinancing does not mean that its risk classification will automatically improve. The algorithm establishes the initial classification of refinanced transactions based on their characteristics: they may be based on an inadequate business plan, they may have certain clauses such as long grace periods, or they may have amounts written off as they are considered to be non-recoverable. The algorithm then changes the initial classification depending on the established cure periods. Reclassification into a lower risk category will only be considered if evidence exists of a continuous and significant improvement in the recovery of the debt over time; therefore, the act of refinancing does not in itself produce any immediate improvements.

Refinancing, refinanced and restructured transactions remain identified as such during a probation period until all of the following requirements are met:

–

It is concluded, having reviewed the borrower’s assets and financial position, that the borrower is unlikely to experience financial difficulties.

–

A minimum of two years have passed since the date of the restructuring or refinancing or, if later, since the date of reclassification to the stage 3 category.

–

The borrower has paid the instalments of principal and interest accumulated since the date of the refinancing or restructuring or, if later, since the date of reclassification to the stage 3 category.

–

The borrower has no other transactions with amounts more than 30 days past due at the end of the probation period.

–

At least 12 months have passed since the grace period came to an end.

–

The refinanced amount of both the contract and the borrower has been reduced and the cumulative amount since the refinancing date is at least the amount equivalent to the refinanced unpaid amount, the write-down or the new risk approved.

Refinancing, refinanced and restructured transactions remain in the stage 3 category until it can be verified that they meet the general criteria for reclassification to the stage 2 category, particularly the following requirements:

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–

It is concluded, having reviewed the borrower’s assets and financial position, that the borrower is unlikely to experience financial difficulties.

–

One year has passed since the date of the refinancing or restructuring.

–

The borrower has paid the accumulated instalments of principal and interest.

–

The borrower has no other transactions with amounts more than 90 days past due on the date on which the refinancing, refinanced or restructured transaction is reclassified to stage 2.

–

At least 12 months have passed since the grace period came to an end.

–

In the case of refinanced/restructured loans classified as stage 2, in addition to the general classification criteria, certain specific criteria are applicable which, if met, lead to reclassification into one of the higher risk categories described previously (i.e. to stage 3, as a result of borrower arrears, when payments are, in general, over 90 days past due, or for reasons other than borrower arrears, when there are reasonable doubts as to their recoverability).

The methodology used to estimate losses on these portfolios is generally similar to that used for other financial assets at amortised cost, but it is considered that, in principle, the estimated loss on a transaction that has had to be restructured to enable payment obligations to be satisfied should be greater than the estimated loss on a transaction with no history of non-payment, unless sufficient additional effective guarantees are provided to justify otherwise.

1.3.4.1.2 Credit loss allowances

The Group applies the following parameters to determine its credit loss allowances:

–	EAD (Exposure at Default): the Institution defines exposure at default as the value to which it expects to be exposed when a loan defaults.

The exposure metrics considered by the Group in order to cover this value are the currently drawn balances and the estimated amounts that it expects to disburse in the event its off-balance sheet exposures enter into default, by applying a Credit Conversion Factor (CCF).

–	PD (Probability of Default): estimation of the probability that a borrower will default within a given period of time.

The Group has tools in place to help in its credit risk management that predict the probability of default of each borrower and which cover practically all lending activity.

In this context, the Group reviews the quality and stability of the scoring and rating tools that are currently in use on an annual basis.

The tools used to assess debtors’ probability of default in the case of companies are the ratings and early warning tool (known as HAT) described below:

–

Credit ratings (for companies): the rating model estimates the risk rating in the medium term, based on qualitative information provided by risk analysts, financial statements and other relevant information. The rating system is based on factors that predict the probability of default over a one-year period. It has been designed for different segments. The rating model is reviewed annually based on the analysis of performance patterns of actual defaulted loans. A predicted default rate is assigned to each credit rating level, which also allows a uniform comparison to be made against other segments and against credit ratings issued by external credit rating agencies using a master ratings scale.

Credit ratings have a variety of uses in risk management. Most notably, they form part of the transaction approval process (system of discretions), risk monitoring and pricing policies.

–

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HAT aims to capture the short-term risk of a company. The scores that it gives are very sensitive to changes in a company’s status or behaviour and are therefore updated on a daily basis.

–

Credit scores: the tools designed to assess the probability of default of debtors who are natural persons are credit scoring systems, which are in turn based on a quantitative model of historical statistical data, where the relevant predictive factors are identified. In geographical areas where credit scoring takes place, credit scores are divided into two types:

•

Reactive credit scores: these are used to assess applications for consumer loans, mortgage loans and credit cards. Once all of the data relating to the transaction has been entered, the system calculates a result based on the estimated borrowing power, financial profile and, if applicable, the profile of assets pledged as collateral. The resulting credit score is integrated in risk management processes using the system of discretions.

•

Behavioural credit scores: the system automatically classifies all customers using information regarding their activity based on their financial situation (balances, activity, non- payments), their personal characteristics and the features of each of the products that they have acquired. These credit scores are mainly used to authorise transactions, establish (authorised) overdraft limits, design advertising campaigns and adjust the initial stages of the debt recovery management process.

If no credit rating or credit scoring system exists, individual assessments supplemented with policies are used instead.

–

LGD (Loss Given Default): expected loss on transactions which are in default. This loss also takes into account outstanding debt, late payment interest and expenses relating to the recovery process. Additionally, for each cash flow (amounts outstanding and amounts recovered) an adjustment is applied to consider the time value of money.

–	Effective Interest Rate (EIR): rate that exactly discounts estimated future cash payments or receipts through the expected life of a financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability.

–

Multiple scenarios: in order to estimate expected losses, the Group applies different scenarios to identify the effect of the non-linearity of losses. To this end, the provisions required are estimated in the different scenarios for which a probability of occurrence has been defined. Specifically, the Bank has considered three macroeconomic scenarios: one baseline scenario, the most likely of all (60%); alternative scenario 1, which is more optimistic and envisages greater potential growth and non-existent inflation (10%); and alternative scenario 2, which is more adverse and envisages a halt in the disinflation process, financial instability and recession (30%). In the case of TSB, the probability of the adverse scenario is reduced to 20%, assigning a 10% probability to a more adverse scenario characterised by interest rate hikes. To carry out the forecasts of these scenarios, 5-year time horizons are used. The main variables considered are changes in GDP, the unemployment rate and house prices. In 2022, the Group considered three macroeconomic scenarios with weights of 61%, 9% and 30%, respectively, and the same macroeconomic variables as in 2023.

Baseline scenario

•

Global economic growth is fragile and constrained by the materialisation of impacts stemming from monetary policy tightening, which affect activity, financing conditions and lending. In terms of regions, there are still structural adjustments in China, while in the Eurozone, Germany’s weaker performance contrasts with the periphery countries that benefit from the Next Generation (NGEU) funds. Labour markets show relative stability, with a more even balance between supply and demand for jobs.

•

Inflation gradually eases towards monetary policy targets. Movements in inflation are especially determined by largely domestic factors, such as the job market, the real estate market and the fiscal policy of each country. However, unstable supply conditions could generate new disruptions in production chains and new specific cost pressures.

•

The geopolitical environment is uncertain, characterised by greater confrontations between blocs and a lack of cooperation in various areas. Countries tend to prioritise trade relations with their neighbours or with countries that are similar to them, and tend to respond to events that generate uncertainty with protectionist policies.

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•

In terms of economic policy, concerns over the state of public finances take centre stage. The bigger role played by the State in tackling the major challenges and transitions that society will face in the future (climate, adverse demographics, convoluted geopolitics, industrial policy, new technologies, etc.) requires governments to seek new and often unorthodox income measures in an attempt to cover higher structural costs. In the European Union, the Next Generation funds continue to be rolled out and serve as a mechanism to channel public investment in the next few years.

•

Central banks cut interest rates as inflation eases off and comes closer to monetary policy targets, in order to avoid a further rebound of the real interest rate. This process starts in 2024 and continues gradually until levels around monetary neutrality are reached. Meanwhile, central banks continue to make progress on their quantitative tightening policies, although they are eventually forced to stop this process to avoid causing liquidity problems in the markets.

•

The environment of tight financial conditions is prone to further episodes of stress due to issues in some segments of the financial sector, including some banks, or liquidity mismatches in the system. In any event, these events are localised and the authorities manage to control them; therefore, their economic repercussions are non-existent.

•

Spain continues to stand out in a positive light in the Eurozone. The recovery in real household incomes, thanks to a favourable job market, rising wages and lower inflation, leads to an improvement in private consumption. The robustness of household balance sheets and a relatively low sensitivity to interest rate hikes also support household spending. The NGEU funds remain a supporting factor.

•

Private sector lending in Spain declines in the near term, while in the long term it continues to grow below nominal GDP, impacted by high interest rates, global economic weakness, companies’ ample liquidity buffers and, in the case of mortgage loans, also by reduced affordability and accessibility.

•

In relation to financial markets, long-term government bond yields remain stable over the forecast period, despite weak economic growth and more moderate inflation. This is because the market gradually prices in a higher forward premium, due to central banks’ quantitative tightening (QT) and concerns about the state of public finances.

•

Risk premiums of the European periphery remain contained and in line with their respective ratings.

•

The dollar depreciates gradually amidst slowing inflation and a cooling US economy once the Fed starts to cut interest rates in 2024.

Alternative scenario 1: Greater potential growth and non-existent inflation

•

The geopolitical environment improves and the conflict in Ukraine is resolved with an agreement that works for all parties, thus removing a source of uncertainty in Europe.

•

Global supply conditions improve substantially and revert back to pre-Covid-19 levels. This is the result of a healthier geopolitical environment, the absence of climate shocks and productivity gains thanks to technological developments (e.g. those related to artificial intelligence).

•

Global economic growth is more robust and synchronised from the outset than in the baseline scenario, due to a better business climate, less uncertainty over geopolitics, lower energy and commodity prices and the positive evolution of core inflation. In the medium term, productivity gains also materialise stemming from the rapid implementation of new technologies and a more sustainable economy, improving economies’ potential growth prospects.

•

Inflation falls faster than in the baseline scenario and remains at levels close to the monetary policy targets of the respective central banks.

•

This environment allows central banks to ease their monetary policies more quickly than in the baseline scenario.

•

Global financing conditions remain lax, with no episodes of risk aversion.

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•

The macroeconomic and financial environment allows risk premiums on both peripheral debt and corporate bonds to remain contained.

•

In Spain, the economy maintains significant growth momentum thanks to the resolution of the conflict in Ukraine, lower interest rates and the use of the NGEU funds.

Alternative scenario 2: Halt in disinflation process, financial instability and recession

•

The scenario centres on the potential materialisation of risks to financial stability.

•

At first, the inflation moderation process stops prematurely and inflation stabilises at levels clearly above central banks’ targets during 2024. Against this backdrop, central banks are forced to further tighten their monetary policies during the first half of 2024.

•

The financial vulnerabilities in the current environment have the potential to trigger significant financial instability. Additional monetary tightening clearly increases the likelihood of persistent financial stress with economic repercussions.

•

The global economy falls into a recession in 2024, as a result of financial instability and the accumulated monetary tightening. Labour markets deteriorate with sharp rises in unemployment.

•

Despite the initial downward stickiness of inflation, it eventually recedes due to damage to the credit channel, financial market dislocation and economic recession.

•

Monetary policy is forced to respond to financial instability through balance sheet policies and liquidity programmes. Central banks also cut official interest rates to expansive levels.

•

Global financing conditions tighten, in terms of both capital markets and credit. Government bond yields end up falling in the face of central banks’ monetary policy shift, economic recession and decreasing inflation.

•

Periphery risk premiums rise sharply, reducing fiscal headroom in some countries.

•

The Spanish economy falls into a recession in the first half of 2024 and records negative growth until the second half of 2025. This is influenced by tightened credit supply, the economic weakness of its main trading partners and the uncertainty characterising this scenario.

As at 31 December 2023 and 2022, the main forecast variables considered for Spain and the United Kingdom are those shown below:


%
	31/12/2023
	Spain										United Kingdom
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 1		Year 2		Year 3		Year 4		Year 5

GDP growth
Baseline scenario		1.6		1.9		1.8		1.6		1.6		0.6		1.2		1.3		1.4		1.4
Alternative scenario 1		4.1		3.5		2.2		2.0		2.0		1.3		2.7		1.7		1.6		1.6
Alternative scenario 2		-0.2		-1.0		1.0		1.2		1.2		-0.6		-1.1		1.2		1.4		1.2

Unemployment rate
Baseline scenario		11.4		11.2		10.9		10.7		10.5		4.5		4.7		4.6		4.3		4.3
Alternative scenario 1		10.3		9.0		8.4		8.1		8.0		4.0		3.6		3.5		3.5		3.5
Alternative scenario 2		15.3		16.0		14.5		13.0		11.5		5.2		6.6		6.2		5.6		5.0

*House price growth ()**
Baseline scenario		0.5		1.7		1.8		1.9		1.9		-6.5		-2.4		1.9		2.5		2.5
Alternative scenario 1		5.6		4.6		3.5		3.5		3.5		-2.5		0.5		1.0		1.6		3.4
Alternative scenario 2		-3.6		-2.1		0.0		1.9		1.9		-7.8		-9.5		-0.4		0.0		1.6

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

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%
	31/12/2022
	Spain										United Kingdom
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 1		Year 2		Year 3		Year 4		Year 5

GDP growth
Baseline scenario		1.3		2.0		2.0		1.8		1.7		-1.3		-0.2		1.0		1.3		1.4
Alternative scenario 1		4.4		4.4		2.5		2.0		2.0		-0.4		0.8		1.3		1.3		1.4
Alternative scenario 2		-1.1		0.1		1.6		1.8		1.7		-2.5		-1.4		1.0		1.3		1.4

Unemployment rate
Baseline scenario		12.7		12.4		12.1		11.9		11.7		4.4		5.2		5.0		4.6		4.2
Alternative scenario 1		11.6		10.2		9.0		8.6		8.4		3.8		3.8		3.8		3.8		3.8
Alternative scenario 2		15.6		16.7		15.8		14.9		14.2		5.4		6.3		5.7		5.0		4.5

*House price growth ()**
Baseline scenario		1.0		1.6		2.0		2.0		2.0		-3.3		-5.1		0.7		1.9		2.5
Alternative scenario 1		3.0		3.6		3.8		3.6		3.6		-0.9		-2.3		0.7		2.9		3.7
Alternative scenario 2		-2.6		-1.6		2.0		2.0		2.0		-3.4		-11.1		-0.5		4.3		4.3

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

In the Group, macroeconomic scenarios have been incorporated into the impairment calculation model.

The Group applies a series of additional adjustments to the results of its credit risk models, referred to as overlays, in order to address situations in which the results of the models are not sufficiently sensitive to the uncertainty of the macroeconomic environment. These adjustments are temporary and remain in place until the reasons for which they were originally applied cease to exist. The application of these adjustments is subject to the governance principles established by the Group. Specifically, as at 31 December 2022, the impairment losses of the loan portfolio included a series of additional provisions that included sector-specific characteristics of the macroeconomic situation and inflationary environment, in the amount of 170 million euros, the adjustment remaining on the balance sheet as at 31 December 2023 being around 80 million euros. The balance variation during the year is mainly due to the specific way in which those adjustments were made, after having completed the recurring updates of internal provisioning models and their parameters.

The Group applies the criteria described below to calculate credit loss allowances.

The amount of impairment allowances is calculated based on whether or not there has been a significant increase in credit risk since initial recognition, and on whether or not a default event has occurred. This way, the impairment allowance for transactions is equal to:

–

12-month expected credit losses, when the risk of a default event materialising has not significantly increased since initial recognition (assets classified as stage 1).

–

Lifetime expected credit losses, if the risk of a default event materialising has increased significantly since initial recognition (assets classified as stage 2).

–

Expected credit losses, when a default event has materialised (assets classified as stage 3).

12-month expected credit losses are defined as:

LOGO

Where:

EAD_12M is the exposure at default at 12 months, PD_12M is the probability of a default occurring within 12 months and LGD_12M is the expected loss given default.

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Lifetime expected credit losses are defined as:

LOGO

Where:

EAD_i is the exposure at default for each year taking into account both the entry into default and the (agreed) amortisation, PD_i is the probability of a default occurring within the next twelve months for each year, LGD_i is the expected loss given default for each year, and EIR is the effective interest rate of each transaction.

During this estimation process, a calculation is made of the allowance necessary to cover, on one hand, the credit risk attributable to the borrower in question and, on the other hand, country risk.

The Group includes forward-looking information when calculating expected losses and determining whether there has been a significant increase in credit risk, using scenario forecasting models to this end.

The agreed amortisation schedule for each transaction is used. Subsequently, these expected credit losses are updated by applying the effective interest rate of the instrument (if its contractual interest rate is fixed) or the contractual effective interest rate ruling on the date of the update (if the interest rate is variable). The amount of effective guarantees received is also taken into account.

The following sections describe the different methodologies applied by the Group to determine impairment loss allowances:

Individual allowance estimates

The Group monitors credit risk on an individual basis for all risks deemed to be significant. To estimate the individual allowance for credit risk, an individual estimate is made for all individually significant borrowers classified as stage 3 and for certain borrowers classified as stage 2. Individual estimates are also made for transactions identified as having negligible risk classified as stage 3.

The Group has developed a methodology to estimate these allowances, calculating the difference between the gross carrying amount of the transaction and the present value of the estimated cash flows it expects to receive, discounted using the effective interest rate. To this end, effective guarantees received are taken into account (see the section entitled “Guarantees” of this note).

Three methods are established to calculate the recoverable amount of assets assessed individually:

–

Discounted cash flow method (going concern): debtors who are estimated to be able to generate future cash flows through their own business activity, thereby allowing them to fully or partially repay the debt owed through the company’s activity and economic/financial structure. This involves estimating the cash flows obtained by the borrower during the course of their business activity.

–

Collateral recovery method (gone concern): debtors who are not able to generate cash flows during the course of their own business activities and who are forced to liquidate assets in order to fulfil their payment obligations. This involves estimating cash flows based on the enforcement of guarantees.

–

Combined method: debtors who are estimated to be able to generate future cash flows and also have non-core assets. These cash flows can be supplemented with potential sales of non-core assets, insofar as they are not required for the performance of their activity and, consequently, for the generation of the aforesaid future cash flows.

Collective allowance estimates

Exposures that are not assessed using individual allowance estimates are subject to collective allowance estimates.

When calculating collective impairment losses, the Group, in accordance with IFRS 9, mainly takes the following aspects into account:

–

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period. For some types of risk, including sovereign risk and exposures with credit institutions and general governments of countries in the European Union and other advanced economies, the Group does not use internal models. These exposures are considered to have negligible risk given that, based on the information available as at the date of signing off the consolidated annual financial statements, and considering past experience with these risks, the impairment allowance that these exposures are estimated to require is not significant as long as they are not reclassified to stage 3.

–

In order to collectively assess impairment, internal models estimate a different PD and LGD for each contract. To that end, various types of historical information are used that allow the risk to be individually classified for each exposure (ratings, non-payments, vintage, exposure, collateral, characteristics of the borrower or contract). Available historical information representative of the Institution and past losses (defaults) is therefore taken into account. It is worth highlighting that the estimation obtained from the models is adjusted to account for the existing economic climate and the forecasts in the scenarios considered, the latter being representative of expected credit losses. The estimates of impairment loss allowance models are directly integrated in some activities related to risk management and the input data that they use (e.g. credit ratings and credit scores) are those used for approving risks, monitoring risks, for pricing purposes and in capital calculations. In addition, recurring back-testing exercises are carried out at least once a year, and the models are adjusted in the event any significant deviations are detected. The models are also reviewed regularly in order to incorporate the most recent information available and to ensure that they perform adequately and that they are suitably representative when applied to the current portfolio for the calculation of impairment loss allowances.

Segmentation of models

Specific models exist depending on the segment or product of the customer (portfolio) and each one uses explanatory variables that uniformly catalogue all of the portfolio’s exposures. The purpose of the segmentation of models is to optimise the capture of customers’ default risk profile based on a set of common risk drivers. Therefore, the exposures of these segments can be considered to reflect a uniform collective treatment.

The models for companies calculate PD at the borrower level and are fundamentally segmented according to the size of the company (annual turnover) and its activity (real estate development, holding, or other).

The PD models for natural persons, including the self-employed, follow a segmentation that centres primarily on the lending product. Different models exist for different products: mortgage loans, consumer loans, credit cards and lines of credit, considering the recipient of the transaction (individual or company). PDs are estimated at the contract level, meaning that a single borrower can have different PDs depending on the lending product being quantified.

The models for significant increase in credit risk (SICR) carry out calculations at the contract level, in order to consider the characteristics specific to each transaction at the time of origination and at the present time.

Where LGD is concerned, contracts with similar risk characteristics are grouped together for collective assessment, using the following segmentation hierarchy:

–

By type of borrower: companies, developers and natural persons.

–

By type of guarantee: mortgage, unsecured, monetary/financial, and guarantors.

–

By type of product: credit cards, overdrafts, leases, credits and loans.

Different LGDs are estimated for each segment, which are representative of the borrowers, of the recovery processes and of the recoverability assigned to each one based on the Institution’s past experience.

Risk drivers

The risk drivers or explanatory variables of models are the shared credit risk characteristics. In other words, they are common elements that can be used to rate borrowers in a homogeneous way within a portfolio and which explain the credit risk rating assigned to each exposure. Risk drivers are identified by means of a rigorous process that combines historical data analysis, explanatory power and expert judgment, as well as knowledge about the risk/business.

The main risk drivers are presented hereafter, grouped together by type of model (PD, SICR and LGD).

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PD models use credit ratings or credit scores as input data (internal ratings-based (IRB) models used for both risk management and capital calculations). They incorporate additional information to give a more faithful reflection of the risk at a given moment in time (point-in-time). For companies, the early warnings tool known as HAT and the credit rating are used. For individuals, the credit score is used. A description of these tools can be found earlier in this same note.

In both cases, other recent risk events (refinancing, exit from default status, non-payments, lending restrictions) also explain the probability of default.

The explanatory factors mainly used by SICR models are the PD upon approval and the current residual lifetime PD (i.e. for the residual life of the transaction).

LGD models use additional risk drivers that enable a more in-depth segmentation to take place. More specifically, for mortgage guarantees, the LTV (Loan to Value) is used, or the order of priority in the event the mortgage guarantee is enforced. Similarly, the amount of debt and the type of product are also factors taken into account.

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Summary of criteria for classification and allowances

The classification of credit risk and the measurement of allowances are determined based on whether or not there has been a significant increase in credit risk since origination, or on whether or not any default events have occurred:

LOGO

Guarantees

Effective guarantees are collateral and personal guarantees proven by the Group to be a valid means of mitigating credit risk.

Under no circumstances will guarantees whose effectiveness substantially depends on the credit quality of the debtor or, where applicable, of the economic group of which the debtor forms part, be accepted as effective guarantees.

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Based on the foregoing, the following types of guarantees can be considered to be effective guarantees:

–

Real estate guarantees applied as first mortgage liens:

•

Completed buildings and completed component parts:

○

Housing units.

○

Offices, commercial premises and multi-purpose industrial buildings.

○

Other buildings, such as non-multi-purpose industrial buildings and hotels.

•

Urban land and regulated building land.

•

Other real estate.

–

Collateral in the form of pledged financial instruments:

•

Cash deposits.

•

Equity instruments in listed entities and debt securities issued by creditworthy issuers.

–

Other collateral:

•

Personal property received as collateral.

•

Subsequent mortgages on properties.

–

Personal guarantees such that direct liability to the customer falls to the new guarantors, who are persons or entities whose solvency is sufficiently verified to ensure the full redemption of the transaction under the terms set forth.

The Group has collateral valuation criteria for assets located in Spain that are in line with prevailing legislation. In particular, the Group applies criteria for the selection and hiring of appraisers that are geared towards assuring their independence and the quality of the appraisals. All of the appraisers used are appraisal companies that have been entered in the Bank of Spain Special Register of Appraisal Firms, and the appraisals are carried out in accordance with the criteria established in Order ECO/805/2003 on rules for the appraisal of real estate and particular rights for specific financial purposes.

Real estate guarantees for loan transactions are valued on the date they are granted, while real estate assets are valued on the date on which they are recognised, whether as a result of a purchase, foreclosure or a payment in kind, and also whenever there is a significant reduction in value. In addition, the criteria for updating the appraisal, established in Annex 9 to Circular 4/2017 published by the Bank of Spain are applied for assets subject to the calculation of provisions for impairment risk. Similarly, statistical methodologies may be used to update appraisals but only for properties that have a certain level of homogeneity among them, in other words, those with low exposure and low risk whose characteristics are likely to be shared by other properties and which are located in an active market with frequent transactions, although a full appraisal is carried out in accordance with the aforesaid ECO Order (an “ECO appraisal”) at least once every three years.

Assets located in other EU countries are appraised in accordance with that set forth in Royal Decree 716/2009 of 24 April, while those in the rest of the world are appraised by companies and/or experts with recognised expertise and experience in the country in question. Real estate assets located in a foreign country, if any, will be appraised using the method approved by the RICS (Royal Institution of Chartered Surveyors), through prudent and independent appraisals carried out by authorised experts in the country where the property is located or, where appropriate, by appraisal firms or services accredited in Spain, and in accordance with the appraisal rules applicable in that country insofar as these are compatible with generally accepted appraisal practices.

The Group has developed internal methodologies to estimate credit loss allowances. These methodologies use the appraisal value as a starting point to determine the amount that can be recovered with the enforcement of real estate guarantees. This appraisal value is adjusted to account for the time required to enforce such guarantees, price trends and the Group’s ability and experience in realising the value of properties with similar prices and timelines, as well as the costs of enforcement, maintenance and sale.

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Credit losses on state-guaranteed loans granted as part of a government support scheme designed to address the impact of Covid-19, irrespective of the credit risk category or categories into which the transaction is classified throughout its life, are calculated based on their expected credit loss less the positive impact of cash flows expected to be recovered with the state guarantee.

Overall comparison between financial asset and real estate asset impairment allowances

The Group has established backtesting methodologies to compare estimated losses against actual losses.

Based on this backtesting exercise, the Group makes amendments to its internal methodologies when this regular backtesting exercise reveals significant differences between estimated losses and actual losses.

The backtests carried out show that the credit loss allowances are adequate given the portfolio’s credit risk profile.

1.3.4.2 Investments in joint ventures and associates

The Group recognises allowances for the impairment of investments in joint ventures and associates, always provided there is objective evidence that the carrying amount of an investment is not recoverable. Objective evidence that equity instruments have become impaired is considered to exist when, after initial recognition, one or more events occur whose direct or combined effect demonstrates that the carrying amount is not recoverable.

The Group considers the following indicators, among others, to determine whether there is evidence of impairment.

–

Significant financial difficulties.

–

Disappearance of an active market for the instrument in question due to financial difficulties.

–

Significant changes in performance compared to the data included in budgets, business plans or milestones.

–

Significant changes in the market of the issuer’s equity instruments, its existing products, or its potential products.

–

Significant changes in the global economy or in the economic environment in which the issuer operates.

–

Significant changes in the technological or legal environment in which the issuer operates.

The value of the allowances for the impairment of interests held in associates included under the heading of “Investments in joint ventures and associates” is estimated by comparing their recoverable amount against their carrying amount. The carrying amount is the higher of the fair value, less selling costs, and the value in use.

The Group determines the value in use of each interest held based on its net asset value, or based on estimates of the companies’ profit/loss, pooling them into activity sectors (real estate, renewable energy, industrial, financial, etc.) and evaluating the macroeconomic factors specific to that sector which could affect the performance of those companies. In particular, interests held in insurance investees are valued by applying the market consistent embedded value methodology, those held in companies related to real estate are valued based on their net asset value, and those held in financial investees are valued using multiples of their carrying amount and/or the profit of other comparable listed companies.

Impairment losses are recognised in the consolidated income statement for the year in which they materialise and subsequent recoveries are recognised in the consolidated income statement for the year in which they are recovered.

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1.3.5 Hedging transactions

The Group has elected to continue applying IAS 39 for its hedge accounting until the IFRS 9 macro hedge accounting project has been finalised, as permitted by IFRS 9.

The Group uses financial derivatives to (i) provide these instruments to customers that request them, (ii) manage risks associated with the Group’s proprietary positions (hedging derivatives), and (iii) realise gains as a result of price fluctuations. To this end, it uses both financial derivatives traded in organised markets and those traded bilaterally with counterparties outside organised markets (over the counter, or OTC).

Financial derivatives that do not qualify for designation as hedging instruments are classified as derivatives held for trading. To be designated as a hedging instrument, a financial derivative must meet the following conditions:

–

The financial derivative must hedge against the exposure to changes in the value of assets and liabilities caused by interest rate and/or exchange rate fluctuations (fair value hedge), the exposure to variability in estimated cash flows that is attributable to a particular risk of financial assets and financial liabilities, firm commitments or highly probable forecast transactions (cash flow hedge), or the exposure associated with net investments in foreign operations (hedge of net investments in foreign operations).

–

The financial derivative must effectively eliminate some portion of the risk that is inherent in the hedged item or position throughout the entire expected life of the hedge. This effectiveness should be measured both prospectively and retrospectively. To this end, the Group analyses whether, at the time of its inception, a hedge is expected to operate with a high level of effectiveness in business-as-usual conditions. It also runs effectiveness tests throughout the life of the hedge, in order to verify that the results of these tests show an effectiveness that falls within a range of between 80% and 125%.

–

Suitable documentation must be available to show that the financial derivative was acquired specifically to hedge against certain balances or transactions and to show the intended method for achieving and measuring hedge effectiveness, provided that this method is consistent with the Group’s own risk management processes.

Hedges are applied to either individual items and balances (micro-hedges) or to portfolios of financial assets and financial liabilities (macro-hedges). In the latter case, the set of financial assets and financial liabilities to be hedged must share the same type of risk, a condition that is met when the individual hedged items have a similar interest rate sensitivity.

Changes that take place after the designation of the hedge, changes in the measurement of financial instruments designated as hedged items and changes in financial instruments designated as hedging instruments are recognised in the following way:

–

In fair value hedges, differences arising in the fair value of the derivative and the hedged item that are attributable to the hedged risk are recognised directly in the consolidated income statement, with a balancing entry under the headings of the consolidated balance sheet in which the hedged item is included, or under the heading “Derivatives – Hedge accounting”, as appropriate.

In fair value hedges of interest rate risk of a portfolio of financial instruments, gains or losses arising when the hedging instrument is measured are recognised directly in the consolidated income statement. Losses and gains arising from fair value changes in the hedged item that can be attributed to the hedged risk are recognised in the consolidated income statement with a balancing entry under the heading “Fair value changes of the hedged items in portfolio hedge of interest rate risk” on either the asset side or the liability side of the consolidated balance sheet, as appropriate. In this case, hedge effectiveness is assessed by comparing the net position of assets and liabilities in each time period against the hedged amount designated for each of them, immediately recognising the ineffective portion under the heading “Gains or (-) losses on financial assets and liabilities, net” of the consolidated income statement.

–

In cash flow hedges, differences in the value of the effective portion of hedging instruments are recognised under the heading “Accumulated other comprehensive income – Hedging derivatives. Cash flow hedges reserve [effective portion]” of the consolidated statement of equity. These differences are recognised in the consolidated income statement when the losses or gains on the hedged item are recognised through profit or loss, when the envisaged transactions are executed, or on the maturity date of the hedged item.

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–

In hedges of net investments in foreign operations, measurement differences in the effective portion of hedging instruments are recognised temporarily in the consolidated statement of equity under “Accumulated other comprehensive income – Hedge of net investments in foreign operations [effective portion]”. These differences are recognised in the consolidated income statement when the investment in foreign operations is disposed of or derecognised from the consolidated balance sheet.

–

Measurement differences in hedging instruments relating to the ineffective portion of cash flow hedges and net investments in foreign operations are recognised under the heading “Gains or (-) losses on financial assets and liabilities, net” of the consolidated income statement.

If a derivative assigned as a hedging derivative does not meet the above requirements due to its termination, discontinuance, ineffectiveness, or for any other reason, it will be treated as a derivative held for trading for accounting purposes. Therefore, changes in its measurement are recognised with a balancing entry in the income statement.

When a fair value hedge is discontinued, any previous adjustments made to the hedged item are recognised in the income statement using the effective interest rate method, recalculated as at the date on which the item ceased to be hedged, and must be fully amortised upon maturity.

Where a cash flow hedge is discontinued, the accumulated gains or losses on the hedging instrument that had been recognised under “Accumulated other comprehensive income” in the consolidated statement of equity while the hedge was still effective will continue to be recognised under that heading until the hedged transaction takes place, at which time the gain or loss will be recognised in the income statement, unless the hedged transaction is not expected to take place, in which case it will be recognised in the income statement immediately.

1.3.6 Financial guarantees

Contracts by which the issuer undertakes to make specific payments on behalf of a third party in the event of that third party failing to do so, irrespective of their legal form, are considered financial guarantees. These can be bonds, bank guarantees, insurance contracts or credit derivatives, among other items.

The Group recognises financial guarantee contracts under the heading “Financial liabilities at amortised cost

– Other financial liabilities” at their fair value which, initially and unless there is evidence to the contrary, is the present value of the expected fees and income to be received. At the same time, fees and similar income received upon commencement of the operations, as well as the accounts receivable, measured at the present value of future cash flows pending collection, are recognised as a credit item on the asset side of the balance sheet.

In the particular case of long-term guarantees given in cash to third parties under service contracts, when the Group guarantees a particular level or volume in terms of the provision of such services, it initially recognises those guarantees at fair value. The difference between their fair value and the disbursed amount is considered an advance payment made or received in exchange for the provision of the service, and this is recognised in the consolidated income statement for the period in which the service is provided. Subsequently, the Group applies analogous criteria to debt instruments measured at amortised cost.

Financial guarantees are classified according to the risk of incurring loan losses attributable to either the customer or the transaction and, where appropriate, an assessment is made of whether provisions need to be allocated for these guarantees by applying criteria similar to the criteria used for debt instruments measured at amortised cost.

Income from guarantee instruments is recognised under the heading “Fee and commission income” in the consolidated income statement and calculated applying the rate laid down in the related contract to the nominal amount of the guarantee. Interest from long-term guarantees given in cash to third parties is recognised by the Group under the heading “Interest income” in the consolidated income statement.

1.3.7 Transfers and derecognition of financial instruments from the balance sheet

Financial assets are only derecognised from the consolidated balance sheet when they no longer generate cash flows or when their inherent risks and rewards have been substantially transferred to third parties. Similarly, financial liabilities are only derecognised from the consolidated balance sheet when there are no further obligations associated with the liabilities or when they are acquired for the purpose of their termination or resale.

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Note 4 provides details of asset transfers in effect at the end of 2023 and 2022, indicating those that did not involve the derecognition of the asset from the consolidated balance sheet.

1.3.8 Offsetting of financial instruments

Financial assets and financial liabilities are only offset for the purpose of their presentation in the consolidated balance sheet when the Group has a legally enforceable right to offset the amounts recognised in such instruments and intends to settle them at their net value or realise the asset and settle the liability simultaneously.

1.3.9 Non-current assets and assets and liabilities included in disposal groups classified as held for sale and discontinued operations

The “Non-current assets and disposal groups classified as held for sale” heading on the consolidated balance sheet includes the carrying amounts of assets – stated individually or combined in a disposal group, or as part of a business unit intended to be sold (discontinued operations) – which are very likely to be sold in their current condition within one year of the date of the consolidated annual financial statements.

It can therefore be assumed that the carrying amount of these assets, which may be of a financial or non-financial nature, will be recovered through the disposal of the item concerned rather than through its continued use.

Specifically, real estate or other non-current assets received by the Group for the full or partial settlement of debtors’ payment obligations are treated as non-current assets held for sale, unless the Group has decided to make continued use of those assets or to include them in its rental operations. Similarly, investments in joint ventures or associates that meet the above criteria are also recognised as non-current assets held for sale. For all of these assets, the Group has specific units that focus on the management and sale of real estate assets.

The heading “Liabilities included in disposal groups classified as held for sale” includes credit balances associated with assets or disposal groups, or with the Group’s discontinued operations.

Non-current assets and disposal groups classified as held for sale are measured, both on the acquisition date and thereafter, at the lower of their carrying amount and their fair value less estimated selling costs. The carrying amount at the acquisition date of non-current assets and disposal groups classified as held for sale deriving from foreclosure or recovery is defined as the outstanding balance of the loans or credit that gave rise to these purchases (less any associated provisions). Tangible and intangible assets that would otherwise be subject to depreciation or amortisation are not depreciated or amortised while they remain classified as “Non-current assets and disposal groups classified as held for sale”.

In order to determine the net fair value of real estate assets, the Group uses its own internal methodology, which uses as a starting point the appraisal value, adjusting this based on its past experience of selling properties that are similar in terms of prices, the period during which each asset remains on the consolidated balance sheet and other explanatory factors. Similarly, agreements entered into with third parties for the disposal of these assets are also taken into account.

The appraisal value of real estate assets recognised in this heading is obtained following policies and criteria analogous to those described in the section entitled “Guarantees” in Note 1.3.4. The main appraisal firms and agencies used to obtain market values are listed in Note 6.

Gains and losses arising from the disposal of assets and liabilities classified non-current assets or liabilities held for sale, as well as impairment losses and their reversal, where applicable, are recognised under the heading “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” in the consolidated income statement. The remaining income and expenses relating to these assets and liabilities are disclosed according to their nature.

Discontinued operations are components of the Institution that have been disposed of or classified as held for sale and which (i) represent a business line or geographical area that is significant and separate from the rest or is part of a single coordinated plan to dispose of that business or geographical area, or (ii) are subsidiaries acquired solely in order to be resold. Income and expenses of any kind generated by discontinued operations, if any, during the year, including those generated before they were classified as discontinued operations, are presented net of the tax effect as a single amount under the heading “Profit or (-) loss after tax from discontinued operations” in the consolidated income statement, regardless of whether the business has been derecognised from or remains on the asset side of the balance sheet as at year-end. This heading also includes the profit or loss obtained from their sale or disposal.

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1.3.10 Tangible assets

Tangible assets include (i) property, plant and equipment held by the Group for current or future use that is expected to be used for more than one year, (ii) property, plant and equipment leased out to customers under operating leases, and (iii) investment properties, which include land, buildings and other structures held in order to be leased out or to obtain a capital gain on their sale. This heading also includes tangible assets received in payment of debts classified on the basis of their final use.

As a general rule, tangible assets are measured at their acquisition cost less accumulated depreciation and, if applicable, less any impairment losses identified by comparing the net carrying amount of each item against its recoverable amount.

Depreciation of tangible assets is systematically calculated on a straight-line basis, applying the estimated years of useful life of the various items to the acquisition cost of the assets less their residual value. The land on which buildings and other structures stand is considered to have an indefinite life and is therefore not depreciated.

The annual depreciation charge on tangible assets is recognised in the consolidated income statement and generally calculated based on the remaining years of the estimated useful life of the different groups of components:



		Useful life (years)

Land and buildings		17 to 75
Fixtures and fittings		5 to 20
Furniture, office equipment and other		3 to 15
Vehicles		3 to 6
Computer equipment		5 to 6

The Group reviews the estimated useful life of the various components of tangible assets at the end of every year, if not more frequently, in order to detect any significant changes. Should any such changes occur, the useful life is adjusted, correcting the depreciation charge in the consolidated income statements for future years as required to reflect the new estimated useful life.

At each year-end closing, the Group analyses whether there are any internal or external signs that a tangible asset might be impaired. If there is evidence of impairment, the Group assesses whether this impairment actually exists by comparing the asset’s net carrying amount against its recoverable amount (the higher of its fair value, less selling costs, and its value in use). When the asset’s carrying amount is higher than its recoverable amount, the Group reduces the carrying amount of the corresponding component to its recoverable amount and adjusts future depreciation charges in proportion to the adjusted carrying amount and new remaining useful life, in the event this needs to be re-estimated. Where there are signs that the value of a component has been recovered, the Group records the reversal of the impairment loss recognised in previous years and adjusts future depreciation charges accordingly. The reversal of an impairment loss on an asset component shall in no circumstances result in its carrying amount being increased to a value higher than the value that the asset component would have had if no impairment losses had been recognised in previous years.

In particular, certain items of property, plant and equipment are assigned to cash-generating units in the banking business. Impairment tests are conducted on these units to verify whether sufficient cash flows are generated to support the assets’ value. To that end, the Group (i) calculates the recurring net cash flow of each branch based on the cumulative contribution margin less the allocated recurring cost of risk, and (ii) that recurring net cash flow is regarded as a perpetual cash flow and a valuation is effected using the discounted cash flow method applying the cost of capital and growth rate in perpetuity determined by the Group (see Note 16).

For investment properties, the Group uses valuations carried out by third parties entered in the Bank of Spain Special Register of Appraisal Firms, in accordance with criteria set forth in Order ECO/805/2003.

The costs of preserving and maintaining tangible assets are recognised in the consolidated income statement for the year in which they are incurred.

1.3.11 Leases

The Group evaluates the existence of a lease contract at its inception or when its terms are changed. A contract is deemed to be a lease contract when the asset is identified in that contract and the party receiving the asset has the right to control its use.

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Leases in which the Group acts as lessee

The Group recognises, for leases in which it acts as lessee, which mostly correspond to lease contracts for real estate and office spaces linked to its operating activity, a right-of-use asset of the leased asset and a liability for payments outstanding at the date on which the leased asset was made available to the Group for use.

For lease contracts with a specified lease term that include, or not, a unilateral option for early termination that can be exercised by the Group and in which the cost associated with such termination is not significant, the term of the lease is generally equivalent to the duration initially stipulated in the contract. However, if there are any circumstances that could result in contracts being terminated early, these will be taken into account.

For lease contracts with a specified lease term that include a unilateral option for extension that can be exercised by the Group, the choice to exercise this option will be made on the basis of economic incentives and past experience.

The lease liability is initially recognised in the heading “Financial liabilities at amortised cost – Other financial liabilities” of the consolidated balance sheet (see Note 21), at a value equal to the present value of the estimated payments outstanding, based on the envisaged maturity date. Lease payments are discounted using the implicit interest rate, if this can be easily determined and, if not, the incremental borrowing rate, understood as the rate of interest that the Group would have to pay to borrow the funds necessary to purchase assets with a value similar to the rights of use acquired over the leased assets for a term equal to the estimated duration of the lease contracts.

These payments comprise fixed payments (less any lease incentives payable), variable payments determined by reference to an index or rate, amounts expected to be paid for residual value guarantees given to the lessor, the strike price of a call option (if the Group is reasonably certain that it will exercise that option) and payments of penalties for terminating the lease (if the lease term shows that an option to terminate the lease is exercised).

The payments settled by the lessee in each period reduce the lease liability and accrue an interest expense that is recognised in the consolidated income statement over the lease term.

A right-of-use asset, which is classified as a fixed asset based on the nature of the leased asset, is initially recognised at cost, which comprises the amount of the initial measurement of the lease liability, payments made before or at the commencement date of the lease, initial direct costs and, where appropriate, the estimated costs of dismantling or restoring the asset to the condition required under the lease.

The right-of-use asset is depreciated on a straight-line basis at the shorter of the useful life of the asset or the lease term.

The criteria for impairing these assets are similar to those used for tangible assets (see Note 1.3.10).

The Group exercises the option to recognise, as an expense during the year, the payments made on short-term leases (those that, at the commencement date, have a lease term of 12 months or less) and leases in which the leased asset has a low value.

Sale and leaseback

If the Group does not retain control over the asset, (i) the asset sold is derecognised from the balance sheet and the right-of-use asset arising from the leaseback is recognised at the proportion of the previous carrying amount that relates to the right of use retained, and (ii) a lease liability is recognised.

If the Group retains control over the asset, (i) the asset sold is not derecognised from the balance sheet and (ii) a financial liability is recognised for the amount of consideration received.

The profit or loss generated in the transaction is immediately recognised in the consolidated income statement, if a sale is determined to exist (only for the amount of the gain or loss relating to the rights over the transferred asset), as the buyer-lessor has acquired control over the asset.

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Leases in which the Group acts as lessor

Finance leases

Where the Group is the lessor of an asset, the sum of the present values of payments receivable from the lessee is recorded as financing provided to a third party and is therefore included under the heading “Financial assets at amortised cost” on the consolidated balance sheet. This financing includes the exercise price of the purchase option payable to the lessee upon termination of the contract in cases where the exercise price is sufficiently lower than the fair value of the asset at the maturity date of the option, such that it is reasonably likely to be exercised.

Operating leases

In operating leases, ownership of the leased asset and a substantial proportion of all of the risks and rewards incidental to ownership of the asset remain with the lessor.

The acquisition cost of the leased asset is recognised under the heading “Tangible assets”. These assets are depreciated in accordance with the same policies followed for similar tangible assets for own use and the revenue from the lease contracts is recognised in the consolidated income statement on a straight-line basis.

1.3.12 Intangible assets

Intangible assets are identifiable, non-monetary assets without physical substance that arise as a result of an acquisition from third parties or which are generated internally by the Group. An intangible asset will be recognised when, in addition to meeting this definition, the Group considers it likely that economic benefits deriving from the asset and its cost can be reliably estimated.

Intangible assets are initially recognised at their acquisition or production cost and are subsequently measured at cost less, where applicable, the accumulated amortisation and any impairment loss that may have been sustained.

Goodwill

Positive differences between the cost of a business combination and the acquired portion of the net fair value of the assets, liabilities and contingent liabilities of the acquired entities are recognised as goodwill on the asset side of the consolidated balance sheet. These differences represent an advance payment made by the Group of the future economic benefits derived from the acquired entities that are not individually identified and separately recognised. Goodwill, which is not amortised, is only recognised when acquired for valuable consideration in a business combination.

Each goodwill item is assigned to one or more cash-generating units (CGUs) which are expected to benefit from the synergies arising from the business combinations. These CGUs are the smallest identifiable group of assets which, as a result of their continuous operation, generate cash flows for the Group, separately from other assets or groups of assets.

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CGUs, or groups of CGUs, to which goodwill has been assigned are tested at least once a year for impairment, or whenever there is evidence that impairment might have occurred. To this end, the Group calculates their value in use using mainly the distributed profit discount method, in which the following parameters are taken into account:

–

Key business assumptions: these assumptions are used as a basis for the cash flow projections used as part of the valuation. For businesses engaging in financial activities, projections are made for variables such as: changes in lending volumes, default rates, customer deposits, interest rates under a forecast macroeconomic scenario, and capital requirements.

–

Estimates of macroeconomic variables and other financial parameters.

–

Projection period: this is usually five years, after which a recurring level is attained in terms of both income and profitability. These projections take into account the existing economic situation at the time of the valuation.

–

Discount rate (post-tax): the present value of future dividends, from which a value in use is obtained, is calculated using the Institution’s cost of capital (Ke), from the standpoint of a market participant, as a discount rate. To determine the cost of capital, the CAPM (Capital Asset Pricing Model) is used in accordance with the formula: “Ke = Rf + b (Pm) + a”, where: Ke = Required return or cost of capital, Rf = Risk-free rate, b = Company’s systemic risk coefficient, Pm = Market premium and a = Non-systemic risk premium.

–

Growth rate used to extrapolate cash flow projections beyond the period covered by the most recent forecasts: this is based on long-term estimates for the main macroeconomic figures and key business variables, and bearing in mind the existing financial market circumstances and outlooks at all times.

If the carrying amount of a CGU (or group of CGUs to which goodwill has been assigned) is higher than its recoverable amount, the Group recognises an impairment loss that is allocated, firstly, by reducing the goodwill attributed to that CGU and, secondly, if any losses remain to be allocated, by reducing the carrying amount of the remaining allocated assets on a pro rata basis. Impairment losses recognised for goodwill cannot subsequently be reversed.

Other intangible assets

This heading mainly includes intangible assets acquired in business combinations, such as the value of brands and contractual rights arising from relationships with customers of the acquired businesses, as well as computer software.

These intangible assets have a finite useful life and are amortised based on their useful lives, applying similar criteria to those used for tangible assets. The useful life of brands and contractual rights arising from relationships with customers of the acquired businesses varies between 5 and 15 years, while for computer software the useful life ranges from 3 to 15 years. In particular, the applications corresponding to infrastructure, communications, architecture and corporate functions of the banking platforms used by Group entities to carry out their activity generally have a useful life of between 10 and 15 years, while the useful life of applications corresponding to channels and to data & analytics ranges from 7 to 10 years. The base platform implemented in 2018 that TSB uses to carry out its activity has a useful life of 15 years.

The criteria for recognising impairment losses on these assets and any reversals of impairment losses recognised in earlier financial years are similar to those applied to tangible assets. To this end, the Group determines whether there is evidence of impairment by comparing actual changes against the initial assumptions applied in the parameters used when they were first recognised. These include possible loss of customers, average customer balances, average revenue and the assigned cost-to-income ratio.

Changes in the estimated useful life of intangible assets are treated in a similar way to changes in the estimated useful life of tangible assets.

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1.3.13 Inventories

Inventories are non-financial assets that are held by the Group for their use or sale in the ordinary course of its business, or which are in the process of production, construction or development for such sale or use, or which are to be consumed in the production process or in the rendering of services.

As a general rule, inventories are measured at the lower of cost and net realisable value. Net realisable value means the estimated selling price net of the estimated production and marketing costs to carry out the sale.

Decreases in net realisable value and, where applicable, any subsequent recoveries in value are recognised under the heading “Impairment or (-) reversal of impairment on non-financial assets – Other” of the consolidated income statement for the year in which they materialise.

Inventories correspond to land and buildings and their net realisable value is calculated based on the appraisal carried out by an independent expert, entered in the Bank of Spain Special Register of Appraisal Firms and performed in accordance with the criteria established in Order ECO/805/2003 on rules for the appraisal of real estate and particular rights for specific financial purposes, which is then adjusted taking into account past experience in selling assets that are similar in terms of prices, the period during which each asset remains on the consolidated balance sheet and other explanatory factors. Nevertheless, statistical methodologies may be used to update appraisals for properties with a fair value of no more than 300,000 euros and which have a certain level of homogeneity among them, in other words, those with low exposure and low risk whose characteristics are likely to be shared by other properties and which are located in an active market with frequent transactions, although a full appraisal is carried out in accordance with the aforesaid ECO Order (an “ECO appraisal”) at least once every three years.

The carrying amount of the inventories is derecognised from the consolidated balance sheet and recognised as an expense during the year in which the income from its sale is recognised.

1.3.14 Own equity instruments

Own equity instruments are defined as equity instruments that meet the following conditions:

–

They do not involve any contractual obligation for the issuer that entails: delivering cash or another financial asset to a third party, or exchanging financial assets or financial liabilities with a third party under terms that are potentially unfavourable to the issuer.

–

In the case of a contract that will or may be settled with the issuer’s own equity instruments: if it is a non-derivative financial instrument, it does not entail an obligation to deliver a variable number of its own equity instruments; or, if it is a derivative instrument, it is settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the issuer’s own equity instruments.

All transactions involving own equity instruments, including their issuance or redemption, are recognised directly with a balancing entry in consolidated equity.

Changes in the value of instruments classified as own equity instruments are not recognised in the financial statements. Any consideration received or paid in exchange for such instruments is directly added to or deducted from consolidated equity net of the associated transaction costs.

Equity instruments issued in full or partial settlement of a financial liability are recognised at fair value unless this cannot be reliably determined. In this case, the difference between the carrying amount of the financial liability (or any part thereof) that has been settled and the fair value of the equity instruments issued is recognised in the income statement for the year.

On the other hand, compound financial instruments, which are contracts that have both a financial liability and an own equity instrument from the issuer’s perspective (e.g. convertible bonds that grant their holder the right to convert them into equity instruments of the issuing entity), are recognised at issuance, separating their component parts and presenting them according to their substance.

Assigning the initial carrying amount to the various component parts of the compound instrument shall not imply, under any circumstances, a recognition of earnings. An amount shall first be assigned to the component part that is a financial liability, including any embedded derivative with an underlying asset that is anything other than an own equity instrument. This amount will be obtained based on the fair value of the Institution’s financial liabilities that share similar characteristics with the compound instrument, but which are not associated with own equity instruments. The initial carrying amount assigned to the equity instrument will be the residual portion of the initial carrying amount of the compound instrument as a whole, after deducting the fair value assigned to the financial liability.

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1.3.15 Remuneration in equity instruments

The delivery of own equity instruments to employees in payment for their services (where these instruments are determined at the start of, and delivered upon completion of, a specified period of service) is recognised as a service cost over the period during which the services are being provided, with a balancing entry under the heading “Other equity” in the consolidated statement of equity. On the date these instruments are awarded, the services received are measured at fair value unless this cannot be reliably estimated, in which case they are measured by reference to the fair value of the committed equity instruments, bearing in mind the tenors and other conditions envisaged in the commitments.

The amounts recognised in consolidated equity cannot subsequently be reversed, even when employees do not exercise their right to receive the equity instruments.

For transactions involving share-based remuneration paid in cash, the Group recognises a service cost over the period during which the services are provided by the employees, with a balancing entry on the liabilities side of the consolidated balance sheet. The Group measures this liability at fair value until it is settled. Changes in value are recognised in the income statement for the year.

1.3.16 Provisions, contingent assets and contingent liabilities

Provisions are present obligations of the Group resulting from past events and whose nature as at the date of the financial statements is clearly specified, but which are of uncertain timing and value. When such obligations mature or become due for settlement, the Group expects to settle them with an expenditure.

In general, the Group’s consolidated annual financial statements include all significant provisions based on which it is estimated that it is more likely than not that the obligation will need to be settled. These provisions include, among other items, pension commitments undertaken with employees by Group entities (see Note 1.3.17), as well as provisions for tax litigation and other contingencies.

Contingent liabilities are any possible obligations in the Group that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the Group. Contingent liabilities include present obligations of the Group whose settlement is unlikely to originate any reduction of funds, or whose value, in extremely rare cases, cannot be reliably measured. Contingent liabilities are not recognised in the consolidated annual financial statements, rather, they are disclosed in the notes to the consolidated annual financial statements.

Contingent assets are possible assets that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of events not wholly within the control of the Group. These contingent assets are not recognised on the consolidated balance sheet or in the consolidated income statement, but they are disclosed in the corresponding report where an inflow of economic benefits is probable.

1.3.17 Provisions for pensions

The Group’s pension commitments to its employees are as follows:

Defined contribution plans

These are plans under which fixed contributions are made to a separate entity in accordance with the agreements entered into with each particular group of employees, without any legal or constructive obligation to make further contributions if the separate entity is unable to pay all employee benefits relating to employee service in the current and prior periods.

These contributions are recognised each year in the consolidated income statement (see Note 33).

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Defined benefit plans

Defined benefit plans cover all existing commitments arising from the application of the Collective Bargaining Agreement for Banks (Convenio Colectivo de Banca).

These commitments are financed through the following vehicles: the pension plan, insurance contracts, the voluntary social welfare agency (E.P.S.V.) and internal funds.

The “Provisions – Pensions and other post employment defined benefit obligations” heading on the liabilities side of the consolidated balance sheet includes the actuarial present value of pension commitments, which is calculated individually using the projected unit credit method on the basis of the financial and actuarial assumptions set out below. This is the same method used for the sensitivity analysis described in Note 22.

The fair value of the plan assets is deducted from the obligations calculated in this way. Plan assets are assets that will be used to settle obligations, including insurance policies, since they meet the following conditions: (i) they are not owned by the Group but by a legally separate third party not qualifying as a related party, (ii) they are only available to pay or fund employee benefits and are not available to creditors of the Group, even in the event of insolvency, (iii) they cannot be returned to the Group unless the assets remaining in the plan are sufficient to settle all obligations, either of the plan or of the Institution, relating to employee benefits, or unless assets are to be returned to the Bank to reimburse it for employee benefits previously paid, and (iv) they are not non-transferable financial instruments issued by the Group.

The assets that back pension commitments shown in the standalone balance sheet of the insurance company BanSabadell Vida, S.A. de Seguros y Reaseguros are not plan assets, as the company is a related party of the Group.

Pension commitments are recognised in the following way:

–

In the consolidated income statement, net interest on the defined benefit liability (asset) net of pension commitments as well as the cost of the services, which includes (i) the cost of services in the current period, (ii) the cost of past services arising from changes made to existing commitments or from the introduction of new benefits, and (iii) any gain or loss arising from a settlement of the plan.

–

Under the heading “Accumulated other comprehensive income – Items that will not be reclassified to profit or loss - Actuarial gains or (-) losses on defined benefit pension plans” in the consolidated statement of equity, the remeasurement of the net defined benefit liability (asset) for pension commitments, which includes (i) actuarial gains and losses generated in the year arising from differences between the previous actuarial assumptions and the real situation and from changes in the actuarial assumptions made, (ii) the return on plan assets, and (iii) any change in the effect of the asset ceiling, excluding, for the last two items, the amounts included in net interest on the defined benefit liability (asset).

–

The heading “Provisions – Other long term employee benefits” on the liabilities side of the consolidated balance sheet mainly includes the value of commitments undertaken with early retirees. Changes occurring during the year in the value of liabilities are recognised in the consolidated income statement.

Actuarial assumptions

The most relevant financial/actuarial assumptions used in the measurement of pension commitments as at 31 December 2023 and 2022 are as follows:



	2023	2022

Tables	PER2020_Col_1er.orden	PER2020_Col_1er.orden
Discount rate, pension plan	3.75% per annum	3.25% per annum
Discount rate, internal fund	3.75% per annum	3.25% per annum
Discount rate, related insurance	3.75% per annum	3.25% per annum
Discount rate, non-related insurance	3.75% per annum	3.25% per annum
Inflation	2.00% per annum	2.00% per annum
Rate of increase in salaries	3.00% per annum	3.00% per annum
Employee disability	SS90-Absolute	SS90-Absolute
Employee turnover	Not considered	Not considered
Early retirement	Considered	Considered
Normal retirement age	65 or 67 years	65 or 67 years

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In 2023 and 2022, the discount rate on all commitments was determined by reference to the return on AA-rated corporate bonds (iBoxx € Corporates AA 10+), with an average duration of 11.96 and 13 years, respectively.

The early retirement age considered is the earliest retirement date after which pension entitlements cannot be revoked by the employer for 100% of the employees.

The return on long-term assets corresponding to plan assets and insurance policies linked to pensions was determined by applying the same discount rate used in actuarial assumptions (3.75% and 3.25% in 2023 and 2022, respectively).

1.3.18 Foreign currency transactions and exchange differences

The Group’s functional and reporting currency is the euro. Consequently, all balances and transactions denominated in currencies other than the euro are treated as being denominated in a foreign currency.

On initial recognition, debit and credit balances denominated in foreign currencies are translated to the functional currency at the spot exchange rate, defined as the exchange rate for immediate delivery, on the recognition date. Subsequent to the initial recognition, the following rules are used to translate foreign currency balances to the functional currency of each investee:

–

Monetary assets and liabilities are translated at the closing rate, defined as the average spot exchange rate as at the reporting date.

–

Non-monetary items measured at historical cost are translated at the exchange rate ruling on the acquisition date.

–

Non-monetary items measured at fair value are translated at the exchange rate ruling on the date on which the fair value was determined.

–

Income and expenses are translated at the exchange rate ruling at the transaction date.

In general, exchange differences arising in the translation of debit and credit balances denominated in foreign currency are recognised in the consolidated income statement. However, for exchange differences arising in non-monetary items measured at fair value where the fair value adjustment is recognised under the heading “Accumulated other comprehensive income” in the consolidated statement of equity, a breakdown is given for the exchange rate component of the remeasurement of the non-monetary item.

The balances of the financial statements of consolidated entities with a functional currency other than the euro are translated into euros in the following manner:

–

Assets and liabilities are translated at the exchange rate ruling at each year-end closing.

–

Income and expenses are translated at the average exchange rate, weighted by the volume of transactions of the company whose income and expenses are being translated.

–

Equity is translated at historical exchange rates.

Exchange differences arising in the translation of financial statements of consolidated entities with a functional currency other than the euro are recognised under the heading “Accumulated other comprehensive income” on the consolidated statement of equity.

The exchange rates applied to translate balances denominated in foreign currency into euros are those published by the European Central Bank (ECB) on 31 December of each year.

1.3.19 Recognition of income and expenses

Interest income and expenses and other similar items

Interest income and expenses and other similar items are generally accounted for over the period in which they accrue using the effective interest rate method, under the headings “Interest income” or “Interest expenses” of the consolidated income statement, as applicable. Dividends received from other entities are recognised as income at the time the right to receive them originates.

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Commissions, fees and similar items

Generally, income and expenses in the form of commissions and similar fees are recognised in the consolidated income statement based on the following criteria:

–

Those linked to financial assets and financial liabilities measured at fair value through profit or loss are recognised at the time of disbursement.

–

Those related to transactions carried out or services rendered over a given period of time are recognised throughout that period.

–

Those related to a transaction or service that is carried out or rendered in a single act are recognised when the originating act takes place.

Financial fees and commissions, which form an integral part of the effective cost or yield of a financial transaction, are accrued net of associated direct costs and recognised in the consolidated income statement over their expected average life.

Assets managed by the Group but owned by third parties are not included in the balance sheet. Fees generated by this activity are recognised under the heading “Fee and commission income” in the consolidated income statement.

Non-financial income and expenses

These items are recognised in the accounts upon delivery of the non-financial asset or upon provision of the non-financial service. To determine the carrying amount and when this item should be recognised, a model is used that consists of five steps: identification of the contract with the customer, identification of the separate obligations of the contract, calculation of the transaction price, distribution of the transaction price between the identified obligations and, lastly, recognition of the revenue when, or as, the obligations are settled.

Deferred payments and collections

Deferred payments and collections are accounted for at the carrying amount obtained by discounting expected cash flows at market rates.

Levies

For levies and tax obligations whose amount and date of payment are certain, the obligation is recognised when the event that leads to its payment takes place in line with the legislative terms and conditions. Therefore, the item to be paid is recognised when there is a present obligation to pay the levy.

Deposit guarantee schemes

The Bank is a member of the Deposit Guarantee Fund. In 2023, the Management Committee of the Deposit Guarantee Fund of Credit Institutions, in accordance with that established in Royal Decree Law 16/2011 and Royal Decree 2606/1996, set the contribution for all entities covered by the Fund’s deposit guarantee at 0.175% of the value of deposits guaranteed as at 31 December 2022. Each entity’s contribution is calculated according to the amount of deposits guaranteed and their risk profile. Furthermore, the contribution to the securities guarantee offered by the Fund has been set at 0.2% of 5% of the value of the securities guaranteed as at 31 December 2023 (see Note 32).

Some of the consolidated entities are integrated into schemes which are similar to the Deposit Guarantee Fund and they make contributions to these schemes in accordance with domestic regulations (see Note 32). The most significant of these are listed below:

–

TSB Bank plc makes contributions to the Financial Services Compensation Scheme.

–

Banco Sabadell, S.A. Institución de Banca Múltiple makes contributions to the deposit guarantee scheme established by the Instituto para la Protección del Ahorro Bancario.

Single Resolution Fund

Law 11/2015 of 18 June, together with its implementing regulation through Royal Decree 1012/2015, entailed the transposition into Spanish law of Directive 2014/59/EU. This Directive established a new framework for the resolution of credit institutions and investment firms, and it is also one of the standards that have contributed to the establishment of the Single Resolution Mechanism, created through Regulation (EU) 806/2014. This Regulation sets out standard rules and procedures for the resolution of credit

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institutions and investment firms within the framework of a Single Resolution Mechanism and a Single Resolution Fund at a European level.

As part of the implementation of this Regulation, on 1 January 2016 the Single Resolution Fund came into effect, to operate as a financing instrument which the Single Resolution Board can use. The Single Resolution Board is the European authority that makes decisions on the resolution of failing banks, in order to efficiently undertake the resolution measures that have been adopted. The Single Resolution Fund receives contributions from credit institutions and investment firms subject to the same.

The calculation of each entity’s contribution to the Single Resolution Fund, governed by Commission Delegated Regulation (EU) 2015/63, is based on the proportion that each entity represents with respect to the aggregate total liabilities of the Fund’s member entities, after deducting own funds and the guaranteed amount of the deposits. The latter is then adjusted to the Institution’s risk profile (see Note 32).

Temporary levy of credit institutions and financial credit establishments

Law 38/2022 of 27 December was published on 28 December 2022. Among other aspects, it establishes a temporary levy for credit institutions and financial credit establishments. This levy must be paid during 2023 and 2024 by credit institutions and financial credit establishments operating in Spain whose sum of interest income and fee and commission income in 2019 was 800 million euros or more. The payment amount was set at 4.8% of the sum of net interest income plus net fees and commissions stemming from their activities in Spain recognised on the income statement for the calendar year immediately preceding the year in which the payment obligation arose. The payment obligation arises each 1 January and must be paid during the first 20 calendar days of the month of September of each year, without prejudice to a 50% advance payment of the total levy, which must be made during the first 20 calendar days of the first February following the date on which the payment obligation arises (see Note 32).

The Fifth Additional Provision of Royal Decree-Law 8/2023 of 27 December extends the payment of the temporary levy by one year, to 2025.

1.3.20 Income tax

Corporation tax applicable to the Spanish companies of Banco Sabadell Group, as well as similar taxes applicable to foreign investees, is considered to be an expense and is recognised under the heading “Tax expense or (-) income related to profit or loss from continuing operations” in the consolidated income statement, except when it arises as a result of a transaction that has been directly recognised in the consolidated statement of equity, in which case it is recognised directly in the latter.

The total corporation tax expense is equivalent to the sum of current tax, calculated by applying the relevant levy to taxable income for the year (after applying fiscally admissible deductions and benefits), and the variation in deferred tax assets and deferred tax liabilities recognised in the consolidated income statement.

Taxable income for the year may be at variance with the income for the year as shown in the consolidated income statement, as it excludes items of income or expenditure that are taxable or deductible in other years as well as items that are non-taxable or non-deductible.

Deferred tax assets and deferred tax liabilities relate to taxes expected to be payable or recoverable arising from differences between the carrying amounts of the assets and liabilities appearing in the financial statements and the related tax bases (“tax value”), as well as tax losses carried forward and unused tax credits that might be offset or applied in the future. They are calculated by applying to the relevant timing differences or tax credits the tax rate at which they are expected to be recovered or settled (see Note 39).

A deferred tax asset such as a tax prepayment or a credit in respect of a tax deduction or tax benefit, or a credit in respect of tax losses carried forward, is recognised provided that the Group is likely to obtain sufficient future taxable profits against which the tax asset can be realised, and that these are not derived from the initial recognition (except in a business combination) of other assets and liabilities in an operation that does not affect either the tax result or the accounting result.

Deferred tax assets arising due to deductible timing differences resulting from investments in subsidiaries, branches and associates, or from equity interests in joint ventures, are only recognised insofar as the difference is expected to be reversed due to the dissolution of the investee.

Deferred tax liabilities arising from timing differences associated with investments in subsidiaries and associates are recognised in the accounts unless the Group is capable of determining when the timing difference will reverse and, in addition, such a reversal is unlikely.

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The “Tax assets” and “Tax liabilities” on the consolidated balance sheet include all tax assets and tax liabilities, differentiating between current tax assets/liabilities (to be recovered/paid in the next twelve months, for example, a corporation tax payment made to the tax authority (Hacienda Pública)) and deferred tax assets/liabilities (to be recovered/paid in future years).

Income or expenses recognised directly in the consolidated statement of equity that do not affect profits for tax purposes, and income or expenses that are not recognised directly and do affect profits for tax purposes, are recorded as timing differences.

At each year-end closing, recognised deferred tax assets and liabilities are reviewed to ascertain whether they are still current and to ensure that there is sufficient evidence of the likelihood of generating future tax profits that will allow them to be realised, in the case of assets, adjusting them as required.

To conduct the aforesaid review, the following variables are taken into account:

–

Forecasts of results of each entity or fiscal group, based on the financial budgets approved by the Group’s directors for a five-year period, subsequently applying constant growth rates similar to the mean long-term growth rates of the sector in which the various companies of the Group operate;

–

Estimate of the reversal of timing differences on the basis of their nature; and

–

The period or limit set forth by prevailing legislation in each country for the reversal of the different tax assets.

1.3.21 Consolidated statement of recognised income and expenses

This statement sets out the recognised income and expenses resulting from the Group’s activity during the year, distinguishing between items recognised as profit or loss in the consolidated income statement and those recognised directly in consolidated equity.

1.3.22 Consolidated statement of total changes in equity

This statement sets out all changes in the Group’s equity, including those arising from accounting changes and corrections of errors. It sets out a reconciliation of the carrying amount at the beginning and end of the year of all items that comprise consolidated equity, grouping changes together by type in the following items:

–

Adjustments due to accounting changes and corrections of errors: includes the changes in consolidated equity that arise as a result of the retroactive restatement of financial statement balances, distinguishing between those that arise from changes in accounting criteria and those that correspond to the correction of errors.

–

Total recognised income and expenses: includes, in aggregate form, the total of items recognised in the aforesaid consolidated statement of recognised income and expenses.

–

Other changes in consolidated equity: includes the remaining items recognised in consolidated equity, such as capital increases or decreases, distribution of dividends, transactions with own equity instruments, payments with own equity instruments, transfers between equity items and any other increase or decrease of consolidated equity.

1.3.23 Consolidated cash flow statement

Consolidated cash flow statements have been prepared using the indirect method, in such a way that, based on the Group’s results, the non-monetary transactions and all types of deferred payment items and accruals which have been or will be the cause of operating income and expenses have been taken into account, in addition to the income and expenses associated with cash flows from activities classified as investing or financing activities.

No situations requiring the application of significant judgements to classify cash flows have arisen during the year.

There have been no significant transactions that have generated cash flows not reflected in the consolidated cash flow statement.

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1.4 Comparability

The information presented in these consolidated annual financial statements corresponding to 2022 is provided solely and exclusively for purposes of comparison with the information for the year ended 31 December 2023 and therefore does not constitute the Group’s consolidated annual financial statements for 2022.

As indicated in the section on Adoption of IFRS 17 “Insurance contracts” of Note 1.2, the comparative information set out in these consolidated annual financial statements has been restated to reflect the application of IFRS 17.

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Note 2 – Banco Sabadell Group

Subsidiaries and associates as at 31 December 2023 and 2022 are listed in Schedule I, along with their registered offices, primary activities, the percentage shareholding in each, key financial data and the consolidation method used (full consolidation or equity method) in each case.

Schedule II provides details of consolidated structured entities (securitisation funds).

A description is provided hereafter of the business combinations, acquisitions and sales or liquidations which are most representative of investments in the capital of other entities (subsidiaries and/or investments in associates) made by the Group during 2023 and 2022. Schedule I also includes details of changes in the scope of consolidation in each financial year and the results obtained by the Group on the disposal of its subsidiaries and associates.

Changes in the scope of consolidation in 2023

Additions to the scope of consolidation:

There were no significant additions to the scope of consolidation in 2023.

Exclusions from the scope of consolidation:

On 22 December 2022, the Board of Directors of Banco Sabadell, S.A. and the Board of Directors of Bansabadell Financiación, E.F.C., S.A.U. approved and signed the common draft terms of the merger between Banco Sabadell, S.A. (as the absorbing company) and Bansabadell Financiación, E.F.C., S.A.U. (as the absorbed company). Having obtained the relevant authorisations, the deed of the merger by absorption of Bansabadell Financiación E.F.C., S.A. by Banco de Sabadell, S.A. was entered in the Alicante Companies Register on 10 October 2023. As Bansabadell Financiación, E.F.C., S.A.U. was a company directly and fully owned by the Bank (see Schedule I – Changes in the scope of consolidation in 2023), this transaction had no significant impact on the Group’s consolidated financial statements.

With the exception of the transaction described above, there were no significant exclusions from the scope of consolidation in 2023.

Changes in the scope of consolidation in 2022

Additions to the scope of consolidation:

There were no significant additions to the scope of consolidation in 2022.

Exclusions from the scope of consolidation:

There were no significant exclusions from the scope of consolidation in 2022.

Other significant transactions in 2023

On 27 February 2023, Banco Sabadell signed a strategic agreement to provide merchant acquiring services with Nexi S.p.A. (hereinafter, “Nexi”), a leading European paytech company, for a renewable ten-year period, under which Nexi is to acquire 80% of Banco Sabadell’s payments subsidiary Paycomet, S.L.U. for 280 million euros. Banco Sabadell will retain a 20% stake for at least three years, whilst aligning interests with its new industrial partner. Following this period, Banco Sabadell will have the option to sell that 20%.

The total transaction amount is fixed at 350 million euros (280 million euros due to the 80% subject to sale), which may be increased depending on the achievement of targets. As at the sign-off date of these consolidated annual financial statements, the closing of this transaction was pending.

Other significant transactions in 2022

The Group made no other significant transactions worth mentioning in 2022. That said, on 22 September 2022, the Bank announced that it was in the process of analysing a possible strategic agreement with an industrial partner specialising in its merchant acquiring business which, as indicated above, was signed in February 2023.

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Note 3 – Shareholder remuneration and earnings per share

Set out below is the proposed distribution of the profits earned by Banco de Sabadell, S.A. in 2023, which the Board of Directors will submit to shareholders for approval at the Annual General Meeting, together with the proposed distribution of profits earned by Banco de Sabadell S.A. in 2022, which was approved by shareholders at the Annual General Meeting of 23 March 2023:


Thousand euro
	2023		2022

To dividends		326,413		225,079
To Canary Island investment reserve		183		279
To voluntary reserves		761,418		515,193
Profit for the year of Banco de Sabadell, S.A.		1,088,014		740,551

On 25 October 2023, the Board of Directors of Banco Sabadell agreed to distribute an interim dividend in cash, to be paid out of its earnings in 2023, of 0.03 euros (gross) per share, which was paid on 29 December 2023.

In fulfilment of the mandatory requirement indicated in Article 277 of Spain’s Capital Companies Act (Ley de Sociedades de Capital), the provisional statement of accounts provided below was created by the Bank to confirm the existence of sufficient liquidity and profit at the time of its approval of the aforesaid interim dividend:


Thousand euro
Available for the payment of dividends according to the interim statement at:	30/09/2023

Banco Sabadell profit as at the date indicated, after provisions for taxes		861,364
Estimated statutory reserve		—
Estimated Canary Island investment reserve		—

Maximum amount available for distribution		861,364

Interim dividend proposed		166,797
Cash balance available at Banco de Sabadell, S.A. (*)		27,263,008

(*) Includes the balance of the heading “Cash, cash balances at central banks and other demand deposits”.

Similarly, on 31 January 2024, the Board of Directors of Banco Sabadell resolved to propose to the next Annual General Meeting of Shareholders a supplementary dividend of 0.03 euros (gross) per share charged to the results of the 2023 financial year, to be paid in cash foreseeably during the month following the holding of the Annual General Meeting of Shareholders.

In addition to this cash dividend, the Board of Directors of Banco Sabadell, after having obtained the prior permission of the competent authority, has also resolved to establish, out of the 2023 earnings, a buyback programme of treasury shares for their redemption through a resolution for share capital reduction to be proposed to the Annual General Meeting of Shareholders, of up to a maximum amount of 340 million euros, whose terms, once they are set by the Board of Directors, will be the content of a new announcement before starting its execution.

The total shareholder remuneration corresponding to 2023, which combines the cash dividend and the share buyback programme, will, therefore, be equivalent to 50% of the profit attributable to the owners of the parent company, complying with the shareholder remuneration policy.

In addition, at its meeting of 25 January 2023, the Board of Directors submitted a proposal to the Annual General Meeting concerning the distribution of a supplementary gross cash dividend of 0.02 euros per share to be paid out of 2022 earnings, which was approved at the Annual General Meeting on 23 March 2023 and paid out in the same month. Previously, the Board of Directors of Banco Sabadell had agreed, on 26 October 2022, to distribute an interim dividend in cash, to be paid out of its earnings in 2022, of 0.02 euros (gross) per share, which was paid on 30 December 2022. Consequently, the cash dividend reached 0.04 euros per share, paid out of 2022 earnings.

The remaining shareholder remuneration, of up to 430 million euros equivalent to 50% of the profit attributable to the owners of the parent in 2022, was reached by establishing a share buyback programme, which is described below.

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Share buyback programme

On 30 June 2023, after receiving the required permission of the competent authority, Banco Sabadell gave notice, by means of an Inside Information filing, of the establishment and execution of a temporary share buyback programme for a maximum pecuniary amount of 204 million euros for the purpose of reducing the Bank’s share capital through the redemption of the treasury shares acquired. The share buyback programme was carried out in accordance with the provisions of Article 5 of Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016.

On 13 November 2023, the Bank gave notice, by means of an ‘Other Relevant Information’ filing, of the end of the share buyback programme as the maximum pecuniary amount mentioned above had been reached, having acquired 186,743,254 treasury shares with a par value of 0.125 euros each, representing approximately 3.32% of Banco Sabadell’s share capital.

On 30 November 2023, the Board of Directors agreed to execute Banco Sabadell’s share capital reduction through the redemption of all the treasury shares acquired under the share buyback programme. The capital reduction was approved under the powers conferred to the Board of Directors by the Ordinary Annual General Meeting held on 23 March 2023 in the amount of 23,342,906.75 euros. The public deed corresponding to the capital reduction was entered with the Companies Register of Alicante on 11 December 2023 (see Note 23).

Earnings per share

Basic earnings (or loss) per share are calculated by dividing the net profit attributable to the Group, adjusted by earnings on other equity instruments, by the weighted average number of ordinary shares outstanding in the year, excluding any treasury shares acquired by the Group. Diluted earnings (or loss) per share are calculated by applying adjustments for the estimated effect of all potential conversions of ordinary shares to the net profit attributable to the Group and the weighted average number of ordinary shares outstanding.

The Group’s earnings per share calculations are shown below:


	2023		*2022 ()**

Profit or loss attributable to owners of the parent (thousand euro)		1,332,181		889,392
Adjustment: Remuneration of other equity instruments (thousand euro)		(115,391)		(110,375)
Profit or (-) loss after tax from discontinued operations (thousand euro)		—		—
Profit or loss attributable to owners of the parent, adjusted (thousand euros)		1,216,790		779,017

Weighted average number of ordinary shares outstanding (**)		5,401,123,639		5,593,885,977
Assumed conversion of convertible debt and other equity instruments
Weighted average number of ordinary shares outstanding, adjusted		5,401,123,639		5,593,885,977

Earnings (or loss) per share (euros)		0.23		0.14
Basic earnings (or loss) per share adjusted for the effect of mandatory convertible		0.23		0.14
bonds (euros)
Diluted earnings (or loss) per share (euros)		0.23		0.14

(*) See Note 1.4.

(**) Average number of total shares minus average treasury stock and average number of shares subject to a buyback programme.

As at 31 December 2023 and 2022, there were no other financial instruments or share-based commitments with employees with a significant impact on the calculation of diluted earnings (or loss) per share for the periods presented. For this reason, basic earnings (or loss) per share coincide with diluted earnings (or loss) per share.

The distributions of profits of subsidiaries are subject to approval by shareholders at their respective Annual General Meetings.

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Note 4 – Risk management

Throughout 2023, Banco Sabadell Group has continued to strengthen its risk management and control framework by incorporating improvements in accordance with supervisory expectations and market trends.

Bearing in mind that Banco Sabadell Group takes risks during the course of its activity, good management of these risks is a central part of the business. The Group has established a set of principles, set out in policies and rolled out through procedures, strategies and processes, which aim to increase the likelihood of achieving the strategic objectives of the Group’s various activities, facilitating management in an uncertain environment. This set of principles is called the Global Risk Framework.

4.1. Macroeconomic, political and regulatory environment

Macroeconomic environment

When managing risks, the Group considers the macroeconomic environment. The most significant aspects of 2023 are set out below:

–

The main factors at play in 2023 were the interest rate hikes carried out by central banks and their gradual effects on economic activity.

–

In 2023, inflation gradually eased from the peaks observed in 2022.

–

The correction in the prices of energy and industrial goods was, to a large extent, the force behind the moderation of headline inflation. The evolution of core inflation was more subdued, although it also showed a clear downward trend.

–

The evolution of the global economy showed a marked divergence between the dynamism of the US economy, which proved to be stronger than expected, and the Eurozone and UK economies, which lagged and were practically stagnant throughout the year.

–

Spain continued to outperform other Eurozone countries. The economy was driven mainly by a gradual improvement of private consumption and, to a lesser extent, by the contribution of the public sector.

–

In terms of economic policy in Spain, the approval of the second part of the government’s pension reform and the continuance of most of the measures to alleviate the impacts of the energy crisis were noteworthy features.

–

The European Commission approved the addendum to the Spanish Recovery Plan, which will mobilise an additional 94 billion euros from the Next Generation EU funds.

–

The emerging economies proved themselves resilient to the global economic landscape. Adjustment of the real estate sector in China intensified, although the repercussions remain limited.

–

In Mexico, the economy performed well. Investment grew at historic double-digit rates, partly due to nearshoring with the United States.

–

Global geopolitics continues to represent a vector of uncertainty for the economic environment. The outbreak of a new conflict between Israel and Hamas reignited instability in the Middle East, although the broader economic repercussions were marginal.

–

The financial sector suffered a temporary episode of instability, related to the collapse of US regional banks Silicon Valley Bank (SVB) and Signature Bank and the acquisition of Credit Suisse by UBS. The authorities managed to contain the financial contagion and, ultimately, the economic consequences were limited.

–

The developed nations’ central banks continued their cycle of interest rate hikes in 2023, although the pace was somewhat less intense than in 2022. In the latter part of the year, they signalled that the rate hike cycle could have reached its end.

–

The European Central Bank (ECB) implemented an unprecedented tightening of its monetary policy and ended up raising the deposit rate to a record high of 4.00%. The reduction of its balance sheet also continued, due to the maturity of TLTRO-III loans and the reduction of asset holdings.

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–

For its part, the Federal Reserve (Fed) continued to pursue its rake hike cycle, with official interest rates at a range of 5.25%-5.50%. With regard to its balance sheet, the reduction process continued, interrupted only briefly to respond to the episode of instability caused by the collapse of SVB.

–

The Bank of England (BoE) raised its base rate to 5.25% and continued with its balance sheet reduction programme.

–

The financial markets performed better in 2023 than the previous year, when a large portion of financial assets posted heavy losses.

–

Long-term government bond yields continued on an upward trend for much of the year. They were driven by pressure from monetary policy tightening, the resilience of the US economy and concerns regarding high levels of need for sovereign debt funding. In the last two months of the year, some unexpected falls in price data and a shift in central banks’ communication policy (particularly that of the Fed) led to a turnaround in yields, which completely reversed the upward trend.

–

The risk premiums on peripheral sovereign debt were at lower levels than those seen at the end of 2022. In the case of Spain, the risk premium remained stable and at low levels.

–

The US dollar posted numerous swings in its exchange rate against the euro, finishing the year at somewhat lower levels compared to the end of 2022 (EUR 1.00 = USD 1.10).

–

In emerging economies’ financial markets, sovereign risk premiums were slightly reduced over the year. Regarding exchange rates, the high official interest rates continued to buoy emerging market currencies and the Mexican peso performed particularly well.

–

The banking sector generally displayed adequate capital levels, with a CET1 ratio that, according to the authorities, would remain above the minimum regulatory requirements even in an adverse scenario. Furthermore, profitability increased, thanks to the positive evolution of net interest income.

–

The financial authorities continued to rate the risks associated with global financial instability as high. Attention was mainly focused on the commercial real estate sector, risks related to the non-banking financial sector and the situation facing companies, above all the most highly leveraged ones, in an environment of higher financing costs.

Political and regulatory environment

Impacts stemming from the war in Ukraine

The war between Russia and Ukraine, which broke out at the end of February 2022 and which is still ongoing today, prompted governments to adopt plans and measures to mitigate the impacts of the conflict by providing public support for the affected sectors.

On 23 March 2022, the European Commission approved a temporary framework for State aid measures intended to support the economy following Russia’s aggression against Ukraine. This framework was implemented in Spain by Royal Decree-Law 6/2022. The Agreements of the Spanish Council of Ministers, of 10 May 2022 and of 27 December 2022, released the first two tranches of the guarantee line for a total of 5,500 million euros. On 12 December 2023, the Agreement of the Council of Ministers of 5 December 2023 was published in the Official State Gazette (Boletín Oficial del Estado or BoE), establishing the terms and conditions for the third tranche of the guarantee line amounting to 4.5 billion euros for financing granted to companies and self-employed persons. Among other changes, it was decided to increase the threshold for guaranteed loans from 2 million to 2.25 million euros and to extend the application deadline for the corresponding guarantee line to 1 June 2024. The amount of the above mentioned third tranche was reduced to 3,500 million euros through the Agreement of the Council of Ministers of 27 December 2023, amending the Agreement of the Council of Ministers of 5 December 2023. The European Commission will be notified of the aforesaid changes so that it may authorise them; their application requires the express authorisation of the European Commission.

In addition, on 27 December 2023, the Council of Ministers adopted Royal Decree-Law 8/2023, which extends certain measures to respond to the economic and social consequences arising from the conflict in Ukraine.

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Banco Sabadell Group’s credit risk with both individuals and companies from these countries is limited, and the same is true of its counterparty credit risk with financial institutions from Russia and Ukraine. Specifically, the largest exposures relate to mortgage loans granted to customers of Russian, Ukrainian or Belarusian nationality residing outside Spain, which amounted to 233 million euros and 293 million euros as at 31 December 2023 and 2022, respectively. The real estate assets securing those exposures are located in Spain and have an average loan-to-value of 37.7% and 39% as at 31 December 2023 and 2022, respectively. Furthermore, these are all transactions that, on average, were originated more than 7 years ago.

Impacts of interest rate hikes and rising inflation

Measures to ease the mortgage burden and strengthening of financial inclusion

On 22 November 2022, the government introduced a package of measures designed to ease the mortgage burden. The package focuses on three key aspects.

Firstly, it amends the 2012 Code of Good Practice to provide greater relief to vulnerable households. This includes a reduction of the interest rate during a five-year grace period (to Euribor minus 0.10% instead of Euribor plus 0.25%), the option to apply for debt restructuring for a second time and to extend the period during which customers can request that their home be surrendered in settlement of the outstanding debt to two years. In addition, the scope of the Code of Good Practice was extended so that households that have not managed to increase their effort rate by the required 50% may take advantage of certain measures.

Secondly, a new temporary Code of Good Practice was established (valid for two years) to help middle-class families ease the financial burden of mortgages taken out up to 31 December 2022. This is achieved by freezing repayment instalment amounts and extending the repayment period of the loan by up to seven years.

Thirdly, it was decided to reduce expenses and fees to make it easier to change from a floating-rate mortgage to a fixed-rate mortgage, and to scrap the fees charged for early repayments and for changing from a floating-rate mortgage to a fixed-rate mortgage throughout the whole of 2023.

Uptake of the two Codes of Good Practice by financial institutions is voluntary, although once they sign up to them, compliance is mandatory. Banco Sabadell signed up to the new Code of Good Practice on 16 December 2022.

As mentioned previously, on 27 December 2023, the Council of Ministers adopted Royal Decree-Law 8/2023 prolonging certain anti-crisis measures, which extended the duration of most of the measures adopted in 2022 and 2023. Notable among them was a series of measures intended to provide mortgage relief for homeowners. One such measure was to raise the income threshold at which the Code of Good Practice may be accessed for at-risk borrowers. This threshold was increased from 3.5 to 4.5 times the monthly Multiplier for the Public Income Index (hereinafter, IPREM), enabling households with an annual income of up to around 37,800 euros to benefit. In addition, the suspension of all fees charged for early repayment of variable-rate mortgage loans and switching to fixed rate was extended to 2024, and free-of-charge conversions from variable-rate to hybrid mortgages were also extended. When this measure ends, the permanent cap of 0.05% that limits the amount of fees applicable when switching a mortgage from variable rate to fixed rate will also apply when switching from variable rate to hybrid rate.

In addition, Royal Decree-Law 8/2023 approves various measures to strengthen the financial inclusion of older and/or disabled persons, including the removal of fees charged for cash withdrawals at bank counters, and the preventive framework to provide relief to at-risk mortgage holders was extended.

In the United Kingdom, Banco Sabadell’s subsidiary, TSB, signed up to the Mortgage Charter which was launched at the end of June 2023. The aim of this initiative is to ease the burden of mortgage repayments for the most vulnerable customers through a series of commitments undertaken by the banking industry. The key measures agreed include offering tailored support for customers struggling to pay their mortgage, delaying property repossessions for at least 12 months following the first missed payment, and offering customers the option to switch to an interest-only mortgage for a six-month period, or to temporarily extend the term of the mortgage to reduce their monthly repayments.

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4.2 Key milestones during the year

4.2.1 The Group’s risk profile during the year

The following milestones have been achieved in relation to the Group’s risk profile during 2023:

I. Non-performing assets:

–

During 2023, non-performing assets were reduced by -223 million euros. The NPL ratio for the year stands at 3.52%,

II. Lending performance:

–

Gross performing loans ended the year 2023 with a balance of 149,798 million euros, declining by 4.1% year-on-year.

–

In Spain, gross performing loans show a fall of 4.6% year-on-year, impacted by lower business and mortgage portfolio volumes.

–

In TSB, at constant exchange rates, gross performing loans show a fall of -5.9% year-on-year, due to the reduced volume of the mortgage portfolio.

–

In Mexico, at constant exchange rates, gross performing loans increased by 7.1% year-on-year.

III. Concentration:

–

From a sectoral point of view, the loan portfolio is diversified, has limited exposure to the sectors most sensitive to the current environment.

–

Similarly, in terms of individual concentration, the metrics relating to concentration of large exposures show a slight downward trend and remain within the target level. The credit rating of the largest exposures has also improved over the year.

–

Geographically speaking, the portfolio is positioned in dynamic regions, both in Spain and worldwide. International exposures account for 37% of the loan book.

IV. Strong capital position:

–

The CET1 ratio improved by 64 basis points to 13.2% in fully-loaded terms as at 2023 year-end (compared to 12.55% as at 2022 year-end).

–

The fully-loaded and phase-in Total Capital ratios stand at 17.76% as at the end of 2023, thus remaining above the requirements for 2024 with an MDA buffer of 431 basis points. The fully-loaded and phase-in leverage ratio was 5.19%.

V. Sound liquidity position:

–

The Liquidity Coverage Ratio stands at 228% (compared with 234% at the end of 2022), with total liquid assets of 61,783 million euros.

4.2.2 Strengthened credit risk management and control environment

2023 has been marked by the monitoring and control of the effects stemming from the inflationary environment and the cycles of interest rate hikes implemented by the central banks in the main geographical areas where Banco Sabadell operates.

To that end, special attention has been paid to strengthening the RAS metrics framework, while risk frameworks have been revised and the risk exposure to the sectors most severely impacted by the current environment has been assessed, proactively managing the counterparties that are potentially most affected.

In the case of individuals, oversight of the management and control framework has continued, with monitoring of the RAS metrics, origination rules and proposals for interest rate adjustments, as well as effort rates and available income to cope with higher rates and the inflationary environment, anticipating the needs of more vulnerable customers by managing, among other things, the commitments pursuant to the Code of Good Practice, for certain customer groups at risk of vulnerability.

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Performance of the main solutions offered in Spain

In terms of the ICO Covid lines, as at 31 December 2023, the amount of loans and credit granted was approximately 4.7 billion euros (7.4 billion euros as at 31 December 2022). As at year-end, there are very few unexpired grace periods remaining.

Performance of the main solutions offered in the United Kingdom

In the United Kingdom, the balance of Bounce Back Loans (BBLs), granted to help SMEs deal with the Covid-19 pandemic during 2020 and 2021, has been diminishing. At TSB, the exposure to these loans as at the end of 2023, amounted to 266 million pounds, which represents 57% of the business customer portfolio (the exposure was 379 million pounds at the end of 2022, representing 64% of the business customer portfolio). In response to the more recent cost-of-living crisis, the approach of regulators and financial Institutions in the country has focused more on establishing adequate communication channels, tools and training to support and proactively help their customers, in particular those in vulnerable situations. In June 2023, the government announced a new tool, the Mortgage Charter, to help mortgage borrowers. This measure, initially planned for a six-month period, was extended to 18 months, with only a very small number of TSB customers taking up the offer to date.

4.3 General principles of risk management

Global Risk Framework

The Global Risk Framework aims to establish the common basic principles relating to the risk management and control activity of Banco Sabadell Group including, among other things, all actions associated with the identification, decision-making, measurement, assessment, monitoring and control of the different risks to which the Group is exposed. With the Global Risk Framework, the Group aims to:

–

Follow a structured and consistent approach to risk throughout the Group.

–

Foster an open and transparent culture with regard to risk management and control, encouraging the involvement of the entire organisation.

–

Facilitate the decision-making process.

–

Align the accepted risk with the risk strategy and the risk appetite.

–

Understand the risk environment in which it operates.

–

Ensure, following the guidelines of the Board of Directors, that critical risks are identified, understood, managed and controlled efficiently.

The Group’s Global Risk Framework consists of the following elements:

–

The Group’s Global Risk Framework Policy.

–

The Risk Appetite Framework (RAF) of the Group and subsidiaries.

–

The Risk Appetite Statement (RAS) of the Group and subsidiaries.

–

Specific policies for the various material risks to which the Group and subsidiaries are exposed.

4.3.1 Global Risk Framework Policy

As an integral part of the Global Risk Framework, the Global Risk Framework Policy establishes the common basic principles for Banco Sabadell Group’s risk management and control activities, including, among other things, all actions associated with the identification, decision-making, measurement, assessment, monitoring and control of the different risks to which the Group is exposed. These activities comprise the duties carried out by the various areas and business units of the Group as a whole.

Consequently, the Global Risk Framework Policy sets out a general framework for the establishment of other policies related to risk management and control, determining core/common aspects that are applicable to the various risk management and control policies.

The Global Risk Framework is applied in all of the Group’s business lines and entities, taking into account proportionality criteria in relation to their size, the complexity of their activities and the materiality of the risks taken.

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Global Risk Framework principles

For risk management and control to be effective, the Group’s Global Risk Framework must comply with the following principles:

–

Risk governance and involvement of the Board of Directors through the model of three lines of defence, among others;

The risk governance arrangements established in the various policies that form part of the Global Risk Framework promote a sound organisation of risk management and control activities, categorising risk, defining limits and establishing clear responsibilities at all levels of the organisation through policies, procedures and manuals specific to each risk.

Among other duties, the Board of Directors of Banco de Sabadell, S.A. is responsible for identifying the Group’s main risks, implementing and monitoring appropriate internal control and reporting systems, which include challenging and monitoring the Group’s strategic planning and supervising the management of material risks and their alignment with the risk profile defined by the Group.

Similarly, the equivalent bodies of the Group’s various subsidiaries have the same level of involvement in risk management and control activities at the local level.

The Group’s risk governance arrangements are designed to organise risk management and control activities by means of the model of three lines of defence, granting independence, hierarchical authority and sufficient resources to the Risk Control function. In the same way, the governance model seeks to ensure that risk management and control processes offer an end-to-end vision of the phases involved.

–

Alignment with the Group’s business strategy, particularly through the implementation of the risk appetite throughout the organisation;

Through the set of policies, procedures, manuals and other documents that comprise it, the Group’s Global Risk Framework is aligned with the Group’s business strategy, adding value as it is designed to contribute to the achievement of objectives and improve medium-term performance. It is therefore embedded in key processes such as strategic and financial planning, budgeting, capital and liquidity planning and, in general, business management.

–

Integration of the risk culture, focusing on aligning remuneration with the risk profile;

Corporate culture and corporate values are a key element, as they strengthen the ethical and responsible behaviour of all members of the organisation.

The Group’s risk culture is based on compliance with the regulatory requirements applicable to it in all of its areas of activity, ensuring compliance with supervisory expectations and best practices in relation to risk management, monitoring and control.

One of the priorities established by the Group is the maintenance of a sound risk culture in the aforesaid terms, on the understanding that this lays the groundwork for appropriate risk-taking, makes it easier to identify and manage emerging risks, and encourages employees to carry out their activities and engage in the business in a legal and ethical manner.

–

A holistic view of risk that translates into the definition of a taxonomy of first- and second-tier risks based on their nature; and

The Global Risk Framework, through the set of documents that comprise it, considers a holistic view of risk: it includes all risks, paying particular attention to the correlation between them (inter-risk) and within the risk itself (intra-risk), as well as the effects of concentration.

–

Alignment with the interests of stakeholders

The Group regularly makes material disclosures to the public, so that market participants can maintain an informed opinion as to the suitability of the management and control framework for these risks, thus ensuring transparency in risk management.

Similarly, risks are managed and controlled with a view to safeguarding the interests of the Group and its shareholders at all times.

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4.3.2 Risk Appetite Framework (RAF)

The risk appetite is a key element in setting the risk strategy, as it determines the scope of activity. The Group has a Risk Appetite Framework (RAF) that sets out the governance framework governing its risk appetite.

Consequently, the RAF establishes the structure and mechanisms associated with the governance, definition, disclosure, management, measurement, monitoring and control of the Group’s risk appetite established by the Board of Directors of Banco de Sabadell, S.A.

Effective implementation of the RAF requires an adequate combination of policies, processes, controls, systems and procedures that enable a set of defined targets and objectives to not only be achieved, but to be done so in an effective and continuous way.

The RAF covers all of the Group’s business lines and units, in accordance with the proportionality principle, and it is designed to enable suitably informed decisions to be made, taking into account the material risks to which it is exposed, including both financial and non-financial risks.

The RAF is aligned with the Group’s strategy and with the strategic planning and budgeting processes, the internal capital and liquidity adequacy assessments, the Recovery Plan and the remuneration framework, among other things, and it takes into account the material risks to which the Group is exposed, as well as their impact on stakeholders such as shareholders, customers, investors, employees and the general public.

4.3.3 Risk Appetite Statement (RAS)

The RAS is a key element in determining the Institution’s risk strategies. It establishes qualitative expressions and quantitative limits for the different risks that the Institution is willing to accept, or seeks to avoid, in order to achieve its business objectives. Depending on the nature of each risk, the RAS includes both qualitative aspects and quantitative metrics, which are expressed in terms of capital, asset quality, liquidity, profitability or any other measure deemed to be relevant. The RAS is therefore a key element in setting the risk strategy, as it determines the area of activity.

Qualitative aspects of the RAS

The Group’s RAS includes the definition of a set of qualitative aspects, which essentially help to define the Group’s position with regard to certain risks, especially when those risks are difficult to quantify.

These qualitative aspects complement the quantitative metrics, establish the general tone of the Group’s approach to risk-taking and define the reasons for taking or avoiding certain types of risks, products, geographical exposures and other matters.

Quantitative aspects of the RAS

The set of quantitative metrics defined in the RAS are intended to provide objective elements with which to compare the Group’s situation against the goals or challenges proposed at the risk management level. These quantitative metrics follow a hierarchical structure, as established in the RAF, with three levels: board (or first-tier) metrics, executive (or second-tier) metrics and operational (or third-tier) metrics.

Each of these levels has its own approval, monitoring and action arrangements that should be followed in the event a threshold is ruptured.

In order to gradually detect possible situations of deterioration of the risk position and thus be able to monitor and control it more effectively, the RAS sets out a system of thresholds associated with the quantitative metrics. These thresholds reflect the desirable levels of risk for each metric, as well as the levels that should be avoided. A rupture of these thresholds can trigger the activation of remediation plans designed to rectify the situation.

These thresholds are established to reflect different levels of severity, making it possible to take preventive action before excessive levels are reached. Some or all of the thresholds will be established for a given metric, depending on the nature of that metric and its hierarchical level within the structure of RAS metrics.

4.3.4 Specific policies for the different material risks

The various policies in place for each of the risks, together with the operating and conceptual procedures and manuals that form part of the set of regulations of the Group and its subsidiaries, are tools on which the Group and subsidiaries rely to expand on the more specific aspects of each risk.

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For each of the Group’s material risks, the policies describe the principles and critical management parameters, the main people and units involved and their duties (including the roles and responsibilities of the various divisions and committees in relation to risks and their control systems), the associated procedures, as well as monitoring and control mechanisms.

4.3.5 Overall organisation of the risk function

Governance structure

The Board of Directors of Banco de Sabadell, S.A. is the body responsible for establishing the general guidelines for the organisational distribution of the risk management and control functions, as well as determining the main strategies in this regard, and for ensuring consistency with the Group’s short- and long-term strategic objectives, as well as with the business plan, capital and liquidity planning, risk-taking capacity and remuneration schemes and policies.

The Board of Directors of Banco de Sabadell, S.A. is also responsible for approving the Group’s Global Risk Framework.

In addition, within the Board of Directors of Banco de Sabadell, S.A., there are five committees involved in the Group’s Global Risk Framework and, therefore, in risk management and control (the Board Risk Committee, the Board Strategy and Sustainability Committee, the Delegated Credit Committee, the Board Audit and Control Committee and the Board Remuneration Committee). There are also other Committees and Divisions with a significant level of involvement in the risk function.

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The governance structure that has been defined aims to ensure a suitable development and implementation of the Global Risk Framework and, consequently, of the risk management and control activity within the Group, while at the same time it aims to facilitate:

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The participation and involvement of the Group’s governing bodies and Senior Management in decisions regarding risks, and also in their supervision and control.

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The alignment of targets and objectives at all levels, monitoring their achievement and implementing corrective measures where necessary.

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The existence of an adequate management and control environment for all risks.

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Organisation

The Group establishes an organisational model for assigning and coordinating risk control responsibilities based on the three lines of defence. This model is described, for each of the risks, in the various policies that make up the Group’s body of regulations, in which responsibilities specific to each of the three lines of defence are established.

For each line of defence, the risk policies describe and assign responsibilities, as appropriate, to the following functions (or any other additional ones that ought to be considered):

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First line of defence: responsible for maintaining adequate and effective internal control and implementing corrective actions to rectify deficiencies in its processes and controls. The responsibilities attributed to this line under the Global Risk Framework are as follows:

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Maintain effective internal controls and perform day-to-day risk assessment and control procedures;

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Identify, quantify, control and mitigate risks, complying with the established internal policies and procedures and ensuring that activities are consistent with the established goals and objectives;

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Implement suitable processes to manage and mitigate material risks.

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Participate in decision-making processes, identifying, assessing, controlling and mitigating the risks inherent in the implementation of significant changes and one-off transactions.

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Define the strategy for each risk.

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Second line of defence: broadly speaking, the second line of defence ensures that the first line of defence is well designed and performs its assigned duties. It also puts forward suggestions for its continuous improvement. The core duties attributed to this line are the following:

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Propose the Global Risk Framework, for risk management and control.

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Participate in the decision-making process where it concerns the implementation of significant changes and one-off transactions.

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Monitor the risk strategy approved by the Board of Directors through its approval of the RAS.

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Keep the risk inventory up to date, justifying those not considered to be material, and review the inventory of material risks.

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Establish and maintain an equivalence between subsidiaries’ local taxonomies and the Group taxonomy.

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Conduct a risk assessment of the Group’s risk profile on an annual basis.

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Supervise the risk management and control activities carried out by the first line of defence to ensure they conform to the established policies and procedures, bearing in mind the tasks specifically assigned to it, and identify potential improvements within risk management.

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The Validation Division gives opinions regarding the suitability of new proposals, changes or adjustments to models, tools and processes with material methodological components. It also designs and rolls out the model risk management and control framework and monitors the Group’s model risk profile.

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The Compliance Division identifies and periodically assesses compliance risks in the different areas of activity.

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Third line of defence: helps the Group to achieve its objectives, carrying out verification activities and providing independent and objective advice. Provides regular oversight of governance processes and of the established risk management and internal control activities.

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4.4 Management and monitoring of the main material risks

The most salient aspects concerning the management of the first-tier risks identified in the Banco Sabadell Group risk taxonomy and concerning the actions taken in this regard in 2023 are set out below:

4.4.1 Strategic risk

Strategic risk is associated with the risk of losses or negative impacts materialising as a result of strategic decisions or their subsequent implementation. It also includes the inability to adapt the Group’s business model to changes in the environment in which it operates.

The Group develops a Strategic Plan which sets out the Bank’s strategy for a specified period of time. In 2021, Banco Sabadell defined a new Strategic Plan which sets out the key courses of action and transformation for each business line over the coming years, in order to seize the opportunity of consolidating its position as a major domestic bank.

As part of the Strategic Plan, the Group carries out five-year financial projections, which are the result of the implementation of the strategies defined in the Plan. These projections are carried out on the basis of the most likely economic scenario for the key geographies (baseline scenario) and they are also included in the ICAAP as a baseline scenario. The economic scenario is described in terms of the key risk factors impacting the Group’s income statement and balance sheet. In addition, the Plan is regularly monitored in order to analyse the Group’s most recent performance and changes in the environment, as well as the risks taken.

The projection exercises and their monitoring are integrated into management arrangements, as they set out the key aspects of the Group’s medium- and long-term strategy. The Plan is drawn up at the business unit level, on the basis of which the Group manages its activities, and annual results are also assessed in terms of compliance with the risk appetite.

Strategic risk includes the management and control of four risks:

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Solvency risk: this is the risk of not having sufficient capital, in terms of either quality or quantity, to achieve strategic and business objectives, withstand operational losses or meet regulatory requirements and/or the expectations of the market in which an institution operates.

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Business risk: this refers to the possibility of incurring losses as a result of adverse events that negatively affect the capacity, strength and recurrence of the income statement, either because of its viability (short term) or sustainability (medium term).

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Reputational risk: current or future risk of the Bank’s competitive capacity being affected as a result of: (i) actions or omissions, carried out by or attributed to the Group, Senior Management or its governing bodies, or (ii) maintaining business relationships with counterparties with poor reputation, resulting in a negative perception by its stakeholders (regulators, employees, customers, shareholders, investors and the general public).

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Environmental risk: risk of incurring losses as a result of the impacts, both those existing at present and those that may exist in the future, of environmental risk factors on counterparties or invested assets, as well as aspects affecting financial institutions as legal entities. Environmental factors are related to the quality and functioning of natural systems and resources, and include factors such as climate change and environmental degradation. Any one of them can have a positive or negative impact on the financial performance or solvency of an institution, sovereign state or individual. These factors may materialise mainly in physical aspects (effects of climate change and environmental degradation, including more frequent extreme weather events and gradual changes in weather patterns and in the balance of ecosystems) and transitional aspects (arising from processes to adjust to an environmentally sustainable economy, for example, lower emissions, greater energy efficiency and reduced consumption of natural resources, among others).

4.4.1.1 Solvency risk

Banco Sabadell’s ratios are above the minimum capital requirements established by the European Central Bank (ECB). Therefore, the Group is not subject to any caps on the distribution of dividends, variable remuneration or coupon payments made to holders of AT1 capital instruments.

Banco Sabadell is also compliant with MREL, which coincides with supervisory expectations and is in line with its funding plans.

Details on the closing data as at 31 December 2023 for solvency risk and capital management are available in Note 5 to these consolidated annual financial statements.

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4.4.1.2 Business risk

2023 has been affected by different macroeconomic and geopolitical events, including the following:

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The interest rate hikes implemented by the central banks, persistently high inflation rates, and the progressive transfer of the impacts of these to economic activity.

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Specific episodes of uncertainty of different kinds, among them: (i) the collapse of certain US regional banks, (ii) the takeover of Credit Suisse by UBS due to the problems observed in the Swiss institution, and (iii) the start of a new conflict in the Middle East, between Israel and Hamas.

Against this backdrop, in year-on-year terms, Banco Sabadell has significantly increased its bottom line. This Group profit was mainly driven by the good performance of core results (net interest income + fees and commissions – recurrent costs), which improved due to both the increase in net interest income and the efforts made to contain costs.

It is also worth highlighting the improvement in the Group’s credit quality, which has made it possible to reduce provisions for non-performing assets and place the total cost of risk below the levels recorded in 2022.

All these aspects are clearly reflected in the Group’s improved profitability, shown by an improvement of its ROTE, which increased from 8.2% as at 31 December 2022 to 11.5% as at 31 December 2023.

4.4.1.3 Reputational risk

In recent years, both customers and society as a whole have attached more importance to the service offered by banks. Vulnerable customers and their specific needs have gained visibility. The change of the Group’s business model, shifting to one in which less of the service is provided in person, increases the materiality of this risk, as these stakeholders’ perception of its performance is one of the factors that it considers.

Banco Sabadell Group bases its business model on corporate values such as ethics, professionalism, rigour, transparency, quality and, in general, long-term business relationships that are beneficial to both the Group and its counterparties.

The Group rigorously manages its reputational risk, identifying any potential or actual threat of this type in good time and ensuring that it is suitably dealt with as quickly and as early as possible, as the materialisation of such a risk could jeopardise the achievement of the vision that the Group has for its future and that it wishes to convey to the market, with its own unique and recognisable personality.

The Group monitors this risk through the Board Risk Committee, which has a dashboard with indicators associated with the main stakeholders. The qualitative aspects of the RAS include the following aspects:

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Low appetite in the event of threats to the Group’s reputation.

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Special consideration of restrictions on transactions with borrowers associated with political parties and the media.

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The Group neither invests nor provides funding to companies linked to the development, manufacture, distribution, storage, transfer or sale of controversial weapons, as set forth in the various conventions of the United Nations currently in force.

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The products and services offered to customers need to be known by all of the parties involved, who must be specifically trained for their sale, only offering customers products and services that are appropriate to their needs, and safeguarding their interests.

4.4.1.4 Environmental risk

The 2015 Paris Agreement, the major milestone in the international commitment against climate change, promotes the reduction of greenhouse gas (GHG) emissions to limit global warming to “well below” 2ºC in 2100 and seeks to ensure that it does not exceed 1.5ºC in relation to pre-industrial average temperatures (1850-1900).

The European Union adopted the Agreement and, in line with its goals, has been promoting various regulatory and non-regulatory measures to achieve a fully decarbonised economy by mid-century. From a financial perspective, this has been implemented through the 2018 Action Plan on Sustainable Finance (APSF), a roadmap that was reformulated and updated in 2021 in the Renewed Sustainable Finance

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Strategy (RSFS), with strategies that have been developed by applying a regulatory and supervisory “tsunami” aimed at achieving the promised objectives.

In this context, Banco Sabadell Group’s commitment to sustainability has been incorporated with a cross-cutting approach into its strategy and business model, internal governance and risk identification, management and control, in order to guide its activity and processes towards contributing to a more sustainable and resilient economy. The aim is to support the Group’s customers with their transformation in two ways: on one hand, by providing them with appropriate funding to meet their needs and, on the other, by offering them savings and investment products that serve as a catalyst to achieve an emissions-neutral world that is resistant to climate variability and the degradation of natural ecosystems. The commitment also extends to the Group as an entity separate from its customers, as the Institution also aims to reduce its own consumption and emissions, thereby ensuring its contribution to the collective aim of sustainability.

As part of this corporate goal, throughout 2023 Banco Sabadell Group has continued to implement the Sustainable Finance Plan, which includes a series of initiatives that add to its track record of projects designed to pursue a more sustainable economy, as described below.

To align with its commitment to achieve a sustainable future, Banco Sabadell Group has been part of the Net-Zero Banking Alliance (NZBA) since 2021. This is an international alliance on climate change formed by major banking institutions, whose main objective is to align their loan and investment portfolios with net-zero emissions scenarios by 2050 or earlier, in accordance with the most ambitious goals of the Paris Agreement (1.5ºC). The Institution has already outlined pathways for four “high risk” sectors: oil & gas, energy, cement and coal.

Banco Sabadell Group also made a commitment, from 2020 onwards, to follow the recommendations for disclosure of financial information related to climate risks established by the Task Force on Climate-related Financial Disclosures (TCFD).

Banco Sabadell Group Sustainable Finance Plan

Since 2020, Banco Sabadell Group has been developing a Sustainable Finance Plan with cross-cutting effect, which includes a set of additional initiatives that allow it to incorporate, develop, apply and comply not only with its sustainability commitments but also with the regulatory and supervisory requirements to which it is subject.

Within the initiatives carried out, it is worth noting the approval by the Board of Directors of the Sustainability Policy in 2020 (which defines the vision, governance and responsibilities of the three lines of defence in relation to sustainability) and of the Environmental Risk Policy drawn up in July 2021 (which defines the critical management parameters to progressively and proportionally integrate these risks in the risk management and control units and business units), which are both regularly updated.

In 2022, the Climate Risk Policy was reviewed and its scope of application and content were expanded to include the risks associated with environmental degradation (air pollution, water pollution, water scarcity, land pollution, loss of biodiversity, deforestation, etc.). This is why the Climate Risk Policy was renamed the Environmental Risk Policy.

During this year, environmental risk indicators have continued to be defined and developed and are gradually being converted to metrics that are included in the Risk Appetite Framework in order to manage and monitor these risks.

Environmental risk management

The Institution has continued to pay increasing attention to environmental risks to include them in management and in its day-to-day banking activities with its customers. Environmental risk should be understood as the risk of incurring losses as a result of the impacts, both those existing at present and those that may exist in the future, stemming from the environmental risk factors (associated with climate change and environmental degradation) and affecting counterparties or invested assets, as well as aspects affecting financial institutions as legal entities.

Environmental factors can produce negative impacts (as well as opportunities) through different risk factors, which can be categorised as either physical risks or transition risks:

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Physical risks are those that occur due to the physical effects of climate change (consequence of adverse climate-related and geological events or changes in climate patterns) and due to environmental degradation (consequence of changes and severe effects on the balance of ecosystems); they are usually classified as acute risks or chronic risks.

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Transition risks are those that occur due to the uncertainty related with the timing and speed of the process for adjusting to an environmentally sustainable and resilient economy. This process can be affected by four risks, according to the risk types enumerated by the TCFD: legal & regulatory, technological, market and reputational.

In this context and in line with the EBA’s Sustainable Finance Plan for 2020-2025 under which ESG risks and factors are expected to be included in the EU regulatory framework (Pillars I, II and III of the Basel prudential framework for credit institutions), Banco Sabadell Group is adapting and aligning its internal corporate governance, strategy, structure and risk management and control processes, and market disclosure of these, in order to comply with the regulatory and supervisory requirements in force.

This change process is based on the materiality assessment of the impacts of environmental risk (the E in ESG) and on the analysis of the transmission channels through which those impacts may materialise. Ultimately, environmental risk affects the institution by acting as an additional risk factor compounding traditional bank risks (for example, credit, market, liquidity and operational risks). It is therefore important to measure its final impact (for example, in terms of the solvency of both customers/counterparties and of the Institution itself).

At present, as the regulatory and supervisory authorities and other bodies all acknowledge, there is a need to continue to develop the most suitable methodologies that can be used to tackle the technical challenges and lack of robust data facing the field of sustainability-related risks (with each of the letters of the ESG acronym).

For its part, Banco Sabadell Group now carries out, on an annual basis, qualitative and quantitative materiality assessments of the impacts that environmental risks have on the main traditional bank risks affected: credit risk, market risk, liquidity risk, operational risk, reputational risk or strategy and business model risk). Since 2022, these assessments have been expanded to include not only climate-related risk but also the risk associated with environmental degradation. Therefore, the Institution regularly carries out (i) a qualitative analysis of the impact of environmental risk factors on the aforesaid risks, (ii) a quantitative estimate of the impacts stemming from environmental risk on credit risk, market risk, liquidity risk and operational risk, (iii) a quantitative analysis of the exposure of its credit portfolios to the most carbon-intensive sectors, and (iv) a measurement of its sustainable exposure (green, social and sustainability-linked transactions).

Furthermore, it should be noted that following a review of the qualitative assessment of the materiality of environmental risk factors on risks that could be significantly impacted, it was concluded that the impacts were concentrated in credit portfolios. Specifically, transition risks were found to be the most material, from a triple point of view: regulations, technological change and market factors. While no impact is expected in the near term, the Group monitors and assesses the potential medium- and long-term impacts on an ongoing basis, depending on the sector. It should be noted that in 2023 and in previous years, the Group has not had any significant losses related to environmental risk.

More information on environmental risk can be found in the Non-Financial Disclosures Report (NFDR), which forms part of the consolidated Directors’ report.

As regards banking activity, a network of teams specialising in environmental risks is being developed and deployed in both risk management and control areas and in the business units themselves, who collect information related to the sustainability of customers and their banking activity through specific ESG questionnaires and indicators. The end goal is to support customers in their transition to a more sustainable and resilient economy.

It should also be noted that the Group has an Environmental and Social Risk Framework that establishes the Group’s position, designed to limit activities with a high environmental risk. At the same time, the Group fosters green financing, using to that end an Eligibility Guide that outlines the activities deemed to be sustainable (in environmental and social terms) and whose main references are the EU Taxonomy and the best practices in the market, such as the Green Loan Principles and the Social Bond Principles.

In parallel, the Sustainable Finance Plan expands its portfolio of sustainable products with the aim of facilitating the transition towards a more sustainable and resilient economy. New financing solutions have been launched, including products such as ‘eco-leases’ and the ‘eco-reformas’ loan for energy-efficient and sustainable home renovations. They have also been integrated across the entire product portfolio, making it possible for a wide range of products to be made sustainable, provided the financed investment meets the stipulated requirements. In addition, the Institution is collating the ESG preferences of retail customers, in line with regulatory requirements, in order to offer them financial products aligned with their preferences in terms of green content and intensity.

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Lastly, it is worth mentioning that over the year Banco Sabadell Group has continued with a new placement of green bonds in the capital market for a total amount of 750 million euros (1,695 million euros in 2022).

4.4.2. Credit risk

Credit risk refers to the risk of losses being incurred as a result of borrowers’ failure to fulfil their payment obligations, or of losses in value taking place due simply to the deterioration of borrower quality.

4.4.2.1 Credit risk management framework

Acceptance and monitoring

Credit risk exposures are rigorously managed and monitored through regular assessments of borrowers’ solvency and their ability to honour their payment obligations undertaken with the Group, adjusting the exposure limits established for each counterparty to levels that are deemed to be acceptable. It is also normal practice to mitigate credit risk exposures by requiring borrowers to provide collateral or other guarantees to the Bank.

The Board of Directors grants powers and discretions to the Delegated Credit Committee to allow the latter to confer different approval powers to different decision-making levels. The implementation of authority thresholds in credit approval systems ensures that the conferral of approval powers established at each level is linked to the expected loss calculated for each transaction, also considering the total amount of the total risk exposure with an economic group and the amount of each transaction.

To optimise the business opportunities provided by each customer and guarantee an appropriate level of security, responsibility for accepting and monitoring risks is shared between the account manager and the risk analyst who, by maintaining effective communication, are able to obtain a comprehensive (360°) and forward-looking insight into each customer’s individual circumstances and needs.

The account manager monitors the business aspect through direct contact with customers and by handling their day-to-day banking activity, while the risk analyst takes a more system-based approach making use of his/her specialised knowledge.

The implementation of advanced risk management methodologies also benefits the process as it ensures that proactive measures can be taken once a risk has been identified. Of vital importance in this process are tools such as credit rating systems for companies and credit scoring systems for natural persons, as well as early warning indicators for monitoring risk. These are integrated into a single tool that provides a comprehensive and forward-looking vision of customers.

The analysis of indicators and early warnings, in addition to credit rating reviews, allow an integrated and continuous measurement to be made of the level of risk taken. The establishment of efficient procedures to manage performing loans also benefits the management of past-due loans as it enables a proactive policy to be devised based on a timely identification of any cases with propensity to default.

Risk monitoring is carried out for all exposures in order to identify potentially problematic situations and prevent credit impairment. In general, this monitoring is based on early warnings system at both the transaction/borrower level and at the portfolio level, and both systems use the firm’s internal information and external information to obtain results. Risk monitoring is carried out prior to any default and on a forward-looking basis, i.e. with an outlook based on the foreseeable future development of circumstances, in order to determine both actions to strengthen the business (increase lending) and to prevent risk (risk mitigation, improvement of guarantees, etc.).

The early warnings system allows an integrated measurement to be made of the level of the risk taken and allows it to be transferred to recovery management specialists, who determine the different types of procedures that should be implemented. Therefore, different groups or categories are established for risks that exceed a given limit and according to predicted default rates, so that they can be treated individually. These warnings are additionally managed by the account manager and the risk analyst.

Responsible lending

In accordance with the nature of the Group’s financial transactions and in order to ensure suitable customer protection in banking services, policies and procedures are implemented in relation to the evaluation and granting of responsible loans and credits, in relation to which it is particularly worth mentioning the importance of the general principles governing responsible lending, as detailed in Annex 6 to Bank of Spain Circular 5/2012 of 27 June on transparency of banking services and responsible lending.

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The Bank’s internal regulations, reflected in the updated Group Credit Risk Acceptance and Monitoring Policy, approved by the Board of Directors on 30 June 2023, explicitly address the application of responsible lending principles when granting and monitoring various types of finance. This commitment is aligned with the guidelines established in the third paragraph of Article 29.1 of Law 2/2011 of 4 March on Sustainable Economy, and covers policies, methods and procedures designed to comply with applicable legislation, such as Order EHA/2899/2011 and Bank of Spain Circular 5/2012, specifically its Rule 12. Effective control mechanisms have also been implemented to ensure these policies are continuously monitored as part of the comprehensive credit risk management arrangements.

Management of non-performing exposures

Generally, during stages of weakness in the economic cycle, debt refinancing and restructuring are the main risk management techniques used. The Bank’s aim, when faced with debtors and borrowers that have, or are expected to have, financial difficulties to honour their payment obligations under the prevailing contractual terms, is to facilitate the repayment of the debt by reducing the probability of default as much as possible. A number of common policies to achieve this are in place in the Institution, as well as procedures for the approval, monitoring and control of potential debt forbearance (refinancing and restructuring) processes, the most significant of which are the following:

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The existence of a sufficiently long good payment history by the borrower and a manifest intention to repay the loan, assessing the period of time during which the customer is likely to continue to experience financial difficulties (in other words, whether they are facing short-term or long-term difficulties).

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Refinancing and restructuring conditions based on a realistic repayment schedule that is in line with borrowers’ current and expected payment capacity, also taking into account the macroeconomic situation and outlooks, avoiding their postponement to a later date.

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If new guarantees are provided, these must be regarded as a secondary and exceptional means of recovering the debt, so as to avoid adversely affecting existing means. In any case, the ordinary interest accrued should be paid up to the refinancing or restructuring date.

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Limits are applied to the length of grace periods and to the granting of successive refinancing.

The Group continually monitors compliance with the agreed terms and with the above policies.

Internal risk models

Banco Sabadell Group also has a system in place which is made up of three lines of defence to ensure the quality and oversight of internal models, as well as a governance process specifically designed to manage and monitor these models and to ensure compliance with regulations and the Supervisor’s instructions.

The governance framework of internal credit risk and impairment models (management of risk, calculation of regulatory capital and provisions) is based on the following pillars:

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Effective management of changes to internal models.

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Ongoing monitoring of the performance of internal models.

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Regular reporting, both internal and external.

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Management tools for internal models.

One of the main bodies within the governance framework of internal credit risk and impairment models is the Models Committee, which meets on a monthly basis and has internal approval responsibilities, depending on the materiality of the risks, and which also monitors internal credit risk models.

Banco Sabadell Group also has an advanced management model for its non-performing exposures in place to manage the impaired assets portfolio. The purpose of managing non-performing exposures is to find the best solution for the customer upon detecting the first signs of impairment, reducing the entry into default of customers with financial difficulties, ensuring intensive management and avoiding downtime between the different phases.

For further quantitative information, see Schedule IV “Other risk information: Refinancing and restructuring transactions” to these consolidated annual financial statements.

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Real estate credit risk management

As part of its general policy on risks and, in particular, its policy on the real estate development sector, the Group has a number of specific policies in place for mitigating risks.

The main measure that is implemented in this portfolio is the ongoing monitoring of projects, both during the construction phase and once the works have been completed. This monitoring makes it possible to validate the progress made, ensuring everything is moving forward as planned, and to take action in the event of any possible deviations. The aim at all times is for the available funding to be sufficient to complete the works and for the existing sales to be able to significantly reduce the risks. The Bank has established three strategic lines of action:

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New lending: real estate development business

New lending to developers is governed by a “Real Estate Development Framework”, which defines the optimum allocation of the new business on the basis of the quality of the customer and development project. This analysis is based on models that allow an objective appraisal to be obtained, taking into account the views of real estate experts.

To this end, the Bank has:

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The Real Estate Business Division (a unit within the Business Banking Division), with a team of real estate specialists who exclusively manage the Bank’s developer customers. This unit has an acceptance and monitoring methodology that allows the Group to gain in-depth knowledge about all the projects analysed by the unit.

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Two Real Estate Investment Analysis and Monitoring divisions (reporting to the Real Estate Risks Division), whose role is to analyse all real estate projects from a technical and real estate point of view. They analyse both the location and suitability of the product, as well as the potential supply and demand. They also compare them against the figures of the business plan submitted by the customer (particularly costs, income, margin and timelines). This analysis process goes hand in hand with a model used to track real estate developments through monitoring reports, which validate the progress made in each development project in order to keep track of drawdowns and compliance with the business plan (income, costs and timelines).

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The Real Estate Risk Division, with specialised analysts in each of the Territorial Divisions. This makes it possible to ensure that newly accepted risks are in line with the policies and acceptance framework for this type of risk.

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Management of non-performing real estate credit

Non-performing exposures are managed in line with the defined policy. In general, they are managed taking into account:

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The customer.

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The guarantees.

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The status of the loan (from the time when a warning is triggered, warning of a potential deterioration of the current status, up until refinancing or restructuring takes place, or until the properties are surrendered in payment of debt (payment in kind)/purchased in an amicable settlement/settlement with debt reduction, or until an auction is held following a mortgage enforcement process and whenever there is a ruling in favour of foreclosure).

After analysing the three aforementioned aspects, an optimal solution is sought to stabilise or settle the position (whether through an amicable settlement or through judicial proceedings), which differs depending on the evolution of each customer/case.

Cases in which the stabilisation of the loan or its settlement by the customer is not a feasible option are managed using support models depending on the type of loan or financed item.

In the case of completed real estate developments or completed non-residential properties, these can be put on sale at prices that drive market traction.

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For other funded real estate, the possibility of entering into sale agreements with third parties is considered, out-of-court settlement solutions are proposed (purchase, payment in kind, which in the case of properties owned by individuals can be arranged under favourable conditions for relocation or social rental depending on the needs of the customer, or with a settlement with debt reduction), or else court proceedings are initiated.

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Management of foreclosed assets

Once the loan has been converted into a real estate asset, a management strategy is defined depending on the type of asset, in order to maximise the potential of each asset during the sale.

The main disposal mechanism is the sale of the asset, for which the Bank has developed different channels depending on the type of property and customer.

The Group, which has had high concentrations of this type of risk in the past, has a first-tier RAS metric in place which establishes a maximum level of concentration of exposures associated with real estate development based on Tier 1 capital in Spain. This metric is monitored on a monthly basis and reported to the Technical Risk Committee, the Board Risk Committee and the Board of Directors.

Lastly, it is worth highlighting that the Risk Control Division, together with the Business and Risk Management Divisions, regularly monitors the adequacy of new loans granted to real estate developers. The monitoring process includes a review of compliance with policies and asset allocation. The results of this monitoring exercise are escalated to the Technical Risk Committee for information.

For further quantitative information, see Schedule IV “Other risk information – Credit Risk: Exposure to construction and real estate development sector” to these consolidated annual financial statements.

4.4.2.2. Risk management models

Credit ratings

Credit risks incurred with companies, real estate developers, specialised lending projects, financial institutions and countries are rated using a rating system based on predictive factors and an internal estimate of their probability of default (see section “Impairment of financial assets” in Note 1).

The rating model is reviewed annually based on the analysis of performance patterns of actual defaulted loans. An estimated default rate is assigned to each internal credit rating level, which also allows a uniform comparison to be made against other segments and ratings issued by external credit rating agencies using a master ratings scale.

The percentage distribution by credit rating of Banco Sabadell’s portfolio of companies as at 31 December 2023 and 2022 is detailed below:


%
Distribution, by credit rating, of Banco Sabadell’s portfolio of companies 2023
9	8	7	6	5	4	3	2	1	0	TOTAL
0.80%	2.20%	8.90%	24.40%	28.14%	19.69%	11.58%	3.69%	0.53%	0.06%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.


%
Distribution, by credit rating, of Banco Sabadell’s portfolio of companies 2022
9	8	7	6	5	4	3	2	1	0	TOTAL
0.64%	1.56%	9.02%	18.80%	28.88%	23.20%	13.11%	4.08%	0.62%	0.10%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.

Credit scores

In general, credit risks undertaken with individuals are rated using credit scoring systems, which are in turn also based on a quantitative model of historical statistical data, identifying the relevant predictive factors (see section “Impairment of financial assets” in Note 1).

Scoring models are used in both the new risk origination process (reactive scoring) and to monitor portfolio risk (behavioural scoring).

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The percentage distribution by behavioural score of Banco Sabadell’s portfolio of individuals as at 31 December 2023 and 2022 is detailed below:


%
Distribution, by behavioural score, of Banco Sabadell’s portfolio of individuals 2023
9	8	7	6	5	4	3	2	1	0	TOTAL
0.99%	7.74%	26.28%	35.61%	17.67%	6.73%	2.64%	1.33%	0.66%	0.35%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.


%
Distribution, by behavioural score, of Banco Sabadell’s portfolio of individuals 2022
9	8	7	6	5	4	3	2	1	0	TOTAL
0.89%	8.92%	26.39%	35.56%	17.11%	6.21%	2.50%	1.35%	0.67%	0.40%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.

Warning tools

In general, the Group has a system of warning tools in place, which include both individual warnings and advanced early warning models for both the Companies segment and the Individuals segment. These warning tools are based on performance factors obtained from available sources of information (credit ratings or credit scores, customer files, balance sheets, CIRBE (Bank of Spain Central Credit Register), information relating to the industry or past banking activity, etc.). They measure the risk presented by the customer on a short-term basis (predicted propensity to default), obtaining a high level of predictability to detect potential defaulters. The resulting rating or score, which is obtained automatically, is used as a basic input in monitoring the risk of individuals and companies (see section “Impairment of financial assets” in Note 1).

This warnings system enables:

–

Efficiency to be improved, as monitoring exercises focus on customers with the lowest credit rating or credit score (different cut-off points for each group).

–

The Institution to anticipate actions required to manage any negative change in the situation of the customer (change in rating, new severe warnings, etc.).

–

Customers whose situation remains unchanged and who have been assessed by the Basic Management Team to be regularly monitored.

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4.4.2.3. Credit risk exposure

The table below shows the distribution, by headings of the consolidated balance sheet, of the Group’s maximum gross credit risk exposure as at 31 December 2023 and 2022, without deducting collateral or credit enhancements obtained in order to ensure the fulfilment of payment obligations, broken down by portfolios and in accordance with the nature of the financial instruments:


Thousand euro
Maximum credit risk exposure	Note		2023		2022

Financial assets held for trading				142,495		417,131
Equity instruments		9		—		—
Debt securities		8		142,495		417,131

Non-trading financial assets mandatorily at fair value through profit or loss				153,178		77,421
Equity instruments		9		52,336		23,145
Debt securities		8		65,744		54,276
Loans and advances		11		35,098		—

Financial assets at fair value through other comprehensive income				6,387,869		5,923,703
Equity instruments		9		302,510		301,011
Debt securities		8		6,085,359		5,622,692

Financial assets at amortised cost				184,116,175		188,068,718
Debt securities		8		21,501,203		21,453,031
Loans and advances		11		162,614,972		166,615,687

Derivatives		10, 12		4,988,592		6,672,213
Total credit risk due to financial assets				195,788,309		201,159,186

Loan commitments given		26		27,035,812		27,460,615
Financial guarantees given		26		2,064,396		2,086,993
Other commitments given		26		7,942,724		9,674,382
Total off-balance sheet exposures				37,042,932		39,221,990

Total maximum credit risk exposure				232,831,241		240,381,176

Schedule IV to these consolidated annual financial statements shows quantitative data relating to credit risk exposures by geographical area and activity sector.

4.4.2.4. Credit risk mitigation

Generally, these take the form of collateral, mainly mortgages on properties used as housing, whether completed or under construction. The Group also accepts, although to a lesser degree, other types of collateral, such as mortgages on retail properties, industrial warehouses, etc. and financial assets. Another credit risk mitigation technique commonly used by the Institution is the acceptance of sureties, in this case subject to the guarantor presenting a certificate of good standing.

All of these mitigation techniques are established ensuring their legal certainty, i.e. under legal contracts that are legally binding on all parties and which are enforceable in all relevant jurisdictions, thus guaranteeing that the collateral can be seized at any time. The entire process is subject to an internal verification of the legal adequacy of these contracts, and legal opinions of international specialists can be requested and applied where these contracts have been entered into under foreign legislation.

All collateral is executed before a notary public through a public document, thus ensuring its enforceability before third parties. In the case of property mortgages, these public documents are also registered with the corresponding land registries, thus gaining constitutive effectiveness before third parties. In the case of pledges, the pledged items are generally deposited with the Institution. Unilateral cancellation by the obligor is not permitted, and the guarantee remains valid until the debt has been fully repaid.

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Personal guarantees or sureties are established in favour of the Institution and, except in certain exceptional cases, these are also executed before a notary through a public document, to vest the agreement with the highest possible legal certainty and to allow legal claims to be filed through executive proceedings in the event of default. They constitute a credit right with respect to the guarantor that is irrevocable and payable on first demand.

The Group has not received any significant guarantees which it is authorised to sell or pledge, irrespective of any non-payment by the owner of the referred guarantees, except for those intrinsic in treasury activities, which are mostly reverse repos (see Note 6). The fair value of the assets sold in connection with reverse repos is included under the heading “Financial liabilities held for trading” as part of the short positions of securities.

Assets assigned under the same transactions amounted to 1,012,508 thousand euros as at 31 December 2023 (417,982 thousand euros as at 31 December 2022) and are included by type under the repos heading in Notes 18 and 19.

There have been no significant changes in Banco de Sabadell’s policies on the topic of guarantees during this year. Neither have there been any significant changes in the quality of the Group’s guarantees with respect to the previous year.

The values of the guarantees received to ensure collection, broken down into collateral and other guarantees, as at 31 December 2023 and 2022 are as follows:


Thousand euro
	2023		2022

Value of collateral		94,323,862		97,340,958
Of which: securing stage 2 loans		7,180,750		8,515,648
Of which: securing stage 3 loans		1,873,003		2,046,793

Value of other guarantees		14,975,715		17,180,550
Of which: securing stage 2 loans		1,881,539		2,635,673
Of which: securing stage 3 loans		1,054,019		1,080,167
Total value of guarantees received		109,299,577		114,521,508

The main risk concentration in relation to all of these types of collateral and credit enhancements corresponds to the use of mortgage guarantees as a credit risk mitigation technique in exposures of loans intended for the financing or construction of housing or other types of real estate. On a like-for-like basis, as at 31 December 2023, the exposure to home equity loans and credit lines represented 57.5% of total gross performing lending items granted to customers (57.2% as at 31 December 2022).

In addition, the Bank has carried out four synthetic securitisation transactions since 2020. Details of the outstanding transactions as at 2023 year-end are shown below:

In September 2023, the Bank carried out a synthetic securitisation of a 1,139 million euro portfolio of loans to SMEs and mid-corporates, having received an initial guarantee from Sabadell Galera 3-2023 Designated Activity Company in the amount of 58 million euros (58 million euros as at 31 December 2023), covering losses of between 0.95% and 5.05% on the securitised portfolio.

In September 2022, the Bank carried out a synthetic securitisation transaction of a 1 billion euro portfolio of project finance loans, having received an initial guarantee from Sabadell Boreas 1-2022 Designated Activity Company for 105 million euros (82 million euros as at 31 December 2023), which covers losses of up to 10.5% on the securitised portfolio.

In September 2021, the Bank carried out a synthetic securitisation of a 1.5 billion euro portfolio of loans to SMEs and mid-corporates, having received an initial guarantee of 75 million euros (38 million euros as at 31 December 2023), covering losses of between 0.9% and 5.9% on the securitised portfolio.

In June 2020, the Bank carried out a synthetic securitisation of a 1.6 billion euro portfolio of loans to SMEs and mid-corporates, having received an initial guarantee of 96 million euros (63 million euros as at 31 December 2023), covering losses of between 1.5% and 7.5% on the securitised portfolio.

These transactions did not involve a substantial transfer of the risks and rewards from the assets concerned and, consequently, did not entail the derecognition of those assets from the consolidated balance sheet.

These transactions are given preferential treatment for capital consumption purposes, in accordance with Article 270 of Regulation (EU) 2017/2401 and Article 26 of Regulation (EU) 2021/557 (see Note 5).

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In the case of market transactions, counterparty credit risk is managed as explained in section 4.4.2.7 of these consolidated annual financial statements.

4.4.2.5. Credit quality of financial assets

As stated earlier, in general terms, the Group uses internal models to rate most borrowers (or transactions) through which credit risk is incurred. These models have been designed considering the best practices proposed by the New Basel Capital Accord (NBCA). However, not all portfolios in which credit risk is incurred have internal models, partly due to the fact that these models can only be reasonably designed if a minimum of historical non-payment case data is available. The standardised approach is followed for these portfolios, for solvency purposes.

The exposure percentage calculated by the Group using internal models, for solvency purposes, is 90%. This percentage has been calculated following the specifications of the ECB guide to internal models (Article 28a) published in June 2023.

The breakdown of total exposures rated according to the various internal rating levels, as at 31 December 2023 and 2022, is set out here below:


Million euro
		Exposures assigned rating/score
		2023
Breakdown of exposure by rating	Note	*Stage 1*			*Stage 2*			*Stage 3*			Of which: purchased credit-impaired			Total

AAA/AA			25,486			57			—			—			25,543
A			11,644			171			13			—			11,829
BBB			83,179			252			—			1			83,431
BB			31,376			522			3			2			31,902
B			17,102			3,105			6			61			20,212
Other			3,577			7,546			5,450			45			16,574
No rating/score assigned			1,675			19			—			—			1,694
Total gross amount	11		174,039			11,672			5,473			109			191,185


Impairment allowances	11		(373	)		(471	)		(2,359	)		(1	)		(3,202	)

Total net amount			173,666			11,202			3,114			*108*			187,982

Million euro
		Exposures assigned rating/score
		2022
Breakdown of exposure by rating	Note	*Stage 1*			*Stage 2*			*Stage 3*			Of which: purchased credit-impaired			Total

AAA/AA			20,031			202			7			—			20,240
A			10,905			52			—			—			10,957
BBB			86,498			182			—			—			86,680
BB			30,428			474			1			2			30,903
B			20,728			3,843			4			68			24,575
Other			4,022			8,929			5,414			54			18,365
No rating/score assigned			3,531			20			35			—			3,586
Total gross amount	11		176,143			13,702			5,461			124			195,306


Impairment allowances	11		(347	)		(480	)		(2,196	)		(1	)		(3,023	)

Total net amount			175,796			13,222			3,265			*123*			192,283

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The breakdown of total off-balance sheet exposures rated based on the various internal rating levels, as at

31 December 2023 and 2022, is set out hereafter:


Million euro
		Exposures assigned rating/score
		2023
Breakdown of exposure by rating	Note	*Stage 1*			*Stage 2*			*Stage 3*			Of which: purchased credit-impaired		Total

AAA/AA			1,442			44			—			—		1,485
A			3,034			—			—			—		3,035
BBB			13,533			34			2			—		13,568
BB			8,611			101			3			1		8,716
B			8,246			724			6			23		8,977
Other			159			620			355			153		1,133
No rating/score assigned			128			1			—			—		129
Total gross amount	26		35,154			1,524			365			*178*		37,043

Provisions recognised on liabilities side of the balance sheet	26		(48	)		(30	)		(86	)		—		(165	)

Total net amount			35,105			1,494			279			178		36,878

Million euro
		Exposures assigned rating/score
		2022
Breakdown of exposure by rating	Note	*Stage 1*			*Stage 2*			*Stage 3*			Of which: purchased credit-impaired		Total

AAA/AA			1,433			64			—			—		1,497
A			1,235			—			—			—		1,235
BBB			11,866			40			1			—		11,907
BB			9,791			164			3			—		9,958
B			11,585			867			5			24		12,457
Other			693			959			397			—		2,049
No rating/score assigned			117			2			—			—		119
Total gross amount	26		36,720			2,096			406			24		39,222

Provisions recognised on liabilities side of the balance sheet	26		(51	)		(30	)		(96	)		—		(177	)

Total net amount			36,669			2,066			310			24		39,045

Further details on the credit rating and credit scoring models are included in section 4.4.2.2 of these consolidated annual financial statements.

For those borrowers included within business in Spain whose coverage has been assessed using internal models as at 31 December 2023 and 2022, the following table shows the breakdown by segment of the average EAD-weighted PD and LGD parameters, distinguishing between on-balance sheet and off-balance sheet exposures, and the stage in which the transactions are classified according to their credit risk:


%
	31/12/2023
	Average ECL parameters for on-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Loans and advances		0.70	%		23.20	%		21.50	%		23.90	%		100.00	%		59.90	%		4.10	%		24.00%
Other financial corporations		0.70	%		27.10	%		8.90	%		30.20	%		100.00	%		67.80	%		1.10	%		27.20%
Non-financial corporations		1.20	%		32.00	%		15.40	%		28.20	%		100.00	%		63.80	%		4.50	%		32.20%
Households		0.40	%		16.40	%		29.80	%		18.00	%		100.00	%		56.90	%		3.90	%		17.30%

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%
	31/12/2023
	Average ECL parameters for off-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Loans and advances		1.00	%		38.80	%		16.80	%		38.40	%		100.00	%		77.20	%		1.60	%		38.90%
Other financial corporations		1.40	%		35.60	%		1.80	%		35.50	%		0.00	%		0.00	%		1.40	%		35.60%
Non-financial corporations		1.10	%		32.70	%		17.00	%		38.20	%		100.00	%		77.80	%		1.90	%		33.00%
Households		0.70	%		59.60	%		15.50	%		40.80	%		100.00	%		58.00	%		0.90	%		59.30%

%
	31/12/2022
	Average ECL parameters for on-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Loans and advances		1.00	%		20.70	%		21.00	%		20.30	%		100.00	%		56.10	%		4.30	%		21.20%
Other financial corporations		0.90	%		21.10	%		20.50	%		17.70	%		100.00	%		84.70	%		1.70	%		21.10%
Non-financial corporations		1.60	%		30.90	%		15.70	%		25.20	%		100.00	%		60.60	%		4.90	%		30.80%
Households		0.50	%		13.00	%		28.40	%		13.50	%		100.00	%		52.60	%		3.90	%		13.70%

%
	31/12/2022
	Average ECL parameters for off-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Loans and advances		1.40	%		32.50	%		16.20	%		34.20	%		100.00	%		73.50	%		2.10	%		32.60%
Other financial corporations		1.20	%		35.30	%		21.00	%		27.10	%		0.00	%		0.00	%		1.30	%		35.30%
Non-financial corporations		1.50	%		30.80	%		15.60	%		34.50	%		100.00	%		74.00	%		2.50	%		31.10%
Households		0.80	%		36.70	%		21.40	%		31.70	%		100.00	%		55.00	%		1.30	%		36.60%

During 2023, the usual LGD model maintenance processes have been continued in order to improve certain aspects identified during the ongoing monitoring carried out by Banco Sabadell or during the independent reviews conducted by the internal control units (Models Validation and Internal Audit). The adjustment processes follow the internal governance arrangements established for their validation, review and approval by the corresponding units.

Details of the PD and LGD parameters for exposures in the business of the subsidiary TSB as at 31 December 2023 and 2022 are shown below:


%
	31/12/2023
	Average ECL parameters for on-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Secured loans		0.26	%		2.71	%		7.88	%		7.52	%		100.00	%		4.02	%		1.53	%		4.42%
Credit cards		1.38	%		81.64	%		9.19	%		80.67	%		100.00	%		59.96	%		5.01	%		80.88%
Current accounts		0.46	%		54.39	%		8.71	%		55.14	%		100.00	%		56.87	%		3.56	%		54.50%
Loans		3.89	%		86.81	%		12.75	%		87.23	%		100.00	%		84.14	%		7.63	%		86.79%

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%
	31/12/2023
	Average ECL parameters for off-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Secured loans		0.58	%		4.49	%		7.88	%		7.52	%		100.00	%		4.02	%		0.58	%		4.49%
Credit cards		1.38	%		81.64	%		9.19	%		80.67	%		100.00	%		59.96	%		5.01	%		80.88%
Current accounts		0.46	%		54.39	%		8.71	%		55.14	%		100.00	%		56.87	%		3.56	%		54.50%
Loans		3.89	%		86.81	%		12.75	%		87.23	%		100.00	%		84.14	%		7.63	%		86.79%

%
	31/12/2022
	Average ECL parameters for on-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Secured loans		0.34	%		3.48	%		3.50	%		7.97	%		100.00	%		3.07	%		1.44	%		4.01%
Credit cards		0.89	%		84.08	%		5.47	%		78.63	%		100.00	%		51.72	%		3.71	%		82.53%
Current accounts		0.50	%		69.85	%		8.76	%		67.52	%		100.00	%		56.78	%		3.58	%		69.35%
Loans		1.36	%		81.02	%		5.96	%		82.23	%		100.00	%		80.45	%		3.99	%		81.21%

%
	31/12/2022
	Average ECL parameters for off-balance sheet exposures
	*Stage 1*						*Stage 2*						*Stage 3*						Total portfolio
	PD			LGD			PD			LGD			PD			LGD			PD			LGD

Secured loans		0.83	%		4.31	%		0.00	%		0.00	%		0.00	%		0.00	%		0.83	%		4.31%
Credit cards		0.89	%		84.08	%		5.47	%		78.63	%		100.00	%		51.72	%		3.71	%		82.53%
Current accounts		0.50	%		69.85	%		8.76	%		67.52	%		100.00	%		56.78	%		3.58	%		69.35%
Loans		1.36	%		81.02	%		5.96	%		82.23	%		100.00	%		80.45	%		3.99	%		81.21%

As can be seen, in TSB the PDs show an increase compared to 2022, especially in credit cards and personal loans, as a result of higher inflation and interest rates and the worse macroeconomic situation in 2023.

Risks classified as stage 3 decreased by 37 million euros in 2023. However, this reduction was accompanied by a decrease in the risk base of 6,415 million euros, which led to an increase in the Group’s NPL ratio, as shown in the table below:


%
	2023		*Proforma 2023 ()**		2022		*Proforma 2022 ()**

NPL ratio (*)		3.52		4.22		3.41		4.13
NPL (stage 3) coverage ratio (*)		42.33		45.55		39.42		42.25
NPL (stage 3) coverage ratio, with total provisions (*)		58.29		60.25		55.04		56.41

(*) Corresponds to the ratio excluding TSB.

The NPL ratio, broken down by lending segment as at 31 December 2023 and 2022, is set out below:


%
	2023		*Proforma 2023 ()**		2022		*Proforma 2022 ()**

Real estate development and construction		6.44		6.48		6.95		6.99
Non-real estate construction		5.25		5.25		7.06		7.07
Corporates		2.47		2.47		2.02		2.02
SMEs and self-employed		8.52		8.58		7.62		7.66
Individuals with 1st mortgage guarantee		2.29		3.12		2.08		2.86
Group NPL ratio		3.52		4.22		3.41		4.13

(*) Corresponds to the NPL ratio excluding TSB.

A more detailed quantitative breakdown of allowances and assets classified as stage 3 can be found in Note 11, and a more detailed breakdown of refinancing and restructuring transactions is included in Schedule IV.

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4.4.2.6. Concentration risk

Concentration risk refers to the level of exposure to a series of economic groups which could, given the size of that exposure, give rise to significant credit losses in the event of an adverse economic situation.

Exposures can be concentrated within a single customer or economic group, or within a given sector or geography.

Concentration risk can be caused by two risk subtypes:

–

Individual concentration risk: this refers to the possibility of incurring significant credit losses as a result of maintaining large exposures to specific customers, either to a single customer or to an economic group.

–

Sector concentration risk: imperfect diversification of systematic components of risk within the portfolio, which can be sector-based factors, geographical factors, etc.

Banco Sabadell has a series of specific tools and policies in place to ensure its concentration risk is managed efficiently:

–

Quantitative metrics from the Risk Appetite Statement and their subsequent monitoring, including both first-tier (Board) metrics and second-tier (Executive) metrics.

–

Individual limits for risks and customers considered to be significant, which are set by the Delegated Credit Committee.

–

A structure of conferred powers which requires transactions with significant customers to be approved by the Risk Operations Committee, or even by the Delegated Credit Committee.

In order to control its concentration risk, Banco Sabadell Group has deployed the following critical control parameters:

Consistency with the Global Risk Framework

The Group ensures that its concentration risk exposures are consistent with its concentration risk tolerance defined in the RAS. Overall concentration risk limits and adequate internal controls are in place to ensure that concentration risk exposures do not go beyond the risk appetite levels established by the Group.

Establishment of limits and metrics for concentration risk control

Given the nature of the Group’s activity and its business model, concentration risk is primarily linked to credit risk, and various metrics are in place, along with their associated limits.

Credit risk exposure limits are set based on the Institution’s past loss experience, seeking to ensure that exposures are in line with the Group’s level of capitalisation as well as the expected level of profitability under different scenarios.

The metrics used to measure such levels, as well as appetite limits and tolerance thresholds for the identified risks, are described in the RAS metrics.

Risk control monitoring and regular reporting

Banco Sabadell Group ensures that concentration risk is monitored on a regular basis, in order to enable any weaknesses in the mechanisms implemented to manage this risk to be quickly identified and resolved. This information is also reported to the Board of Directors on a recurring basis in accordance with the established risk governance arrangements.

Action plans and mitigation techniques

When dealing with exceptions to internally established limits, the criteria based on which such exceptions can be approved must be included.

The Group will take any measures necessary to match the concentration risk to the levels approved in the RAS by the Board of Directors.

Exposure to customers or significant risks

As at 31 December 2023 and 2022, there were no borrowers with an approved lending transaction that individually exceeded 10% of the Group’s own funds.

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Country risk: geographical exposure to credit risk

Country risk is defined as the risk associated with a country’s debts, taken as a whole, due to factors inherent to the sovereignty and the economic situation of a country, i.e. for circumstances other than regular credit risk. It manifests itself in the eventual inability of obligors to honour their foreign currency payment obligations undertaken with external creditors due to, among other reasons, the country preventing access to that foreign currency, the inability to transfer it, or the non-enforceability of legal actions against borrowers for reasons of sovereignty, war, expropriation or nationalisation.

Country risk not only affects debts undertaken with a state or entities guaranteed by it, but also all private debtors that belong to that state and who, for reasons outside their control and not at their volition, are generally unable to satisfy their debts.

An exposure limit is set for each country which is applicable across the whole of Banco Sabadell Group. These limits are approved by the Board of Directors and the corresponding decision-making bodies, as per their conferred powers, and they are continuously monitored to ensure that any deterioration in the economic, political or social prospects of a country can be detected in good time.

The main component of the procedure for the acceptance of country risk and financial institution risk is the structure of limits for different metrics. This structure is used to monitor the various risks and it is also used by Senior Management and the delegated bodies to establish the Group’s risk appetite.

Different indicators and tools are used to manage country risk: credit ratings, credit default swaps, macroeconomic indicators, etc.

Schedule IV includes quantitative data relating to the breakdown of the concentration of risks by activity and on a global scale.

Exposure to sovereign risk and exposure to the construction and real estate development sector

Schedule IV includes quantitative data relating to sovereign risk exposures and exposures to the construction and real estate development sector.

4.4.2.7. Counterparty credit risk

This heading considers credit risk associated with activities in financial markets involving specific transactions that have an associated counterparty credit risk. Counterparty credit risk is a type of credit risk that refers to the risk of a counterparty defaulting before definitively settling cash flows of either a transaction with derivatives or a transaction with a repurchase commitment, with deferred settlements or collateral financing.

The amount exposed to a potential default by the counterparty does not correspond to the notional amount of the contract, instead, it is uncertain and depends on market price fluctuations until the maturity or settlement of the financial contracts.

Exposure to counterparty credit risk is mainly concentrated in customers, financial institutions and central counterparty clearing houses.

The following tables show the breakdown of exposures by credit rating and by the geographical areas in which the Group operates, as at 31 December 2023 and 2022:


%
2023
AAA	AA+	AA	AA-	A+	A	A-	BBB+	BBB	BBB-	BB+	BB	BB-	B+	Other	TOTAL

0.7%	11.5%	0.1%	32.1%	21.2%	8.1%	7.9%	3.0%	3.4%	2.0%	2.9%	2.8%	2.3%	0.5%	1.6%	100%

%
2022
AAA	AA+	AA	AA-	A+	A	A-	BBB+	BBB	BBB-	BB+	BB	BB-	B+	Other	TOTAL

17.4%	0.0%	2.4%	31.0%	14.5%	11.8%	9.0%	4.6%	2.5%	1.9%	2.2%	1.5%	0.7%	0.1%	0.4%	100%

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%
	2023			2022

Eurozone		77.3	%		70.7%
Rest of Europe		16.9	%		24.5%
United States and Canada		3.0	%		3.0%
Rest of the world		2.8	%		1.8%
Total		100	%		100%

As can be seen in the table, the risk is concentrated in counterparties with a high credit quality, with 82% of the risk relating to counterparties rated A, whereas as at 31 December 2022 this concentration was 86%.

In 2016, under the European Market Infrastructure Regulation (EMIR) (Regulation 648/2012), the obligation to settle and clear certain over-the-counter (OTC) derivatives through central counterparty clearing houses (CCPs) began to apply to the Group. For this reason, the derivatives arranged by the Group and subject to the foregoing are channelled via these agents. At the same time, the Group has improved the standardisation of OTC derivatives with a view to fostering the use of clearing houses. The exposure to risk with CCPs largely depends on the value of the deposited guarantees.

With regard to derivative transactions in organised markets (OMs), based on management criteria, it is considered that there is no exposure, given that there is no risk as the OMs act as counterparties in the transactions and a daily settlement and guarantee mechanism is in place to ensure the transparency and continuity of the activity. In OMs the exposure is equivalent to the deposited guarantees.

The breakdown of transactions involving derivatives in financial markets, according to whether the counterparty is another financial institution, a clearing house or an organised market, is shown below:


Thousand euro
	2023		2022

Transactions with organised markets		1,505,736		979,533
OTC transactions		188,207,641		183,975,718
Settled through clearing houses		113,467,997		114,649,971
Total		189,713,377		184,955,251

There are currently no transactions that meet the accounting criteria for offsetting transactions involving financial assets and financial liabilities on the balance sheet. The netting of derivative and repo transactions is only material when calculating the amount pending collateralisation, and is not material in terms of their presentation on the balance sheet.

The following tables show the aggregate amount reflected on the balance sheet for the financial instruments subject to a master netting and collateral agreement for 2023 and 2022:

Thousand euro

2023

Financial assets subject to collateral agreements

Amount recognised
on balance sheet

Amount offset (for

collateral calculations

only)

Guarantee received

Net amount

Cash

Securities

Financial assets

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

4,827,407

2,903,168

1,822,777

124,929

(23,467

)

Repos

5,146,361

—

45,522

5,207,911

(107,072

)

Total

9,973,768

2,903,168

1,868,299

5,332,840

(130,539

)

Thousand euro

2023

Financial liabilities subject to collateral agreements

Amount recognised

on balance sheet

Amount offset (for

collateral calculations
only)

Guarantee given

Net amount

Cash

Securities

Financial
liabilities

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

3,206,489

2,903,168

457,090

358,000

(511,769

)

Reverse repos

11,065,324

—

144,461

11,608,411

(687,548

)

Total

14,271,813

2,903,168

601,551

11,966,411

(1,199,317

)

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Thousand euro

2022

Financial assets subject to collateral agreements

Amount recognised
on balance sheet

Amount offset (for

collateral calculations
only)

Guarantee received

Net amount

Cash

Securities

Financial assets

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

6,445,760

3,603,978

2,249,400

129,934

462,448

Repos

3,114,965

—

23,590

3,008,362

83,013

Total

9,560,725

3,603,978

2,272,990

3,138,296

545,461

Thousand euro

2022

Financial liabilities subject to collateral agreements

Amount recognised

on balance sheet

Amount offset (for

collateral calculations
only)

Guarantee given

Net amount

Cash

Securities

Financial
liabilities

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

4,090,024

3,603,978

574,218

489,144

(577,316)

Reverse repos

8,528,435

—

126,059

8,819,189

(416,813)

Total

12,618,459

3,603,978

700,277

9,308,333

(994,129)

The values of derivative financial instruments which are settled through a clearing house as at 31 December 2023 and 2022 are indicated hereafter:


Thousand euro
	2023		2022

Derivative financial assets settled through a clearing house		4,012,659		5,367,736
Derivative financial liabilities settled through a clearing house		2,498,128		3,204,917

The philosophy behind counterparty credit risk management is consistent with the business strategy, seeking to ensure the creation of value at all times whilst maintaining a balance between risk and return. To this end, criteria have been established for controlling and monitoring counterparty credit risk arising from activity in financial markets, which ensure that the Bank can carry out its business activity whilst adhering to the risk thresholds approved by the Board of Directors.

The approach for quantifying counterparty credit risk exposure takes into account current and future exposure. Current exposure represents the cost of substituting a transaction at market value in the event of a default by a counterparty. To calculate it, the current or Mark to Market (MtM) value of the transaction is required. The future exposure represents the risk that a transaction could potentially represent over a certain period of time, given the characteristics of the transaction and the market variables on which it depends. In the case of transactions carried out under a collateral agreement, the future exposure represents the possible fluctuation of the MtM between the time of default and the substitution of such transactions in the market. If the transaction is not carried out under a collateral agreement, it represents the possible changes in MtM throughout the life of the transaction.

Each day at close of business, all of the exposures are recalculated in accordance with the transaction inflows and outflows, changes in market variables and risk mitigation mechanisms established by the Group. Exposures are thus subject to daily monitoring and they are controlled in accordance with the limits approved by the Board of Directors. This information is included in risk reports for disclosure to the departments and areas responsible for their management and monitoring.

With regard to counterparty credit risk, the Group has different mitigation techniques. The main techniques are:

–

Netting agreements for derivatives (ISDA and Spain’s Framework Agreement for Financial Transactions (the Contrato Marco de Operaciones Financieras, or CMOF)).

–

Variation margin collateral agreements for derivatives (CSA and Annex 3 - CMOF), repos (GMRA, EMA) and securities lending (GMSLA).

–

Initial margin collateral agreements for derivatives (CTA and SA).

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Netting agreements allow positive and negative MtM to be aggregated for transactions with a single counterparty, in such a way that in the event of default, a single payment or collection obligation is established in relation to all of the transactions closed with that counterparty.

By default, the Group has netting agreements with all counterparties wishing to trade in derivatives.

Variation margin collateral agreements, as well as including the netting effect, also include the regular exchange of guarantees which mitigate the current exposure with a counterparty in respect of the transactions subject to such agreements.

In order to trade in derivatives or repos with financial institutions, the Group requires variation margin collateral agreements to be in place. Furthermore, for derivative transactions with these institutions, the Group is obliged to exchange variation margin collateral with financial counterparties pursuant to Delegated Regulation (EU) 2251/2016. The Group’s standard variation margin collateral agreement, which complies with the aforesaid regulation, is bilateral (i.e. both parties are obliged to deposit collateral) and includes the daily exchange of guarantees in the form of cash and in euros.

Initial margin collateral agreements include the provision of guarantees to mitigate the potential future exposure with a counterparty in respect of the transactions subject to such agreements.

The Group has initial margin collateral agreements in place for derivative transactions with financial institutions pursuant to Delegated Regulation (EU) 2251/2016.

4.4.2.8 Assets pledged in financing activities

As at 31 December 2023 and 2022, there were certain financial assets pledged in financing operations, i.e. offered as collateral or guarantees for certain liabilities. These assets correspond mainly to loans linked to the issuance of mortgage covered bonds, public sector covered bonds, TSB covered bonds and long-term asset-backed securities (see Note 20 and Schedule II). The remaining pledged assets are debt securities which are submitted in transactions involving assets sold under repurchase agreements, pledged collateral (loans or debt instruments) to access certain funding operations with central banks and all types of collateral provided to secure derivative transactions.

The issuing entity Banco Sabadell did not issue any public sector covered bonds in either 2023 or 2022.

The Group has used part of its portfolio of loans and similar credit in fixed-income securities by transferring assets to various securitisation funds created for this purpose. Under current regulations, securitisations in which there is no significant risk transfer cannot be derecognised from the balance sheet.

The balance of the financial assets securitised under these programmes by the Group, as well as other financial assets transferred, depending on whether they have been derecognised or retained in full on the consolidated balance sheet, as at 31 December 2023 and 2022, is as follows:


Thousand euro
	2023		2022

Fully derecognised from the balance sheet:		568,975		693,853
Securitised mortgage assets		111,624		116,868
Other securitised assets		228,671		319,468
Other financial assets transferred		228,680		257,517

Fully retained on the balance sheet:		7,446,823		7,753,225
Securitised mortgage assets		6,394,928		7,087,569
Other securitised assets		1,051,894		665,656
Total		8,015,798		8,447,078

The assets and liabilities associated with securitisation funds of assets originated after 1 January 2004, and for which inherent risks and rewards of ownership have not been transferred to third parties, have been retained on the consolidated balance sheet. As at 31 December 2023 and 2022, there was no significant financial aid from the Group for unconsolidated securitisations.

Schedule II to these consolidated annual financial statements includes certain information regarding the securitisation funds originated by the Group.

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4.4.3. Financial risks

Financial risk is defined as the possibility of obtaining inadequate returns or having insufficient levels of liquidity that prevent an institution from meeting future requirements and expectations.

4.4.3.1 Liquidity risk

Liquidity risk refers to the possibility of losses being incurred as a result of the Institution being unable, albeit temporarily, to honour payment commitments due to a lack of liquid assets or because it is unable to access the markets to refinance debts at a reasonable cost. This risk may be associated with factors of a systemic nature or specific to the Institution itself.

In this regard, the Group aims to maintain liquid assets and a funding structure that, in line with its strategic objectives and based on its Risk Appetite Statement, allow it to honour its payment commitments as usual and at a reasonable cost, both under business-as-usual conditions and in a stress situation caused by systemic and/or idiosyncratic factors.

The fundamental pillars of Banco Sabadell’s governance structure for liquidity management and control are the direct involvement of the governing body, Board committees and management bodies, following the model of three lines of defence, and a clear segregation of duties, as well as a clear-cut structure of responsibilities.

Liquidity management

Banco Sabadell’s liquidity management seeks to ensure funding for its business activity at an appropriate cost and term while minimising liquidity risk. The Institution’s funding policy focuses on maintaining a balanced funding structure, based mainly on customer deposits, and it is supplemented with access to wholesale markets that allows the Group to maintain a comfortable liquidity position at all times.

The Group follows a structure based on Liquidity Management Units (LMUs) to manage its liquidity. Each LMU is responsible for managing its own liquidity and for setting its own metrics to control liquidity risk, working together with the Group’s corporate functions. At present, the LMUs are Banco Sabadell (includes Banco de Sabadell, S.A., which in turn includes activity in foreign branches, as well as the business in Mexico of Banco Sabadell S.A., I.B.M. (IBM) and SabCapital S.A. de C.V., SOFOM, E.R. (SOFOM) and the individual management of their own risk) and TSB.

In order to achieve these objectives, the Group’s current liquidity risk management strategy is based on the following principles and pillars, in line with the LMUs’ retail business model and the defined strategic objectives:

–

Risk governance and involvement of the Board of Directors and Senior Management in managing and controlling liquidity risk. The Board of Directors has the highest level of responsibility for the oversight of liquidity risk, while the management bodies of the LMUs are in charge of transposing these strategies to their local areas of activity.

–

Integration of the risk culture, based on prudent liquidity risk management and clear and consistent definitions of their terminology, and on its alignment with the Group’s business strategy through the established risk appetite.

–

Clear segregation of responsibilities and duties between the different areas and bodies within the organisation, with a clear-cut distinction between each of the three lines of defence, providing independence in the evaluation of positions and in risk assessment and control.

–

Implementation of best practices in liquidity risk management and control, ensuring not only compliance with regulatory requirements but also, under a criterion of prudence, the availability of sufficient liquid assets to overcome possible stress events.

–

Decentralised liquidity management system for the more significant units but with a centralised risk oversight and management system.

–

Sound processes for the identification, measurement, management, control and disclosure of the different liquidity sub-risks to which the Group is exposed.

–

Holistic overview of risk, through first- and second-tier risk taxonomies, and complying with regulatory requirements, recommendations and guidelines.

–

Existence of a transfer pricing system to transfer the cost of funding.

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–

Balanced funding structure with a predominance of customer deposits.

–

Ample base of unencumbered liquid assets that can be used immediately to generate liquidity and which comprise the Group’s first line of liquidity.

–

Diversification of funding sources, with controlled use of short-term wholesale funding without having to depend on individual fund suppliers.

–

Self-funding by the main banking subsidiaries outside Spain.

–

Oversight of the balance sheet volume being used as collateral in funding operations.

–

Maintenance of a second line of liquidity that includes the capacity to issue covered bonds.

–

Alignment with the interests of stakeholders through regular public disclosure of liquidity risk information.

–

Availability of a Liquidity Contingency Plan.

With respect to 2023, the mitigating measures introduced by central banks due to Covid-19 continue to be phased out and certain measures, such as the granting of loans and credit to non-defaulted non-financial companies (including SMEs) and self-employed persons with a State guarantee granted under and in accordance with Art. 29 of Royal Decree-Law 8/2020 of 17 March, and the extraordinary urgent measures to address the economic and social impact of Covid-19, as well as the reduction of haircuts applied to the valuation of collateral provided to secure loans, were discontinued.

Tools/metrics for monitoring and controlling liquidity risk management

Banco Sabadell Group has a system of metrics and thresholds which are provided in the RAS and which define the appetite for liquidity risk, previously approved by the Board of Directors. This system enables liquidity risk to be assessed and monitored, ensuring the achievement of strategic objectives, adherence to the risk profile, as well as compliance with regulations and supervisory guidelines. Within the Group-level monitoring of liquidity metrics, there are metrics established at the Group level and calculated on a consolidated basis, metrics established at the Group level and rolled out to each Group LMU, as well as metrics established at the LMU level to reflect specific local characteristics.

Both the metrics defined in the Banco Sabadell Group RAS and those defined in the local RAS of subsidiaries are subject to governance arrangements relating to the approval, monitoring and reporting of threshold breaches, as well as remediation plans established in the RAF on the basis of the hierarchical level of each metric (these are classified into three tiers).

It should be mentioned that the Group has designed and implemented a system of early warning indicators (EWIs) at the LMU level, which includes market and liquidity indicators adapted to the funding structure and business model of each LMU. The rollout of these indicators at the LMU level complements the RAS metrics and allows tensions in the local liquidity position and funding structure to be detected early, thereby making it easier to take corrective measures and actions and reducing the risk of contagion between the different management units.

The risk of each LMU is also monitored on a daily basis through the Structural Treasury Report, which measures daily changes in the funding needs of the balance sheet, daily changes in the outstanding balance of transactions in capital markets, as well as daily changes in the first line of liquidity maintained by each LMU.

The metrics reporting and control framework involves, among other things:

–

Monitoring the RAS metrics and their thresholds on a consolidated basis, as well as those established for each LMU, in line with the established monitoring frequency.

–

Reporting on the relevant set of metrics to the governing body, Board committees and management bodies, depending on the tiers into which those metrics have been classified.

–

In the event a threshold breach is detected, activating the communication protocols and necessary plans for its resolution.

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strategy for their management, and they regularly analyse compliance with that plan, any deviations from the projected budget and the extent to which the plan is appropriate to the market environment.

In addition, Banco Sabadell regularly reviews the identification of potential liquidity risks and assesses their materiality. It also conducts regular liquidity stress tests, which envisage a series of stress scenarios in the short and longer term, and it analyses their impact on the liquidity position and the main metrics in order to ensure that the existing exposures are consistent at all times with the established liquidity risk tolerance level.

The Institution also has an internal transfer pricing system to transfer the funding costs to business units.

Lastly, Banco Sabadell has a Liquidity Contingency Plan (LCP) in place, which sets forth the strategy for ensuring that the Institution has sufficient management capabilities and measures in place to minimise the negative impacts of a crisis situation on its liquidity position and to allow it to return to a business-as-usual situation. The LCP can be invoked in response to different crisis situations affecting either the markets or the Institution itself. The key components of the LCP include, among others: the definition of the strategy for its implementation, the inventory of measures available to generate liquidity in business-as-usual situations or in a crisis situation linked to the invocation of the LCP and a communication plan (both internal and external) for the LCP.

Residual maturity periods

The tables below show the breakdown, by contractual maturity, of certain pools of items on the consolidated balance sheet as at 31 December 2023 and 2022, under business-as-usual market conditions:


Thousand euro
							2023
Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

ASSETS

Cash, balances at central banks and other demand deposits		2,879,139		26,518,399		575,341		1,972		64		1,630		206		—		9,102		29,985,853

Financial assets at fair value through other comprehensive income		—		28,056		69,236		791,454		560,553		518,426		302,223		1,132,974		2,682,438		6,085,359

Debt securities		—		28,056		69,236		791,454		560,553		518,426		302,223		1,132,974		2,682,438		6,085,359

Loans and advances		—		—		—		—		—		—		—		—		—		—

Customers		—		—		—		—		—		—		—		—		—		—

Financial assets at amortised cost		4,062,743		5,493,867		3,858,019		12,168,889		11,057,059		10,776,821		10,537,660		10,184,113		112,774,622		180,913,793

Debt securities		—		4,833		315,660		1,204,916		1,123,028		479,039		1,743,646		1,187,212		15,442,594		21,500,927

Loans and advances		4,062,743		5,489,034		3,542,359		10,963,974		9,934,031		10,297,782		8,794,014		8,996,901		97,332,028		159,412,866

Central banks		—		156,516		—		—		—		—		—		—		—		156,516

Credit institutions		1,411,422		445,014		732,541		2,114,438		1,666,642		573,056		56		9,210		43,572		6,995,951

Customers		2,651,321		4,887,504		2,809,818		8,988,540		8,267,389		9,724,726		8,793,958		8,987,691		97,149,452		152,260,399
Total assets		6,941,882		32,040,322		4,502,596		12,962,315		11,617,676		11,296,876		10,840,089		11,317,087		115,466,162		216,985,005

LIABILITIES

Financial liabilities at amortised cost		107,548,804		43,256,136		11,499,120		15,574,656		15,126,695		6,730,104		4,632,257		5,160,504		6,543,490		216,071,766

Deposits		101,442,894		42,529,331		9,538,402		13,218,907		12,300,947		2,453,941		1,103,014		750,550		609,211		183,947,196

Central banks		60,915		—		5,106,963		5,753		3,926,127		—		676,601		—		—		9,776,360

Credit institutions		1,039,225		4,678,234		816,081		2,817,579		2,263,510		1,306,692		254,561		171,991		492,311		13,840,183

Customers		100,342,754		37,851,097		3,615,358		10,395,575		6,111,309		1,147,249		171,852		578,559		116,900		160,330,653

Debt securities issued		16,214		693,854		1,951,456		2,340,622		2,816,403		4,270,058		3,525,049		4,406,209		5,771,418		25,791,284

Other financial liabilities		6,089,696		32,951		9,262		15,127		9,345		6,105		4,194		3,745		162,861		6,333,286
Total liabilities		107,548,804		43,256,136		11,499,120		15,574,656		15,126,695		6,730,104		4,632,257		5,160,504		6,543,490		216,071,766



Trading and Hedging derivatives

Receivable		—		50,823,146		11,328,791		28,452,907		14,570,051		10,892,738		7,921,211		9,074,442		33,210,726		166,274,013

Payable		—		30,233,517		10,838,943		29,856,672		20,222,682		11,930,292		8,979,495		7,146,036		40,908,171		160,115,808

Contingent risks

Financial guarantees		17,922		66,449		66,038		414,294		259,415		92,562		68,818		34,938		1,043,960		2,064,396

(*) For details of maturities of issues aimed at institutional investors, see the section entitled “Funding strategy and evolution of liquidity in 2023” in this note.

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Thousand euro
							2022
Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

ASSETS

Cash, balances at central banks and other demand deposits		3,681,237		37,009,112		563,743		18		1,043		51		1,206		—		3,986		41,260,395

Financial assets at fair value through other comprehensive income		—		124,536		86,954		855,454		777,596		582,648		196,407		244,104		2,754,993		5,622,692

Debt securities		—		124,536		86,954		855,454		777,596		582,648		196,407		244,104		2,754,993		5,622,692

Loans and advances		—		—		—		—		—		—		—		—		—		—

Customers		—		—		—		—		—		—		—		—		—		—

Financial assets at amortised cost		3,371,931		8,590,617		4,437,359		11,540,390		9,820,139		10,505,170		10,274,823		11,211,714		115,293,310		185,045,452

Debt securities		—		236,772		44,310		1,403,285		1,371,253		1,126,338		459,093		1,935,711		14,876,058		21,452,820

Loans and advances		3,371,932		8,353,845		4,393,049		10,137,104		8,448,886		9,378,833		9,815,730		9,276,002		100,417,252		163,592,632

Central banks		2,221		160,443		—		—		—		—		—		—		—		162,664

Credit institutions		978,063		2,341,986		428,487		753,460		131,473		83		175		34		66,525		4,700,287

Customers		2,391,648		5,851,416		3,964,561		9,383,645		8,317,413		9,378,751		9,815,555		9,275,968		100,350,726		158,729,681
Total assets		7,053,167		45,724,266		5,088,056		12,395,862		10,598,777		11,087,869		10,472,437		11,455,817		118,052,289		231,928,539

LIABILITIES

Financial liabilities at amortised cost		119,453,858		47,461,256		4,223,087		24,152,729		12,151,025		9,370,909		3,903,867		4,233,378		7,579,822		232,529,932

Deposits		113,012,257		47,375,927		2,719,435		22,548,986		7,666,937		6,556,190		650,136		1,855,757		907,897		203,293,522

Central banks		43,223		—		—		17,223,750		4,939,290		4,974,464		—		662,961		—		27,843,687

Credit institutions		843,529		7,506,691		901,048		714,986		329,534		136,998		160,605		117,597		662,402		11,373,390

Customers		112,125,507		39,869,236		1,818,387		4,610,250		2,398,113		1,444,728		489,531		1,075,199		245,495		164,076,445

Debt securities issued		6,213		66,725		1,486,936		1,590,320		4,477,376		2,807,926		3,248,767		2,371,575		6,521,711		22,577,549

Other financial liabilities		6,435,388		18,605		16,717		13,422		6,712		6,793		4,964		6,046		150,214		6,658,861
Total liabilities		119,453,858		47,461,256		4,223,087		24,152,729		12,151,025		9,370,909		3,903,867		4,233,378		7,579,822		232,529,932


Trading and Hedging derivatives

Receivable		—		46,863,268		9,509,600		24,047,648		22,014,057		9,609,213		9,828,147		7,123,277		33,292,235		162,287,446

Payable		—		34,864,873		10,226,762		22,347,484		25,943,323		10,464,426		9,068,820		7,440,695		40,138,871		160,495,254
Contingent risks

Financial guarantees		33,551		39,680		102,916		389,668		188,159		163,372		58,470		50,582		1,060,594		2,086,993

In this analysis, very short-term maturities traditionally represent funding requirements, as they include continuous maturities of short-term liabilities, which in typical banking activities see higher turnover rates than assets, but as they are continuously rolled over they actually end up satisfying these requirements and at times even result in the growth of outstanding balances.

Furthermore, the Group’s funding capacity in capital markets is systematically checked to ensure it can meet its short-, medium- and long-term needs.

The information provided is static and does not reflect foreseeable funding needs.

It should also be noted that cash flow breakdowns in the parent company have not been deducted.

In order to present the contractual maturities of financial liabilities with certain particular characteristics, the parent company has taken the following approach:

–

Transactions are placed in different time brackets according to their contractual maturity date.

–

Demand liabilities are included in the “on demand” tranche, without taking into account their type (stable versus unstable).

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–

There are also contingent commitments which could lead to changes in liquidity needs. These are fundamentally credit facilities with amounts undrawn by the borrowers as at the balance sheet date. The Board of Directors also establishes limits in this regard for control purposes.

–

Balances related to financial guarantee contracts have been included for the parent company, allocating the maximum amount of the guarantee to the earliest period in which the guarantee can be called.

–

As at 31 December 2023 and 2022, the Group had no instruments in addition to those regulated by master agreements associated with the arrangement of derivatives and repos/reverse repos.

–

The Group did not have any instruments which allow the Institution to decide whether to settle its financial liabilities using cash (or another financial asset) or through the submission of its own shares as at 31 December 2023 and 2022.

Funding strategy and evolution of liquidity in 2023

The Group’s primary source of funding is customer deposits (mainly demand deposits and term deposits acquired through the branch network), supplemented with funding raised through interbank and capital markets in which the Institution has and regularly renews various short-term and long-term funding programmes in order to achieve an adequate level of diversification by type of product, term and investor. The Institution maintains a diversified portfolio of liquid assets that are largely eligible as collateral in exchange for access to funding operations with the European Central Bank (ECB).

On-balance sheet customer funds

On-balance sheet customer funds as at 31 December 2023 and 2022 are shown below by maturity:


Million euro / %
	Note		2023		3 months			6 months			12 months			>12 months			No maturity

*Total on-balance sheet customer funds ()**				160,888		5.6	%		2.4	%		4.3	%		4.3	%		83.4	%
Term deposits and others				25,237		32.1	%		13.6	%		26.8	%		27.5	%		—	%
Sight accounts		19		134,243		—	%		—	%		—	%		—	%		100.0	%
Retail issues				1,408		53.8	%		30.9	%		14.7	%		0.6	%		—	%

(*) Includes customer deposits (excl. repos) and other liabilities placed via the branch network: straight bonds issued by Banco Sabadell, commercial paper and others.


Million euro / %
	Note		2022		3 months			6 months			12 months			>12 months			No maturity

*Total on-balance sheet customer funds ()**				164,140		3.9	%		1.1	%		1.9	%		3.2	%		89.9	%
Term deposits and others				15,690		39.5	%		8.2	%		19.3	%		33.0	%		—	%
Sight accounts		19		147,540		—	%		—	%		—	%		—	%		100.0	%
Retail issues				910		33.9	%		58.4	%		5.6	%		2.1	%		—	%

(*) Includes customer deposits (excl. repos) and other liabilities placed via the branch network: straight bonds issued by Banco Sabadell, commercial paper and others.

Due to rising interest rates in the financial markets, the weight of term deposits and other deposits in the composition of on-balance sheet customer funds has increased.

Details of off-balance sheet customer funds managed by the Group and those sold but not under management are provided in Note 27 to these consolidated annual financial statements.

The Group’s deposits are sold through the business units/companies of the Group (Banking Business Spain, TSB and Mexico). Details of the volumes of these business units are included in the “Business” section of the consolidated Directors’ Report.

In 2023, the funding gap has widened, with a sharper decline in lending than in customer funds, thus placing the Group’s Loan-to-Deposit (LtD) ratio at 94.0% as at 2023 year-end (95.6% as at 2022 year-end).

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Capital markets

In 2023, the level of funding in capital markets has increased, with mortgage covered bonds being the item with the greatest net increase. Furthermore, in order to keep an adequate level of own funds and eligible liabilities above the applicable regulatory requirement or MREL (Minimum Requirement for own funds and Eligible Liabilities), senior non-preferred debt has also increased. The outstanding nominal balance of funding in capital markets, by type of product, as at 31 December 2023 and 2022, is shown below:


Million euro
	2023		2022

Outstanding nominal balance		24,596		22,077
Covered bonds		10,975		9,409
Of which: TSB Bank		3,164		1,409
Commercial paper and ECP		6		7
Senior debt		4,215		4,440
Senior non-preferred debt		4,425		3,505
Subordinated debt and preferred securities		3,565		3,465
Asset-backed securities		1,410		1,251
Of which: Sabadell Consumer Finance		494		—

Maturities of issues in capital markets, by type of product (excluding securitisations and commercial paper), and considering their legal maturity, as at 31 December 2023 and 2022, are analysed below:


Million euro
	2024		2025		2026		2027		2028		2029		>2029		Balance outstanding

Mortgage bonds and covered bonds (*)		2,425		836		1,390		2,251		2,423		950		700		10,975
Senior debt (**)		735		1,480		—		500		750		750		—		4,215
Senior non-preferred debt (**)		395		500		1,317		18		500		1,500		195		4,425
Subordinated debt and preferred securities (**)		—		—		500		—		—		—		3,065		3,565
Total		3,555		2,816		3,207		2,769		3,673		3,200		3,960		23,180

(*) Secured issues.

(**) Unsecured issues.


Million euro
	2023		2024		2025		2026		2027		2028		>2028		Balance outstanding

Mortgage bonds and covered bonds (*)		1,388		2,696		836		390		1,100		1,549		1,450		9,409
Senior debt (**)		975		735		1,480		—		500		750		—		4,440
Senior non-preferred debt (**)		—		975		500		1,317		18		500		195		3,505
Subordinated debt and preferred securities (**)		—		—		—		500		—		500		2,465		3,465
Total		2,363		4,406		2,816		2,207		1,618		3,299		4,110		20,819

(*) Secured issues.

(**) Unsecured issues.

The Group has a number of funding programmes in operation in capital markets, with a view to diversifying its different funding sources.

In terms of short-term funding, as at year-end there was one commercial paper programme in operation, which governs the issuance of such securities and is aimed at institutional and retail investors. The Banco Sabadell Commercial Paper Programme for 2023, registered with Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (IBERCLEAR), has an issuance limit of 7 billion euros, which can be extended to 9 billion euros. As at 31 December 2023, the outstanding balance of the programme was 1,383 million euros (net of commercial paper subscribed by Group companies), compared with 872 million euros as at 31 December 2022.

Regarding medium- and long-term funding, the Institution has the following programmes in operation:

–

Programme for the issuance of non-equity securities (“Fixed Income Programme”) registered with the CNMV on 16 November 2023, with an issuance limit of 10 billion euros: this programme regulates the issuance of straight, non-preferred or structured bonds and debentures, in addition to mortgage covered bonds and public sector covered bonds (European guaranteed bonds, also known as premium covered bonds) issued under Spanish law through the CNMV and aimed at institutional and retail investors, both domestic and foreign. As at 31 December 2023, the limit

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available for new issues under the Banco Sabadell Programme for the issuance of non-equity securities for 2023 is 9.8 billion euros (as at 31 December 2022, the available limit under the Fixed Income Programme for 2022 was 9.0 billion euros).

In 2023, Banco Sabadell carried out two public issues of mortgage covered bonds under the current Fixed Income Programme amounting to a total of 1.2 billion euros.

Million euro

ISIN code

Type of investor

Issue date

Amount

Term
(years)

Mortgage Covered Bonds 1/2023

ES0413860836

Institutional

28/02/2023

1,000

Mortgage Covered Bonds EIB 1/2023

ES0413860844

Institutional

22/12/2023

200

–

Euro Medium Term Notes (EMTN) programme, registered with the Irish Stock Exchange on 19 May 2023 and renewed on 27 July and 26 October 2023. This programme allows senior debt (preferred and non-preferred) and subordinated debt to be issued in various currencies, with a maximum limit of 15 billion euros.

In 2023, Banco Sabadell executed four issues under the EMTN Programme, amounting to a total of 2,750 million euros: one issue of senior preferred debt, two issues of senior non-preferred debt and one subordinated Tier 2 bond issue. Of the four issues, the senior preferred issue was in green format, amounting to 750 million euros. The issues executed by Banco Sabadell over the year are indicated here below (showing the legal maturity period in the case of issues with an early redemption option):

Million euro

ISIN code

Type of investor

Issue date

Amount

Term
(years)

Senior Non-Preferred Debt 1/2023

XS2583203950

Institutional

7/2/2023

750

Subordinated Debt 1/2023

XS2588884481

Institutional

16/2/2023

500

Green Senior Debt 1/2023

XS2598331242

Institutional

7/6/2023

750

Senior Non-Preferred Debt 2/2023

XS2677541364

Institutional

8/9/2023

750

On 18 January 2023, Banco Sabadell carried out an issue of preferred securities contingently convertible into ordinary shares of the Bank (Additional Tier 1 CoCos) for 500 million euros at a fixed rate of 9.375%.

In 2023, having obtained the corresponding authorisations, Banco Sabadell exercised the early redemption option on the AT1 2/2017 issue amounting to 400 million euros on 23 February 2023 and the early redemption option on the Subordinated Debt 1/2018 issue amounting to 500 million euros on 12 December 2023. Furthermore, on 8 September 2023, together with the Senior Non-Preferred Debt 2/2023 issue, Banco Sabadell called the Senior Non-Preferred Debt 1/2019 issue in the amount of 580.4 million euros, leaving an outstanding balance of 419.6 million euros on this issue.

For its part, TSB Bank was active in the covered bonds market in 2023. On 14 February 2023, it issued covered bonds in the amount of 1 billion pounds with a floating rate coupon indexed at SONIA +60 basis points and with a 4-year maturity, and on 15 September, it executed another issue for 750 million pounds with a floating rate coupon at SONIA +65 basis points with a 5-year maturity. Together with this transaction, TSB Bank called its Covered Floating Rate Notes 2019 issue in the amount of 250 million pounds, leaving an outstanding balance on this issue of 500 million pounds.

In relation to traditional format asset securitisation:

–

The Group is an active participant in this market and it takes part in various securitisation programmes, sometimes acting together with other institutions, granting mortgage loans, loans to small and medium-sized enterprises, consumer loans and vehicle purchase loans.

–

There are currently 17 outstanding traditional asset securitisation transactions fully recognised on the Group’s balance sheet. A portion of the securities issued by securitisation funds have been placed in the capital markets and the remainder have been kept in the Group’s portfolio. Of the latter, the eligible securities can be used as collateral for the central bank’s funding operations. The remaining securities are placed on the capital market. As at 31 December 2023, the nominal balance of asset-backed securities placed in the market was 1,410 million euros.

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–

On 29 September 2023, the traditional securitisation fund Autos 1, FT was disbursed. This inaugural securitisation carried out by the subsidiary Sabadell Consumer Finance, S.A.U., enabled the financing and transfer of credit risk of a portfolio of loans granted by this subsidiary in the amount of 650 million euros. The issue consists of six classes of bonds that were placed in the market, with the exception of the first loss tranche of 9.5 million euros to fund the reserve fund and initial expenses, which was retained by Sabadell Consumer Finance, S.A.U., and 156 million euros from the senior series which was subscribed by Banco de Sabadell, S.A.

–

On 13 September 2023, the Management Company TdA (Titulización de Activos, Sociedad Gestora de Fondos de Titulización, S.A.) published an inside information notice through the National Securities Market Commission (CNMV) disclosing the fact that Banco Sabadell had exercised its pre-emptive right to buy back its portion of the portfolio sold to the multi-seller fund TDA 25 FTA (currently in the process of being liquidated by the management company).

As at the end of 2023, Banco Sabadell had 5 billion euros of outstanding TLTRO III borrowing, due to mature in March 2024, having prepaid 17 billion euros of the aforesaid borrowing during the year. In 2023, the Group recognised interest expense related to TLTRO III in the amount of 305 million euros (162 million euros of interest income in 2022).

For its part, TSB had outstanding borrowings from the Bank of England in the amount of 4,005 million pounds as at the end of 2023, of which 4,000 million correspond to the Term Funding Scheme with additional incentives for SMEs (TFSME) and 5 million to the Indexed Long Term Repo (ILTR).

Liquid assets

In addition to these sources of funding, the Group maintains a liquidity buffer in the form of liquid assets to meet potential liquidity needs:


Million euro
	2023		2022

Cash(*) + Net Interbank Position		25,036		35,012
Funds available in Bank of Spain facility		15,363		7,788
ECB eligible assets not pledged in facility		11,419		6,010
Other non-ECB eligible marketable assets (**)		6,740		5,234

Memorandum item:
Balance drawn from Bank of Spain facility (*)		5,000		22,000
Balance drawn from Bank of England Term Funding Scheme (**)		4,608		6,201
Total Liquid Assets Available		58,558		54,044

(*) Excess reserves and Marginal Deposit Facility in Central Banks.

(**) Market value, and after applying the Liquidity Coverage Ratio (LCR) haircut. Includes Fixed Income qualifying as a high quality liquid asset according to LCR (HQLA) and other marketable assets from different Group entities.

(***) Correspond to TLTRO-III facility.

(****) As at year-end 2023, includes 4 billion pounds to support Small and Medium-sized Enterprises (TFSME) and 5 million pounds from the Indexed Long Term Repo (ILTR). As at year-end 2022, included 5 billion pounds from the TFSME and 500 million pounds from the ILTR.

With regard to 2023, the balance of reserves and marginal deposit facility in central banks and the net interbank position showed a decline of 9,976 million euros, while the volume of ECB eligible assets increased by 12,984 million euros and the available non-ECB eligible assets increased by 1,506 million euros in 2023, thus raising the first line of liquidity by 4,514 million euros in the year, with the funding gap and increased wholesale issues standing out as positive factors.

It should be noted that the Group follows a decentralised liquidity management model. This model tends to limit the transfer of liquidity between the different subsidiaries involved in liquidity management, thereby limiting intra-group exposures, beyond any restrictions imposed by the local regulators of each subsidiary. Thus, the subsidiaries involved in liquidity management determine their liquidity position by considering only those assets in their possession that meet the eligibility, availability and liquidity criteria set forth both internally and in regulations in order to comply with regulatory minima.

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In addition to the first line of liquidity, each LMU monitors its liquidity buffer with an internal conservative criterion, referred to as the counterbalancing capacity. In the case of the BSab LMU (includes Banco de Sabadell S.A., which in turn includes activity in foreign branches as well as the businesses of Banco de Sabadell S.A. in Mexico), this liquidity buffer comprises the first and second lines of liquidity. As at 31 December 2023, the second line of liquidity added a volume of 12,155 million euros to the liquidity buffer, including the covered bond issuing capacity considering the average valuation applied by the central bank to own-use covered bonds to obtain funding, as well as the deposits held in other financial institutions and immediately available for the business in Mexico not included in the first line of liquidity.

For the TSB LMU, this metric is calculated as the sum of the first line of liquidity and loans pre-positioned at the Bank of England to obtain funding. As at 31 December 2023, the second line of liquidity, considering the amount of loans pre-positioned with the Bank of England, amounted to 4,936 million euros (3,366 million euros as at 31 December 2022).

There are no significant amounts of cash or cash equivalents that are unavailable for use by the Group.

Compliance with regulatory ratios

As part of its liquidity management, Banco Sabadell Group monitors the short-term Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) and reports the necessary information to the Regulator on a monthly and quarterly basis, respectively. The measurement of liquidity based on these metrics forms part of liquidity risk control arrangements in all LMUs.

In terms of the LCR, since 1 January 2018, the regulatory required minimum LCR has been 100%, a level which is amply surpassed by all of the Group’s LMUs. At the Group level, throughout the year, the LCR has consistently been well above 100%. As at 31 December 2023, the LCR stood at 203% for the TSB LMU, 274% for Banco Sabadell Spain and 228% at Group level.

In terms of the NSFR, the regulatory minimum requirement, effective from June 2021, is 100%, a level amply surpassed by all LMUs of the Institution given the funding structure, in which customer deposits are predominant and where the majority of market funding is in the medium/long term. As at 31 December 2023, the NSFR stood at 152% for the TSB LMU, 134% for Banco Sabadell Spain and 140% at Group level.

As at 31 December 2023, Banco Sabadell had outstanding issues of mortgage covered bonds amounting to 15,876 million euros (16,114 million euros as at 31 December 2022), which are secured by eligible mortgage loans and credit in the amount of 24,677 million euros (24,187 million euros at 31 December 2022). The mortgage covered bonds therefore have an overcollateralisation ratio of 161% (150% as at 31 December 2022), with all their collateral denominated in euros. More information can be found on the corporate website at www.grupbancsabadell.com (see section on Shareholders and Investors - Fixed income investors).

4.4.3.2. Market risk

Market risk is defined as the risk of financial instrument positions losing some or all of their market value due to changes in risk factors affecting their market price or quotations, their volatility, or the correlations between them.

Positions that generate market risk are usually held in connection with trading activity, which consists of the hedging transactions arranged by the Bank to provide services to its customers as well as discretionary proprietary positions.

Market risk can also arise from the mere maintenance of overall (also known as structural) balance sheet positions that in net terms are left open. This risk is addressed in the sections on structural risks.

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The items of the consolidated balance sheet as at 31 December 2023 and 2022 are shown below, making a distinction between positions included in trading activity and other positions. In the case of items not included in trading activity, their main risk factor is indicated:


Thousand euro
	31/12/2023
	On-balance sheet balance			Trading activity		Other			Main market risk factor in “Other”

Assets subject to market risk		235,172,955			1,731,724		233,441,231

Cash, cash balances at central banks and other demand deposits		29,985,853			—		29,985,853			Interest rate

Financial assets held for trading		2,706,489			1,731,724		974,765			Interest rate; credit spread

Non-trading financial assets mandatorily at fair value through profit or loss		153,178			—		153,178			Interest rate; credit spread

Financial assets at fair value through other comprehensive income		6,269,297			—		6,269,297			Interest rate; credit spread

Financial assets at amortised cost		180,913,793			—		180,913,793			Interest rate

Derivatives – Hedge accounting		2,424,598			—		2,424,598			Interest rate

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(567,608	)		—		(567,608	)		Interest rate

Investments in joint ventures and associates		462,756			—		462,756			Equity

Other assets		12,824,599			—		12,824,599			—

Liabilities subject to market risk		221,293,749			1,689,953		219,603,796

Financial liabilities held for trading		2,867,459			1,689,953		1,177,506			Interest rate

Derivatives – Hedge accounting		1,171,957			—		1,171,957			Interest rate

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(422,347	)		—		(422,347	)		Interest rate

Financial liabilities at amortised cost		216,071,766			—		216,071,766			Interest rate

Other liabilities		1,604,914			—		1,604,914			—

Equity		13,879,206			—		13,879,206


Thousand euro
	31/12/2022
	On-balance sheet balance			Trading activity		Other			Main market risk factor in “Other”

Assets subject to market risk		251,241,223			2,670,824		248,570,399

Cash, cash balances at central banks and other demand deposits		41,260,395			—		41,260,395			Interest rate

Financial assets held for trading		4,017,253			2,670,824		1,346,429			Interest rate

Non-trading financial assets mandatorily at fair value through profit or loss		77,421			—		77,421			Interest rate; credit spread

Financial assets at fair value through other comprehensive income		5,802,264			—		5,802,264			Interest rate; credit spread

Financial assets at amortised cost		185,045,452			—		185,045,452			Interest rate

Derivatives – Hedge accounting		3,072,091			—		3,072,091			Interest rate

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(1,545,607	)		—		(1,545,607	)		Interest rate

Investments in joint ventures and associates		376,940			—		376,940			Equity

Other assets		13,135,014			—		13,135,014			—

Liabilities subject to market risk		238,155,107			2,149,776		236,005,331

Financial liabilities held for trading		3,598,483			2,149,776		1,448,707			Interest rate

Derivatives – Hedge accounting Fair value changes of the hedged items in		1,242,470			—		1,242,470			Interest rate

portfolio hedge of interest rate risk		(959,106	)		—		(959,106	)		Interest rate

Financial liabilities at amortised cost		232,529,932			—		232,529,932			Interest rate

Other liabilities		1,743,328			—		1,743,328			—

Equity		13,086,116			—		13,086,116

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The market risk acceptance, management and oversight system is based on managing positions expressly assigned to different trading desks and establishing limits for each one, in such a way that the different trading desks have the obligation to always manage their positions within the limits established by the Board of Directors and the Investments and Liquidity Committee. Market risk limits are aligned with the Group’s targets and risk appetite framework.

Trading activity

The main market risk factors considered by the Group in its trading activity are the following:

–

Interest rate risk: risk associated with the possibility of interest rate fluctuations adversely affecting the value of a financial instrument. This is reflected, for example, in transactions involving interbank deposits, fixed income and interest rate derivatives.

–

Credit spread risk: this risk arises from fluctuations in the credit spreads at which instruments are quoted with respect to other benchmark instruments, such as interbank interest rates. This risk occurs mainly in fixed-income instruments.

–

Foreign exchange risk: risk associated with the fluctuation of exchange rates with respect to the functional currency. In the case of Banco Sabadell, the functional currency is the euro. This risk occurs mainly in currency exchange transactions and currency derivatives.

–

Equity price risk: risk arising from fluctuations in the value of capital instruments (shares and quoted indices). This risk is reflected in the market prices of the securities and their derivatives.

Changes in commodities prices have not had an impact in the year, as the Group has residual (both direct and underlying) exposures.

Market risk incurred in trading activity is measured using the VaR and stressed VaR methodologies. These allow risks to be standardised across different types of financial market transactions.

VaR provides an estimate of the maximum potential loss associated with a position due to adverse, but normal, movements of one or more of the identified parameters generating market risk. This estimate is expressed in monetary terms and refers to a specific date, a particular level of confidence and a specified time horizon. A 99% confidence interval is used. Due to the low complexity of the instruments and the high level of liquidity of the positions, a time horizon of 1 day is used.

The methodology used to calculate VaR is historical simulation. The advantages of this methodology are that it is based on a full revaluation of transactions under recent historical scenarios, and that no assumptions need to be made as regards the distribution of market prices. The main limitation to this methodology is its reliance on historical data, given that, if a possible event has not materialised within the range of historical data used, it will not be reflected in the VaR data.

The reliability of the VaR methodology used can be verified using backtesting techniques, which serve to verify that the VaR estimates fall within the confidence level considered. Backtesting consists of comparing daily VaR against daily results. If losses exceed the VaR level, an exception occurs. No backtesting exceptions occurred in 2023 or 2022.

Stressed VaR is calculated in the same way as VaR but with a historical insight into variations of the risk factors in stressed market conditions. These stressed conditions are determined on the basis of currently outstanding transactions, and may vary if the portfolios’ risk profile changes. The methodology used for this risk measurement is historical simulation.

Market risk monitoring is supplemented with additional measurements such as risk sensitivities, which refer to a change in the value of a position or portfolio in response to a change in a particular risk factor, and also with the calculation of management results, which are used to monitor stop-loss limits.

Furthermore, specific simulation exercises are carried out considering extreme market scenarios (stress testing). These exercises consist of revaluing the portfolios in scenarios to which different assumptions are applied. Broadly speaking there are two types of scenarios: on one hand, historical scenarios, developed based on historical events that have occurred in the markets in the past and which are relevant to the current position of the portfolios (e.g. the global financial crisis or the Covid-19 crisis) and, on the other hand, hypothetical scenarios, which consider theoretical shifts in risk factors, such as shifts in yield curves, credit spreads or exchange rates, as well as movements in these factors resulting from the application of different macroeconomic forecasts determined based on the current situation. As at the end of December 2023, the impact of the most adverse scenario considered was -21 million euros.

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Market risk is monitored on a daily basis and reports are made to supervisory bodies on the existing risk levels and on the compliance with the limits set forth by the Investments and Liquidity Committee for each trading desk (limits based on nominal value, VaR and sensitivity, as applicable). This makes it possible to keep track of changes in exposure levels and measure the contribution of market risk factors.

The market risk incurred on trading activity in terms of 1-day VaR with a 99% confidence interval for 2023 and 2022 was as follows:


Million euro
	2023						2022
	Average		Maximum		Minimum		Average		Maximum		Minimum

Interest rate risk		1.98		3.96		1.00		1.08		2.21		0.61
Foreign exchange risk (trading)		2.26		2.52		1.81		1.30		2.42		0.90
Equity		—		—		—		0.13		1.24		—
Credit spread		0.27		0.72		0.09		0.25		0.57		0.11
Aggregate VaR		4.51		5.94		3.25		2.75		4.81		2.10

In 2023, the overall VaR figures for trading activity increased, particularly where trading involves interest and exchange rates. This is due to greater exposure to interest rate risk, mainly short-term rates, and foreign exchange risk.

Structural interest rate risk

Structural interest rate risk is inherent in banking activity and is defined as the current or future risk to both the income statement (income and expenses) and the economic value of equity (present value of assets, liabilities and off-balance sheet positions) arising from adverse interest rate fluctuations affecting interest rate-sensitive instruments in non-trading activities (also known as Interest Rate Risk in the Banking Book, or IRRBB). The Group identifies five interest rate sub-risks:

–

Repricing risk is the risk arising from mismatches at the time the repricing of interest rate-sensitive instruments occurs, including those changes in the time structure of interest rates that occur consistently along the yield curve (parallel shifts).

–

Curve risk is the risk arising from mismatches at the time the repricing of interest rate-sensitive instruments occurs, including those changes in the time structure of interest rates that occur differently depending on the time to maturity (non-parallel shifts).

–

Basis risk includes the risk arising from the impact of relative changes in interest rates on instruments with similar maturities but whose repricing is determined using different interest rate indices.

–

Automatic optionality risk comprises the risk arising from automatic options (for example, lending floors and caps), both embedded and explicit, in which the Balance Sheet Management Unit (BSMU) or its customer can alter the level and timing of their cash flows and in which the holder will almost certainly exercise the option when it is in their financial interest to do so.

–

Behavioural optionality risk arises from the flexibility embedded within the terms of certain financial contracts, which allow variations in interest rates to produce a change in customer behaviour.

The Group’s management of this risk pursues two fundamental objectives:

–

To stabilise and protect the net interest margin, preventing interest rate movements from causing excessive variations in the budgeted margin.

–

To minimise the volatility of the economic value of equity, this perspective being complementary to that of the margin.

Interest rate risk is managed through a Group-wide approach on the basis of the RAS, approved by the Board of Directors. A decentralised model is followed based on Balance Sheet Management Units (BSMUs). In coordination with the Group’s corporate functions, each BSMU has the autonomy and capability to carry out risk management and control duties.

The Group’s current interest rate risk management strategy is based on the following principles in particular, in line with the business model and the defined strategic objectives:

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–

Each BSMU has appropriate tools and robust processes and systems in place to adequately identify, measure, manage, control and report on IRRBB, following the main criteria defined by the Group’s internal methodology. The Group uses these to obtain information about all of the identified sources of IRRBB, assess their effect on the net interest margin and the economic value of equity and measure the vulnerability of the Group/BSMU in the event of potential losses arising from IRRBB under different scenarios affecting the interest rate curves.

–

At the corporate level, a series of limits are established for overseeing and monitoring IRRBB exposure levels, which are aligned with internal risk tolerance policies. However, each BSMU has the autonomy and structure required to properly manage and control IRRBB. Specifically, each BSMU has sufficient autonomy to choose the management target that it will pursue, although all BSMUs should follow the principles and critical parameters set by the Group, adapting them to the specific characteristics of the region in which they operate.

–

The existence of a transfer pricing system.

–

The set of systems, processes, metrics, limits, reporting arrangements and governance arrangements included within the IRRBB strategy must comply with regulatory precepts at all times.

As defined in the IRRBB Management and Control Policy, the first line of defence is undertaken by the various BSMUs, which report to their respective local Asset and Liability Committees. Their main role is to manage interest rate risk, ensuring it is assessed on a recurrent basis through management and regulatory metrics, taking into account the modelling of the various balance sheet totals and the level of risk taken.

The metrics developed to control and monitor the Group’s structural interest rate risk are aligned with the market’s best practices and are implemented consistently across all BSMUs, based on the results obtained from the exercise carried out to identify sub-risks and assess their materiality mentioned previously, and by each of the local asset and liability committees. The diversification effect between currencies and BSMUs is taken into account when disclosing overall figures.

The main calculations performed by the Group on a monthly basis are the following:

–

Interest rate gap: static metric showing the breakdown of maturities and repricing of sensitive balance sheet items. This metric compares the values of assets that are due to be revised or that mature in a given period and the liabilities that mature or reprice in that same period.

–

Duration analysis: a static metric based on the allocation of all flows of principal and interest of pools of interest rate sensitive items to time buckets. The duration of each pool of balance sheet items is calculated based on the variation of its net present value due to a parallel shift of 1 basis point in the interest rate curve. This gives the duration of both assets and liabilities.

–

Net interest margin sensitivity: dynamic metric that measures the impact of interest rate fluctuations over different time horizons. It is obtained by comparing the net interest margin over given time horizon in the baseline scenario, which would be the one obtained from implied market rates, against the one obtained in a scenario of instant disruption, always considering the result obtained in the least favourable scenario. This metric supplements the economic value of equity sensitivity.

–

Economic value of equity sensitivity: static metric that measures the impact of interest rate fluctuations. It is obtained by comparing the economic value of the balance sheet in the baseline scenario against the one obtained in a scenario of instant disruption, always considering the result obtained in the least favourable scenario. This is done by calculating the present value of interest rate-sensitive items as an update in the risk-free yield curve, on the reference date, of future payments of principal and interest without taking into account mark-ups, in line with the Group’s IRRBB management strategy. This metric supplements the net interest margin sensitivity.

–

Sensitivity that combines the two above metrics: the effect of changes in value of instruments recognised directly through profit or loss or through equity is added to the net interest margin sensitivity.

In the quantitative interest rate risk estimations made by each BSMU, a series of interest rate scenarios are designed which allow the different sources of risk mentioned above to be identified. These scenarios include, for each significant currency, parallel shifts and non-parallel shifts of the interest rate curve. Based on these, sensitivity is calculated as the difference resulting from:

–

Baseline scenario: market interest rate movements based on implied interest rates.

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–

Stressed scenario: a shift in interest rates in relation to the baseline scenario, with the extent of this shift varying depending on the scenario to be calculated. A minimum post-disruption interest rate is applied, starting at -150 basis points for current maturities and increasing by 3 basis point intervals, eventually reaching 0% after 50 years or more.

In addition, in the annual planning exercises, measurements are carried out that include assumptions regarding the evolution of the balance sheet based on the forward-looking scenarios of the Group’s Financial Plan, referring to scenarios of interest rates, volumes and margins.

Furthermore, in accordance with the Group’s corporate principles, all BSMUs regularly carry out stress tests, which allow them to forecast high-impact situations with a low probability of occurrence that could place BSMUs in a position of extreme exposure in relation to interest rate risk, and they also consider mitigating actions for such situations. The stress test is complemented with reverse stress tests which aim to identify the scenarios capable of producing a particular impact within a pre-established range of values.

The following table gives details of the Group’s interest rate gap based on estimated maturities as at 31 December 2023 and 2022:


Thousand euro
									2023
Time to maturity	Up to 1 month			1 to 3 months			3 to 12 months		1 to 2 years		2 to 3 years			3 to 4 years			4 to 5 years			More than 5 years			Total

Money Market		29,298,908			664,785			1,818,033		1,648,692		571,125			287,671			—			—			34,289,214

Loans and advances		23,289,667			18,267,252			36,992,760		19,860,090		14,717,416			11,920,708			5,947,632			20,062,136			151,057,661

Debt securities		1,565,120			1,299,818			1,505,582		1,647,183		1,044,180			2,025,963			3,155,852			16,790,643			29,034,341

Other assets		—			—			—		—		—			—			—			—			—
Total assets		54,153,695			20,231,855			40,316,375		23,155,965		16,332,721			14,234,342			9,103,484			36,852,779			214,381,216

Money Market		17,450,615			1,108,877			2,058,721		1,726,558		445,470			287,671			679			9,706			23,088,297

Customer deposits		46,218,567			6,417,593			19,517,264		17,132,088		13,348,923			12,421,891			12,849,214			30,969,933			158,875,473

Issues of marketable securities		4,555,412			3,950,878			1,801,870		3,908,110		3,457,000			3,118,100			3,735,000			1,660,025			26,186,395

Of which: Subordinated liabilities		—			—			—		300,000		1,500,000			750,000			500,000			515,025			3,565,025

Other liabilities		48,661			133,257			232,342		152,773		138,920			121,899			110,203			615,072			1,553,127
Total liabilities		68,273,255			11,610,605			23,610,197		22,919,529		17,390,313			15,949,561			16,695,096			33,254,736			209,703,292

Hedging derivatives		9,660,254			(2,755,498	)		1,713,842		308,201		105,235			539,236			2,366,742			(11,938,012	)		—

Interest rate gap		(4,459,305	)		5,865,752			18,420,020		544,637		(952,357	)		(1,175,983	)		(5,224,870	)		(8,339,969	)		4,677,925

Thousand euro
									2022
Time to maturity	Up to 1 month			1 to 3 months			3 to 12 months		1 to 2 years		2 to 3 years			3 to 4 years			4 to 5 years			More than 5 years			Total

Money Market		41,797,003			920,472			1,438,829		125,651		—			—			—			—			44,281,955

Loans and advances		24,331,743			19,232,160			40,248,534		19,007,600		13,430,353			10,564,714			10,073,683			20,016,175			156,904,962

Debt securities		1,219,034			450,395			2,078,877		1,769,818		1,496,546			620,315			2,825,650			17,658,927			28,119,562

Other assets		—			—			—		—		—			—			—			—			—
Total assets		67,347,780			20,603,027			43,766,240		20,903,069		14,926,899			11,185,029			12,899,333			37,675,102			229,306,479

Money Market		36,299,672			352,799			2,153,181		133,675		2,964			8,256			—			10,096			38,960,643

Customer deposits		54,225,831			5,912,100			16,275,410		10,774,657		9,757,034			9,759,935			14,789,281			39,816,239			161,310,487

Issues of marketable securities		3,083,924			2,925,321			1,853,628		3,510,000		3,908,110			2,457,000			3,118,100			2,145,025			23,001,108

Of which: Subordinated liabilities		—			400,000			500,000		—		300,000			1,500,000			750,000			15,025			3,465,025

Other liabilities		55,015			122,537			277,700		217,712		144,908			130,335			113,172			670,277			1,731,656
Total liabilities		93,664,442			9,312,757			20,559,919		14,636,044		13,813,016			12,355,526			18,020,553			42,641,637			225,003,894

Hedging derivatives		11,271,252			(6,214,446	)		550,236		283,019		1,334,541			1,383,868			1,086,452			(9,694,922	)		—

Interest rate gap		(15,045,410	)		5,075,824			23,756,557		6,550,044		2,448,424			213,371			(4,034,768	)		(14,661,458	)		4,302,584

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The following tables show the interest rate risk levels in terms of the sensitivity of the Group’s main currencies, as at 2023 year-end, to the most frequently used interest rate scenarios in the sector, under stressed pass-through assumptions:


	Instant and parallel interest rate increase
	100 bp			200 bp
Interest rate sensitivity	*Impact on net interest margin ()**			Impact on economic value of equity ()**

EUR		0.2	%		1.2	%

GBP		1.4	%		(0.9	)%

USD		0.8	%		(0.5	)%

MXN		0.1	%		0.0	%

(*) Percentage calculated on the basis of net interest margin at 12 months.

(**) Percentage calculated on the basis of shareholders’ equity.


	Instant and parallel interest rate decrease
	100 bp			200 bp
Interest rate sensitivity	*Impact on net interest margin ()**			Impact on economic value of equity ()**

EUR		(1.0	)%		(5.9	)%

GBP		(1.0	)%		0.5	%

USD		(0.9	)%		0.5	%

MXN		(0.1	)%		0.0	%

(*) Percentage calculated on the basis of net interest margin at 12 months.

(**) Percentage calculated on the basis of shareholders’ equity.

In addition to the impact on the net interest income within the time horizon of one year shown in the previous tables, the Group calculates the impact on the margin over a time horizon of two and three years, the result of which is considerably more positive for all currencies.

The metrics are calculated taking into account the behavioural assumptions concerning items with no contractual maturity and those whose expected maturity is different from the maturity established in the contracts, in order to obtain a view that is more realistic and, therefore, more effective for management purposes. The most significant of these include:

–

Prepayment of the loan portfolio and early termination of term deposits (implicit optionality): in order to reflect customers’ reactions to interest rate movements, prepayment/termination assumptions are defined, broken down by type of product. To this end, the Institution uses historical data to ensure it is in line with the market’s best practices. Changes in market interest rates can prompt customers to terminate their loans or term deposits early, altering the future behaviour of balances with respect to that envisaged in the contractual schedule. Prepayment mainly affects fixed-rate mortgages when their contractual interest rates are high compared to market interest rates.

–

Modelling of demand deposits and other liabilities with no contractual maturity: a model has been defined using historical monthly data to reproduce customer behaviour, establishing parameters concerning the deposits’ stability, the percentage of interest rate movements that is passed through to the interest paid on the deposits and the delay with which this occurs, depending on the type of product (type of account/transactionality/interest paid) and the type of customer (retail/wholesale). The model captures the effect of low interest rates on the stability of deposits, as well as the potential migration to other deposits that earn more interest in different interest rate scenarios.

–

Modelling of non-performing lending items: a model has been defined that allows the expected payment flows associated with non-performing positions (net of provisions, i.e. those expected to be recovered) to be included in pools of interest rate-sensitive items. To this end, both existing balances and estimated recovery periods are included.

The process for approving and updating IRRBB models is part of the corporate governance arrangements for models, whereby these models are reviewed and validated by a division that is always separate from the division that created them. This process is included in the corresponding model risk policy and establishes both the duties of the different areas involved in the models and the internal validation framework to be followed, the monitoring requirements established on the basis of their materiality and the backtesting processes.

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As for the measurement systems and tools used, all sensitive transactions are identified and recorded taking into account their interest rate characteristics, the sources of information being the official ones of the Institution. These transactions are aggregated according to predefined criteria, so that calculations can be made faster without undermining the quality or reliability of the data. The entire data process is subject to the requirements of information governance and data quality, to ensure compliance with the best practices in relation to information governance and data quality. Additionally, a regular process is carried out to reconcile the information uploaded onto the measurement tool against accounting information. The calculation tool includes sensitive transactions and its parameters are also configured to reflect the result of the behavioural models described above, the volumes and prices of the new business, defined according to the Financial Plan, and the interest rate curves on which the aforesaid scenarios are built.

Based on the balance sheet position and the market situation and outlooks, risk mitigation techniques are proposed and agreed upon to adjust this position to match the one desired by the Group and to ensure it remains within the established risk appetite. Interest rate instruments additional to the natural hedges of balance sheet items are used as mitigation techniques, such as fixed-income bond portfolios or hedging derivatives that enable metrics to be placed at levels in keeping with the Institution’s risk appetite. In addition, proposals can be put forward to redefine the interest rate characteristics of commercial products or the launch of new products.

Derivatives, mainly interest rate swaps (IRS), which qualify as hedges for accounting purposes, are arranged in financial markets to be used as risk hedging instruments. Two separate types of macro-hedges are used:

–

Cash flow macro-hedges of interest rate risk, the purpose of which is to reduce the volatility of the net interest margin due to changes in interest rates over one-year time horizon.

–

Fair value macro-hedges of interest rate risk, the purpose of which is to maintain the economic value of the hedged items, consisting of fixed-rate assets and liabilities.

For each type of macro-hedge, there is a framework document that includes the hedging strategy, defining it in terms of management and accounting and establishing its governance.

In Banco Sabadell, as part of the continuous improvement process, structural interest rate risk management and monitoring activities are implemented and regularly updated, aligning the Institution with best market practices and current regulations. In particular, throughout 2023 work has continued on the review and continuous improvement of the systems and behavioural models in accordance with the new guidelines established by the EBA. Among other things, some of the improvements worth noting are the update of the key behavioural modelling assumptions for demand deposits, prepayment of the loan portfolio and early termination of term deposits, taking sufficiently large time series data to capture periods of both rising and falling interest rate stress, obtaining different results based on the different interest rate scenarios modelled, and their recurrent monitoring to ensure the appropriateness of those assumptions.

In 2023, the Bank’s loan book has continued to trend towards a higher proportion of fixed rate transactions (mainly mortgages and business loans), while on the liabilities side, balances of interest-bearing demand deposits and term deposits have increased in contrast with a reduced balance of non-interest bearing demand deposits, all while keeping costs at low levels relative to the upward trend of interest rates over the year. In addition, other balance sheet variations in 2023 included: the increase of the fixed-income portfolio on the asset side, which acts as a balance sheet management and coverage lever; the maturity of 17 billion euros of TLTRO III, leaving a total of 5 billion euros to mature in 2024 on the liabilities side.

With regard to interest rates, in 2023 benchmark rates increased in all currencies as inflation remained at high levels, affecting the euro in particular, with the 12-month Euribor, for example, standing above 4% in the month of September and falling back to 3.51% as at the end of 2023. The marginal deposit rate of the European Central Bank (ECB) ended the year at 4% (increase of 200 basis points over the year), while the base rate of the Bank of England (BoE) ended at 5.25% (increase of 175 basis points over the year). The scenario envisaged in the short/medium term will likely involve a reduction in central bank rates as inflation continues to fall back gradually. This is already reflected in current market rates, and it is therefore expected that Euribor levels will remain at levels similar to those at the end of 2023. In this respect, it is expected that the cost of customer funds may increase slightly as balances of interest-bearing products continue to grow.

Taking into account the balance sheet variations detailed previously, as well as episodes of volatility and variations in the benchmark interest rates of all the Group’s major currencies, the IRRBB metrics have been affected during the year, although the measures taken have allowed the Group’s IRRBB metrics to be kept within the risk appetite and below the levels considered significant under current legislation.

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Furthermore, the Group continues to monitor customer behaviour in reaction to interest rate hikes and variations of other economic variables (unemployment rates, gross domestic product, etc.), in order to anticipate possible changes and impacts on the behavioural assumptions used to measure and manage IRRBB. In particular, it analyses customer behaviour related to non-maturing items (changes in the stability of demand deposits and possible migration to other products that earn more interest) and related to items with an expected maturity that may be different to the contractually established maturity (due to early repayment of loans, early termination of term deposits or recovery time and balance of non-performing exposures).

4.4.3.3. Structural foreign exchange risk

Structural foreign exchange risk occurs when changes in market exchange rates between different currencies generate losses on permanent investments in foreign branches and subsidiaries with functional currencies other than the euro.

The purpose of managing structural foreign exchange risk is to minimise the impact on the value of the Institution’s portfolio/equity in the event of any adverse movements in currency markets. The foregoing takes into account the potential impacts on the capital (CET1) ratio and on the net interest margin, subject to the risk appetite defined in the RAS. Furthermore, the levels set for the established risk metrics must be complied with at all times.

Foreign exchange risk is monitored regularly and reports are sent to supervisory bodies on existing risk levels and on compliance with the limits set forth by the Board of Directors. The main monitoring metric is currency exposure, which measures the maximum potential loss that the open structural position could produce over a 1-month time horizon, with a 99% confidence level and in stressed market conditions.

Compliance with, and the effectiveness of, the Group’s targets and policies are monitored and reported on a monthly basis to the Board Risk Committee.

The Bank’s Financial Division, through the ALCO, designs and executes strategies to hedge structural FX positions in order to achieve its objectives in relation to the management of structural foreign exchange risk.

The most prominent permanent investments in non-local currencies are held in US dollars, pounds sterling and Mexican pesos.

The Group has been following a hedging policy for its equity that seeks to minimise the sensitivity of capital ratios to adverse movements in these currencies against the euro. To that end, the evolution of foreign business is monitored, as are the political and macroeconomic variables that could have a significant impact on exchange rates.

As regards permanent investments in US dollars, the overall position in this currency has gone from 1,278 million as at 31 December 2022 to 1,413 million as at 31 December 2023. In relation to this position, as at 31 December 2023, a buffer of 34% of total investment is maintained.

In terms of permanent investments in Mexican pesos, the capital buffer has gone from 9,253 million Mexican pesos as at 31 December 2022 (of a total exposure of 15,261 million Mexican pesos) to 8,553 million Mexican pesos as at 31 December 2023 (of a total exposure of 16,340 million Mexican pesos), representing 52% of the total investment made.

As regards permanent investments in pounds sterling, the capital buffer has increased from 333 million pounds sterling as at 31 December 2022 to 393 million pounds sterling as at 31 December 2023 (total exposure has gone from 1,998 million pounds sterling as at 31 December 2022 to 2,105 million pounds sterling as at 31 December 2023), representing 19% of the total investment made (excluding intangibles).

Currency hedges are continuously reviewed in light of market movements.

The exchange value in euros of assets and liabilities in foreign currencies maintained by the Group as at 31 December 2023 and 2022, classified in accordance with their nature, is as follows:

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Thousand euro
			2023
	USD		GBP		Other currencies		Total

Assets denominated in foreign currency:		11,265,090		56,117,680		4,600,172		71,982,942
Cash, cash balances at central banks and		481,860		6,819,973		553,349		7,855,182
other demand deposits
Debt securities		1,559,704		2,855,459		680,098		5,095,261
Loans and advances		8,966,780		43,462,345		3,109,836		55,538,961
Central banks and Credit institutions		43,478		516,046		508,155		1,067,679
Customers		8,923,302		42,946,299		2,601,681		54,471,282
Other assets		256,746		2,979,903		256,889		3,493,538

Liabilities denominated in foreign currency:		6,130,275		51,558,530		3,482,251		61,171,056
Deposits		5,891,369		45,112,710		3,374,404		54,378,483
Central banks and Credit institutions		717,213		4,720,896		562,911		6,001,020
Customers		5,174,156		40,391,814		2,811,493		48,377,463
Other liabilities		238,906		6,445,820		107,847		6,792,573

Thousand euro
			2022
	USD		GBP		Other currencies		Total

Assets denominated in foreign currency:		11,230,828		57,349,488		4,111,351		72,691,667
Cash, cash balances at central banks and		606,605		5,963,971		1,044,938		7,615,514
other demand deposits
Debt securities		1,136,840		2,775,734		423,855		4,336,429
Loans and advances		9,210,413		45,410,799		2,375,221		56,996,433
Central banks and Credit institutions		70,704		514,160		165,627		750,491
Customers		9,139,709		44,896,639		2,209,594		56,245,942
Other assets		276,970		3,198,984		267,337		3,743,291

Liabilities denominated in foreign currency:		6,962,558		53,016,847		3,118,316		63,097,721
Deposits		6,671,410		48,123,748		3,044,677		57,839,835
Central banks and Credit institutions		1,120,977		6,373,980		331,899		7,826,856
Customers		5,550,433		41,749,768		2,712,778		50,012,979
Other liabilities		291,148		4,893,099		73,639		5,257,886

The net position of foreign currency assets and liabilities includes the structural position of the Institution, valued as at 31 December 2023, which amounted to 3,278 million euros, of which 1,970 million euros corresponded to permanent equity holdings in pounds sterling, 844 million euros corresponded to permanent equity holdings in US dollars and 416 million euros to permanent equity holdings in Mexican pesos. Net assets and liabilities valued at historical exchange rates are hedged with currency forwards and currency options in line with the Group’s risk management policy.

As at 31 December 2023, the sensitivity of the equity exposure to a 2.5% exchange rate depreciation against the euro of the main currencies to which exposure exists, calculated based on quarterly exchange rate volatility over the past three years, amounted to 82 million euros, of which 60% corresponded to the pound sterling, 26% corresponded to the US dollar and 13% to the Mexican peso.

4.4.4. Operational risk

Operational risk is defined as the risk of incurring losses due to inadequacies or failures of processes, staff or internal systems or due to external events. This definition includes but is not limited to legal risk, model risk and information and communications technology (ICT) risk and excludes strategic risk and reputational risk.

The management of operational risk is decentralised and devolved to process managers throughout the organisation. The processes that they manage are indicated in the corporate process flowchart, which facilitates the integration of data according to the organisational structure. The Group has a central unit that specialises in the management of operational risk, whose main duties are to coordinate, oversee and promote the identification, assessment and management of risks by the process managers, based on the management model adopted by Banco Sabadell Group.

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the reliability of the reported information, as well audits of the internal validation tests of the operational risk model. Operational risk is managed through two main courses of action:

The first course of action is based on the analysis of processes, the identification of risks associated with those processes that may result in losses, and a qualitative assessment of the risks and the associated controls. The foregoing are carried out jointly between process managers and the central operational risk unit. This provides an assessment of the future exposure to risk in terms of expected and unexpected losses and also allows trends to be foreseen and the corresponding mitigating actions to be adequately planned.

This is complemented by the identification, monitoring and active management of the risk through the use of key risk indicators. These allow warnings to be established, which alert the Institution to any increase in this exposure, and also enable it to identify the causes of that increase and measure the effectiveness of the implemented controls and improvements.

The second course of action is based on experience. It consists of recording all losses incurred by the Institution in a database, which provides information about the operational risks encountered by each business line as well as their causes, so as to be able to take action to minimise these risks and detect potential weaknesses in processes that require action plans to be drawn up aimed at mitigating the associated risks. Recoveries are also recorded, which make it possible to reduce the extent of the loss either as a result of its direct management or by having an insurance policy that covers all or part of the resulting impacts.

Furthermore, this information allows the consistency between estimated losses and actual losses to be determined, in terms of both frequency and severity, iteratively improving the estimates of exposure levels.

Within operational risk, the following risks are also managed and controlled:

–

Conduct risk: broadly speaking, this is defined as the current or future possibility of incurring losses due to the inadequate provision of financial services or any other activity carried out by the Institution, due to misconduct with customers (existing or potential), employees (in relation to human rights, equality, well-being, inclusion, and health & safety in the workplace), shareholders and suppliers, markets, political parties or society in general, including cases of wilful misconduct or negligence.

–

Technology risk: technology risk (or information and communications technology (ICT) risk) is defined as the current or future risk of incurring losses due to inadequacies or failures of technical infrastructures’ hardware and software, which could compromise the availability, integrity, accessibility, confidentiality or traceability of infrastructures, applications and data, or would make it impossible for IT platforms to be changed at a reasonable cost and within a reasonable timeframe in response to the changing needs of the environment or the business.

It also includes security risks resulting from inadequate or failed internal processes or external events, including cyberattacks or inadequate physical security in data centres.

–

Outsourcing risk: this is the current or future risk of losses arising as a result of suppliers failing to provide subcontracted services or discontinuing their provision, weaknesses in their systems’ security, disloyal employees or a breach of applicable regulations. It also encompasses other related risks, such as concentration risk, country risk, legal risk or compliance risk and includes the risk of losses arising from the use of third-party resources and/or means for the regular, ongoing and stable performance over time of certain business processes of the subcontracting company, which in itself involves exposure to a series of inherent underlying risks, such as operational risk, (including conduct risk, risks related to Information and Communications Technology (ICT), reputational risk, concentration risk and vendor lock-in risk.

–

Model risk: current or future risk of an institution incurring losses as a result of decisions largely based on the outputs of internal models, due to errors in their development, implementation or use.

–

Tax risk: the probability of failing to achieve the objectives set out in Banco Sabadell’s tax strategy from a dual perspective due to either internal or external factors:

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•

On one hand, the probability of failing to fulfil tax obligations, potentially resulting in a failure to pay taxes that are due, or the occurrence of any other event that could potentially prevent the Bank from achieving its goals.

•

On the other hand, the probability of paying taxes not actually due under tax obligations, thus negatively affecting shareholders and other stakeholders.

–

Compliance risk: defined as the risk of incurring legal or administrative penalties, significant financial losses or reputational damage as a result of an infringement of laws, regulations, internal rules or codes of conduct applicable to banking activity.

Senior Management and, in particular, the Board Risk Committee, monitor the Group’s risk profile through specific reports containing information and indicators associated with the main operational risks (including those associated with technology, human error, conduct, processes, security and fraud). No noteworthy impacts have been detected in 2023.

Detailed information on the risks that the Group deems most material is provided below:

4.4.4.1 Technology risk

In recent years, the importance, complexity and use of technology and data have increased even further in banking processes, especially in remote channels (online banking) as a result of the impact of COVID-19 and the growing use of cloud services. Consequently, the reliance on information systems and their availability is a key factor, as the Bank is more exposed to cyberattacks just like the other operators in the sector. The ongoing geopolitical conflicts have brought with them the risk of becoming a target for cyberattacks, generating the need to introduce back-up measures. At the present time, the risk related to geopolitical conflicts is stable, though latent.

Furthermore, the Institution is currently undergoing a process of transformation, based on the digitalisation and automation of processes, which increases the reliance on systems and the exposure to risks associated with this change, including digital fraud. Technology risk therefore remains one of the key focus areas of Banco Sabadell Group’s risk management.

It should be mentioned that this risk is not only applicable to the Group’s own systems and processes, but it is also applicable to suppliers, given the widespread use of third parties for support in technological and business processes, and this therefore represents a significant risk when it comes to managing outsourcing. On the topic of IT outsourcing, with regard to 2022, the implementation of Project Dingle was particularly noteworthy, involving the outsourcing of application development and testing among three key suppliers, thus requiring a greater level of supplier control and monitoring and the need for special oversight and adjustment throughout 2023, reducing the likelihood of experiencing cybersecurity incidents in area with input from the aforesaid outsourced suppliers.

In order to holistically and adequately manage all risks related to technology and data, the Institution classifies and categorises these risks into eight categories, in line with the Guidelines on ICT and security risk management (EBA/GL/2019/04):

–

IT security (cybersecurity): risk of unauthorised access to IT systems, and of there being an impact on the confidentiality, availability, integrity and traceability of the information (data and metadata) that they contain (including cyberattacks and deliberate action), as well as the potential repudiation of digital operations.

–

IT availability (technological resilience): risk of critical services provided to customers and employees becoming affected by systems failures.

–

IT change: risk arising from errors in the change and development processes of information systems.

–

Data integrity: risk of data stored and processed by IT systems being incomplete, inaccurate or inconsistent.

–

IT outsourcing: risk that engaging a third party or another Group entity (intragroup outsourcing) to provide IT systems, their management or related services produces a negative effect on the Institution’s performance (including impacts on customers, as well as reputational, regulatory or financial impacts).

–

IT governance: risk arising from inadequate or insufficient management and use of technology, as well as a poor alignment of these technologies and their intended uses with the business strategy.

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–

Technological transformation: risk associated with inappropriate adoption or inefficient use of technology within the organisation for the development of new value propositions.

–

IT skills: risk arising from the insufficiency of adequate IT profiles (internal and/or external partners) to ensure effective and efficient coverage of technological activities, processes and services.

4.4.4.2 Tax risk

With regard to tax risk, Banco Sabadell Group’s tax risk policies aim to establish the general guidelines for managing and controlling tax risk, specifying the applicable principles and critical parameters and covering all significant elements to systematically identify, assess and manage any risks that may affect the Group’s tax strategy and fiscal objectives, meeting the requirements of the Spanish Capital Companies Act and of Banco Sabadell Group stakeholders.

In terms of tax risk, Banco Sabadell Group aims to fulfil its tax obligations at all times, adhering to the existing legal framework in this regard.

Banco Sabadell Group’s tax strategy, approved by the Board of Directors, reflects its commitment to fostering responsible taxation, promoting preventive measures and developing key transparency schemes in order to gain the confidence and trust of its various stakeholders.

The tax strategy is governed by the principles of efficiency, prudence, transparency and mitigation of tax risk, and it is aligned with the business strategy of Banco Sabadell Group.

The Board of Directors of Banco Sabadell, under the mandate set out in the Spanish Capital Companies Act for the improvement of corporate governance, is responsible, and cannot delegate such responsibility, for the following:

–

Setting the Institution’s tax strategy.

–

Approving investments and operations of all types which are considered to be strategic or to carry considerable tax risk due to their high monetary value or particular characteristics, except when such approval corresponds to the Annual General Meeting.

–

Approving the creation and acquisition of shareholdings in special purpose entities or entities registered in countries or territories classified as tax havens.

–

Approving any transaction which, due to its complexity, might undermine the transparency of the Institution and its Group.

Consequently, the duties of the Board of Directors of Banco Sabadell include the obligation to approve the corporate tax policy and ensure compliance therewith by implementing an appropriate control and oversight system, which is enshrined in the general risk management and control framework of the Group.

4.4.4.3 Compliance risk

As regards compliance risk, one of the core aspects of the Group’s policy, and the foundation of its organisational culture, is strict compliance with all legal provisions, meaning that the achievement of business objectives must be compatible, at all times, with adherence to the law and the established legal system.

To that end, the Group has a Compliance Division, whose mission is to promote and strive to attain the highest levels of Group compliance and ethics, mitigating compliance risk, understood as the risk of legal or administrative sanctions, significant financial losses or loss of reputation due to a breach of laws, regulations, internal regulations and codes of conduct applicable to the Group’s activity; minimising the possible occurrence of any regulatory breach and ensuring that any breaches that may occur are diligently identified, reported and resolved.

This division assesses and manages compliance risk through the following duties:

–

Monitoring and overseeing the adaptation to new regulations through proactive management to ensure regular and systematic monitoring of legal updates, and ensuring the distribution of those which are deemed to have an impact on any area of the Institution’s business, according to the scope established in the corresponding internal procedures.

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–

Identifying and periodically assessing compliance risks in the different areas of activity and contributing to their management in an efficient manner. To this end, establishing, applying and maintaining appropriate procedures to prevent, detect, correct and minimise any compliance risk.

–

Establishing, in accordance with the above, an up-to-date oversight and control programme, with the appropriate tools and methodologies for control.

–

Supervising the risk management activities carried out by the first line of defence to ensure that they are aligned with the established policies and procedures.

–

Conducting an appropriate follow-up on any findings (incidents, weakness or areas for improvement detected in the Institution, which may have an impact on compliance risk), in accordance with the corresponding internal procedures.

–

Keeping, for at least the period of time established by the legislation in force at any given time, the documentary justification of the controls carried out by the Compliance Division, as well as any other policies and procedures implemented for the best possible fulfilment of regulatory obligations.

–

Monitoring and coordinating inspections, as well as responses to the requirements of supervisors and regulators, and checking that their recommendations have been acted on accordingly.

–

With regard to Anti-Money Laundering, Countering the Financing of Terrorism (AML/CFT) and International Sanctions, implementing, managing and updating policies and procedures on the topic of AML/CFT and international sanctions; carrying out the preliminary classification of the AML/CFT risk of customers during the onboarding process; applying enhanced due diligence measures when onboarding high-risk customers so that they may be accepted and duly updated beforehand; managing tracking alerts; detecting matches in lists of designated persons and transactions of countries subject to international sanctions; performing special analyses of suspicious activities and reporting them as necessary; preparing training plans; approving new products, services, channels and business areas; and conducting a periodic risk assessment of internal control procedures in relation to AML/CFT and international sanctions.

–

Advising on data protection through the Data Protection Office, acting as the point of contact with the Spanish Data Protection Agency (Agencia Española de Protección de Datos) and performing all other duties assigned in regulations to the Data Protection Officer.

–

Taking part in the process to formulate remuneration policies and practices.

–

Promoting a culture of compliance and appropriate conduct in each of the Group entities, adopting measures that will enable employees to obtain the training and experience they need to perform their duties correctly.

–

Assigning functional responsibilities for compliance where necessary.

–

Collaborating in the development of training programmes in order to advise and make employees aware of the importance of complying with the established internal procedures.

–

Sharing relevant information, reviewing and proposing corrective measures and/or responses to incidents detected in matters of conduct or to queries submitted to the Corporate Ethics Committee, which is tasked with promoting the Group’s ethical conduct to ensure compliance with the action principles set out in the Banco Sabadell Group Code of Conduct, the Banco Sabadell Group Internal Code of Conduct relating to the securities market, the Banco Sabadell Group General Policy on Conflicts of Interest, the Banco Sabadell Group Corporate Crime Prevention Policy and the Banco Sabadell Group Anti-Corruption Policy.

–

Submitting to the administrative and management bodies the regular or ad hoc reports on compliance that are legally required at any given time.

–

Reporting to the administrative and management bodies on any information relevant to compliance arising from all areas and activities of each Group entity.

–

Assisting the Board of Directors and Senior Management in compliance matters.

–

Taking on institutional responsibilities and interacting with supervisory authorities and institutions in relation to matters within its remit and where agreed by the Institution’s management and administrative bodies.

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The following compliance risks have been identified:

–

Anti-Money Laundering and Counter-Terrorist Financing.

–

Data protection.

–

Market integrity.

–

Customer protection (including the following risks: MiFID, EBA, other products and services, sustainability, misconduct with customers and advertising).

–

New legislation.

–

Ethics and conduct (includes risks related to corporate crime prevention, remuneration and the code of conduct and ethics).

–

Customer Care Service (Servicio de Atención al Cliente, or SAC).

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Note 5 – Minimum own funds and capital management

Minimum own funds requirements

The Group calculates minimum capital requirements based on Directive 2013/36/EU, amended by Directive 2019/878/EU (hereinafter, CRD-V), and Regulation (EU) 575/2013, amended by Regulation (EU) 2019/876 (hereinafter, CRR-II).

The European Commission, the European Central Bank and the EBA provided clarity regarding the application of the flexibility already embedded in Regulation (EU) 575/2013 by issuing interpretations and guidance on the application of the prudential framework in the context of Covid-19. These transitional provisions will end in December 2024, as established in Regulation (EU) 2020/873.

In accordance with the aforesaid regulatory framework, credit institutions must comply with a total capital ratio of 8% at all times. However, regulators may exercise their authority and require institutions to maintain additional capital.

On 14 December 2022, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements that would be applicable to it from 1 January 2023, as a result of the Supervisory Review and Evaluation Process (SREP). The requirement, on a consolidated basis, was that Banco Sabadell should keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.65% and a phase-in Total Capital ratio of at least 13.09%. These ratios include the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2R (2.15%, of which 1.21% must be met with CET1), the capital conservation buffer (2.50%), the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%), and the requirement stemming from the calculation of the specific countercyclical capital buffer (0.19%) as a result of the Bank of England’s Financial Policy Committee (FPC) decision of 13 December 2021 to increase the countercyclical buffer from 0% to 1% from 13 December 2022.

On 30 November 2023, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements applicable as from 1 January 2024, as a result of the SREP. The requirement, on a consolidated basis, is that Banco Sabadell should keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.93% and a phase-in Total Capital ratio of at least 13.42%. These ratios include the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2R (2.25%, of which 1.27% must be met with CET1), the capital conservation buffer (2.50%), the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%), and the countercyclical buffer (0.42%) that stems from the Bank of England’s Financial Policy Committee (FPC) decision to increase the countercyclical buffer from 1% to 2% from 5 July 2023.

As at 31 December 2023, the Group’s phase-in CET1 capital ratio stood at 13.2% (12.68% as at 31 December 2022) and its phase-in total capital ratio was 17.76% (17.08% as at 31 December 2022); therefore, the capital requirements indicated in the preceding points are being comfortably met.

The following table sets out the minimum prudential requirements applicable to Banco Sabadell Group following the Supervisory Review and Evaluation Process (SREP) for the years 2022-2024:


	2024		2023		2022

Pillar 1 CET1		4.50%		4.50%		4.50%
Pillar 2 Requirement		1.27%		1.21%		1.21%
Capital conservation buffer		2.50%		2.50%		2.50%
Systemic buffer		0.25%		0.25%		0.25%
Countercyclical buffer		0.42%		0.19%		0.19%
Common Equity Tier 1 (CET1) ratio		8.93%		8.65%		8.65%
Dates of communication of the SREP outcome		30/11/2023		14/12/2022		23/11/2020

On a standalone basis, the requisite Common Equity Tier 1 (CET1) ratio to be attained as at 31 December 2023 is 7.29% and the required Total Capital ratio is 10.79%. This requirement includes the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the capital conservation buffer (2.50%) and the requirement stemming from the calculation of the specific countercyclical capital buffer which, as at 31 December 2023, was 0.29%.

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As at 31 December 2023, Banco Sabadell had a CET1 capital ratio of 13.65% (13.30% as at 31 December 2022) and a phase-in total capital ratio of 18.04% (17.59% as at 31 December 2022), both also well above the standalone capital requirements.

Requirements related to the restructuring and resolution of credit institutions

On 15 May 2014, Directive 2014/59/EU was published in the Official Journal of the European Union, which establishes a framework for the restructuring and resolution of credit institutions and investment firms, known by its acronym BRRD (Bank Recovery and Resolution Directive).

Through the publication of the Royal Decree 1012/2015 of 6 November 2015, implementing Law 11/2015 of 18 June 2015 on the recovery and resolution of credit institutions and investment firms, the BRRD was transposed into Spanish law.

The BRRD arises from the need to establish a framework that provides authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the Institution’s critical financial and economic functions, to avoid a significant adverse repercussions for financial stability, and to adequately protect public funds by minimising reliance on extraordinary public financial support. Likewise, covered depositors enjoy special treatment.

The framework proposed by the BRRD is based on the principle that traditional insolvency proceedings are not, in many cases, the best option to achieve the aforementioned objectives. That is why the BRRD introduces the resolution procedure, whereby competent resolution authorities obtain administrative powers to manage a failing institution.

The preamble of Law 11/2015 defines a resolution process as a unique administrative process to address the failure of credit institutions and investment firms, when an insolvency proceeding is not appropriate for reasons of public interest and financial stability. In order to achieve the aforementioned objectives, the BRRD envisages a series of instruments available to the competent resolution authority, including a bail-in tool. The BRRD introduces for this purpose a minimum requirement for own funds and eligible liabilities (MREL) that institutions must comply with at all times in order to ensure their loss-absorbing capacity is sufficient to guarantee the effective implementation of the resolution tools and that, in the current regulatory environment, would be the amount of own funds and eligible liabilities expressed as a percentage of the Institution’s total liabilities and own funds.

Similarly, in 2015 the FSB defined the TLAC (Total Loss-Absorbing Capacity) requirement, also designed to ensure that institutions have sufficient capacity to absorb losses and execute a bail-in in the event of resolution. It should be noted that this requirement only applies to global systemically important banks (G-SIBs); therefore, it does not apply to Banco Sabadell Group.

In June 2019, after more than two and a half years of negotiations, a reform of the bank resolution framework was agreed with the approval of the new resolution directive, BRRD II (Directive 2019/879), which implements the international TLAC standard in the EU. BRRD II was transposed into Spanish law by Royal Decree-Law 7/2021 of 27 April 2021.

Responsibility for determining MREL falls to the Single Resolution Board (SRB), pursuant to that set forth in Regulation (EU) 806/2014, also revised in 2019 and substituted by Regulation (EU) 2019/877. Thus, the SRB, after consulting with the competent authorities, including the ECB, will establish the MREL for each bank, taking into consideration aspects such as the size, funding model, risk profile and the risk of contagion to the financial system, among others.

In May 2021, the SRB published the MREL Policy under the Banking Package, which integrates the regulatory changes of the aforesaid resolution framework reform. The new SRB requirements are based on balance sheet data as at December 2021 and set two binding MREL targets: the final MREL target, which is binding from 1 January 2024, and an interim target to be met from 1 January 2022 onwards. The latter corresponded to an intermediate level, which has allowed for a linear build-up by institutions of their MREL capacity. Its calibration therefore depended on the Institution’s MREL capacity at the time of calibration and its final target.

The interim requirements in effect since 1 January 2022 are:

–

The MREL requirement is 21.05% of the TREA and 6.22% of the LRE.

–

The subordination requirement is 14.45% of the TREA and 6.06% of the LRE.

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On 19 December 2023, Banco Sabadell received a communication from the Bank of Spain regarding the decision made by the Single Resolution Board (SRB) concerning the minimum requirement for own funds and eligible liabilities (MREL) and the subordination requirement applicable on a consolidated basis.

The requirements that must be met from 1 January 2024 are as follows:

–

The minimum MREL is 22.52% of the total risk exposure amount (TREA) and 6.35% of the leverage ratio exposure (LRE).

–

The subordination requirement is 17.31% of the TREA and 6.35% of the LRE.

The decision does not introduce changes to the following interim requirements that must be met from 1 January 2022.

The own funds used by the Institution to meet the combined buffer requirement (CBR), comprising the capital conservation buffer, the systemic risk buffer and the countercyclical buffer, will not be eligible to meet the MREL and subordination requirements expressed in terms of the TREA.

Banco Sabadell is already compliant with the requirements that it needs to meet from 1 January 2024 onwards, which coincide with Banco Sabadell’s expectations and are in line with its funding plans. In 2023, the Institution issued 1.5 billion euros of MREL-eligible senior non-preferred debt and 750 million euros of senior preferred debt.


	MREL Requirement						Subordination Requirement
	% TREA			% LRE			% TREA			% LRE

Requirement 1 January 2022		21.05	%		6.22	%		14.45	%		6.06	%
Requirement 1 January 2024		22.52	%		6.35	%		17.31	%		6.35	%
MREL 31 December 2023 (*)		24.73	%		9.34	%		20.13	%		7.80	%

(*)

The MREL and Subordination ratios as a % of the TREA do not include capital used to meet the CBR, set at 3.13%.

Capital management

The management of capital resources is the result of an ongoing capital planning process. This process considers the evolution of the economic, regulatory and sectoral environment. It takes into account the expected capital consumption of different activities, under the various envisaged scenarios, and the market conditions that could determine the effectiveness of the different actions being considered for implementation. The process is enshrined within the Group’s strategic objectives and aims to achieve an attractive return for shareholders, whilst also ensuring that its level of own funds is appropriate in terms of the risks inherent in banking activity.

As regards capital management, as a general policy, the Group aims to adjust its available capital to its overall level of risks incurred.

The Group follows the guidelines set out in CRD-V and associated regulations, as well as their successive updates, in order to establish own funds requirements that are inherent in the risks actually incurred by the Group, based on independently validated internal risk measurement models. To this end, the Group has been authorised by the supervisor to use the majority of its internal models to calculate regulatory capital requirements.

The Group carries out frequent backtesting exercises on its IRB models, at least once a year. These backtesting exercises are carried out independently by the Models and Internal Validation unit and reported for monitoring purposes to the established internal governing bodies, such as the Models Committee, the Technical Risk Committee and the Board Risk Committee (delegated Board committee). Additionally, the backtesting results that affect the risk parameters used to calculate regulatory capital and the main conclusions drawn from those results are included in the annual Pillar III Disclosures report, taking into account the criteria established by the EBA in its disclosure guidelines.

Banco Sabadell Group carries out an internal capital adequacy assessment process (ICAAP) on a consolidated and ongoing basis throughout the year in order to generate a relevant, up-to-date, fully comprehensive and forward-looking appraisal of the adequacy of its levels of capital, considering the Group’s business model and the risks taken.

The ICAAP is carried out under a solid governance framework, with high levels of involvement from Senior Management. The ultimate responsibility for its review and approval lies with the Board of Directors.

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The ICAAP is seen as a complementary tool to Basel Pillar 1 (regulatory capital), which first analyses the Group’s business model within its economic, financial and regulatory context, and its short- and medium-term sustainability and viability. The Group’s business model involves taking risks and a risk profile is therefore defined. As part of the ICAAP, an identification is made of the material risks and of the main threats and vulnerabilities derived from the Group’s activity and a self-assessment is carried out of the inherent and residual risk that they entail, after considering the risk governance, management and control systems.

Based on the inventory of the Group’s material risks and their management, a comprehensive quantitative assessment of the necessary capital based on internal approaches (economic capital) is established, the scope of which goes beyond the risks covered by Pillar 1, integrating the models used by the Group (e.g. borrower rating systems: credit ratings and credit scores) and other internal estimates appropriate to each type of risk.

In addition, the ICAAP includes forward-looking analyses with a three-year time horizon (or even a 30-year time horizon in the case of scenarios designed to forecast climate risk). These analyses are carried out under a baseline economic scenario, but also under plausible albeit unlikely adverse scenarios (stress tests), which are relevant to the Group and therefore reflect adverse situations that could have a particular impact on the Group. The baseline forecast includes the Group’s business and financial plans. These forecasting exercises are carried out to verify whether the business performance, risk and income statement in possible adverse scenarios could pose a risk to the Group’s solvency based on the available own funds, or affect the Group’s compliance with its Risk Appetite Statement. As a result of these exercises, weaknesses can be detected and, if necessary, action plans can be proposed to mitigate the identified risks.

Forward-looking analyses under adverse scenarios are supplemented with reverse stress tests, which identify the Group’s idiosyncratic aspects that could put its solvency at considerable risk if they were to materialise.

The combination of the various solvency measures (static or dynamic and regulatory or economic), taking into account the inventory of risks affecting the Group and the main vulnerabilities detected, enables the Board of Directors, as the body ultimately responsible for the ICAAP, to draw a conclusion regarding the Group’s solvency position.

The Group has implemented a risk-adjusted return on capital (RaRoC) metric in segments where this is considered relevant, which is embedded in the pricing management system and therefore subject to the Institution’s policies and procedures. In addition to being used in the pricing process, this metric can measure the return obtained on each transaction and customer and even by each business unit, which makes it possible to make like-for-like comparisons.

The level and quality of capital are Group RAS metrics and their management and control are governed by the Group’s Risk Appetite Framework (RAF).

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Eligible capital and capital ratios

As at 31 December 2023, the Group’s eligible capital amounted to 13,926 million euros (13,588 million euros as at 31 December 2022), representing a surplus of 3,480 million euros (3,177 million euros as at 31 December 2022), as shown below:

Thousand euro

2023

2022

Year-on-year

change (%)

Capital

680,028

703,371

(3.32)

Reserves (includes profit attributable to the Group, net of dividends)

13,198,328

12,838,901

2.80

Valuation adjustments

(471,695)

(641,901)

(26.52)

Deductions and transitory effects

(3,059,900)

(2,817,620)

8.60

CET1 capital

10,346,761

10,082,751

2.62

CET1 (%)

13.19

12.68

4.02

Preference shares, convertible bonds and deductions

1,750,000

1,650,000

6.00

Additional Tier 1 capital

1,750,000

1,650,000

6.00

AT1 (%)

2.23

2.07

7.73

Tier 1 capital

12,096,761

11,732,751

3.10

Tier 1 (%)

15.42

14.75

4.54

Tier 2 capital

1,829,460

1,855,001

(1.38)

Tier 2 (%)

2.33

—

Capital base

13,926,221

13,587,753

2.49

Minimum capital requirement (*)

10,445,833

10,411,235

0.33

Capital surplus

3,480,388

3,176,518

9.57

Total capital ratio (%)

17.76

17.08

3.98

Risk weighted assets (RWAs)

78,427,616

79,544,790

(1.40)

(*) Minimum capital requirements have been calculated taking into account capital requirements in effect as at 2023 year-end for Pillar I (8%) and Pillar 2R (2.15%), as well as the capital conservation buffer (2.5%), countercyclical buffer (0.42%) and the buffer for other systemically important institutions (0.25%).

Common Equity Tier 1 (CET1) capital accounts for 74.30% of eligible capital. Deductions mainly comprise intangible assets, goodwill and deferred tax assets. The impact of applying Regulation 2020/873 from June 2020 onwards in the context of Covid-19 is deemed to be transitory. This regulation extends the transitional arrangements designed to mitigate the impact of IFRS 9 for two years, allowing institutions to fully add back to their Common Equity Tier 1 capital any increase in new expected credit loss provisions that they recognise after 1 January 2020 for their financial assets that are not credit-impaired. As at 31 December 2022, the impact of these transitional arrangements came to 98 million euros, while as at 31 December 2023 these transitional arrangements had no effect, mainly because of the loss of eligibility of the static component of IFRS 9.

Tier 1 comprises, in addition to CET1 funds, items that largely make up Additional Tier 1 capital (12.57% of own funds), which are capital items comprised of preferred securities. On 18 January 2023, a new issue, Preferred Securities 1/2023, was executed in the amount of 500 million euros, which replaced the Preferred Securities 2/2017 issue of 400 million euros, whose early call option envisaged in the issue’s conditions was exercised on 23 February 2023.

Tier 2 capital provides 13.14% of the total capital ratio and is made up largely of subordinated debt. Regarding subordinated debt, it is worth noting the Subordinated Debt 1/2023 series issued on 16 February 2023, which increased Tier 2 capital by 500 million euros and replaced the Subordinated Debt 1/2018 series, in the amount of 500 million euros, after exercising the early redemption option on 12 December 2023, in accordance with that established in that issue’s conditions.

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In terms of risk-weighted assets (RWAs), two securitisations were carried out during the period: one synthetic securitisation of SME and business loans, disbursed on 27 September 2023 for an amount of 1,103 million euros, and one traditional securitisation carried out by the subsidiary Sabadell Consumer Finance, S.A.U. of loans intended for vehicle purchase, disbursed on 29 September 2023, which amounted to 650 million euros. In addition, in Banco Sabadell (excluding TSB), it is worth noting the reductions in RWAs due to the portfolio’s improved density, as a result, among other factors, of the implementation of new models for mortgages and consumer loans granted to individuals, the reduction of lending volumes (although its impact on RWAs is limited as most of that reduction corresponds to ICO loans) and, lastly, the reduction of market risk requirements, especially for interest rate risk, due in large part to the portfolio’s evolution. This reduction in credit RWAs and market RWAs is partially offset by the update of operational RWAs following the increase of the material risk indicator in 2023.

In fully-loaded terms, as at 31 December 2023, the Common Equity Tier 1 (CET1) ratio stood at 13.2% and the total capital ratio stood at 17.76%, both well above the regulatory minima.

The following table shows movements in the various regulatory capital components during 2023 and 2022:


Thousand euro
CET1 balance as at 31 December 2021			10,079,533

Reserves (includes profit attributable to the Group, net of dividends)			319,654
Valuation adjustments			(273,616)
Deductions and transitory effects			(42,819)
CET1 balance as at 31 December 2022			10,082,751

Capital			(23,343)
Reserves (includes profit attributable to the Group, net of dividends) (*)			359,427
Valuation adjustments			170,206
Deductions and transitory effects			(242,280)
CET1 balance as at 31 December 2023			10,346,761

(*) The movement in Reserves includes -204 million euros corresponding to the share buyback carried out in 2023.


Thousand euro
Additional Tier 1 balance as at 31 December 2021			2,400,000

Eligible instruments			(750,000)
Additional Tier 1 balance as at 31 December 2022			1,650,000

Eligible instruments			100,000
Additional Tier 1 balance as at 31 December 2023			1,750,000


Thousand euro
Tier 2 balance as at 31 December 2021			2,021,270

Eligible instruments			(99,745)
Credit risk adjustments			(10,193)
Deductions and transitory effects			(56,330)
Tier 2 balance as at 31 December 2022			1,855,001

Eligible instruments			(99,745)
Credit risk adjustments			17,874
Deductions and transitory effects			56,330
Tier 2 balance as at 31 December 2023			1,829,460

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The table below shows the reconciliation of equity and regulatory capital as at 31 December 2023 and 2022:


Thousand euro
	2023		*2022()**

Shareholders’ equity		14,343,946		13,840,723
Accumulated other comprehensive income		(498,953)		(650,645)
Minority interests		34,213		34,344
Total equity		13,879,206		13,224,422

Goodwill and intangibles		(2,189,218)		(2,144,909)
Dividends (**)		(503,988)		(317,281)
TLCFs and thresholds for non-monetisable DTAs		(490,572)		(537,712)
Deductions		(257,415)		(124,898)
Other adjustments		(91,252)		(16,870)
Regulatory accounting adjustments		(3,532,445)		(3,141,670)

Common Equity Tier 1 capital		10,346,761		10,082,751

Additional Tier 1 capital		1,750,000		1,650,000
Tier 2 capital		1,829,460		1,855,001
Total regulatory capital		13,926,221		13,587,753

(*) Information corresponding to the consolidated annual financial statements for the year ended 31 December 2022.

(**) Does not consider interim dividend booked

As at 31 December 2023 and 2022, there was no significant difference between the accounting scope of consolidation and the regulatory scope of consolidation.

Risk-weighted assets amounted to 78,428 million euros as at 31 December 2023, representing a balance variation of -1.40% with respect to 31 December 2022. Details of the main components of that balance variation can be found in the previous paragraphs of this note.

The breakdown of risk-weighted assets by type of risk, as at 31 December 2023 and 2022, is shown below:


Thousand euro
	2023				2022
	Amount		%		Amount		%

Credit risk (*)		68,970,951		87.94 %		70,387,473		88.48 %
Operational risk		9,008,555		11.49 %		8,160,674		10.26 %
Market risk		448,110		0.57 %		996,644		1.25 %
Total		78,427,616		100.00 %		79,544,790		100.00 %

(*) Includes counterparty credit risk, due to the contribution made to the default guarantee fund of CCPs and due to securitisation positions. Certain impacts linked mainly to the completion of the IRB Repair Programme, which the Institution has decided to frontload, are also included. Not including the aforementioned supplementary items, credit RWAs measured under the standardised approach and using advanced models (including deferred tax assets and the impact on RWAs after applying the prudential adjustments requested by the supervisor (SSM)) amounted to 66,119 million euros.

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The following table shows the reasons for the variation in credit RWAs occurring during 2023 and 2022:


Thousand euro
	RWAs		Capital requirements (*)

Balance as at 31 December 2021		69,543,133		5,563,451

Change in business volume		(769,481)		(61,558)
Asset quality		(3,006,475)		(240,518)
Changes in models		951,398		76,112
Methodology, parameters and policies		1,017,559		81,405
Acquisitions and disposals		(446,665)		(35,733)
Exchange rate		(430,845)		(34,468)
Balance as at 31 December 2022		66,858,624		5,348,690

Change in business volume		(989,535)		(79,163)
Asset quality		(1,284,349)		(102,748)
Changes in models		326,000		26,080
Methodology, parameters and policies		294,000		23,520
Acquisitions and disposals		(60,000)		(4,800)
Exchange rate		287,882		23,031
Other (**)		686,000		54,880
Balance as at 31 December 2023		66,118,622		5,289,490

Excludes credit valuation adjustment (CVA) requirements and contributions to the default guarantee fund of CCPs. Also excludes “Other risk exposure amounts” and RWAs corresponding to securitisations.

(*) Calculated as 8% of RWAs.

(**) The increase in the “Other” category is essentially due to the assignment, at a granular level, of a series of add-ons at TSB, which as at December 2022 were reported as “Other risk exposure amounts”.

Details of risk-weighted assets for the risk with the largest volume (credit risk), broken down by geographical area as at 31 December 2023 and 2022, are included here below:


%
	2023		2022

Spain		63.47 %		64.95 %
Rest of European Union		4.74 %		4.97 %
United Kingdom		19.60 %		18.24 %
Americas		11.36 %		11.08 %
Rest of the world		0.83 %		0.77 %
Total		100 %		100 %
Includes counterparty credit risk.

The leverage ratio aims to reinforce capital requirements by providing a supplementary measure that is not linked to the level of risk. Article 92 of the CRR-II regulation establishes that a minimum leverage ratio of 3% is required as from June 2021; this percentage is comfortably exceeded by the Group as at 31 December 2023.

The phase-in leverage ratio as at 31 December 2023 and 2022 is shown below:


Thousand euro
	2023		2022

Tier 1 capital		12,096,761		11,732,751
Exposure		233,254,941		253,840,350
Leverage ratio		5.19 %		4.62 %

During 2023, the leverage ratio increased by 57 basis points compared to the leverage ratio as at 31 December 2022, mainly due to the decrease in the exposure with central banks linked in large part to TLTRO repayments and, to a lesser extent, the decline in lending volumes. Tier 1 capital also improved during the period, mainly due to the positive evolution of Common Equity Tier 1 (CET1) capital thanks to the profit earned during the year, combined with the positive impact of the net movement of new issues and redemptions of preferred securities during the year.

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For more information about capital management, capital ratios and the leverage ratio, their composition, details of parameters and their management, see the Pillar III Disclosures report, which is published annually and is available on the Group’s website (www.grupbancsabadell.com), in the section “Information for shareholders and investors - Financial information”.

Note 6 – Fair value of assets and liabilities

Financial assets and financial liabilities

The fair value of a financial asset or financial liability at a given date is understood as the amount at which it could be sold or transferred, respectively, as at that date, between two independent and knowledgeable parties acting freely and prudently, under market conditions. The most objective and commonly used reference for the fair value of a financial asset or financial liability is the price that would be paid in an organised, transparent and deep market (‘quoted price’ or ‘market price’).

When there is no market price for a particular financial asset or financial liability, the fair value is estimated based on the values established for similar instruments in recent transactions or, alternatively, by using mathematical valuation models that have been suitably tested by the international financial community. When using these models, the particular characteristics of the financial asset or financial liability to be valued are taken into account, particularly the different types of risks that may be associated therewith. Notwithstanding the foregoing, the limitations inherent in the valuation models that have been developed and possible inaccuracies in the assumptions and parameters required by these models may result in the estimated fair value of a financial asset or financial liability not exactly matching the price at which the asset or liability could be delivered or settled on the valuation date.

The fair value of financial derivatives quoted on an active market is the daily quoted price.

In the case of instruments for which quoted prices cannot be determined, prices are estimated using internal models developed by the Bank, most of which take data based on observable market parameters as significant inputs. In the remaining cases, the models make use of other inputs that rely on internal assumptions based on generally accepted practices within the financial community.

For financial instruments, the fair values disclosed in the financial statements are classified according to the following fair value levels:

–

Level 1: fair values are obtained from the (unadjusted) prices quoted on active markets for that instrument.

–

Level 2: fair values are obtained from the prices quoted on active markets for similar instruments, the prices of recent transactions, expected payment flows or other valuation techniques in which all significant inputs are directly or indirectly based on observable market data.

–

Level 3: fair values are obtained through valuation techniques in which one or more significant inputs is not based on observable market data.

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Set out below are the main valuation methods, assumptions and inputs used when estimating the fair value of financial instruments classified in Levels 2 and 3, according to the type of financial instrument concerned:



Level 2 financial instruments	Valuation techniques	Main assumptions	Main inputs used
Debt securities	Net present value method	Calculation of the present value of financial instruments as the present value of future cash flows (discounted at market interest rates), taking into account: - An estimate of pre-payment rates - Issuers’ credit risk	- Issuer credit spreads - Observable market interest rates
Equity instruments	Sector multiples (P/BV)	Based on the NACE code that best represents the company’s primary activity, the price-to-book value (P/BV) ratio obtained from peers is applied	- NACE codes - Quoted prices in organised markets

Simple derivatives (a)	Net present value method	Implicit curves calculated based on quoted market prices	- Observable yield curve - FX swaps curve and spot curve
Other derivatives (a)	Analytic/ semi-analytic formulae	- For equity derivatives, FX or commodities: Black-Scholes model: a lognormal distribution is assumed for the underlying asset with volatility depending on the term	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options
	Analytic/ semi-analytic formulae	- For interest rate derivatives: Normal model and shifted Libor Market Model: negative rates and forward rates in the term structure of the interest rate curve are fully correlated. For calculation of CVA and DVA adjustments: Normal model and Black- Scholes model	- Term structure of interest rates - Volatility surfaces of Libor rate options (caps) and swap rate options (swaptions) - Probability of default for calculation of CVA and DVA (b)
	Monte Carlo simulations	- For valuation of equity derivatives, FX or commodities: Black-Scholes model: a lognormal distribution is assumed for the underlying asset with volatility depending on the term	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options
	Hybrid local stochastic volatility models	- For FX derivatives: Tremor model: implicit volatility obtained through stochastic differential equations	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options
	For credit derivatives: - Intensity models	These models assume a default probability structure resulting from term-based default intensity rates	- Price listings of Credit Default Swaps (CDS) - Historic volatility of credit spreads

(a) Given the small net position of Banco Sabadell, the funding value adjustment (FVA) is estimated to have a non-material impact on the valuation of derivatives.

(b) To calculate CVA and DVA, levels of severity fixed at 60% have been used, which corresponds to the market standard for senior debt. Average future, positive and negative exposures have been estimated using market models, Libor for interest rates and the Black-Scholes model for FX, using market inputs. The probability of default of customers with no quoted debt instruments or CDS have been obtained using the IRB model and for Banco Sabadell those obtained from the CDS market prices have been assigned.

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Level 3 financial instruments	Valuation techniques	Main assumptions	Main non-observable inputs

Debt securities	Net present value method	Calculation of the present value of financial instruments as the present value of future cash flows (discounted at market interest rates), taking into account in each case: - An estimate of pre-payment rates - Issuers’ credit risk - Other estimates of variables that affect future cash flows: claims, losses, redemptions	- Estimated credit spreads of the issuer or a similar issuer - Rates of claims, losses and/or redemptions

Loans and advances	Net present value method	Calculation of the present value of future cash flows discounted at market interest rates based on the scenarios generated	- The entity’s business plans

Equity instruments	Discounted cash flow method	Calculation of the present value of future cash flows discounted at market interest rates adjusted for risk (CAPM method), taking into account: - An estimate of the company’s projected cash flows - Risk in the company’s sector - Macroeconomic inputs	- The entity’s business plans - Risk premiums of the company’s sector - Adjustment for systemic risk (Beta Parameter)

Derivatives (a)	For credit derivatives: - Intensity models	These models assume a default probability structure resulting from term-based default intensity rates	For credit derivatives: - Estimated credit spreads of the issuer or a similar issuer - Historic volatility of credit spreads
Derivatives (a)	For commodity derivatives: - Net present value method	Forward curve calculated based on adjusted quoted market prices	Unquoted futures curves

(a) Given the small net position of Banco Sabadell, the funding value adjustment (FVA) is estimated to have a non-material impact on the valuation of derivatives.

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Determination of the fair value of financial instruments

A comparison between the value at which the Group’s main financial assets and financial liabilities are recognised on the accompanying consolidated balance sheets and their corresponding fair values is shown below:


Thousand euro
			2023				2022
	Note		Carrying amount		Fair value		Carrying amount		Fair value

Assets:
Cash, cash balances at central banks and		7		29,985,853		29,985,853		41,260,395		41,260,395
other demand deposits

Financial assets held for trading		8,9,10		2,706,489		2,706,489		4,017,253		4,017,253

Non-trading financial assets mandatorily at fair value through profit or loss		8,9,11		153,178		153,178		77,421		77,421

Financial assets designated at fair value through profit or loss				—		—		—		—

Financial assets at fair value through other comprehensive income		9		6,269,297		6,269,297		5,802,264		5,802,264

Financial assets at amortised cost		8		180,913,793		175,310,626		185,045,452		178,139,213

Derivatives – Hedge accounting		12		2,424,598		2,424,598		3,072,091		3,072,091
Total assets				222,453,208		216,850,041		239,274,876		232,368,637


Thousand euro
			2023				2022
	Note		Carrying amount		Fair value		Carrying amount		Fair value

Liabilities:

Financial liabilities held for trading		10		2,867,459		2,867,459		3,598,483		3,598,483

Financial liabilities designated at fair value through profit or loss				—		—		—		—

Financial liabilities at amortised cost		18, 19,

		20, 21		216,071,766		215,397,464		232,529,932		230,522,957

Derivatives – Hedge accounting		12		1,171,957		1,171,957		1,242,470		1,242,470
Total liabilities				220,111,182		219,436,880		237,370,885		235,363,910

Financial instruments at fair value

The following tables show the main financial instruments recognised at fair value in the accompanying consolidated balance sheets, broken down according to the valuation method used to estimate their fair value:


Thousand euro
			2023
	Note		Level 1		Level 2		Level 3		Total

Assets:
Financial assets held for trading				142,495		2,563,994		—		2,706,489
Derivatives		10		—		2,563,994		—		2,563,994
Debt securities		8		142,495		—		—		142,495
Loans and advances – Customers				—		—		—		—
Non-trading financial assets mandatorily at				31,255		15,974		105,949		153,178
fair value through profit or loss
Equity instruments		9		18,398		14,840		19,098		52,336
Debt securities		8		12,857		1,134		51,753		65,744
Loans and advances		11		—		—		35,098		35,098
Financial assets at fair value through other				4,656,989		1,522,988		89,320		6,269,297
comprehensive income
Equity instruments		9		582		130,441		52,915		183,938
Debt securities		8		4,656,407		1,392,547		36,405		6,085,359

Derivatives – Hedge accounting		12		—		2,424,598		—		2,424,598
Total assets				4,830,739		6,527,554		195,269		11,553,562

A-125


Thousand euro
					2023
	Note		Level 1		Level 2		Level 3		Total

Liabilities:
Financial liabilities held for trading				337,373		2,530,086		—		2,867,459
Derivatives		10		—		2,530,086		—		2,530,086
Short positions				337,373		—		—		337,373

Derivatives – Hedge accounting		12		—		1,171,957		—		1,171,957
Total liabilities				337,373		3,702,043		—		4,039,416


Thousand euro
					2022
	Note		Level 1		Level 2		Level 3		Total

Assets:
Financial assets held for trading				417,131		3,597,627		2,495		4,017,253
Derivatives		10		—		3,597,627		2,495		3,600,122
Debt securities		8		417,131		—		—		417,131
Loans and advances – Customers				—		—		—		—
Non-trading financial assets mandatorily at				14,861		10,428		52,132		77,421
fair value through profit or loss
Equity instruments		9		1,945		9,286		11,914		23,145
Debt securities		8		12,916		1,142		40,218		54,276
Financial assets at fair value through other				5,557,280		142,327		102,657		5,802,264
comprehensive income
Equity instruments		9		631		122,400		56,541		179,572
Debt securities		8		5,556,649		19,927		46,116		5,622,692

Derivatives – Hedge accounting		12		—		3,062,111		9,980		3,072,091
Total assets				5,989,272		6,812,493		167,264		12,969,029


Thousand euro
					2022
	Note		Level 1		Level 2		Level 3		Total

Liabilities:
Financial liabilities held for trading				224,447		3,374,036		—		3,598,483
Derivatives		10		—		3,374,036		—		3,374,036
Short positions				224,447		—		—		224,447

Derivatives – Hedge accounting		12		—		1,242,470		—		1,242,470
Total liabilities				224,447		4,616,506		—		4,840,953

Derivatives with no credit support annexes (CSAs) include the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA), respectively, in their fair value. The fair values of these derivatives represent 5.87% of the total, and their adjustment for credit and debit risks represents 4.12% of their fair value as at 31 December 2023 (5.31% and 17.30%, respectively, as at 31 December 2022).

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Movements in the balances of financial assets and financial liabilities recognised at fair value and classified as Level 3, disclosed in the accompanying consolidated balance sheets, are shown below:


Thousand euro
	Assets		Liabilities
Balance as at 31 December 2021		201,081		—

Valuation adjustments recognised in profit or loss (*)		3,662		—
Valuation adjustments not recognised in profit or loss		10,115		—
Purchases, sales and write-offs		(44,502)		—
Net additions/removals in Level 3		(4,957)		—
Exchange differences and other		1,865		—

Balance as at 31 December 2022		167,264		—

Valuation adjustments recognised in profit or loss (*)		7,104		—
Valuation adjustments not recognised in profit or loss		(11,318)		—
Purchases, sales and write-offs		(1,184)		—
Net additions/removals in Level 3		(980)		—
Exchange differences and other		34,383		—

Balance as at 31 December 2023		195,269		—

(*) Relates to securities retained on the balance sheet.

Details of financial instruments that were transferred to different valuation levels in 2023 are as follows:


Thousand euro
	2023
	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			—		—		—		—		—		—
Non-trading financial assets mandatorily at fair			—		—		—		—		—		—
value through profit or loss
Financial assets designated at fair value through			—		—		—		—		5,500		—
profit or loss
Financial assets at fair value through other			687,365		4,520		—		—		—		—
comprehensive income
Derivatives			—		—		—		—		—		—

Liabilities:
Financial liabilities held for trading			—		—		—		—		—		—
Financial liabilities designated at fair value through			—		—		—		—		—		—
profit or loss
Derivatives – Hedge accounting			—		—		—		—		—		—
Total			687,365		4,520		—		—		5,500		—

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Details of financial instruments that were transferred to different valuation levels in 2022 are as follows:


Thousand euro
	2022
	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			—		—		—		—		—		—
Non-trading financial assets mandatorily at			—		—		—		—		—		—
fair value through profit or loss
Financial assets designated at fair value			—		—		—		—		—		—
through profit or loss
Financial assets at fair value through other			—		—		—		429		4,465		920
comprehensive income
Derivatives			—		—		—		—		—		—

Liabilities:
Financial liabilities held for trading			—		—		—		—		—		—
Financial liabilities designated at fair value			—		—		—		—		—		—
through profit or loss
Derivatives – Hedge accounting			—		—		—		—		—		—
Total			—		—		—		429		4,465		920

Transfers from Level 1 to Level 2 in 2023 correspond mainly to bonds issued by US government agencies for which, given their characteristics, it has been determined that their fair value should be obtained primarily using directly or indirectly observable market data.

Transfers from Level 1 to Level 3 during the year are due to the fact that the markets in which these instruments (fixed-income bonds) are traded are no longer considered to be active markets; therefore, their value is instead calculated using valuation techniques in which one of the main significant inputs is based on unobservable market data.

Transfers from Level 3 to Level 1 in 2023 correspond to equity instruments that began to be traded on an active market.

Transfers from Level 3 to Level 1 in 2022 were due to the fact that the markets in which those instruments (senior bonds) were traded began to be considered active markets; therefore, their valuation was instead obtained from quoted prices.

As at 31 December 2023 and 2022, the effect of replacing the main assumptions used in the valuation of Level 3 financial instruments with other reasonably possible assumptions, taking the highest value (most favourable assumption) or lowest value (least favourable assumption) of the range that is considered likely, is not significant.

As at year-end in both years, there were no derivatives using equity instruments as underlying assets or material interests in discretionary gains in any companies.

Financial instruments at amortised cost

The following tables show the fair value of the main financial instruments recognised at amortised cost in the accompanying consolidated balance sheets:

Thousand euro

2023

Level 1

Level 2

Level 3

Total

Assets:

Financial assets at amortised cost:

Debt securities

18,563,516

1,575,850

303,590

20,442,956

Loans and advances

—

20,952,925

133,914,744

154,867,669

Total assets

18,563,516

22,528,775

134,218,334

175,310,625

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Thousand euro

2023

Level 1

Level 2

Level 3

Total

Liabilities:

Financial liabilities at amortised cost (*):

Deposits (**)

—

183,661,142

—

183,661,142

Debt securities issued

20,405,507

4,966,959

—

25,372,466

Total liabilities

20,405,507

188,628,101

—

209,033,608

(*) As at 31 December 2023, the Group had other financial liabilities amounting to 6,333,286 thousand euros.

(**) The fair value of demand deposits has been likened to their carrying amount as they are mainly short-term balances.

Thousand euro

2022

Level 1

Level 2

Level 3

Total

Assets:

Financial assets at amortised cost

Debt securities

19,264,376

778,098

207,034

20,249,508

Loans and advances

2,776,939

20,211,002

134,901,764

157,889,705

Total assets

22,041,315

20,989,100

135,108,798

178,139,213

Thousand euro

2022

Level 1

Level 2

Level 3

Total

Liabilities:

Financial liabilities at amortised cost (*)

Deposits (**)

—

197,569,465

3,772,522

201,341,987

Debt securities issued

18,674,324

3,847,785

—

22,522,109

Total liabilities

18,674,324

201,417,250

3,772,522

223,864,096

(*) As at 31 December 2022, the Group had other financial liabilities amounting to 6,658,861 thousand euros.

(**) The fair value of demand deposits has been likened to their carrying amount as they are mainly short-term balances.

In general, the fair value of “Financial assets at amortised cost” and “Financial liabilities at amortised cost” has been estimated using the discounted cash flow method, applying market interest rates as at the end of each year adjusted for the credit spread and incorporating any behavioural assumptions deemed relevant, with the exception of debt securities with active markets, for which it has been estimated using year-end quoted prices.

The fair value of the heading “Cash, cash balances at central banks and other demand deposits” has been likened to its carrying amount, as these are mainly short-term balances.

Financial instruments at cost

As at the end of 2023 and 2022, there were no equity instruments valued at their acquisition cost that could be considered significant.

A-129

Non-financial assets

Real estate assets

As at 31 December 2023 and 2022, the net carrying amounts of real estate assets do not differ significantly from the fair values of these assets (see Notes 13, 15 and 17).

The selection criteria for appraisers and the update of appraisals are defined in the section on "Guarantees", in Note 1.3.4. to these consolidated annual financial statements.

Valuation techniques are generally used by all appraisal companies based on each type of real estate asset.

As per regulatory requirements, in the valuation techniques used, appraisal companies maximise the use of observable market data and other factors which would be taken into account by market operators when setting prices, endeavouring to keep the use of subjective considerations and unobservable or non-verifiable data to a minimum.

The main valuation methods used fall into the following measurement levels:

Level 2

–

Comparison method: applicable to all kinds of properties provided that there is a representative market of comparable properties and that sufficient data is available relating to transactions that reflect the current market situation.

–

Rental update method: applicable when the valued property generates or may generate rental income and there is a representative market of comparable data.

–

Statistical model: this model adjusts the value of the assets based on the acquisition date and their location, updating the value in accordance with price trends in the area concerned as from the date of purchase. To that end, it includes statistical information on price trends in all provinces, as provided by external appraisal companies, as well as demographic data from the Spanish Office for National Statistics (INE) to calculate sensitivity at a municipality level. The value obtained is in turn adjusted based on the construction status (finished product, development in progress, plots or land under management) and use (residential, industrial, etc.) of the asset.

Level 3

–

Cost method: applicable to determine the value of buildings being planned, under construction or undergoing renovations.

–

Residual method: in the present macroeconomic climate, the dynamic calculation procedure is being used preferentially in new land valuations to the detriment of the static procedure, which is reserved for specific cases in which the envisaged timeframes for project completion are in line with the relevant regulations.

Depending on the type of asset, the methods used for the valuation of the Group’s portfolio are the following:

–

Completed buildings: valued using the comparison method, the rental update method or the statistical model (Level 2).

–

Buildings under construction: valued using the cost method as a sum of the land value and the value of the work carried out (Level 3).

–

Land: valued using the residual method (Level 3).

A-130

Determination of the fair value of real estate assets

The following tables show the main real estate assets broken down by the valuation method used to estimate their fair value as at 31 December 2023 and 2022:


Thousand euro
	2023
	Level 1		Level 2		Level 3		Total

Housing		—		567,229		—		567,229
Branches and offices, retail establishments		—		879,689		—		879,689
and other real estate
Land and building plots		—		5,295		20,833		26,128
Work in progress		—		—		1,225		1,225
Total assets		—		1,452,213		22,058		1,474,271

Thousand euro
	2022
	Level 1		Level 2		Level 3		Total

Housing		—		672,441		—		672,441
Branches and offices, retail establishments		—		943,251		—		943,251
and other real estate
Land and building plots		—		5,351		25,031		30,382
Work in progress		—		—		2,585		2,585
Total assets		—		1,621,043		27,616		1,648,659

Significant unobservable variables used in valuations classed as Level 3 have not been developed by the Group but by the independent third party companies that performed the appraisals. Given the widespread use of the appraisals, the valuation techniques of which are clearly set out in the regulation governing the valuation of properties, the unobservable variables used reflect the assumptions frequently used by all appraisal companies. In terms of proportional weight, unobservable variables account for almost all of the value of these appraisals.

The main unobservable variables used in the valuation of assets in accordance with the dynamic residual method are the future selling price, the estimated construction costs, the costs of development, the time required for land planning and development and the discount rate. The main unobservable variables used in accordance with the static residual method are construction costs, the costs of development and the profit for the developer.

The number of plots in the Group’s possession is very fragmented, and they are very diverse, both in terms of location and in terms of the stage of development of the urban infrastructure and the possibility of future development. For this reason, no quantitative information can be provided regarding the unobservable variables affecting the fair value of these types of assets.

Movements in the balances of real estate assets classified as Level 3 in 2023 and 2022 are shown below:


Thousand euro
	Housing		Branches and offices, retail establishments and other real estate		Land, building plots and work in progress
Balance as at 31 December 2021		—		—		34,406

Purchases		—		—		329
Sales		—		—		(5,084)
Impairments recognised on income statement (*)		—		—		(1,796)
Net additions/removals in Level 3		—		—		(239)
Balance as at 31 December 2022		—		—		27,616

Purchases		—		—		1,474
Sales		—		—		(3,951)
Impairments recognised on income statement (*)		—		—		(2,496)
Net additions/removals in Level 3		—		—		(585)
Balance as at 31 December 2023		—		—		22,058

(*) Relates to assets retained on the balance sheet as at 31 December 2023 and 2022.

A-131

The following table shows a comparison between the value at which real estate assets are recognised under the headings "Investment properties", "Inventories" and "Non-current assets and disposal groups classified as held for sale" and their appraisal value, as at the end of 2023 and 2022:


Thousand euro
			2023									2022
	Note		Carrying amount (*)		Impairment			Net carrying amount		Appraisal value		Carrying amount (*)		Impairment			Net carrying amount		Appraisal value

Investment properties		15		307,074		(77,476	)		229,598		282,727		383,975		(84,233	)		299,742		354,375
Inventories		17		130,437		(68,093	)		62,344		100,962		170,942		(77,107	)		93,835		145,728
Non-current assets held for		13		708,051		(180,911	)		527,140		814,946		721,078		(183,927	)		537,151		854,546
sale
Total				1,145,562		(326,480	)		819,082		1,198,635		1,275,995		(345,267	)		930,728		1,354,649

(*) Cost less accumulated depreciation.

The fair values of real estate assets valued by appraisal companies and included in the headings “Investment properties”, “Inventories” and "Non-current assets and disposal groups classified as held for sale" in 2023 are as follows:


Thousand euro
Appraisal firm	Investment properties		Inventories		Non-current assets held for sale

Afes Técnicas de Tasación, S.A.		185		—		4,550
Alia Tasaciones, S.A.		16,842		3,587		23,419
Arco Valoraciones, S.A.		—		—		912
CBRE Valuation Advisory, S.A.		25,912		5,335		30,385
Col.lectiu d’Arquitectes Taxadors		—		—		720
Cushman & Wakefield		—		—		271
Eurovaloraciones, S.A.		6,593		1,961		29,363
Gestión de Valoraciones y Tasaciones, S.A.		14		—		2,095
Gloval Valuation, S.A.U.		5,918		9,544		91,948
Ibertasa, S.A.		—		—		165
Krata, S.A.		—		—		41
Sociedad de Tasación, S.A.		19,307		11,790		176,052
Tecnitasa Técnicos en Tasación, S.A		269		107		6,467
Tinsa Tasaciones Inmobiliarias, S.A.		6,876		2,809		32,295
UVE Valoraciones, S.A.		81,672		9,425		38,094
Valoraciones Mediterráneo, S.A.		66,010		17,651		90,201
Other		—		135		162
Total		229,598		62,344		527,140

The fair value of property, plant and equipment for own use does not differ significantly from its net carrying amount.

A-132

Note 7 – Cash, cash balances at central banks and other demand deposits

The composition of this asset heading on the consolidated balance sheets as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023	2022

By nature:
Cash	726,122	686,258
Cash balances at central banks	28,566,694	39,236,780
Other demand deposits	693,037	1,337,357
Total	29,985,853	41,260,395

By currency:
In euro	22,130,671	33,644,881
In foreign currency	7,855,182	7,615,514
Total	29,985,853	41,260,395

Cash balances at central banks include balances held to comply with the central bank’s mandatory minimum required reserves (MRR) ratio. Throughout 2023 and 2022, Banco Sabadell has complied with minimum requirements set out in applicable regulations regarding that ratio.

Note 8 – Debt securities

Debt securities reported in the consolidated balance sheets as at 31 December 2023 and 2022 are broken down below:


Thousand euro
	2023	2022

By heading:
Financial assets held for trading	142,495	417,131
Non-trading financial assets mandatorily at fair value through profit or loss	65,744	54,276
Financial assets at fair value through other comprehensive income	6,085,359	5,622,692
Financial assets at amortised cost	21,500,927	21,452,820
Total	27,794,525	27,546,919

By nature:
Central banks	—	—
General governments	26,250,576	27,099,465
Credit institutions	2,072,205	1,271,290
Other sectors	424,261	486,731
Stage 3 assets	899	73
Impairment allowances	(276)	(211)
Other valuation adjustments (interest, fees and commissions, other)	(953,140)	(1,310,429)
Total	27,794,525	27,546,919

By currency:
In euro	22,699,264	23,210,490
In foreign currency	5,095,261	4,336,429
Total	27,794,525	27,546,919

The breakdown of debt securities classified according to their credit risk and movements of impairment allowances associated with these instruments are included, together with those of other financial assets, in Note 11.

A-133

Details of debt instruments included under the “Financial assets at fair value through other comprehensive income” heading, as at 31 December 2023 and 2022, are shown below:


Thousand euro
	2023	2022

Amortised cost	6,282,291	5,867,885
Fair value (*)	6,085,359	5,622,692
Accumulated losses recognised in equity	(269,215)	(298,718)
Accumulated capital gains recognised in equity	72,777	54,864
Value adjustments made for credit risk	(494)	(1,339)

(*) Includes net impairment losses in the consolidated income statements for 2023 and 2022, in the amount of 852 and -182 thousand euros, of which, -192 and -742 thousand euros correspond to allowances, and 1,044 and 560 thousand euros correspond to provision reversals, respectively (see Note 34).

Details of exposures held in public debt instruments included under the “Financial assets at fair value through other comprehensive income” heading, as at 31 December 2023 and 2022, are as follows:


Thousand euro
	2023	2022

Amortised cost	5,470,805	5,472,721
Fair value	5,242,996	5,226,075
Accumulated losses recognised in equity	(266,112)	(291,636)
Accumulated capital gains recognised in equity	38,433	45,097
Value adjustments made for credit risk	(130)	(107)

Details of the “Financial assets at amortised cost” portfolio as at 31 December 2023 and 2022 are shown below:


Thousand euro
	2023	2022

General governments	19,950,179	20,295,771
Credit institutions	1,380,685	970,492
Other sectors	170,340	186,768
Impairment allowances	(277)	(211)
Total	21,500,927	21,452,820

Note 9 – Equity instruments

The balance of equity instruments on the consolidated balance sheets as at 31 December 2023 and 2022 breaks down as follows:


Thousand euro
	2023	2022

By heading:
Non-trading financial assets mandatorily at fair value through profit or loss	52,336	23,145
Financial assets at fair value through other comprehensive income	183,938	179,572
Total	236,274	202,717

By nature:
Resident sector	200,584	176,474
Credit institutions	9,408	8,484
Other	191,176	167,990
Non-resident sector	18,007	15,034
Other	18,007	15,034
Participations in investment vehicles	17,683	11,209
Total	236,274	202,717

By currency:
In euro	235,549	202,189
In foreign currency	725	528
Total	236,274	202,717

A-134

As at 31 December 2023 and 2022, there were no investments in listed equity instruments for which their quoted price was not considered as a reference of their fair value.

In addition, as at the aforesaid dates, there were no Group investments in equity instruments included in the portfolio of “Financial assets at fair value through other comprehensive income” considered to be individually significant.

Details of equity instruments included under the “Financial assets at fair value through other comprehensive income” heading are as follows:


Thousand euro
	2023	2022

Acquisition cost	243,197	241,468
Fair value	183,938	179,572
Accumulated capital losses recognised in equity at reporting date	(146,586)	(146,236)
Accumulated capital gains recognised in equity at reporting date	87,327	84,340
Transfers of gains or losses within equity during the year	(925)	(6,799)
Recognised dividends from investments held at the end of the year	8,413	2,609

Note 10 – Derivatives held for trading

The breakdown by type of risk of derivatives held for trading as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023			2022
		Assets	Liabilities		Assets	Liabilities

Securities risk		3,472	3,472		14,807	14,807
Interest rate risk		2,063,411	2,167,508		2,954,325	2,943,405
Foreign exchange risk		367,282	229,322		552,656	340,033
Other types of risk		129,829	129,784		78,334	75,791
Total		2,563,994	2,530,086		3,600,122	3,374,036

By currency:
In euro		1,417,104	1,214,618		2,060,859	1,740,524
In foreign currency		1,146,890	1,315,468		1,539,263	1,633,512
Total		2,563,994	2,530,086		3,600,122	3,374,036

The fair values of derivatives held for trading, broken down by type of derivative instrument as at 31 December 2023 and 2022, are shown below:

A-135


Thousand euro
	2023	2022

Assets

Swaps, CCIRS, Call Money Swap	2,138,207	2,940,879
Currency options	62,626	126,794
Interest rate options	55,012	85,552
Index and securities options	3,472	14,807
Currency forwards	304,656	425,861
Fixed income forwards	21	6,229
Total derivatives on asset side held for trading	2,563,994	3,600,122

Liabilities

Swaps, CCIRS, Call Money Swap	2,262,684	2,984,512
Currency options	62,745	126,486
Interest rate options	34,586	33,640
Index and securities options	3,472	14,807
Currency forwards	166,578	213,547
Fixed income forwards	21	1,044
Total derivatives on liability side held for trading	2,530,086	3,374,036

As at 31 December 2023, the Group holds embedded derivatives that have been separated from their host contracts and recognised under the heading “Financial liabilities held for trading – Derivatives” of the consolidated balance sheet in the amount of 18,483 thousand euros (278 thousand euros as at 31 December 2022). The host contracts of those embedded derivatives correspond to customer deposits and they have been allocated to the portfolio of financial liabilities at amortised cost.

A-136

Note 11 – Loans and advances

Central banks and Credit institutions

The breakdown of the headings “Loans and advances – Central banks” and “Loans and advances – Credit institutions” of the consolidated balance sheets as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023	2022

By heading:
Financial assets at amortised cost	7,152,467	4,862,951
Total	7,152,467	4,862,951

By nature:
Deposits with agreed maturity	974,533	1,055,449
Repos	5,601,564	3,255,069
Other	537,709	546,896
Impairment allowances	(3,135)	(2,777)
Other valuation adjustments (interest, fees and commissions, other)	41,796	8,314
Total	7,152,467	4,862,951

By currency:
In euro	6,084,788	4,112,460
In foreign currency	1,067,679	750,491
Total	7,152,467	4,862,951

A-137

Customers

The breakdown of the heading “Loans and advances – Customers” (General governments and Other sectors) of the consolidated balance sheets as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023	2022

By heading:
Non-trading financial assets mandatorily at fair value through profit or loss	35,098	—
Financial assets at amortised cost	152,260,399	158,729,681
Total	152,295,497	158,729,681

By nature:
Overdrafts, etc.	2,769,073	3,369,675
Commercial loans	7,465,119	7,489,183
Finance leases	2,236,140	2,226,514
Secured loans	91,226,348	92,751,597
Repos	17,413	—
Other term loans	46,136,443	50,293,284
Stage 3 assets	5,472,296	5,460,665
Impairment allowances	(3,198,969)	(3,020,279)
Other valuation adjustments (interest, fees and commissions, other) (*)	171,634	159,042
Total	152,295,497	158,729,681

By sector:
General governments	8,957,524	10,072,272
Other sectors	140,893,012	146,057,981
Stage 3 assets	5,472,296	5,460,665
Impairment allowances	(3,198,969)	(3,020,279)
Other valuation adjustments (interest, fees and commissions, other) (*)	171,634	159,042
Total	152,295,497	158,729,681

By currency:
In euro	97,824,215	102,483,739
In foreign currency	54,471,282	56,245,942
Total	152,295,497	158,729,681

By geographical area:
Spain	93,868,665	98,957,073
Rest of European Union	5,045,047	4,680,628
United Kingdom	44,254,530	46,088,800
Americas	10,991,155	10,556,298
Rest of the world	1,335,069	1,467,161
Impairment allowances	(3,198,969)	(3,020,279)
Total	152,295,497	158,729,681

(*) Other valuation adjustments of financial assets classified as stage 3 amount to 37,236 thousand euros as at 31 December 2023 and 29,922 thousand euros as at 31 December 2022.

The “Loans and advances” heading on the consolidated balance sheets includes certain assets pledged in funding operations, i.e. assets pledged as collateral or guarantees with respect to certain liabilities. For further information, see the “Credit risk” section of Note 4.

A-138

Finance leases

Certain information concerning finance leases carried out by the Group in which it acts as lessor is set out below:


Thousand euro
	2023	2022

Finance leases
Total gross investment	2,477,207	2,410,412
Impairment allowances	(96,444)	(98,827)
Interest income	71,932	51,607

As at 31 December 2023 and 2022, the reconciliation of undiscounted lease payments received against the net investment in the leases is as follows:


Thousand euro
	2023	2022

Undiscounted lease payments received	2,318,548	2,255,402
Residual value	158,659	155,010
Gross investment in the lease	2,477,207	2,410,412
Unearned financial income	(241,067)	(183,898)
Net investment in the lease	2,236,140	2,226,514

The table below shows a breakdown, by term, of the minimum undiscounted future amounts receivable by the Group during the mandatory term (assuming that no extensions or existing purchase options will be exercised) as set out in the finance lease contracts:


Thousand euro
	2023	2022

Up to 1 year	596,371	502,389
1-2 years	549,969	528,719
2-3 years	388,839	398,780
3-4 years	258,360	264,057
4-5 years	168,571	171,803
More than 5 years	356,438	389,654
Total	2,318,548	2,255,402

Past-due financial assets

The balance of “Loans and advances – Customers” past-due and pending collection not classified as stage 3 amounted to 343,472 thousand euros as at 31 December 2023 (298,466 thousand euros as at 31 December 2022). Of this total, over 81% of the balance as at 31 December 2023 (74% of the balance as at 31 December 2022) was no more than one month past-due.

A-139

Financial assets classified on the basis of their credit risk

The breakdown of financial assets, not considering valuation adjustments, classified on the basis of their credit risk as at 31 December 2023 and 2022 is as follows:


Thousand euro
*Stage 1*	31/12/2023	31/12/2022

Debt securities	28,747,042	28,808,314
Loans and advances	145,291,906	147,334,819
Customers	138,178,496	142,483,973
Central banks and Credit institutions	7,113,410	4,850,846
Total stage 1	174,038,948	176,143,133

By sector:
General governments	35,196,900	37,166,529
Central banks and Credit institutions	9,185,616	6,122,136
Other private sectors	129,656,433	132,854,468
Total stage 1	174,038,948	176,143,133

*Stage 2*

Debt securities	—	49,173
Loans and advances	11,672,436	13,652,848
Customers	11,672,041	13,646,280
Central banks and Credit institutions	396	6,568
Total stage 2	11,672,436	13,702,021

By sector:
General governments	11,200	5,207
Central banks and Credit institutions	396	6,568
Other private sectors	11,660,840	13,690,246
Total stage 2	11,672,436	13,702,021

*Stage 3*

Debt securities	899	73
Loans and advances	5,472,297	5,460,665
Customers	5,472,296	5,460,665
Central banks and Credit institutions	—	—
Total stage 3	5,473,196	5,460,738

By sector:
General governments	802	8,122
Central banks and Credit institutions	—	—
Other private sectors	5,472,394	5,452,615
Total stage 3	5,473,196	5,460,738

Total stages	191,184,580	195,305,892

A-140

Movements of gross values, not considering valuation adjustments, of assets subject to impairment by the Group during the years ended 31 December 2023 and 2022 were as follows:


Thousand euro

	*Stage 1*	*Stage 2*	*Stage 3*	Of which: purchased credit-impaired	*Total*
Balance as at 31 December 2021	171,339,270	12,326,943	5,698,151	159,766	189,364,364

Transfers between stages	(5,077,901)	3,536,810	1,541,091	—	—
Stage 1	7,237,830	(7,067,385)	(170,445)	—	—
Stage 2	(11,912,792)	12,560,731	(647,939)	—	—
Stage 3	(402,939)	(1,956,536)	2,359,475	—	—
Increases	64,002,931	1,245,295	447,319	9,473	65,695,545
Decreases	(52,904,809)	(3,217,206)	(1,778,439)	(39,602)	(57,900,454)
Transfers to write-offs	(319)	(817)	(419,658)	881	(420,794)
Adjustments for exchange differences	(1,216,039)	(189,004)	(27,726)	(7,334)	(1,432,769)
Balance as at 31 December 2022	176,143,133	13,702,021	5,460,738	*123,184*	195,305,892

Transfers between stages	(1,511,186)	191,372	1,319,814	—	—
Stage 1	9,046,690	(8,772,531)	(274,159)	—	—
Stage 2	(10,249,989)	10,797,954	(547,965)	—	—
Stage 3	(307,887)	(1,834,051)	2,141,938	—	—
Increases	50,604,996	1,489,365	448,084	5,389	52,542,445
Decreases	(52,266,707)	(3,814,228)	(1,387,800)	(21,945)	(57,468,735)
Transfers to write-offs	—	—	(386,109)	—	(386,109)
Adjustments for exchange differences	1,068,712	103,906	18,469	2,505	1,191,087
Balance as at 31 December 2023	174,038,948	11,672,436	5,473,196	*109,133*	191,184,580

The breakdown of assets classified as stage 3 by type of guarantee as at 31 December 2023 and 2022 is as follows:


Thousand euro
	31/12/2023	31/12/2022

Secured with a mortgage (*)	2,215,559	2,347,550
Of which: Stage 3 financial assets with guarantees covering all of the risk	1,429,856	1,571,003
Other collateral (**)	276,082	339,516
Of which: Stage 3 financial assets with guarantees covering all of the risk	114,222	166,371
Other	2,981,555	2,773,672
Total	5,473,196	5,460,738

(*) Assets secured with a mortgage with an outstanding exposure below 100% of their valuation amount.

(**) Includes the rest of assets secured with collateral.

The breakdown by geographical area of the balance of assets classified as stage 3 as at 31 December 2023 and 2022 is as follows:


Thousand euro
	31/12/2023	31/12/2022

Spain	4,141,559	4,216,505
Rest of European Union	450,006	456,072
United Kingdom	656,821	593,793
Americas	199,622	165,292
Rest of the world	25,188	29,076
Total	5,473,196	5,460,738

A-141

Movements of impaired financial assets derecognised from the asset side of the balance sheet as the likelihood of them being recovered during 2023 and 2022 was deemed to be remote were as follows:


Thousand euro
Balance as at 31 December 2021			5,929,842

Additions			579,122
Use of accumulated impairment balance			399,682
Directly recognised on income statement			21,112
Contractually payable interests			155,795
Other items			2,533

Disposals			(645,432)
Collections of principal in cash from counterparties			(51,936)
Collections of interest in cash from counterparties			(2,188)
Debt forgiveness			(22,771)
Expiry of statute-of-limitations period			—
Forbearance			—
Sales			(468,369)
Foreclosure of tangible assets			(857)
Other items			(99,311)

Exchange differences			(15,583)
Balance as at 31 December 2022			5,847,949

Additions			552,439
Use of accumulated impairment balance			362,984
Directly recognised on income statement			23,125
Contractually payable interests			166,330
Other items			—

Disposals			(193,768)
Collections of principal in cash from counterparties			(47,446)
Collections of interest in cash from counterparties			(1,079)
Debt forgiveness			(55,234)
Expiry of statute-of-limitations period			—
Forbearance			—
Sales			(25,394)
Foreclosure of tangible assets			(694)
Other items			(63,921)

Exchange differences			13,698
Balance as at 31 December 2023			6,220,318

A-142

Allowances

Financial asset impairment allowances, broken down by consolidated balance sheet heading, classified according to their credit risk as at 31 December 2023 and 2022 were as follows:


Thousand euro
*Stage 1*	2023	2022

Debt securities	276	211
Loans and advances	372,373	347,269
Central banks and Credit institutions	2,752	2,773
Customers	369,621	344,496
Total stage 1	372,649	347,480

*Stage 2*

Debt securities	—	—
Loans and advances	470,529	479,941
Central banks and Credit institutions	383	4
Customers	470,146	479,937
Total stage 2	470,529	479,941

*Stage 3*

Debt securities	—	—
Loans and advances	2,359,203	2,195,845
Central banks and Credit institutions	—	—
Customers	2,359,202	2,195,845
Total stage 3	2,359,203	2,195,845

Total stages	3,202,381	3,023,266

A-143

The movement of impairment allowances allocated by the Group to cover credit risk during 2023 and 2022 was as follows:


Thousand euro
	Individually measured				Collectively measured						Total
	*Stage 2*		*Stage 3*		*Stage 1*		*Stage 2*		*Stage 3*		Total

Balance as at 31 December 2021		2,595		548,461		377,703		491,438		1,883,898		3,304,096

*Movements reflected in impairment gains/(losses) ()**		2,256		65,735		42,051		136,575		512,023		758,640
Increases due to origination		—		—		267,330		—		—		267,330
Changes due to credit risk variance		4,841		88,109		(68,080)		158,783		521,049		704,702
Changes in calculation approach		—		—		—		—		—		—
Other movements		(2,585)		(22,374)		(157,199)		(22,208)		(9,026)		(213,392)

Movements not reflected in impairment gains/(losses)		4,830		(60,100)		(72,352)		(153,318)		(749,124)		(1,030,064)
Transfers between stages		4,830		6,202		(57,503)		(142,731)		189,202		—
Stage 1		(171)		(246)		98,181		(80,660)		(17,104)		—
Stage 2		9,782		(5,805)		(139,268)		209,346		(74,055)		—
Stage 3		(4,781)		12,253		(16,416)		(271,417)		280,361		—
Utilisation of allocated provisions		—		(91,556)		(39)		(82)		(922,192)		(1,013,869)
Other movements (**)		—		25,254		(14,810)		(10,505)		(16,134)		(16,195)

Adjustments for exchange differences		29		902		78		(4,463)		(5,951)		(9,405)
Balance as at 31 December 2022		9,710		554,998		347,480		470,232		1,640,846		3,023,266

Scope additions / exclusions

*Movements reflected in impairment gains/(losses) ()**		(1,840)		68,586		69,867		124,296		459,570		720,479
Increases due to origination		—		—		358,591		—		—		358,591
Changes due to credit risk variance		(2,301)		70,273		(61,521)		118,121		407,292		531,864
Changes in calculation approach		—		—		—		—		—		—
Other movements		461		(1,687)		(227,203)		6,175		52,278		(169,976)

Movements not reflected in impairment gains/(losses)		3,901		(124,279)		(48,729)		(139,818)		(244,663)		(553,588)
Transfers between stages		3,901		4,850		(48,109)		(137,732)		177,087		—
Stage 1		(530)		158		71,895		(69,050)		(2,474)		—
Stage 2		9,255		(10,993)		(111,887)		173,776		(60,152)		—
Stage 3		(4,824)		15,685		(8,117)		(242,458)		239,713		—
Utilisation of allocated provisions		—		(113,894)		(81)		(1,845)		(397,770)		(513,590)
Other movements (**)		—		(15,235)		(539)		(241)		(23,980)		(39,995)

Adjustments for exchange differences		15		778		4,032		4,033		3,366		12,224
Balance as at 31 December 2023		11,786		500,083		372,650		458,743		1,859,119		3,202,381

(*) This figure, corresponding to the amortisation charged to results on impaired financial assets derecognised from the asset side of the balance sheet and the recovery of write-offs, has been recognised with a balancing entry under the heading ‘Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains’ (see Note 34).

(**) Corresponds to credit loss allowances transferred to non-current assets held for sale and investment property .

The breakdown by geographical area of the balance of impairment allowances as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023	2022

Spain	2,566,179	2,489,789

Rest of European Union	171,176	121,016

United Kingdom	283,907	253,629

Americas	167,230	145,458

Rest of the world	13,889	13,374
Total	3,202,381	3,023,266

A-144

Sensitivity analysis of the key variables of macroeconomic scenarios

The table below analyses the sensitivity of the expected loss of the Group and of the main geographies and its impact, by segment, on impairment allowances in the event of a deviation in the key variables, ceteris paribus, from the actual macroeconomic environment, with respect to the most probable baseline macroeconomic scenario envisaged in the Group’s business plan:


	Group
	*Change in the variable ()**		Impact on expected loss
	*Change in the variable ()**		Corporates			Individuals
GDP growth deviation		-100 pb		5.3	%		2.1	%
GDP growth deviation		+100 pb		(4.6	)%		(1.9	)%

Unemployment rate deviation		+100 pb		1.9	%		2.9	%
Unemployment rate deviation		-100 pb		(1.8	)%		(2.2	)%

House price growth deviation		-100 pb		0.7	%		1.1	%
House price growth deviation		+100 pb		(0.6	)%		(1.0	)%

	Spain
	*Change in the variable ()**		Impact on expected loss
	*Change in the variable ()**		Corporates			Individuals
GDP growth deviation		-100 pb		5.3	%		2.7	%
GDP growth deviation		+100 pb		(4.7	)%		(2.4	)%

Unemployment rate deviation		+100 pb		1.9	%		1.2	%
Unemployment rate deviation		-100 pb		(1.8	)%		(1.0	)%

House price growth deviation		-100 pb		0.7	%		1.3	%
House price growth deviation		+100 pb		(0.6	)%		(1.2	)%

	United Kingdom
	*Change in the variable ()**		Impact on expected loss
	*Change in the variable ()**		Individuals
Unemployment rate deviation ()**		+100 pb		9.1%
Unemployment rate deviation ()**		-100 pb		(6.4)%

House price growth deviation		-100 pb		0.4%
House price growth deviation		+100 pb		(0.4)%

(*) Changes to macroeconomic variables are applied in absolute terms.

(**) Changes to macroeconomic variables are applied in absolute terms. In the scenario of a change to the UK unemployment rate, a deviation of +/- 100 bp represents the relative value of a deviation from the macroeconomic variable more than two times greater than in Spain.

A-145

Note 12 – Derivatives - hedge accounting

Hedging management

The main hedges arranged by the Group are described below:

Interest rate risk hedge

Based on the balance sheet position and the market situation and outlooks, interest rate risk mitigation strategies are proposed and agreed upon to adapt that position to the one desired by the Group. With this aim in mind, the Group establishes interest rate risk hedging strategies for positions that are not included in the trading book and, to that end, derivative instruments are used, whether fair value or cash flow hedging instruments, and a distinction is made between them depending on the items hedged:

–

Macro-hedges: hedges intended to mitigate the risk of balance sheet components.

–

Micro-hedges: hedges intended to mitigate the risk of a particular asset or liability.

When a transaction is designated as a hedging operation, it is classified as such from the inception of the transaction or of the instruments included in the hedge, and a document is prepared which covers the hedging strategy, defining it in management and accounting terms and setting out its governance arrangements. The aforesaid document clearly identifies the item(s) hedged and the hedging instrument(s), the risk that it seeks to hedge and the criteria or methodologies followed by the Group to evaluate its effectiveness.

The Group operates with the following types of hedges intended to mitigate structural interest rate risk:

–

Fair value hedges: hedges against the exposure to changes in the fair value of assets and liabilities recognised on the balance sheet, or against the analogous exposure of a specific selection of such assets and liabilities, that can be attributed to interest rate risk. These are used to keep a stable economic value of equity.

The main types of balance sheet items hedged are:

•

Fixed-rate loans included in the lending portfolio.

•

Debt securities included in the portfolio of “Financial assets at fair value through other comprehensive income” and the portfolio of “Financial assets at amortised cost”.

•

Fixed-rate liabilities, including fixed-term deposits and the Institution’s funding operations in capital markets.

Banco Sabadell generally uses macro-hedging for balance sheet items, both assets and liabilities, while TSB uses macro-hedging for fixed-rate loans or deposits and micro-hedging for debt securities or the Bank’s funding operations in capital markets, for which derivative contracts are arranged, typically for a nominal amount identical to that of the hedged item and with the same financial characteristics.

If the hedge relates to assets, the Group enters into a fixed-for-floating swap, whereas if the hedge relates to liabilities, it enters into a floating-to-fixed interest rate swap. These derivatives can be traded in cash or as forwards. The hedged risk is the interest rate risk deriving from a potential change in the risk-free interest rate that gives rise to changes in the value of the hedged balance sheet items. As such, the hedge will not cover any risk inherent in the hedged items other than the risk of a change in the risk-free interest rate.

In order to assess the effectiveness of the hedge from the beginning, a backtesting exercise is carried out which compares the accumulated monthly variance in the fair value of the hedged item against the accumulated monthly variance in the fair value of the hedging derivative. Hedge effectiveness is also assessed on a forward-looking basis, verifying that future changes in the fair value of the hedged balance sheet items are offset by future changes in the fair value of the derivative in the event of any changes in the market interest rate curve.

A-146

–

Cash flows: hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction that could affect profit or loss. They are used to reduce net interest income volatility.

The main types of balance sheet items hedged are:

•

Floating-rate mortgage loans indexed to the mortgage Euribor.

•

Floating-rate liabilities indexed to the 3-month Euribor.

Banco Sabadell generally uses macro-hedging for balance sheet items, both assets and liabilities, while TSB also uses micro-hedging for floating-rate issues of its own-name securities, for which derivative contracts are arranged, typically for a nominal amount identical to that of the hedged item and with the same financial characteristics.

If the hedge relates to assets, the Group enters into a floating-to-fixed interest rate swap, whereas if the hedge relates to liabilities, it enters into a fixed-for-floating swap. These derivatives can be traded in cash or as forwards. The hedged risk is the interest rate risk deriving from a potential change in the benchmark interest rate that affects the future interest accrued on hedged balance sheet items. The credit risk spread or credit risk premium which, together with the benchmark index, makes up the contractual interest rate applicable to the hedged balance sheet items is expressly excluded from the hedge.

In order to assess the effectiveness of the hedge from the beginning, a backtesting exercise is carried out which compares the accumulated variance in the fair value of the hedged item against the accumulated variance in the fair value of the hedging derivative. Hedge effectiveness is also assessed on a forward-looking basis, verifying that the expected cash flows of the hedged items are still highly probable.

Possible causes of partial or total ineffectiveness include changes in the sufficiency of the portfolio of hedged balance sheet items or differences in their contractual characteristics in relation to hedging derivatives.

Every month the Group calculates the interest rate risk metrics and establishes hedging strategies in accordance with the established risk appetite framework. Hedges are therefore managed, establishing hedges or discontinuing them, as required, on the basis of the evolution of the balance sheet items described previously within the management and control framework defined by the Group through its policies and procedures.

Hedges of net investment in foreign operations

The positions of subsidiaries and foreign branches implicitly entail exposure to foreign exchange risk, which is managed by creating hedges through the use of forward contracts and options.

The maturities of these instruments are periodically renewed on the basis of prudential and forward-looking criteria.

A-147

2023 hedging disclosures

The nominal values and the fair values of hedging instruments as at 31 December 2023 and 2022, broken down by risk category and type of hedge, are as follows:


Thousand euro
	2023						2022
	Nominal		Assets		Liabilities		Nominal		Assets		Liabilities

Microhedges:
Fair value hedges		11,305,664		812,117		246,705		8,353,601		831,005		207,837

Foreign exchange risk		—		—		—		—		—		—
Of liability-side transactions		—		—		—		—		—		—
Of permanent investments		—		—		—		—		—		—
Of non-monetary items		—		—		—		—		—		—

Interest rate risk		3,131,379		764,450		27,988		4,121,267		790,860		32,908
Of liability-side transactions (A)		686,434		912		23,990		65,304		—		5,532
Of asset-side transactions (B)		2,444,945		763,538		3,998		4,055,963		790,860		27,376

Equity risk		8,174,285		47,667		218,717		4,232,334		40,145		174,929
Of liability-side transactions (A)		8,174,285		47,667		218,717		4,232,334		40,145		174,929

Cash flow hedges		2,749,498		104,510		24,886		5,153,957		172,117		134,543

Foreign exchange risk		—		—		—		—		—		—
Of non-monetary items		—		—		—		—		—		—
Interest rate risk		1,993,010		99,229		4,091		3,915,860		162,137		3,875
Of future transactions (C)		—		—		—		332,674		11,466		1,733
Of liability-side transactions (A)		875,071		97,768		4,088		1,155,712		147,454		1,201
Of securitisation transactions (D)		1,117,939		1,461		3		2,427,474		3,217		941
Other		—		—		—		—		—		—
Equity risk		31,380		258		9		63,980		—		640
Of liability-side transactions (E)		31,380		258		9		63,980		—		640
Other risks		725,108		5,023		20,786		1,174,117		9,980		130,028
Of inflation-linked bonds (F)		725,000		5,023		20,786		1,174,000		—		130,028
Of future transactions (C)		108		—		—		117		9,980		—

Hedge of net investment in foreign operations		1,343,425		16,867		4,910		1,217,579		31,352		—
Foreign exchange risk (G)		1,343,425		16,867		4,910		1,217,579		31,352		—

Macrohedges:
Fair value hedges		48,904,105		1,484,180		864,880		39,183,746		2,037,523		898,400

Interest rate risk		48,904,105		1,484,180		864,880		39,183,746		2,037,523		898,400
For funding operations (H)		19,619,340		138,287		581,242		15,428,947		14,607		882,905
For lending operations (I)		29,284,765		1,345,893		283,638		23,754,799		2,022,916		15,495

Cash flow hedges		9,800,000		6,924		30,576		2,050,000		94		1,690
Interest rate risk		9,800,000		6,924		30,576		2,050,000		94		1,690
Of liability-side transactions		—		—		—		—		—		—
Of asset-side transactions (J)		9,800,000		6,924		30,576		2,050,000		94		1,690
Total		74,102,692		2,424,598		1,171,957		55,958,883		3,072,091		1,242,470

By currency:
In euro		40,869,593		872,897		831,600		28,752,613		1,303,596		935,274
In foreign currency		33,233,099		1,551,701		340,357		27,206,270		1,768,495		307,196
Total		74,102,692		2,424,598		1,171,957		55,958,883		3,072,091		1,242,470

The types of hedges according to their composition that are identified in the table are as follows:

Micro-hedges of interest rate risk on the Institution’s funding operations in capital markets and transactions involving structured term deposits opened by customers, recognised under the heading “Financial liabilities at amortised cost”.

Micro-hedges of transactions involving loans granted to customers, recognised under the heading “Financial assets at amortised cost”, and those involving debt securities under the headings “Financial assets at fair value through other comprehensive income” and “Financial assets at amortised cost”. As at 31 December 2023, the hedge of transactions involving loans granted to customers was no longer in effect.

A-148

Micro-hedges of future transactions. The Institution designates as a hedging item those derivative contracts that will be settled at their gross amount through the transfer of the underlying asset (generally fixed-income securities) according to the contract price.

Micro-hedging operations carried out by the Group’s securitisation funds.

Micro-hedges of transactions involving structured term deposits arranged with customers and which are currently being sold.

Micro-hedges of interest rates on inflation-linked bonds, recognised under the heading “Financial assets at amortised cost”. The Group has arranged financial swaps to hedge future changes in cash flows that will be settled by inflation-linked bonds.

Hedges against foreign exchange risk on permanent investments currently cover 393 million pounds sterling and 8,553 million Mexican pesos corresponding to interests held in Group entities (333 million pounds sterling and 9,253 million Mexican pesos as at 31 December 2022) and 480 million US dollars corresponding to interests held in foreign branches (425 million US dollars as at 31 December 2022). All of these hedges are arranged through currency forwards.

Macro-hedges of the Institution’s funding operations in capital markets and transactions involving term deposits and demand deposits arranged by customers recognised under the heading “Financial liabilities at amortised cost”.

Macro-hedges of debt securities classified under the headings “Financial assets at fair value through other comprehensive income” and “Financial assets at amortised cost”, and of fixed-rate mortgage loans granted to customers recognised under the heading “Financial assets at amortised cost”.

Macro-hedges of floating-rate mortgage loans granted to customers recognised under the heading “Financial assets at amortised cost”. The average rate of interest rate swaps used for this hedge was 3.87% as at 31 December 2023 (3.59% as at 31 December 2022).

The maturity profiles of the hedging instruments used by the Group as at 31 December 2023 and 2022 are shown below:


Thousand euro
	2023
	Nominal
	Up to 1 month		1 to 3 months		3 to 12 months		1 and 5 years		More than 5 years		Total

Foreign exchange risk		675,264		645,726		22,435		—		—		1,343,425
Interest rate risk		586,848		3,898,997		14,262,726		28,693,797		16,386,126		63,828,494
Equity risk		49,073		229,858		2,809,004		5,106,350		11,380		8,205,665
Other risks		—		—		—		525,000		200,108		725,108
Total		1,311,185		4,774,581		17,094,165		34,325,147		16,597,614		74,102,692

Thousand euro
	2022
	Nominal
	Up to 1 month		1 to 3 months		3 to 12 months		1 and 5 years		More than 5 years		Total

Foreign exchange risk		460,156		737,282		20,141		—		—		1,217,579
Interest rate risk		1,114,907		1,535,196		6,092,608		22,276,713		18,251,449		49,270,873
Equity risk		60,038		90,741		408,348		3,539,198		197,989		4,296,314
Other risks		—		—		449,000		200,000		525,117		1,174,117
Total		1,635,101		2,363,219		6,970,097		26,015,911		18,974,555		55,958,883

In 2023 and 2022 there were no reclassifications from equity to the consolidated income statement due to cash flow hedges and hedges of net investments in foreign operations for transactions that were ultimately not executed.

A-149

The following table shows the accounting information of items covered by the fair value micro-hedges arranged by the Group:


Thousand euro
	2023
	Carrying amount of hedged item				Accumulated fair value adjustments in the hedged item						Accumulated amount of adjustments in hedged items for which hedge accounting no longer applies
	Assets		Liabilities		Assets			Liabilities

Micro-hedges:

Fair value hedges

Foreign exchange risk		—		—		—			—			—

Interest rate risk		2,277,611		344,500		(834,132	)		(26,400	)		(620	)

Equity risk		—		4,052,256		—			(17,108	)		—
Total		2,277,611		4,396,756		(834,132	)		(43,508	)		(620	)

Thousand euro
	2022
	Carrying amount of hedged item				Accumulated fair value adjustments in the hedged item						Accumulated amount of adjustments in hedged items for which hedge accounting no longer applies
	Assets		Liabilities		Assets			Liabilities

Micro-hedges:

Fair value hedges

Foreign exchange risk		—		—		—			—			—

Interest rate risk		3,783,282		322,472		(538,313	)		(40,517	)		(76	)

Equity risk		—		2,040,966		—			(92,318	)		—
Total		3,783,282		2,363,438		(538,313	)		(132,835	)		(76	)

In terms of fair value macro-hedges, the carrying amount of the hedged items recognised in assets and liabilities for 2023 amounted to 66,138,396 thousand euros and 44,657,503 thousand euros, respectively (78,804,701 thousand euros and 52,078,774 thousand euros in 2022, respectively). Similarly, fair value adjustments of the hedged asset and liability items in the portfolio hedge of interest rate risk amounted to -567,608 thousand euros and -422,347 thousand euros as at 31 December 2023, respectively (-1,545,607 thousand euros and -959,106 thousand euros as at 31 December 2022).

In relation to fair value hedges, the losses and gains recognised in 2023 and 2022 arising from both hedging instruments and hedged items are detailed hereafter:


Thousand euro
	2023				2022
	Hedging instruments		Hedged items		Hedging instruments		Hedged items

Micro-hedges		(331,922)		64,566		596,080		(599,425)

Fixed-rate assets		(352,997)		85,530		735,627		(739,915)

Capital markets and fixed-rate liabilities		76,055		(75,866)		(107,478)		108,411

Assets denominated in foreign currency		(54,980)		54,902		(32,069)		32,079

Macro-hedges		(289,542)		575,855		1,126,218		(1,104,218)

Capital markets and fixed-rate liabilities		535,919		(548,298)		(982,993)		990,659

Fixed-rate assets		(825,461)		1,124,153		2,109,211		(2,094,877)
Total		(621,464)		640,421		1,722,298		(1,703,643)

A-150

In cash flow hedges, the amounts recognised in the consolidated statement of equity during the year and the amounts derecognised from consolidated equity and included in profit and loss during the year are indicated in the consolidated statement of total changes in equity.

The ineffectiveness of cash flow hedges recognised in profit or loss for 2023 amounted to losses of 6,763 thousand euros (losses of 804 thousand euros in 2022).

As at 31 December 2023, the Group holds embedded derivatives that have been separated from their host contracts and recognised under the headings “Derivatives – Hedge accounting” on the asset side and on the liabilities side of the consolidated balance sheet in the amount of 18,322 thousand euros and 173,828 thousand euros, respectively (33,586 thousand euros and 46,917 thousand euros, respectively, as at 31 December 2022). The host contracts of those embedded derivatives correspond to customer deposits and debt securities issued and they have been allocated to the portfolio of financial liabilities at amortised cost.

Note 13 – Non-current assets and disposal groups classified as held for sale

The composition of this heading in the consolidated balance sheets as at 31 December 2023 and 2022 was as follows:


Thousand euro
	2023		2022

Assets		991,045		951,792
Loans and advances		6,328		10,337
Customers		6,328		10,337
Equity instruments		159,748		159,748
Real estate exposure		708,051		777,108
Tangible assets for own use		49,432		56,030
Foreclosed assets		658,619		721,078
Other tangible assets		103,864		—
Rest of other assets		13,054		4,599

Impairment allowances		(220,167)		(213,479)
Non-current assets and disposal groups classified as held for sale		770,878		738,313

Liabilities		13,347
Financial liabilities at amortised cost		12,682		—

Tax liabilities		665		—
Liabilities included in disposal groups classified as held for sale		13,347		—

Tangible assets for own use relate mainly to commercial premises.

Regarding real estate assets obtained through foreclosures, 94.37% of the balance corresponds to residential properties, 5.18% to industrial properties and 0.45% to agricultural properties.

The average term during which assets remained within the category of “Non-current assets and assets and liabilities included in disposal groups classified as held for sale – Foreclosed assets” was 61 months in 2023 (53 months in 2022). The policies on the sale or disposal by other means of these assets are described in Note 4.4.2.1.

The percentage of foreclosed assets sold with financing granted to the buyer in 2023 was 3.3% (4.9% in 2022). On the date of sale, these properties had a gross asset value of 4.6 million euros in 2023 (5.7 million euros in 2022).

This heading includes the amounts of assets linked to the strategic agreement signed with Nexi S.p.A. in relation to the merchant acquiring business. These assets have been reclassified as “Non-current assets and disposal groups classified as held for sale” and will remain so until the transaction is fully closed (see Note 2).

Similarly, this heading also includes the 20% stake held in the associate company Promontoria Challenger I, S.A., an entity controlled by Cerberus, to which the Group transferred a large portion of its real estate exposure in 2019.

A-151

Movements in “Non-current assets and disposal groups classified as held for sale” during 2023 and 2022 were as follows:


Thousand euro
	Note		Non-current assets held for sale

Cost:
Balances as at 31 December 2021				998,210

Additions				63,908
Disposals				(114,227)
Transfer of credit losses (*)				(16,195)
Other transfers/reclassifications				20,096
Balances as at 31 December 2022				951,792

Additions				171,503
Disposals				(302,164)
Transfer of credit losses (*)				(11,620)
Other transfers/reclassifications				181,534
Balances as at 31 December 2023				991,045

Impairment allowances:
Balances as at 31 December 2021				220,175
Impairment through profit or loss		37		48,966
Reversal of impairment through profit or loss		37		(45,542)
Utilisations				(26,170)
Other transfers/reclassifications				16,050
Balances as at 31 December 2022				213,479

Impairment through profit or loss		37		56,629
Reversal of impairment through profit or loss		37		(22,317)
Utilisations				(56,997)
Other transfers/reclassifications				29,373
Balances as at 31 December 2023				220,167

Net balances as at 31 December 2022				738,313

Net balances as at 31 December 2023				770,878

(*) Allowance arising from provisions allocated to cover credit risk.

Details of the net carrying amount of transfers shown in the table above are as follows:


Thousand euro
	Note		2023		2022

Loans and advances				5,667		10,153
Tangible assets		15		136,614		(5,941)
Intangible assets		16		8,499		—
Other assets				—		—
Inventories				—		—
Equity interests				—		—
Other				1,381		(166)
Total				152,161		4,046

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Note 14 – Investments in joint ventures and associates

Movements in this heading of the consolidated balance sheets during the financial years 2023 and 2022 were as follows:


Thousand euro
Balance as at 31 December 2021			638,782

Profit/(loss) for the year			122,167

Acquisition or capital increase (*)			1,747

Sale or dissolution			(49,972)

Dividends			(151,818)

Impairment, allowances, translation differences and other			(45,661)

IFRS 17 restatement impact (**)			(138,305)
Balance as at 31 December 2022			376,940

Profit/(loss) for the year			122,807

Acquisition or capital increase (*)			1,356

Dividends			(28,669)

Impairment, allowances, translation differences and other			(9,678)
Balance as at 31 December 2023			462,756

(*) See consolidated cash flow statement.

(**) See Note 1.4.

The section of the cash flow statement entitled “Investing activities – Collections from investments in joint ventures and associates” shows an amount of 28,669 thousand euros, which corresponds to dividends received. On the other hand, the section “Investing activities – Payments for investments in joint ventures and associates” of that statement shows an amount of 1,356 thousand euros corresponding to the acquisitions and capital increases carried out in 2023.

The main investee companies included in the accounts for the first time and those no longer included in 2023 y 2022 are indicated in Schedule I.

As at 31 December 2023 and 2022, no support agreements or other type of significant contractual commitment had been provided by the Bank or its subsidiaries to associates.

The reconciliation between the Group’s investment in investees and the balance recorded under the heading “Investments in joint ventures and associates” is as follows:


Thousand euro
	2023		*2022 ()**

Group investment in associates (Schedule I)		219,544		220,505

Contributions due to retained earnings		239,000		143,636

Value adjustments and other		4,212		12,799
Total		462,756		376,940

(*) See Note 1.4.

Set out below are the most relevant financial data of the associate BanSabadell Vida, S.A. as at 31 December 2023 and 2022, through which the Bank extends its customer offer via the distribution of insurance products through its branch network:


Thousand euro
	*BanSabadell Vida ()**
	2023		2022

Total assets		9,556,627		8,808,926
Of which: financial investments		8,510,475		7,802,671
Total liabilities		8,837,988		8,209,481
Of which: technical provisions		9,037,426		8,561,133

Profit/(loss) of Vida’s technical account		136,313		125,764
Of which: premiums earned during the year		2,511,257		1,053,473
Of which: claims paid during the year		(1,963,876)		(1,276,160)
Of which: technical financial yield		211,763		155,337

(*) Figures taken from BanSabadell Vida accounts without taking into consideration consolidation adjustments or the Group’s percentage holding.

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As at 31 December 2023 and 2022, the carrying amount of the investment in BanSabadell Vida, S.A. amounted to 210,941 thousand euros and 126,978 thousand euros, respectively. Furthermore, as at these dates, the aggregate carrying amount of investments in associates not considered individually significant was 251,815 thousand euros and 249,962 thousand euros, respectively.

Note 15 – Tangible assets

The composition of this heading in the consolidated balance sheets as at 31 December 2023 and 2022 was as follows:


Thousand euro
	2023								2022
	Cost		Depreciation		Impairment		Net amount		Cost		Depreciation		Impairment		Net amount

Property, plant and equipment		3,930,317		(1,818,023)		(45,188)		2,067,106		4,082,057		(1,754,760)		(45,248)		2,282,049

For own use:		3,907,505		(1,804,259)		(45,188)		2,058,058		4,061,108		(1,743,155)		(45,248)		2,272,705
Computer equipment and related facilities		587,570		(415,704)		—		171,866		727,049		(483,483)		—		243,566
Furniture, vehicles and other facilities		935,347		(590,146)		—		345,201		956,696		(572,885)		—		383,811
Buildings		2,329,727		(789,168)		(45,188)		1,495,371		2,258,790		(675,671)		(45,248)		1,537,871
Work in progress		19,011		—		—		19,011		31,501		—		—		31,501
Other		35,850		(9,241)		—		26,609		87,072		(11,116)		—		75,956

Leased out under operating leases		22,812		(13,764)		—		9,048		20,949		(11,605)		—		9,344

Investment properties		369,376		(62,302)		(77,476)		229,598		438,398		(54,423)		(84,233)		299,742

Buildings		369,376		(62,302)		(77,476)		229,598		438,004		(54,423)		(83,922)		299,659
Rural property, plots and sites		—		—		—		—		394		—		(311)		83
Total		4,299,693		(1,880,325)		(122,664)		2,296,704		4,520,455		(1,809,183)		(129,481)		2,581,791

A-154

Movements in the balance under this heading during 2023 and 2022 were as follows:


Thousand euro
			Own use - Buildings, work in progress and other		Own use - Computer equipment, furniture and related facilities		Investment properties		Leased out under operating leases		Total
Cost:	Note
Balances as at 31 December 2021				2,452,478		1,715,625		504,952		5,380		4,678,432

Additions				99,878		123,020		190		15,852		238,940
Disposals				(79,904)		(156,271)		(111,219)		—		(347,394)
Transfers				(68,553)		6,077		44,477		—		(17,999)
Exchange rate				(26,536)		(4,704)		—		(283)		(31,523)
Balances as at 31 December 2022				2,377,363		1,683,747		438,400		20,949		4,520,456

Additions				113,393		121,534		62		1,431		236,420
Disposals				(86,630)		(61,866)		(61,062)		—		(209,558)
Transfers				(29,137)		(223,188)		(8,024)		—		(260,349)
Exchange rate				9,599		2,693		—		432		12,724
Balances as at 31 December 2023				2,384,588		1,522,920		369,376		22,812		4,299,693
Accumulated depreciation:
Balances as at 31 December 2021				633,494		1,070,034		54,308		2,587		1,760,423

Additions				129,684		137,613		9,616		9,514		286,427
Disposals				(56,639)		(149,642)		(11,937)		—		(218,218)
Transfers				(10,436)		1,387		2,436		—		(6,613)
Exchange rate				(9,317)		(3,023)		—		(496)		(12,836)
Balances as at 31 December 2022				686,786		1,056,369		54,423		11,605		1,809,183

Additions				137,953		113,267		9,366		1,916		262,502
Disposals				(22,813)		(42,028)		(5,411)		—		(70,252)
Transfers				(7,075)		(123,090)		3,924		—		(126,241)
Exchange rate				3,558		1,332		—		243		5,133
Balances as at 31 December 2023				798,409		1,005,850		62,302		13,764		1,880,325

Impairment losses:
Balances as at 31 December 2021				69,877		—		71,375		—		141,251

Impairment through profit or loss		35		2,078		—		58,163		—		60,241
Reversal of impairment through profit or loss		35		(162)		—		(22,981)		—		(23,143)
Utilisations				(4,596)		—		(34,407)		—		(39,003)
Transfers				(21,948)		—		12,084		—		(9,864)
Balances as at 31 December 2022				45,249		—		84,234		—		129,482

Impairment through profit or loss		35		3,319		—		17,053		—		20,372
Reversal of impairment through profit or loss		35		(1,389)		—		(7,457)		—		(8,846)
Utilisations				—		—		(20,271)		—		(20,271)
Transfers				(1,990)		—		3,917		—		1,927
Balances as at 31 December 2023				45,189		—		77,476		—		122,664

Net balances as at 31 December 2022				1,645,329		627,378		299,742		9,344		2,581,791

Net balances as at 31 December 2023				1,540,991		517,070		229,597		9,048		2,296,704

The net carrying amount of "Transfers" in 2023 was -136,035 thousand euros (-1,522 thousand euros in 2022), of which 579 thousand euros (-7,463 thousand euros in 2022) correspond to reclassifications from the heading "Inventories" (see Note 17) and -136,614 thousand euros (5,941 thousand euros in 2022) to reclassifications of assets from or to the heading "Non-current assets and disposal groups classified as held for sale" (see Note 13).

Specific information relating to tangible assets as at 31 December 2023 and 2022 is shown hereafter:


Thousand euro
	2023		2022

Gross value of tangible assets for own use in use and fully depreciated		572,004		440,137
Net carrying amount of tangible assets of foreign operations		302,192		369,759

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Lease contracts in which the Group acts as lessee

As at 31 December 2023, the cost of property, plant and equipment for own use includes right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee, in the amount of 1,359,188 thousand euros, which have accumulated depreciation of 486,883 thousand euros and are impaired in the amount of 40,026 thousand euros as at the aforesaid date (1,293,944 thousand euros as at 31 December 2022, which had accumulated depreciation of 396,041 thousand euros and were impaired in the amount of 38,657 thousand euros as at that date).

The expense recognised in the consolidated income statement for 2023 for the depreciation and impairment of right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee amounted to 94,454 thousand euros and 1,369 thousand euros, respectively (96,017 thousand euros and 1,991 thousand euros, respectively, in 2022).

Information is set out below concerning the lease contracts in which the Group acts as lessee:


Thousand euro
	2023		2022

Interest expense on lease liabilities		(16,910)		(15,347)
Expense related to short-term low-value leases (*)		(11,793)		(11,592)
Total lease payments in cash (**)		106,577		110,950

(*) Recognised in the “Administrative expenses” heading, in the item on “Of property, plant and equipment” (see Note 33).

(**) Payments of the principal and interest components of the lease liability are recognised as cash flows from financing activities in the Group’s consolidated cash flow statement.

The future cash outflows to which the Group may potentially be exposed as lessee and which are not included under lease liabilities are not significant.

Minimum future payments over the non-cancellable period for lease contracts in effect as at 31 December 2023 and 2022 are indicated below:


Thousand euro
	2023		2022

Undiscounted lease payments receivable
Up to 1 month		7,424		1,348
1 to 3 months		18,825		25,356
3 to 12 months		75,693		76,513
1 to 5 years		351,045		352,018
More than 5 years		516,939		511,547

Sale and leaseback transactions

Between 2009 and 2012, the Group completed transactions for the sale of properties and simultaneously entered into a lease contract, for the same properties, with the buyers (maintenance, insurance and taxes to be borne by the Bank). The main characteristics of the most significant lease contracts in effect as at the end of 2023 are as follows:


Operating lease contracts	No. properties sold		No. contracts with purchase option		No. contracts without purchase option		Mandatory term

2009		60		23		37		10 to 20 years
2010		377		376		1		10 to 25 years
2011 (acquisition B.Guipuzcoano)		32		24		8		8 to 20 years
2012 (acquisition Banco CAM)		12		12		—		10 to 25 years
2012		4		4		—		15 years

A-156

Specific information in connection with this set of lease contracts as at 31 December 2023 and 2022 is given below:


Thousand euro
	2023		2022

Undiscounted lease payments receivable
Up to 1 month		4,145		130
1 to 3 months		8,021		11,167
3 to 12 months		36,677		34,392
1 to 5 years		193,424		178,154
More than 5 years		350,954		367,262

In 2023 and 2022, no significant profit/(loss) was recorded for sale and leaseback transactions.

Contracts in which the Group acts as lessor

The lease contracts entered into by the Group in which it acts as lessor are mainly operating leases.

The Group implements strategies to reduce risks related to the rights held over the underlying assets. For example, the lease contracts include clauses which stipulate a minimum non-cancellable lease term, a deposit which the lessor may retain as compensation if the asset sustains excessive wear during the lease term, and additional guarantees or sureties to limit losses in the event of non-payment.

As regards the investment properties item, the rental income from these investment properties and the direct costs associated with the investment properties that produced rental income during 2023 amounted to 22,850 thousand euros and 9,908 thousand euros, respectively (23,474 thousand euros and 9,768 thousand euros in 2022). Direct costs associated with investment properties that did not produce rental income were not significant in the context of the consolidated annual financial statements.

Note 16 – Intangible assets

The composition of this heading in the consolidated balance sheets as at 31 December 2023 and 2022 was as follows:


Thousand euro
	2023		2022

Goodwill:		1,018,311		1,026,810
Banco Urquijo		473,837		473,837
Grupo Banco Guipuzcoano		285,345		285,345
From acquisition of Banco BMN Penedés assets		245,364		245,364
Other		13,765		22,264

Other intangible assets:		1,464,763		1,457,352
With a finite useful life:		1,464,763		1,457,352
Private Banking Business, Miami		1,825		4,925
Contractual relations with TSB customers and brand		17,509		39,783
Computer software		1,444,408		1,411,516
Other		1,021		1,128
Total		2,483,074		2,484,162

Goodwill

As set forth in the regulatory framework of reference, Banco Sabadell carried out an analysis in 2023 to evaluate the existence of any potential impairment of its goodwill.

The main transactions that generated goodwill were the acquisition of Banco Urquijo in 2006, of Banco Guipuzcoano in 2010 and of certain assets of BMN-Penedès in 2013.

Banco Sabadell Group monitors the Group’s total goodwill across the ensemble of Cash-Generating Units (CGUs) that make up the Banking Business Spain operating segment. In addition, the Group considers that the United Kingdom operating segment is a CGU.

A-157

The value in use of the Banking Business Spain operating segment is used to determine its recoverable amount. The valuation method used in this analysis was that of discounting future net distributable profit associated with the activity carried out by the Banking Business Spain operating segment until 2028, plus an estimated terminal value.

The projections used to determine the recoverable amount are those set out in the financial projections approved by the Board of Directors. Those projections are based on sound and well-founded assumptions, which represent Management’s best estimates of overall upcoming economic conditions. To determine the key variables (basically net interest income, fees and commissions, expenses, cost of risk and solvency levels) that underpin the financial projections, Management has used microeconomic variables, such as the existing balance sheet structure, market positioning and strategic decisions made, as well as macroeconomic variables, such as the expected evolution of GDP and the forecast evolution of interest rates and unemployment. The macroeconomic variables used for the baseline macroeconomic scenario, described in Note 1 were estimated by the Group’s Research Service.

The approach used to determine the values of assumptions is based both on the projections and on past experience. These values are compared against external information sources, where available.

In 2023, to calculate the terminal value, Spain’s real GDP in 2028 was taken as reference, using a growth rate in perpetuity of 1.8% (1.9% in 2022), which does not exceed the long-term average growth rate of the market in which the operating segment is active. The discount rate used was 11.2% (10.4% in 2022), determined using the Capital Asset Pricing Model (CAPM); it therefore comprises a risk-free rate (10-year Spanish bond) plus a risk premium which reflects the inherent risk of the operating segment being evaluated.

The recoverable amount obtained is higher than the carrying amount; therefore, there is no evidence of impairment. The individual recoverable amount for each CGU at the end of 2023 and 2022, before allocating goodwill to the ensemble of CGUs, was above its carrying amount; therefore, the Group did not recognise any impairment at the CGU level during the aforesaid years.

In addition, the Group carried out a sensitivity analysis, making reasonable adjustments to the main assumptions used to calculate the recoverable amount.

This test consisted of adjusting, individually, the following assumptions:

–

Discount rate +/- 0.5%.

–

Growth rate in perpetuity +/- 0.5%.

–

Minimum capital requirement +/-0.5%.

–

NIM/ATAs in perpetuity +/- 5bps.

–

Cost of risk in perpetuity +/- 10bps.

The sensitivity analysis does not alter the conclusions drawn from the impairment test. In all scenarios defined in that analysis, the recoverable amount obtained is greater than the carrying amount.

In accordance with the specifications of the restated text of the Corporation Tax Law, the goodwill generated is not tax-deductible.

Other intangible assets

Private Banking Business, Miami

Intangible assets associated with the acquisition of the Private Banking business in Miami include the value of contractual rights arising from customer relationships taken over from this business, mainly short-term lending items and deposits. These assets are amortised over a period of between 10 and 15 years from their creation.

Contractual relations with TSB customers and brand

Intangible assets associated with the acquisition of TSB include the value of the contractual rights arising from customer relationships taken over from TSB for core deposits, initially estimated at 353,620 thousand euros. This asset is amortised over a period of 8 years. These intangible assets were valued by calculating the value in use based on the income approach (discounted cash flows) with the multi-period excess earnings method. To determine whether there was any evidence of impairment, the balance of deposits

A-158

currently in TSB linked to existing customers at the time of its acquisition by the Bank was compared against the estimated balance that those customers would have at the end of 2023, forecast at the time of the initial valuation. Based on this comparison, it was concluded that there was no evidence of any impairment. As at 31 December 2023, contractual relationships with TSB customers were fully amortised (as at 31 December 2022, the carrying amount came to 17,727 thousand euros).

The value of the right to the exclusive use of the TSB brand was also estimated at an initial amount of 73,328 thousand euros. The value attributable to this asset was determined through the replacement cost method, consisting of establishing the cost of rebuilding or acquiring an exact replica of the asset in question. This asset is amortised over a period of 12 years. The assessment of the recoverable amount of the TSB CGU included an implicit valuation of the brand, concluding that there was no impairment. The carrying amount of the TSB brand amounted to 17,509 thousand euros as at 31 December 2023 (22,056 thousand euros as at 31 December 2022).

Computer software

Computer software costs include mainly the capitalised costs of developing the Group’s computer software and the cost of purchasing software licences.

R&D expenditure in 2023 and 2022 was not significant.

Movements

Movements in goodwill in 2023 and 2022 were as follows:


Thousand euro
	Goodwill		Impairment		Total

Balance as at 31 December 2021		1,026,457		—		1,026,457

Additions		353		—		353

Disposals		—		—		—
Balance as at 31 December 2022		1,026,810		—		1,026,810

Additions		—		—		—

Disposals		—		—		—

Transfers		(8,499)		—		(8,499)
Balance as at 31 December 2023		1,018,311		—		1,018,311

Movements in other intangible assets in 2023 and 2022 were as follows:


Thousand euro

	Cost						Amortisation						Impairment						Total

	Developed internally		Other		Total		Developed internally		Other		Total		Developed internally		Other		Total
Balance as at 31 December 2021		2,413,611		862,547		3,276,158		(1,065,540)		(655,654)		(1,721,194)		—		—		—		1,554,964

Additions		187,533		7,105		194,638		(195,655)		(63,009)		(258,664)		—		—		—		(64,026)

Disposals		(27,296)		(83,657)		(110,953)		6,299		77,859		84,158		—		—		—		(26,795)

Other		(6,554)		5,168		(1,386)		(14,115)		(28)		(14,143)		—		—		—		(15,529)

Exchange differences		6,511		(16,611)		(10,100)		2,693		16,145		18,838		—		—		—		8,738
Balance as at 31 December 2022		2,573,805		774,552		3,348,357		(1,266,318)		(624,687)		(1,891,005)		—		—		—		1,457,352

Additions		235,489		60,596		296,085		(221,636)		(34,827)		(256,463)		—		—		—		39,622

Disposals		(103,691)		(5,612)		(109,303)		60,722		2,464		63,186		—		—		—		(46,117)

Other		438		(2,759)		(2,321)		(1,529)		3,536		2,007		—		—		—		(314)

Exchange differences		12,214		7,572		19,786		848		(6,414)		(5,566)		—		—		—		14,220
Balance as at 31 December 2023		2,718,255		834,349		3,552,604		(1,427,913)		(659,928)		(2,087,841)		—		—		—		1,464,763

The gross value of other intangible assets that were in use and had been fully amortised as at 31 December 2023 and 2022 amounted to 1,367,070 thousand euros and 1,078,836 thousand euros, respectively.

A-159

Note 17 – Other assets and liabilities

The “Other assets” heading on the consolidated balance sheets as at 31 December 2023 and 2022 breaks down as follows:


Thousand euro
	Note		2023		2022

Insurance contracts linked to pensions		22		80,693		89,729
Inventories				62,344		93,835
Rest of other assets				293,086		296,116
Total				436,123		479,680

The “Rest of other assets” item includes mainly prepaid expenses, the accrual of customer fees and commissions and transactions in progress pending settlement.

Movements in inventories in 2023 and 2022 were as follows:


Thousand euro
	Note		Land		Buildings under construction		Completed buildings		Total

Balance as at 31 December 2021				8,409		1,516		132,787		142,713

Additions				802		3,661		8,946		13,409
Disposals				(2,279)		(558)		(42,895)		(45,732)
Impairment through profit or loss		35		(2,459)		(173)		(33,519)		(36,151)
Reversal of impairment through profit or loss		35		996		71		11,066		12,133
Other transfers		15		—		(3,645)		11,108		7,463
Balance as at 31 December 2022				5,469		872		87,493		93,835

Additions				422		39		4,978		5,439
Disposals				(1,268)		(50)		(20,714)		(22,032)
Impairment through profit or loss		35		(1,711)		(4,505)		(13,060)		(19,276)
Reversal of impairment through profit or loss		35		710		4,210		37		4,957
Other transfers		15		—		—		(579)		(579)
Balance as at 31 December 2023				3,622		566		58,155		62,344

As at 31 December 2023 and 2022, the amount of inventories associated with debt secured with mortgages was 10,292 thousand euros and 11,318 thousand euros, respectively.

The composition of the “Other liabilities” heading as at 31 December 2023 and 2022 was as follows:


Thousand euro
	31/12/2023		31/12/2022

Other accrual/deferral		574,997		577,298
Rest of other liabilities		147,527		294,810
Total		722,524		872,108

The “Rest of other liabilities” item mainly includes transactions in progress pending settlement.

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Note 18 – Deposits in central banks and credit institutions

The breakdown of the balance of deposits in central banks and credit institutions in the consolidated balance sheets as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		2022

By heading:
Financial liabilities at amortised cost		23,616,543		39,217,078
Total		23,616,543		39,217,078

By nature:
Demand deposits		222,195		378,442
Deposits with agreed maturity		12,274,576		30,936,695
Repurchase agreements		10,821,129		8,118,516
Other accounts		74,163		125,378
Valuation adjustments		224,480		(341,953)
Total		23,616,543		39,217,078

By currency:
In euro		17,615,523		31,390,222
In foreign currency		6,001,020		7,826,856
Total		23,616,543		39,217,078

In 2023, Banco Sabadell prepaid 17 billion euros corresponding to TLTRO III maturing in March 2024. The closing balance of this liquidity facility as at the end of 2023 and 2022 was 5 billion euros and 22 billion euros, respectively (see Note 4.4.3.1).

Note 19 – Customer deposits

The balance of customer deposits on the consolidated balance sheets as at 31 December 2023 and 2022 breaks down as follows:


Thousand euro
	2023		2022

By heading:
Financial liabilities at amortised cost		160,330,653		164,076,445
Total		160,330,653		164,076,445

By nature:
Demand deposits		134,242,908		147,539,675
Deposits with agreed maturity		21,081,166		14,066,824
Fixed term		20,244,357		11,985,933
Non-marketable covered bonds and bonds issued		323,010		418,835
Other		513,799		1,662,056
Hybrid financial liabilities (see Notes 10 and 12)		4,507,056		2,074,477
Repurchase agreements		200,336		404,866
Other valuation adjustments (interest, fees and commissions, other)		299,187		(9,397)
Total		160,330,653		164,076,445

By sector:
General governments		7,869,390		8,499,245
Other sectors		152,162,076		155,586,597
Other valuation adjustments (interest, fees and commissions, other)		299,187		(9,397)
Total		160,330,653		164,076,445

By currency:
In euro		111,953,190		114,063,466
In foreign currency		48,377,463		50,012,979
Total		160,330,653		164,076,445

Due to rising interest rates in the financial markets, the weight of the term deposits making up customer deposits increased during 2023.

A-161

Note 20 – Debt securities in issue

The composition of this heading in the consolidated balance sheets as at 31 December 2023 and 2022, by type of issuance, is as follows:


Thousand euro
	2023		2022

Straight bonds/debentures		8,671,400		7,990,800
Straight bonds		8,630,100		7,949,500
Structured bonds		41,300		41,300
Commercial paper		1,382,828		871,896
Mortgage covered bonds		7,475,000		7,563,000
TSB covered bonds		3,164,376		1,409,356
Asset-backed securities		1,370,573		1,202,846
Subordinated marketable debt securities		3,550,000		3,450,000
Subordinated bonds		1,800,000		1,800,000
Preferred securities		1,750,000		1,650,000
Valuation and other adjustments		177,107		89,651
Total		25,791,284		22,577,549

Schedule III shows details of the outstanding issues as at 2023 and 2022 year-end.

The remuneration for preferred securities contingently convertible into ordinary shares amounted to 115,391 thousand euros in 2023 (110,374 thousand euros in 2022) and is recognised under the “Other reserves” heading in consolidated equity.

A-162

Note 21 – Other financial liabilities

The composition of this heading in the consolidated balance sheets as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		2022

By heading:
Financial liabilities at amortised cost		6,333,286		6,658,861
Total		6,333,286		6,658,861

By nature:
Debentures payable		293,380		364,207
Guarantee deposits received		8,688		8,992
Clearing houses		1,138,627		1,032,869
Collection accounts		3,379,742		3,322,141
Lease liabilities		947,469		969,477
Other financial liabilities		565,380		961,175
Total		6,333,286		6,658,861

By currency:
In euro		4,694,730		4,913,626
In foreign currency		1,638,556		1,745,235
Total		6,333,286		6,658,861

The following table shows information relating to the average time taken to pay suppliers (days payable outstanding), as required by Additional Provision Three of Law 15/2010, taking into consideration the amendments introduced by Law 18/2022 of 28 September on the creation and growth of companies:


	2023		2022

Average payment period and supplier payment ratios (in days)
Average time taken to pay suppliers		25.49		28.74
Ratio of transactions paid (*)		25.49		28.72
Ratio of transactions payable (**)		38.81		50.03

Payments made and pending at year-end (in thousand euro)
Total payments made		1,194,239		1,131,038
Total payments outstanding		369		1,131

Payments made in < 60 days (in thousand euro) ()*
Monetary volume of paid invoices		1,110,490		1,011,940
Percentage of total amount of payments to suppliers		93		89

Number of invoices paid in < 60 days ()*
Number of invoices paid		133,690		141,339
Percentage of total number of invoices		92		92

The calculations above only take into account transactions undertaken by the Group’s main Spanish entities, which represent 98.75% of total invoicing.

(*) The ratio of transactions paid is equal to the amount of each transaction paid multiplied by the number of days elapsed since the date of receipt of the invoice until its payment, divided by the total amount of payments made.

(**) The ratio of transactions pending payment is equal to the amount of each transaction pending payment multiplied by the number of days elapsed since the date of receipt of the invoice until the last day of the period, divided by the total amount of pending payments.

(***) Corresponds to invoices paid within the maximum period established in regulations on late payment.

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Note 22 – Provisions and contingent liabilities

Movements during 2023 and 2022 under the “Provisions” heading are shown below:


Thousand euro

	Pensions and other post employment defined benefit obligations		Other long term employee benefits		Pending legal issues and tax litigation		Commitments and guarantees given		Other provisions		Total

Balance as at 31 December 2021		86,020		650		76,848		190,591		532,029		886,138

Scope additions / exclusions		—		—		—		—		—		—

Interest and similar expenses - pension commitments		1,958		4		—		—		—		1,962

*Allowances charged to income statement - staff expenses ()**		1,152		5		—		—		(2,790)		(1,633)

Allowances not charged to income statement		—		—		—		—		—		—

Allowances charged to income statement - provisions		228		(32)		45,211		(14,258)		65,672		96,821
Allocation of provisions		84		—		47,619		191,058		65,672		304,433
Reversal of provisions		—		—		(2,408)		(205,316)		—		(207,724)
Actuarial losses / (gains)		144		(32)		—		—		—		112

Exchange differences		688		—		—		(305)		(6,645)		(6,262)

Utilisations:		(7,562)		(457)		(32,209)		—		(172,876)		(213,104)
Net contributions of plan assets by sponsor		612		—		—		—		—		612
Pension payments		(8,174)		(457)		—		—		—		(8,631)
Other		—		—		(32,209)		—		(172,876)		(205,085)

Other movements		(19,100)		—		—		795		(101,108)		(119,413)
Balance as at 31 December 2022		63,384		170		89,850		176,823		314,282		644,509

Scope additions / exclusions		—		—		—		—		—		—

Interest and similar expenses - pension commitments		1,755		4		—		—		—		1,759

*Allowances charged to income statement - staff expenses ()**		3,171		4		—		—		26,595		29,770

Allowances not charged to income statement		—		—		—		—		—		—

Allowances charged to income statement - provisions		1,260		(4)		(4,560)		(11,403)		20,997		6,290
Allocation of provisions		1,260		—		1,209		211,347		26,872		240,688
Reversal of provisions		—		—		(5,769)		(222,750)		(5,875)		(234,394)
Actuarial losses / (gains)		—		(4)		—		—		—		(4)

Exchange differences		648		—		—		1,295		2,488		4,431

Utilisations:		(9,139)		(105)		(24,740)		—		(114,583)		(148,567)
Net contributions of plan assets by sponsor		233		—		—		—		—		233
Pension payments		(9,372)		(105)		—		—		—		(9,477)
Other		—		—		(24,740)		—		(114,583)		(139,323)

Other movements		(2,771)		—		—		(1,339)		2,010		(2,100)
Balance as at 31 December 2023		58,308		69		60,550		165,376		251,789		536,092

(*) See Note 33.

The headings “Pensions and other post employment defined benefit obligations” and “Other long term employee benefits” include the amount of provisions allocated for the coverage of post-employment remuneration and commitments undertaken with early retirees and similar obligations.

The heading “Commitments and guarantees given” includes the amount of provisions allocated for the coverage of commitments given and contingent risks arising from financial guarantees or other types of contracts.

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During the usual course of business, the Group is exposed to fiscal, legal and regulatory contingencies, among others. All significant contingencies are analysed on a regular basis, with the collaboration of third-party experts where necessary and, where appropriate, provisions are recognised under the headings “Pending legal issues and tax litigation” and “Other provisions”. As at 31 December 2023 and 2022, these headings mainly included:

–

Provisions for legal contingencies amounting to 17 million euros as at 31 December 2023 (23 million euros as at 31 December 2022).

–

Other provisions for legal contingencies in Spain arising from customer claims in connection with certain general contractual terms and conditions amounting to 150 million euros (179 million euros as at 31 December 2022). The most significant provision relates to the possible reimbursement of amounts received as a result of the application of mortgage floor clauses, whether as a result of the hypothetical voiding by the courts of law of floor clauses or whether due to the implementation of Royal Decree-Law 1/2017 of 20 January on measures to protect consumers regarding floor clauses, in the amount of 81 million euros as at 31 December 2023 (99 million euros as at 31 December 2022). In an unlikely adverse scenario of potential additional claims being filed, both through the procedures established by the Institution in accordance with that set forth in the aforesaid Royal Decree, and through court proceedings, applying the percentages set forth in the current arrangements, the maximum contingency would amount to 111 million euros.

With regard to these provisions, it is worth specifying that the Bank considers its floor clauses to be transparent and clear to customers, and in general, these have not been definitively voided with a final ruling. On 12 November 2018, Section 28 of the Civil Division of the Provincial Court of Madrid issued a ruling in which it partially supported the appeal brought forth by Banco de Sabadell, S.A. against the ruling issued by Commercial Court no. 11 of Madrid on the invalidity of the restrictive interest rate clauses, considering that some of the clauses established by Banco de Sabadell, S.A. are transparent and valid in their entirety. With regard to the rest of the clauses, the Bank still considers that it has legal arguments which should be reviewed in the legal appeal which the Institution filed with the Supreme Court with regard to the ruling made by the Provincial Court of Madrid. This appeal has been suspended by the Supreme Court, which has referred the matter to the Court of Justice of the European Union for a preliminary ruling. A hearing took place in the aforesaid Court on 28 September 2023, but no ruling has been made as yet.

The remaining provisions mainly relate to customer claims in connection with the repayment of mortgage arrangement fees, developer deposit funds and revolving card interest, with the provision set aside amounting to 69 million euros as at 31 December 2023 (80 million euros as at 31 December 2022).

–

Provisions to cover the anticipated costs relating to restructuring plans in Spain announced in previous years and pending final implementation amounting to 56 million euros as at 31 December 2023 and 2022.

–

Provisions for legal contingencies deriving from claims filed by certain TSB customers. The estimated potential cost of compensation payable, which includes compensatory interest and associated operational costs, amounted to 19 million euros as at 31 December 2023 (86 million euros as at 31 December 2022). During 2023, utilisations linked to legal contingencies in TSB were recorded in the amount of 64 million euros.

–

Provisions to cover the anticipated costs relating to restructuring in TSB and pending final implementation amounting to 35 million euros as at 31 December 2023 (13 million euros as at 31 December 2022), of which 26 million euros were allocated in 2023 (see Note 33).

The final disbursement amount and the payment schedule are uncertain due to the difficulties inherent in estimating the factors used to determine the amount of the provisions set aside.

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Pensions and similar obligations

Defined benefit plans cover all existing commitments arising from the application of the Collective Bargaining Agreement for Banks (Convenio Colectivo de Banca). These commitments are financed through the following vehicles:

Pension plan

Banco Sabadell’s employee pension plan covers the benefits detailed above payable under the collective bargaining agreement with employees belonging to regulated groups, with the following exceptions:

–

Additional commitments due to early retirement, as set out in the Collective Bargaining Agreement for Banks.

–

Supervening incapacity in certain circumstances.

–

Widowhood and orphanhood benefits arising from the death of a retired member of staff who began their employment after 8 March 1980.

Banco Sabadell’s employee pension plan is regarded to all intents and purposes as a plan asset for the obligations insured by entities outside of the Group. Obligations of the pension plan insured by the Group’s associate entities are not considered plan assets.

A Control Board has been created for the pension plan, formed of representatives of the sponsor and representatives of the participants and beneficiaries. This Control Board is the body responsible for supervising its operation and execution.

Insurance contracts

Insurance contracts generally cover certain commitments arising from the Collective Bargaining Agreement for Banks, including in particular:

–

Commitments expressly excluded from Banco Sabadell’s employee pension plan (indicated in the previous section).

–

Serving employees covered by a collective bargaining agreement of Banco Atlántico.

–

Pension commitments undertaken with certain serving employees not provided for under the collective bargaining agreement.

–

Commitments towards employees on extended leave of absence not covered with benefits accrued in Banco Sabadell’s employee pension plan.

–

Commitments towards early retirees; these may be partly financed with benefits accrued in Banco Sabadell’s employee pension plan.

These insurance policies have been arranged with insurers outside the Group, whose insured commitments are mainly those towards former Banco Atlántico employees, and with BanSabadell Vida, S.A. de Seguros y Reaseguros.

Voluntary social welfare agency (Entidad de Previsión Social Voluntaria, or E.P.S.V.)

The acquisition and subsequent merger of Banco Guipuzcoano resulted in the takeover of Gertakizun, E.P.S.V., which covers defined benefit commitments in respect of serving and former employees, who are insured by policies. It was set up by the aforesaid bank in 1991 as an agency with a separate legal personality. All obligations with respect to serving and former employees are insured by entities outside the Group.

A-166

Internal funds

Internal funds are used to settle obligations with early retirees up to their legal retirement age and relate to employees previously working for Banco Sabadell.

The origins of liabilities recognised in respect of post-employment benefits and other similar long-term obligations on the Group’s balance sheet are shown below:


Thousand euro
	2023		2022		2021		2020		2019

Obligations arising from pension and similar commitments		509,946		565,046		739,456		819,789		803,905
Fair value of plan assets		(451,569)		(501,492)		(652,786)		(716,128)		(697,621)
Net liability recognised on balance sheet		58,377		63,554		86,670		103,661		106,284

The return on Banco Sabadell’s employee pension plan was 5.37% and that of the E.P.S.V. was -0.17% in 2023 (-13.88% and 0.22%, respectively, in 2022).

Movements during 2023 and 2022 in obligations due to pension and similar commitments and the fair value of the plan assets are as follows:


Thousand euro
	Obligations arising from pension and similar commitments		Fair value of plan assets		Net liability recognised on balance sheet

Balance as at 31 December 2021		739,456		652,786		86,670

Interest costs		12,800		—		12,800
Interest income		—		10,838		(10,838)
Normal cost in year		1,631		—		1,631
Past service cost		(474)		—		(474)
Benefits paid		(47,415)		(38,784)		(8,631)
Payments for settlements, curtailments and terminations		(3,832)		(3,976)		144
Net contributions by the Institution		—		(644)		644
Actuarial gains or losses from changes in demographic assumptions		(1,126)		—		(1,126)
Actuarial gains or losses from changes in financial assumptions		(143,190)		—		(143,190)
Actuarial gains or losses from experience		(4,208)		—		(4,208)
Return on plan assets excluding interest income		—		(131,322)		131,322
Other movements		10,715		12,594		(1,879)
Balance as at 31 December 2022		565,046		501,492		63,554

Interest costs		18,090		—		18,090
Interest income		—		15,693		(15,693)
Normal cost in year		1,876		—		1,876
Past service cost		1,063		—		1,063
Benefits paid		(46,726)		(37,250)		(9,476)
Settlements, curtailments and terminations		(470)		(1,300)		830
Net contributions by the Institution		—		(233)		233
Actuarial gains or losses from changes in demographic assumptions		—		—		—
Actuarial gains or losses from changes in financial assumptions		(23,195)		—		(23,195)
Actuarial gains or losses from experience		(11,004)		—		(11,004)
Return on plan assets excluding interest income		—		(31,391)		31,391
Other movements		4,618		4,558		60
Exchange differences		648		—		648
Balance as at 31 December 2023		509,946		451,569		58,377

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The breakdown of the Group’s pension commitments and similar obligations as at 31 December 2023 and 2022, based on the financing vehicle, coverage and the interest rate applied in their calculation, is given below:

Thousand euro

2023

Financing vehicle

Coverage

Amount

Interest rate

Pension plans

236,299

Insurance policies with related parties

Matched

22,709

3.75 %

Insurance policies with unrelated parties

Matched

213,590

3.75 %

Insurance contracts

266,615

Insurance policies with related parties

Matched

55,095

3.75 %

Insurance policies with unrelated parties

Matched

211,520

3.75 %

Internal funds

Without cover

7,032

3.75 %

Total obligations

509,946

Thousand euro

2022

Financing vehicle

Coverage

Amount

Interest rate

Pension plans

270,917

Insurance policies with related parties

Matched

26,279

3.25 %

Insurance policies with unrelated parties

Matched

244,638

3.25 %

Insurance contracts

288,417

Insurance policies with related parties

Matched

60,555

3.25 %

Insurance policies with unrelated parties

Matched

227,862

3.25 %

Internal funds

Without cover

5,712

3.25 %

Total obligations

565,046

The value of the obligations covered by matched insurance policies under pension plans and insurance contracts as at 31 December 2023 amounted to 502,914 thousand euros (559,334 thousand euros as at 31 December 2022); therefore, in 98.62% of its commitments (98.99% as at 31 December 2022) there is no mortality risk (mortality tables) or profitability risk (interest rate) for the Group. Therefore, the evolution of interest rates in 2023 had no impact on the Institution’s capacity to pay its pension commitments.

The sensitivity analysis for the actuarial assumptions of the technical interest rate and the rate of salary increase shown in Note 1.3.17 to these consolidated annual financial statements, as at 31 December 2023 and 2022, shows how the obligation and the service cost of the current year would have been affected by changes deemed reasonably possible as at that date.

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%
	2023		2022
Sensitivity analysis	Percentage change

Interest rate

Interest rate -50 basis points:
Assumption		3.25 %		2.75 %
Change in obligation		4.59 %		5.19 %
Change in current service cost		10.64 %		11.60 %

Interest rate +50 basis points:
Assumption		4.25 %		3.75 %
Change in obligation		(4.24) %		(4.47) %
Change in current service cost		(9.19) %		(10.13) %

Rate of salary increase

Rate of salary increase -50 basis points:
Assumption		2.50 %		2.50 %
Change in obligation		(0.01) %		(0.01) %
Change in current service cost		(3.03) %		(3.49) %

Rate of salary increase +50 basis points:
Assumption		3.50 %		3.50 %
Change in obligation		0.01 %		0.01 %
Change in current service cost		3.50 %		3.88 %

The estimate of probable present values, as at 31 December 2023, of benefits payable for the next ten years, is set out below:


Thousand euro
	Years
	2024		2025		2026		2027		2028		2029		2030		2031		2032		2033		Total

Probable pensions		8,220		8,140		7,709		7,643		7,574		8,679		8,371		8,055		7,733		7,406		79,530

The fair value of assets linked to pensions recognised on the consolidated balance sheet amounted to 80,693 thousand euros as at 31 December 2023 (89,729 thousand euros as at 31 December 2022); see Note 17.

The main categories of the plan assets as at 31 December 2023 and 2022 are indicated hereafter:


%
	2023		2022

Mutual funds		3.63 %		2.90 %
Deposits and guarantees		0.38 %		0.42 %
Other (non-linked insurance policies)		95.99 %		96.68 %
Total		100 %		100 %

There were no financial instruments issued by the Bank included in the fair value of plan assets as at 31 December 2023 and 2022.

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Note 23 – Shareholders’ equity

The breakdown of the balance of shareholders’ equity on the consolidated balance sheets as at 31 December 2023 and 2022 is the following:


Thousand euro
	2023		*2022 ()**

Capital		680,028		703,371
Share premium		7,695,227		7,899,227
Other equity		21,268		21,548
Retained earnings		6,401,782		5,859,520
Other reserves		(1,584,816)		(1,602,079)
(-) Treasury shares		(39,621)		(23,767)
Profit or loss attributable to owners of the parent		1,332,181		889,392
(-) Interim dividends		(162,103)		(112,040)
Total		14,343,946		13,635,172

(*) See Note 1.4.

Capital

The Bank’s share capital as at 31 December 2023 amounted to 680,027,680.875 euros, represented by 5,440,221,447 registered shares at a par value of 0.125 each (as at 31 December 2022, it amounted to 703,370,587.63 euros, represented by 5,626,964,701 registered shares with a par value of 0.125 euros). All shares are fully paid up and numbered in sequential order from 1 through 5,440,221,447, inclusive.

The Bank’s shares are listed on the Madrid, Barcelona, Bilbao and Valencia stock exchanges and on Spain’s electronic market (Mercado Continuo) managed by Sociedad de Bolsas, S.A.

None of the other subsidiary companies included in the scope of consolidation are listed on the stock exchange.

The rights conferred to the equity instruments are those regulated by the Capital Companies Act. During the Annual General Meeting, shareholders may exercise a percentage of votes equivalent to the percentage of the share capital in their possession. The Articles of Association do not contain any provision for additional loyalty voting rights.

Capital reduction

On 30 November 2023, the Board of Directors of Banco Sabadell agreed to execute the Bank’s share capital reduction, in the amount of 23,343 thousand euros, through the redemption charged to unrestricted reserves of all the treasury shares acquired under the share buyback programme, i.e. 186,743,254 shares with a par value of 0.125 euros each, representing approximately 3.32% of the Bank’s share capital (see Note 3). This capital reduction was approved as part of the resolution adopted by the Annual General Meeting on 23 March 2023.

The capital reduction and the amendment of Article 7 of the Articles of Association relating to share capital were entered in the Companies Register of Alicante on 11 December 2023, the reduction being thus completed and the redeemed shares delisted.

This operation did not entail the reimbursement of contributions made by shareholders, as the Bank was the holder of the redeemed shares.

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Significant investments in the Bank’s capital

As required by Articles 23 and 32 of Royal Decree 1362/2007 of 19 October, implementing the Securities Market Law 24/1988 of 28 July, on transparency requirements relating to information on issuers whose securities have been admitted to trading on an official secondary market or on any other European Union regulated market, the following table gives details of significant investments in Banco Sabadell’s share capital as at 31 December 2023:


	% of voting rights assigned to shares		% of voting rights through financial instruments		Total % of voting rights
Name or company name of shareholder			% of voting rights through financial instruments		Total % of voting rights
	Direct	Indirect	Direct	Indirect

BlackRock, Inc (*)	—	3.43%	—	0.67%	4.10%

Dimensional Fund Advisors LP (**)	—	3.11%	—	—	3.11%

David Martínez Guzmán (***)	—	3.56%	—	—	3.56%

The sources for the information provided are communications sent by shareholders to the National Securities Market Commission (CNMV) or directly to the Bank. In accordance with Royal Decree 1362/2007 of 19 October, implementing Securities Market Law 24/1998 of 28 July, on transparency requirements relating to information on issuers whose securities have been admitted to trading on an official secondary market or on any other European Union regulated market, a shareholder is considered to own a significant shareholding when they have in their possession a proportion of at least 3% of the voting rights, or 1% in the case of residents in tax havens.

(*) BlackRock, Inc. owns an indirect shareholding through several of its subsidiaries.

(**) Dimensional Fund Advisors LP disclosed the shares held in funds and accounts advised by either itself or by its subsidiary undertakings. The voting rights correspond to shares held in those funds and accounts. Neither Dimensional Fund Advisors LP nor any of its subsidiaries are beneficial owners of those shares and/or their voting rights.

(***) Fintech Europe, S.À.R.L. (FE) is 100% owned by Fintech Investments Ltd. (FIL), which is the investment fund managed by Fintech Advisory Inc. (FAI). FAI is 100% owned by David Martínez Guzmán. Consequently, the stake currently held by FE is considered to be under the control of David Martínez Guzmán.

Share premium

The share premium’s balance as at 31 December 2023 came to 7,695,227 thousand euros (7,899,227 thousand euros as at 31 December 2022).

In 2023, the share premium was reduced by 180,657 thousand euros, which corresponds to the difference between the purchase price of the shares redeemed as part of the Bank’s capital reduction explained in this note (204,000 thousand euros) and the nominal value of those shares (23,343 thousand euros).

Furthermore, pursuant to applicable legislation, a restricted capital redemption reserve has been created, with a charge to the share premium in an amount equal to the nominal value of the redeemed shares, 23,343 thousand euros, subject to the same disposal requirements applied for the share capital reduction.

Retained earnings and Other reserves

The balance of these headings of the consolidated balance sheets as at 31 December 2023 and 2022 breaks down as follows:


Thousand euro
	2023		*2022 ()**

Restricted reserves:		228,033		222,820
Statutory reserve (**)		140,674		140,674
Reserve for treasury shares pledged as security		50,061		68,470
Reserve for investments in the Canary Islands		10,840		10,561
Reserve for redenomination of share capital		113		113
Capital redemption reserve		26,345		3,002

Unrestricted reserves		4,534,097		4,107,070

Reserves of entities accounted for using the equity method		54,836		(72,449)
Total		4,816,966		4,257,441

(*) See Note 1.4.

(**) At its meeting held on 22 February 2024, the Board of Directors agreed to submit a proposal to the Annual General Meeting for the reclassification to voluntary reserves of the amount held in the statutory reserve in excess of 20% of the share capital resulting from the capital reduction carried out during 2023, that is, 4,668 thousand euros.

Information on the reserves of each of the consolidated companies is indicated in Schedule I.

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Other equity

This heading includes share-based remuneration pending settlement which, as at 31 December 2023 and 2022, amounted to 21,268 thousand euros and 21,548 thousand euros, respectively.

Treasury shares

The movements of the parent company’s shares acquired by the Bank are as follows:

Nominal value

Average price

No. of shares

(in thousand euro)

(in euro)

% Shareholding

Balance as at 31 December 2021

40,679,208

5,084.90

0.85

0.72

Purchases

115,797,928

14,474.74

0.75

2.06

Sales

131,704,453

16,463.06

0.77

2.34

Balance as at 31 December 2022

24,772,683

3,096.58

0.96

0.44

Purchases

248,821,193

31,102.65

1.10

4.43

Sales

236,416,334

29,552.04

1.11

4.21

Balance as at 31 December 2023

37,177,542

4,647.19

1.07

0.68

Net gains and losses arising from transactions involving own equity instruments are included under the heading “Shareholders’ equity – Other reserves” on the consolidated balance sheet, and they are shown in the statement of changes in equity, in the row corresponding to the sale or cancellation of treasury shares.

As at 31 December 2023, TSB held 232 Banco Sabadell shares (60,517 as at 31 December 2022), with a cost of 255 euros (46 thousand euros as at 31 December 2022), recorded as treasury shares on the consolidated balance sheet.

As at 31 December 2023, the number of the Bank’s shares pledged as collateral for transactions was 44,978,083 with a nominal value of 5,622 thousand euros (77,735,661 shares with a nominal value of 9,717 thousand euros as at 31 December 2022).

The number of Banco de Sabadell, S.A. equity instruments owned by third parties but managed by the different companies of the Group amounted to 12,398,979 and 3,067,904 securities as at 31 December 2023 and 2022, respectively. Their nominal value as at the aforesaid dates amounted to 1,550 thousand euros and 383 thousand euros, respectively. In both years, 100% of the securities corresponded to Banco Sabadell shares.

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Note 24 – Accumulated other comprehensive income

The composition of this heading of consolidated equity as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		*2022 ()**

Items that will not be reclassified to profit or loss		(30,596)		(29,125)
Actuarial gains or (-) losses on defined benefit pension plans		(3,313)		(1,969)
Non-current assets and disposal groups classified as held for sale		—		—
Share of other recognised income and expense of investments in joint ventures and associates		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income		(27,283)		(27,156)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—
Items that may be reclassified to profit or loss		(468,357)		(554,275)
Hedge of net investments in foreign operations [effective portion] (**)		77,997		119,348
Foreign currency translation		(384,086)		(476,030)
Hedging derivatives. Cash flow hedges [effective portion] (***)		(49,215)		(64,224)
Amount deriving from outstanding operations		(71,464)		(93,562)
Amount deriving from discontinued operations		22,249		29,338
Fair value changes of debt instruments measured at fair value through other comprehensive income		(145,732)		(180,199)
Hedging instruments [not designated elements]		—		—
Non-current assets and disposal groups classified as held for sale		—		—
Share of other recognised income and expense of investments in joint ventures and associates		32,679		46,830
Total		(498,953)		(583,400)

(*) See Note 1.4.

(**) The value of the hedge of net investments in foreign operations is fully obtained from outstanding transactions (see Note 12).

(***) Cash flow hedges mainly mitigate interest rate risk and other risks (see Note 12).

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The breakdown of the items in the statement of recognised income and expenses as at 31 December 2023 and 2022, indicating their gross and net of tax effect amounts, is as follows:


Thousand euro
	2023						*2022 ()**
	Gross value		Tax effect		Net		Gross value		Tax effect		Net

Items that will not be reclassified to profit or loss		(669)		(802)		(1,471)		12,991		(358)		12,633
Actuarial gains or (-) losses on defined benefit pension plans		(1,919)		575		(1,344)		(4,123)		1,237		(2,886)
Non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—
Share of other recognised income and expense of investments in joint ventures and associates		—		—		—		—		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income		1,250		(1,377)		(127)		17,114		(1,595)		15,519
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—		—		—		—		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—		—		—		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—		—		—		—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—		—		—		—		—
Items that may be reclassified to profit or loss		107,466		(21,548)		85,918		(398,499)		80,040		(318,459)
Hedge of net investments in foreign operations [effective portion]		(41,351)		—		(41,351)		(38,393)		—		(38,393)
Foreign currency translation		91,944		—		91,944		5,238		—		5,238
Hedging derivatives. Cash flow hedges reserve [effective portion]		22,291		(7,282)		15,009		(52,125)		18,064		(34,061)
Fair value changes of debt instruments measured at fair value through other comprehensive income		48,733		(14,266)		34,467		(230,451)		61,976		(168,475)
Hedging instruments [not designated elements]		—		—		—		—		—		—
Non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—
Share of other recognised income and expense of investments in joint ventures and associates		(14,151)		—		(14,151)		(82,768)		—		(82,768)
Total		106,797		(22,350)		84,447		(385,508)		79,682		(305,826)

(*) See Note 1.4.

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Note 25 – Minority interests (non-controlling interests)

The companies comprising this heading of consolidated equity as at 31 December 2023 and 2022 are the following:


Thousand euro
	2023						2022

	% Minority interests		Amount		Of which: Profit/(loss) *attributed*		% Minority interests		Amount		Of which: Profit/(loss) attributed

Aurica Coinvestment, S.L.		38.24 %		33,433		1,498		38.24 %		33,553		10,009
Other		—		780		(76)		—		791		739
Total				34,213		1,422				34,344		10,748

Movements in the balance under this heading in 2023 and 2022 were as follows:


Thousand euro
Balances as at 31 December 2021			24,980

Valuation adjustments			—
Other			9,364
Scope additions / exclusions			—
Percentage shareholding and other			(1,384)
Profit or loss for the year			10,748
Balances as at 31 December 2022			34,344

Valuation adjustments			—
Other			(131)
Scope additions / exclusions			—
Percentage shareholding and other			(1,553)
Profit or loss for the year			1,422
Balances as at 31 December 2023			34,213

The dividends distributed to minority shareholders of Group entities in 2023 amounted to 1,618 thousand euros and were distributed by Aurica Coinvestment, S.L. (646 thousand euros in 2022).

A-175

Note 26 – Off-balance sheet exposures

The breakdown of this heading for the years ended 31 December 2023 and 2022 is the following:


Thousand euro
Commitments and guarantees given	Note		2023		2022

Loan commitments given				27,035,812		27,460,615
Of which, amount classified as stage 2				986,368		1,407,538
Of which, amount classified as stage 3				97,219		82,078
Drawable by third parties				27,035,812		27,460,615
By credit institutions				54		43
By general governments				910,744		1,019,180
By other resident sectors				15,565,366		15,815,706
By non-residents				10,559,648		10,625,686

Provisions recognised on liabilities side of the balance sheet		22		72,888		71,698

*Financial guarantees given ()**				2,064,396		2,086,993
Of which, amount classified as stage 2				165,222		254,090
Of which, amount classified as stage 3				44,828		58,197

Provisions recognised on liabilities side of the balance sheet (**)		22		23,814		26,817

Other commitments given				7,942,724		9,674,382
Of which, amount classified as stage 2				372,597		434,869
Of which, amount classified as stage 3				222,999		265,507
Other guarantees given				6,832,086		6,916,058
Assets earmarked for third-party obligations				—		—
Irrevocable letters of credit				729,299		722,640
Additional settlement guarantee				25,000		25,000
Other guarantees and sureties given				6,077,787		6,168,418
Other contingent risks				—		—
Other commitments given				1,110,638		2,758,324
Financial asset forward purchase commitments				1,007,047		2,639,536
Conventional financial asset purchase contracts				8,249		—
Capital subscribed but not paid up				19		19
Underwriting and subscription commitments				—		—
Other loan commitments given				95,323		118,769

Provisions recognised on liabilities side of the balance sheet		22		68,674		78,308
Total				37,042,932		39,221,990

(*) Includes 99,631 and 122,500 thousand euro as of 31 December 2023 and 2022, respectively, corresponding to financial guarantees given in connection with construction and real estate development.

(**) Includes 3,402 thousand euros and 4,305 thousand euros as at 31 December 2023 and 2022, respectively, corresponding to provisions for financial guarantees given in connection with construction and real estate development.

Total commitments drawable by third parties as at 31 December 2023 include home equity loan commitments amounting to 4,640,343 thousand euros (4,566,727 thousand euros as at 31 December 2022). As regards other commitments, in the majority of cases there are other types of guarantees which are in line with the Group’s risk management policy.

Financial guarantees and other commitments given classified as stage 3

The movement of the balance of financial guarantees and other commitments given classified as stage 3 during 2023 and 2022 was the following:


Thousand euro
Balances as at 31 December 2021			474,557

Additions			90,909
Disposals			(241,762)
Balances as at 31 December 2022			323,704

Additions			43,391
Disposals			(99,268)
Balances as at 31 December 2023			267,827

A-176

The breakdown by geographical area of the balance of the financial guarantees and other commitments given classified as stage 3 as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		2022

Spain		265,046		321,296
Rest of European Union		448		439
United Kingdom		15		8
Americas		1,905		14
Rest of the world		413		1,947
Total		267,827		323,704

Credit risk allowances corresponding to financial guarantees and other commitments given as at 31 December 2023 and 2022, broken down by the method used to determine such allowances, are as follows:


Thousand euro
	2023		2022

Specific individually measured allowances:		67,247		79,564
Stage 2		7,454		3,753
Stage 3		59,793		75,811

Specific collectively measured allowances:		25,241		25,560
Stage 1		3,930		4,833
Stage 2		6,325		7,098
Stage 3		14,672		13,234
Others		314		395
Total		92,488		105,124

Movements in these allowances during the years 2023 and 2022, together with movements in allowances for loan commitments given, are shown in Note 22.

Note 27 – Off-balance sheet customer funds

Off-balance sheet customer funds managed by the Group, those sold but not under management and the financial instruments deposited by third parties as at 31 December 2023 and 2022 are shown below:


Thousand euro
	2023		2022

Managed by the Group:		4,186,603		4,234,635
Investment firms and funds		588,844		702,580
Asset management		3,597,759		3,532,055

Sold by the Group:		36,373,953		34,257,725
Mutual Funds		23,503,719		21,878,344
Pension funds		3,249,167		3,182,486
Insurance		9,621,067		9,196,895

Financial instruments deposited by third parties		66,753,270		58,006,395
Total		107,313,826		96,498,755

A-177

Note 28 – Interest income and expenses

These headings in the consolidated income statement include interest accrued during the year on all financial assets and financial liabilities the yield of which, implicit or explicit, is obtained by applying the effective interest rate approach, irrespective of whether they are measured at fair value or otherwise, and using corrections of income from hedge accounting operations.

The majority of interest income is generated by the Group’s financial assets measured either at amortised cost or at fair value through other comprehensive income.

The breakdown of net interest income for the years ended 31 December 2023 and 2022 is the following:


Thousand euro
	2023		2022

Interest income
Loans and advances		7,286,718		4,252,331
Central banks		1,215,497		252,274
Credit institutions		281,945		72,999
Customers		5,789,276		3,927,058
Debt securities (*)		589,033		288,540
Stage 3 assets		27,036		21,840
Correction of income from hedging operations		671,414		151,473
Other interest (**)		84,555		274,419
Total		8,658,756		4,988,603

Interest expense
Deposits		(2,480,542)		(585,695)
Central banks		(532,310)		(99,658)
Credit institutions		(526,696)		(83,742)
Customers		(1,421,536)		(402,295)
Debt securities issued		(700,109)		(302,023)
Correction of expenses on hedging operations		(566,050)		(147,708)
Other interest (***)		(188,837)		(154,451)
Total		(3,935,538)		(1,189,877)

Net interest income		4,723,218		3,798,726

(*) Includes 69,956 thousand euro in 2023 and 20,903 thousand euro in 2022 corresponding to interest from financial assets recognised at fair value through profit and loss (trading portfolio).

(**) Includes positive returns from liability products.

(***) Includes negative returns on asset products.

The improvement in net interest income is mainly due to the higher yield of the loan book and improved income from the fixed-income portfolio, supported by the increase in interest rates, all of which offset the higher cost of customer funds and capital markets.

The average annual interest rate during 2023 and 2022 of the following balance sheet headings is shown below:


%
	2023		2022

Assets

Cash, cash balances at central banks and other demand deposits		3.51		0.39

Debt securities		2.92		1.11
Loans and advances
Customers		3.79		2.51

Liabilities
Deposits
Central banks and Credit institutions		(3.38)		0.02
Customers		(0.89)		(0.19)
Debt securities issued		(3.32)		(1.42)
Positive (negative) figures correspond to income (expenses) for the Group.

A-178

Note 29 – Fee and commission income and expenses

Income and expenses arising from fees and commissions on financial assets and liabilities and the provision of services are as follows:


Thousand euro
	2023		2022

Fees from risk transactions		286,480		282,500
Asset-side transactions		183,209		180,403
Sureties and other guarantees		103,271		102,097

Service fees		796,822		869,794
Payment cards		251,815		256,492
Payment orders		82,296		82,935
Securities		57,028		53,145
Sight accounts		277,111		286,471
Other		128,572		190,751

Asset management and marketing fees		302,856		337,914
Mutual funds		114,912		122,218
Sale of pension funds and insurance products		165,075		193,833
Asset management		22,869		21,863
Total		1,386,158		1,490,208

Memorandum item

Fee and commission income		1,671,213		1,742,311
Fee and commission expenses		(285,055)		(252,103)
Fees and commissions (net)		1,386,158		1,490,208

Note 30 – Gains or (-) losses on financial assets and liabilities, net and exchange differences, net

“Gains or (-) losses on financial assets and liabilities, net” groups together a series of headings from the consolidated income statement for the years ended 31 December 2023 and 2022, which are shown below:


Thousand euro
	2023		2022

By heading:
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		23,250		13,227
Financial assets at fair value through other comprehensive income		4,304		22,752
Financial assets at amortised cost		15,939		(9,190)
Financial liabilities at amortised cost		3,007		(335)
Gains or (-) losses on financial assets and liabilities held for trading, net		122,249		204,691
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net		11,781		(4,157)
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net		—		—
Gains or (-) losses from hedge accounting, net		12,193		17,851
Total		169,473		231,612

By type of financial instrument:
Net gain/(loss) on debt securities		10,193		16,131
Net gain/(loss) on other equity instruments		7,100		(877)
Net gain/(loss) on derivatives		140,199		225,548
Net gain/(loss) on other items (*)		11,981		(9,190)
Total		169,473		231,612

(*) Mainly includes gains/(losses) on the sale of various loan portfolios sold during the year.

A-179

The breakdown of the heading “Exchange differences [gain or (-) loss], net” of the consolidated income statement for the years ended 31 December 2023 and 2022 is shown below:


Thousand euro
	2023		2022

Exchange differences [gain or (-) loss], net		(101,093)		(127,971)

During 2023, the Group carried out sales of certain debt securities which it held in its portfolio of financial assets at fair value through other comprehensive income, generating profits of 4,304 thousand euros (22,752 thousand euros in 2022). Of those profits, 4,930 thousand euros (22,752 thousand euros in 2022) came from the sale of debt securities held with general governments.

The “Net gain/(loss) on derivatives” heading in the table above includes, among other things, the change in the fair value of derivatives used to hedge against the foreign exchange risk of debit and credit balances denominated in foreign currencies. As at 31 December 2023, the gains generated by these derivatives amounted to 143,569 thousand euros (138,796 thousand euros as at 31 December 2022), which are recognised under the heading “Gains or (-) losses on financial assets and liabilities held for trading, net” of the consolidated income statement, while the exchange differences generated by debit and credit balances denominated in foreign currencies hedged with these derivatives are recognised under the heading “Exchange differences [gain or (-) loss], net” of the consolidated income statement.

Note 31 – Other operating income

The composition of this heading of the consolidated income statement for the years ended 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		2022

Income from use of investment properties (*)		22,850		23,474
Sales and other income from the provision of non-financial services		14,264		11,522
Other operating income		54,070		86,558
Total		91,184		121,554

(*) The amounts relate mainly to income from operating leases in which the Group acts as lessor.

The reduction in the balance recognised under “Other operating income” is mainly due to income in the amount of 45 million euros recognised in 2022 in connection with the insurance taken out by the Group to offset the payment made by TSB to UK regulators due to the incidents that took place following its IT migration in 2018 (see Note 32).

Note 32 – Other operating expenses

The composition of this heading of the consolidated income statement for the years ended 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		2022

Contribution to deposit guarantee schemes		(150,784)		(129,157)
Banco Sabadell		(132,209)		(113,832)
TSB		(280)		(540)
BS IBM Mexico		(18,295)		(14,785)

Contribution to resolution fund		(76,485)		(100,151)

Other items		(310,959)		(229,559)
Of which: temporary levy of credit institutions and financial credit establishments ()*		(156,182)		—
Total		(538,228)		(458,867)

(*) See Note 1.3.19.

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The “Other items” heading includes expenses corresponding to the Spanish tax on deposits of credit institutions, amounting to 34,418 thousand euros in 2023 (34,894 thousand euros in 2022), as well as expenses associated with non-financial activities.

Similarly, in 2022, expenses in the amount of approximately 57 million euros were recognised in relation to the agreement between the subsidiary TSB and UK regulators regarding the conclusions of the investigation into the causes and circumstances of the incidents that took place following its IT migration in 2018. However, in 2023 and 2022, income amounting to 16 and 45 million euros, respectively, corresponding to compensation obtained through the arranged insurance policies was recognised under the heading “Other operating income” of the consolidated income statements for 2023 and 2022 (see Note 31).

Note 33 – Administrative expenses

This heading of the consolidated income statement includes expenses incurred by the Group corresponding to staff and other general administrative expenses.

Staff expenses

The staff expenses recognised in the consolidated income statement for the years ended 31 December 2023 and 2022 were as follows:


Thousand euro
	Note		2023		2022

Payrolls and bonuses for active staff				(1,095,399)		(1,050,441)
Social Security payments				(231,124)		(212,576)
Contributions to defined benefit pension plans		22		(3,175)		(1,157)
Contributions to defined contribution pension plans				(65,452)		(61,560)
Other staff expenses				(99,494)		(65,874)
Of which: restructuring plan in United Kingdom		22		(26,409)		—
Total				(1,494,644)		(1,391,608)

As at 31 December 2023 and 2022, the breakdown of the average workforce for all companies within the Group by category and sex is as follows:


Average number of employees
	2023						2022
	Men		Women		Total		Men		Women		Total

Senior management		514		245		759		479		208		687
Middle management		2,011		1,477		3,488		1,947		1,381		3,328
Specialist staff		5,379		7,248		12,627		5,307		7,222		12,529
Administrative staff		706		1,733		2,439		707		1,817		2,524
Total		8,610		10,703		19,313		8,440		10,628		19,068

The breakdown of the Group’s average workforce with a disability of 33% or more, by category, as at 31 December 2023 and 2022 is as follows:


Average number of employees
	2023		2022

Senior management		9		10
Middle management		22		27
Specialist staff		210		207
Administrative staff		64		78
Total		305		322

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As at 31 December 2023 and 2022, the breakdown of the Group’s workforce by category and sex is as follows:


Number of employees
	2023						2022
	Men		Women		Total		Men		Women		Total

Senior management		529		262		791		460		208		668
Middle management		2,091		1,632		3,723		1,944		1,381		3,325
Specialist staff		5,341		7,077		12,418		5,298		7,194		12,492
Administrative staff		680		1,704		2,384		683		1,727		2,410
Total		8,641		10,675		19,316		8,385		10,510		18,895

Of the total workforce as at 31 December 2023, 300 had some form of recognised disability (309 as at 31 December 2022).

Long-term share-based complementary incentive scheme

Pursuant to the Remuneration Policy, the latest version of which was approved by the Board of Directors at its meeting of 21 December 2023, at the proposal of the Board Remuneration Committee, members of the Group’s Identified Staff, with the exception of Non-Executive Directors, were allocated long-term remuneration through the schemes in effect during 2023, as described below:

Share-based complementary incentive scheme

TSB’s Share Incentive Plan (SIP) provides its employees with the opportunity to own shares in Banco Sabadell and grants shares, where applicable, to certain senior employees as part of their hiring arrangements.

Long-term remuneration scheme

Every year, the Board of Directors, at the proposal of the Board Remuneration Committee, approves Long-Term Remuneration aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff assigned to TSB Banking Group Plc or its subsidiaries, which consists of allocating a certain amount to each beneficiary, determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. 55% of the incentive is paid in the Bank’s shares (using the weighted average price of the last 20 trading sessions of the month of December of the first year of the accrual period to calculate the number of shares), with the remaining 45% paid in cash. The incentive accrual period consists of three financial years, beginning on 1 January of the financial year immediately following the date of its approval and ending two years later, on 31 December of the third financial year. The aforesaid accrual period in turn comprises two sub-periods:

–

Individual annual targets measurement period: this period lasts one financial year, from 1 January to 31 December of the year following the date on which the incentive is approved. During that period, each beneficiary’s annual targets are measured (formed of Group targets, management targets and individual targets) established to determine the “Adjusted Target”.

A-182

–

Group multi-year targets measurement period: this period lasts three financial years, beginning on 1 January of the financial year immediately following the date on which the incentive is approved and ending two years later, on 31 December of the third financial year. During that period, the Group’s multi-year targets are measured in order to determine the final incentive, which is subject to the Risk Correction Factor. The Group’s multi-year targets for each incentive are linked to the following indicators and weights, whose achievement percentages are used to calculate the final payment owed, if any, to management staff who have been assigned that incentive:


Incentive		Indicators and weights

Long-Term Remuneration 2019-2021, 2020-2022 and 2021-2023		- Total shareholder return (25%) - Group liquidity coverage ratio (25%) - CET1 capital indicator (25%) - Group return on risk-adjusted capital (RoRAC) (25%)

Long-Term Remuneration 2022-2024		- Total shareholder return (25%) - Group liquidity coverage ratio (25%) - CET1 capital indicator (25%) - Return on tangible equity (ROTE) (25%)

Long-Term Remuneration 2023-2025		- Total shareholder return (40%) - Return on tangible equity (ROTE) (40%) - Sustainability indicator (20%)

In addition to the achievement of the annual and multi-year targets described above, payment of the incentives is subject to the requirements set out in the General Conditions of each long-term remuneration scheme.

The main characteristics of the current incentives of the long-term remuneration scheme are summarised below:

Thousand euro

Incentive

Date approved
by Board of

Directors

Incentive

accrual period

Individual
annual targets

Group multi-year targets

Amount
pending
payment as at

31/12/2023

Measurement
period

Percentage achievement

Final
payment

2019-2021

Long-term

remuneration

20/12/2018

01/01/2019 -
31/12/2021

01/01/2019 -
31/12/2019

01/01/2019 -
31/12/2021

0% total shareholder return.

100% liquidity coverage ratio.

100% CET1 indicator.

0% RoRAC indicator.

50% of
target

444

2019-2021

Long-term

remuneration

19/12/2019

01/01/2020 -
31/12/2022

01/01/2020 -
31/12/2020

01/01/2020 -
31/12/2022

50% total shareholder return.

100% liquidity coverage ratio.

100% CET1 indicator.

100% RoRAC indicator.

87.5% of
target

2,265

2021-2023

Long-term

remuneration

17/12/2020

01/01/2021 -
31/12/2023

01/01/2021 -
31/12/2021

01/01/2021 -
31/12/2023

50% total shareholder return.

100% liquidity coverage ratio.

100% CET1 indicator.

100% RoRAC indicator.

100% of
target

4,533

2022-2024

Long-term

remuneration

16/12/2021

01/01/2022 -
31/12/2024

01/01/2022 -
31/12/2022

01/01/2022 -
31/12/2024

—

2023-2025

Long-term

remuneration

21/12/2022

01/01/2023 -
31/12/2025

01/01/2023 -
31/12/2023

01/01/2023 -
31/12/2025

—

As regards the staff expenses associated with share-based incentive schemes (see Note 1.3.15), the balancing entry for such expenses is recognised in equity in the case of stock options settled with shares (see consolidated statement of total changes in equity – share based payments), while those settled with cash are recognised in the “Other liabilities” heading of the consolidated balance sheet.

A-183

Expenditure recognised in relation to incentive schemes and long-term remuneration granted to employees in 2023 and 2022 is shown below:


Thousand euro
	2023		2022

Settled in shares		6,191		4,923
Settled in cash		1,330		693
Total		7,521		5,616

Other administrative expenses

The composition of this heading in the consolidated income statement for the years 2023 and 2022 is as follows:


Thousand euro
	2023		2022

Property, plant and equipment		(68,908)		(70,614)
Information technology		(416,313)		(391,562)
Communication		(25,862)		(30,231)
Publicity		(96,682)		(71,601)
Subcontracted administrative services		(118,383)		(112,898)
Contributions and taxes		(116,542)		(114,185)
Technical reports		(26,948)		(26,094)
Security services and fund transfers		(17,429)		(18,375)
Entertainment expenses and staff travel expenses		(15,077)		(9,600)
Membership fees		(6,771)		(5,602)
Other expenses		(92,803)		(95,045)
Total		(1,001,718)		(945,807)

Audit firm fees

The fees received by KPMG Auditores, S.L. in the years ended 31 December 2023 and 2022 for audit and other services were as follows:


Thousand euro
	2023		2022

*Audit services ()**		2,921		2,540
Of which: Audit of the Bank’s annual and interim accounts		2,471		2,100
Of which: Audit of the annual accounts of foreign branches (**)		27		27
Of which: Audit of the annual accounts of subsidiaries		423		413
Audit-related services		292		281
Total		3,213		2,821

(*) Including fees corresponding to the year’s audit, irrespective of the date on which that audit was completed. The annual financial statements of Banco Sabadell and the consolidated Banco Sabadell Group for the financial years 2023, 2022, 2021 and 2020 were audited by the external audit firm KPMG Auditores, S.L. (KPMG), holder of company tax number (CIF) B-78510153 and with registered office in Madrid, Torre de Cristal, Paseo de la Castellana, no. 259 C, 28046 Madrid, entered in the Madrid Companies Register in Volume 11,961, Folio 90, Section 8, Sheet M-188,007, entry 9 and entered in the Official Record of Statutory Auditors under number S0702. KPMG Auditores, S.L. neither gave up nor was relieved of its responsibilities as auditor of Banco Sabadell and the consolidated Banco Sabadell Group during 2023, 2022, 2021 and 2020, nor up to the date on which these annual financial statements were signed off.

(**) Corresponding to the branch located in London.

A-184

The fees received by other companies forming part of the KPMG network in the years ended 31 December 2023 and 2022 for audit and other services were as follows:


Thousand euro
	2023		2022

*Audit services ()**		6,848		6,861
Of which: Audit of the annual accounts of foreign branches		341		343
Of which: Audit of the annual accounts of Group subsidiaries		6,507		6,518
Audit-related services		213		192
Other services		474		383
Of which: Other		474		383
Total		7,535		7,436

(*) Including fees corresponding to the year’s audit, irrespective of the date on which that audit was completed.

The main items included under “Audit-related services” correspond to fees related to reports that auditors are required to produce under applicable regulations, the issuance of comfort letters and other assurance reports required. “Other services” includes fees related to review reports of the Pillar III Disclosures report and the Non-Financial Disclosures report, mainly provided by other companies of the KPMG network.

Lastly, the Group engaged auditors other than KPMG to carry out the audits of foreign branches and other Group subsidiaries. Audit and other services provided to those branches and subsidiaries amounted to 62 thousand euros and 0 thousand euros in the year ended 31 December 2023, respectively (51 and 9 thousand euros in the year ended 31 December 2022).

All services provided by the auditors and companies forming part of their network comply with the requirements for statutory auditor independence set forth in the Spanish Audit Law and do not, in any case, include work that is incompatible with the audit function.

Other information

The cost-to-income ratio as at 2023 year-end (staff and general expenses/gross income) stood at 42.59% (44.86% in 2022).

Information about the Group’s branches and offices is given below:


Number of branches and offices
	2023		2022

Branches and offices		1,420		1,461

Spain		1,178		1,210
Outside Spain		242		251

Note 34 – Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains

The composition of this heading of the consolidated income statement for the years ended 31 December 2023 and 2022 is as follows:


Thousand euro
	Note		2023		2022

Financial assets at fair value through other comprehensive income				852		(182)
Debt securities		8		852		(182)
Other equity instruments				—		—
Financial assets at amortised cost		11		(825,245)		(839,397)
Debt securities				(40)		(190)
Loans and advances				(825,205)		(839,207)
Total				(824,393)		(839,579)

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Note 35 – Impairment or (-) reversal of impairment on non-financial assets

The composition of this heading of the consolidated income statement for the years ended 31 December 2023 and 2022 is as follows:


Thousand euro
	Note		2023		2022

Property, plant and equipment for own use		15		(1,930)		(1,916)
Investment properties		15		(9,596)		(35,182)
Goodwill and other intangible assets				—		—
Inventories		17		(14,319)		(24,018)
Total				(25,845)		(61,116)

The total allowance for the impairment of investment properties in 2023 and 2022 was calculated based on Level 2 valuations (see Note 6). The fair value of impaired assets amounted to 225,641 thousand euros and 293,226 thousand euros in 2023 and 2022, respectively.

Of the total inventory impairment allowances for 2023 and 2022, 1,295 thousand euros and 1,564 thousand euros were allocated based on Level 2 valuations, respectively, and 13,024 thousand euros and 22,454 thousand euros based on Level 3 valuations, respectively. The fair value of impaired assets amounted to 61,561 thousand euros and 90,614 thousand euros at 2023 and 2022 year-end, respectively.

Note 36 – Gains or (-) losses on derecognition of non-financial assets, net

The composition of this heading of the consolidated income statement for the years ended 31 December 2023 and 2022 is as follows:


Thousand euro
	2023		2022

Property, plant and equipment		(657)		3,261
Investment properties		4,274		3,072
Intangible assets		(50,750)		(35,132)
Interests (*)		7,799		11,449
Other items		(10)		(19)
Total		(39,344)		(17,369)

(*) See Schedule I – Exclusions from the scope of consolidation

The sale of tangible assets under finance leases in which the Group acted as lessor did not have a material impact on the 2023 and 2022 consolidated income statements.

The “intangible assets” heading mainly includes the impact of certain computer software assets derecognised due to obsolescence.

Note 37 – Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

The composition of this heading of the consolidated income statement for the years ended 31 December 2023 and 2022 is as follows:


Thousand euro
	Note		2023		2022

Property, plant and equipment for own use and foreclosed				(58,067)		(25,693)
Gains/losses on sales				(23,755)		(22,269)
Impairment/Reversal		13		(34,312)		(3,424)
Investment properties				—		—
Interests (*)				396		(1,829)
Other items				(2,284)		(279)
Total				(59,955)		(27,801)

(*) See Schedule I - Companies no longer consolidated.

A-186

In 2023, the heading “Plant and equipment for own use and foreclosed – Impairment/reversal” mainly includes the impact of the reduced fair value of tangible assets to be disposed of as part of the sale of the merchant acquiring business as a result of their regular use (see Note 2).

The impairment of non-current assets held for sale excludes income from the increase in fair value less selling costs.

The total allowance for the impairment of non-current assets held for sale in 2023 and 2022 was calculated based on Level 2 valuations (see Note 6). The fair value of impaired assets amounted to 554,978 thousand euros and 585,758 thousand euros as at 2023 and 2022 year-end, respectively.

Note 38 – Segment reporting

Segmentation criteria

This section gives information regarding earnings and other indicators of the Group’s business units.

In 2023, the criteria that Banco Sabadell Group uses to report on results for each segment are those established in 2022, specifically:

–

Three geographical areas: Banking Business in Spain, United Kingdom and Mexico. Banking Business Spain includes foreign branches and representative offices.

–

Each business unit is allocated capital equivalent to 12% of its risk-weighted assets, assigning all deductions corresponding to each business unit, and the surplus of own funds is allocated to Banking Business Spain.

In terms of the other criteria applied, segment information is first structured with a breakdown by geographical area and then broken down according to the customers at which each segment is aimed.

The information presented herein is based on the standalone accounting records of each Group company, after all consolidation disposals and adjustments have been made.

Each business unit bears its own direct costs, calculated on the basis of general accounting.

A-187

Details of profit attributable to the Group and other key figures of each business unit for the years 2023 and 2022 are shown in the table below, along with a reconciliation of the totals shown in the table with those shown in the consolidated accounts:


Million euro
	*2023 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Net interest income		3,353		1,174		196		4,723

Fees and commissions (net)		1,247		124		15		1,386
Core revenue		4,601		1,298		211		6,109

Net trading income and exchange differences		45		16		8		68
Equity-accounted income and dividends		131		—		—		131
Other operating income/expense		(404)		(23)		(20)		(447)
Gross income		4,372		1,291		198		5,862

Operating expenses and depreciation and amortisation		(1,965)		(941)		(108)		(3,015)
Pre-provisions income		2,407		350		90		2,847

Provisions and impairments		(816)		(75)		(19)		(910)
Capital gains on asset sales and other revenue		(27)		—		(19)		(46)
Profit/(loss) before tax		1,564		274		53		1,891

Corporation tax		(469)		(80)		(9)		(557)
Profit or loss attributed to minority interests		1		—		—		1
Profit attributable to the Group		1,093		195		44		1,332

ROTE (net profit attributable to Group / average shareholders’ equity excluding intangible assets)		12.0%		10.0%		8.9%		11.5%
Cost-to-income (general administrative expenses / gross income)		37.2%		62.1%		45.7%		42.6%
NPL ratio		4.3%		1.5%		2.4%		3.5%
Stage 3 exposure coverage ratio (**)		59.9%		41.8%		74.3%		58.3%

Employees		13,455		5,426		435		19,316
Domestic and foreign branches and offices		1,194		211		15		1,420

(*) Exchange rates applied in the income statement: GBP 0.8706 (average), MXN 19.1120 (average), USD 1.0798 (average) and MAD 10.9543 (average).

(**) Considering total provisions for losses on transactions in stage 3.

Million euro

2023 (*)

Banking Business
Spain

Banking Business
UK

Banking
Business Mexico

Total Group

Assets

173,648

54,855

6,670

235,173

Gross performing loans to customers

103,830

41,381

4,587

149,798

Non-performing real estate assets (net)

586

—

586

Liabilities

162,767

52,487

6,039

221,294

On-balance sheet customer funds

117,820

39,864

3,205

160,888

Wholesale funding in capital markets

19,949

4,545

—

24,494

Allocated equity

10,880

2,368

631

13,879

Off-balance sheet customer funds

40,561

—

40,561

(*) Exchange rates applied in the balance sheet: GBP 0.8691, MXN 18.7231, USD 1.1050 and MAD 10.9116.

A-188


Million euro
	*2022 ()**
	Banking Business Spain (**)		Banking Business UK		Banking Business Mexico		Total Group ()**
Net interest income		2,499		1,151		149		3,799

Fees and commissions (net)		1,344		134		12		1,490
Core revenue		3,843		1,284		162		5,289

Net trading income and exchange differences		95		6		3		104
Equity-accounted income and dividends		156		—		—		156
Other operating income/expense		(225)		(95)		(17)		(337)
Gross income		3,869		1,195		148		5,211

Operating expenses and depreciation and amortisation		(1,887)		(909)		(86)		(2,883)
Pre-provisions income		1,982		285		62		2,328

Provisions and impairments		(920)		(104)		(9)		(1,032)
Capital gains on asset sales and other revenue		(9)		1		(14)		(23)
Profit/(loss) before tax		1,053		182		39		1,273

Corporation tax		(270)		(95)		(8)		(373)
Profit or loss attributed to minority interests		11		—		—		11
Profit attributable to the Group		772		87		31		889

ROTE (net profit attributable to Group / average shareholders’ equity excluding intangible assets)		9.3%		4.2%		6.6%		8.2%
Cost-to-income (general administrative expenses / gross		39.9%		63.0%		48.7%		44.9%
NPL ratio		4.2%		1.3%		2.3%		3.4%
Stage 3 exposure coverage ratio (***)		56.2%		42.3%		70.1%		55.0%

Employees		12,991		5,482		422		18,895
Domestic and foreign branches and offices		1,226		220		15		1,461

(*) Exchange rates used in the income statement: GBP 0.8532 (average), MXN 21.0739 (average), USD 1.0538 (average) and MAD 11.1232 (average).

(**) See Note 1.4.

(***) Considering total provisions for losses on transactions in stage 3.

Million euro

2022 (*)

Banking Business
Spain (**)

Banking Business
UK

Banking Business
Mexico

Total Group (**)

Assets

189,545

55,810

6,025

251,380

Gross performing loans to customers

108,889

43,110

4,131

156,130

Non-performing real estate assets (net)

713

—

713

Liabilities

179,402

53,316

5,437

238,155

On-balance sheet customer funds

120,118

40,931

3,090

164,140

Wholesale funding in capital markets

19,444

2,537

—

21,981

Allocated equity

10,005

2,494

587

13,086

Off-balance sheet customer funds

38,492

—

38,492

(*) Exchange rates used in the balance sheet: GBP 0.8869, MXN 20.856, USD 1.066 and MAD 11.1558.

(**) See Note 1.4.

The Group’s average total assets as at 31 December 2023 amounted to 245,173,480 thousand euros (257,553,459 thousand euros as at 31 December 2021).

A-189

The types of products and services from which revenue is derived are described below for each business unit:

–

Banking Business Spain: groups together the Retail Banking, Business Banking and Corporate Banking business units, with individuals and businesses managed under the same branch network:

–

Retail Banking: offers financial products and services to individuals for personal use. These include investment products and medium- and long-term finance, such as consumer loans, mortgages, leasing and rental services, as well as other short-term finance. Funds come mainly from customers’ term and demand deposits, savings insurance, mutual funds and pension plans. The main services also include payment methods such as cards and various kinds of insurance products.

–

Business Banking: offers financial products and services to companies and self-employed persons. These include investment and financing products, such as working capital products, revolving loans and medium- and long-term finance. It also offers custom structured finance and capital market solutions, as well as specialised advice for businesses. Funds mainly come from customers’ term and demand deposits and mutual funds. The main services also include collection/payment solutions such as cards and POS terminals, as well as import and export services. It also includes Private Banking, which offers personalised expert advice, backed by specialised and high-value product capabilities for our customers.

–

Corporate Banking: offers specialised lending services together with a comprehensive offering of solutions, ranging from transaction banking services to more complex and tailored solutions relating to the fields of finance and cash management, as well as import and export activities, among others.

–

Banking Business UK: the TSB franchise covers business conducted in the United Kingdom, which includes current and savings accounts, loans, credit cards and mortgages.

–

Banking Business Mexico: offers banking and financial services for corporate banking and commercial banking.

Details of income from ordinary activities and the pre-tax profit/(loss) generated by each business unit are set out below for the years 2023 and 2022:


Thousand euro
	Consolidated
	*Income from ordinary activities ()**				Profit/(loss) before tax

SEGMENTS	2023		2022		2023		2022 ()**

Banking Business Spain		7,395,289		5,036,309		1,563,668		1,052,145
Banking Business UK		2,486,036		1,627,943		274,397		182,452
Banking Business Mexico		717,713		422,437		52,713		38,799
Total		10,599,038		7,086,689		1,890,778		1,273,396

(*) Includes the following headings from the consolidated income statements: “Interest income”, “Dividend income”, “Fee and commission income”, “Gains or (-) losses on financial assets and liabilities, net” and “Other operating income”.

(**) See Note 1.4.

The table below shows the deposits, net interest income and net fees and commissions generated by each business unit as a percentage of the total for 2023 and 2022:

A-190


%
	2023
	Breakdown net interest income and net fees and commissions
	Customer loans				Customer deposits				Income from services (*)
	% of average balance		% of total yield		% of average balance		% of total cost		% of total balance
SEGMENTS

Banking Business Spain		69.3 %		65.5 %		73.2 %		61.1 %		91.7 %
Banking Business UK		27.6 %		26.6 %		24.8 %		28.7 %		7.4 %
Banking Business Mexico		3.1 %		7.9 %		2.0 %		10.2 %		0.9 %
Total		100 %		100 %		100 %		100 %		100 %

(*) Segment percentage of total net fees and commissions.


%
	2022
	Breakdown net interest income and net fees and commissions
	Customer loans				Customer deposits				Income from services (*)
	% of average balance		% of total yield		% of average balance		% of total cost		% of total balance
SEGMENTS

Banking Business Spain		69.7 %		63.0 %		73.2 %		54.2 %		90.2 %
Banking Business UK		27.6 %		28.9 %		24.9 %		24.6 %		9.0 %
Banking Business Mexico		2.7 %		8.0 %		1.9 %		21.2 %		0.8 %
Total		100 %		100 %		100 %		100 %		100 %

(*) Segment percentage of total net fees and commissions.

Furthermore, a breakdown by geographical area of the “Interest income” heading of the 2023 and 2022 income statements is shown below:


Thousand euro
	Breakdown of interest income by geographical area
Geographical area	Standalone				Consolidated
	2023		2022		2023		2022

Domestic market		5,212,561		2,874,905		5,040,658		2,869,020
International market		619,846		268,772		3,618,098		2,119,583
European Union		92,376		44,755		92,376		44,755
Eurozone		92,376		44,755		92,376		44,755
Non-Eurozone		—		—		—		—
Other		527,470		224,017		3,525,722		2,074,828
Total		5,832,407		3,143,677		8,658,756		4,988,603

Section 4 of the consolidated Directors’ Report gives a more detailed assessment of each of these business units.

Note 39 – Tax situation (income tax relating to continuing operations)

Consolidated tax group

Banco de Sabadell, S.A. is the parent company of a consolidated tax group for corporation tax purposes, in Spain, comprising, as subsidiaries, all the Spanish companies in which the Bank holds an interest that meet the requirements of the Spanish Corporation Tax Law.

The other companies in the accounting group, both those that are Spanish and those not resident in Spain, are taxed in accordance with the tax regulations applicable to them.

A-191

Reconciliation

The reconciliation between the Group’s corporation tax expense calculated by applying the general tax rate and the expense recognised for that corporation tax in the consolidated income statements is as follows:


Thousand euro
	2023		2022

Profit or loss before tax		1,890,778		1,273,396
Corporation tax, applying national tax rate (30%)		(567,234)		(382,019)
Reconciliation:
Gains/(losses) on sale of equity instruments (exempt)		2,049		(1,239)
Remuneration of preferred securities		34,617		33,112
Profit/(loss) of entities accounted for using the equity method		37,893		47,350
Difference in effective tax rate on companies outside Spain () (*)		22,678		(15,447)
Generated deductions/Non-deductible expenses		(66,157)		(22,640)
Other		(21,021)		(32,373)

(Tax expense or (-) income related to profit from continuing operations)		(557,175)		(373,256)

(*) Calculated applying the difference between the current tax rate for the Group in Spain (30%) and the effective tax rate applied to the Group’s profit/(loss) in each jurisdiction.

The effective tax rate, calculated as tax expenses related to profit divided by profit or loss before tax, came to 29.47% and 30.04% in 2023 and 2022, respectively.

Taxable income – increases and decreases

The increases and decreases in taxable income are analysed in the following table on the basis of whether

they arose from timing or permanent differences:


Thousand euro
	2023		2022

Permanent difference		320,184		205,979
Generated deductions/Non-deductible expenses		156,504		181,566
Temporary levy to credit institutions		156,182		—
Other		7,498		24,413
Timing difference arising during the year		191,808		298,710
Timing difference arising in previous years		15,192		33,704
Increases		527,184		538,393

Permanent difference		(353,708)		(328,741)
Gains/(losses) on sale of equity instruments (exempt) and equity method		(140,638)		(134,582)
Difference in effective tax rate of permanent establishments and foreign subsidiaries		(75,591)		(35,716)
Generated deductions/Non-deductible expenses		(115,391)		(110,374)
Other		(22,088)		(48,069)
Timing difference arising during the year		(12,123)		—
Timing difference arising in previous years		(269,009)		(177,698)
Decreases		(634,840)		(506,439)

Deferred tax assets and liabilities

Under current tax and accounting regulations, certain timing differences should be taken into account when quantifying the relevant tax expense related to profit from continuing operations.

In 2013, Spain made a provision (Royal Decree-Law 14/2013) for tax assets generated by allowances for the impairment of loans and other assets arising from the potential insolvency of debtors not related to the relevant taxable person, as well as those corresponding to contributions or provisions in respect of social welfare systems and, where appropriate, early retirement schemes, to be afforded the status of assets guaranteed by the Spanish State (hereinafter, “monetisable tax assets”).

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Monetisable tax assets can be converted into credit enforceable before the Spanish Tax Authority in cases where the taxable person incurs accounting losses or the Institution is liquidated or legally declared insolvent. Similarly, they can be exchanged for public debt securities, once the 18-year term has elapsed, calculated from the last day of the tax period in which these assets were recognised in the accounting records. To retain the State guarantee, and to keep their status as monetisable tax assets, deferred tax assets generated before 2016 are subject to an annual capital contribution of 1.5% of the deferred tax assets that meet the legal requirements.

Movements of deferred tax assets and liabilities during 2023 and 2022 are shown below:


Thousand euro
Deferred tax assets	Monetisable		Non-monetisable		Tax credits for losses carried forward		Deductions not applied		Total
Balances as at 31 December 2021		5,042,392		1,156,067		478,826		30,242		6,707,527
(Debit) or credit recorded in the income statement		(47,661)		6,607		(87,366)		(16,385)		(144,805)
(Debit) or credit recorded in equity		—		85,337		—		—		85,337
Exchange differences and other movements		1,147		(5,096)		(771)		1,168		(3,552)
Balances as at 31 December 2022		4,995,878		1,242,915		390,689		15,025		6,644,507
(Debit) or credit recorded in the income statement		(93,090)		53,010		(104,319)		(14,999)		(159,398)
(Debit) or credit recorded in equity		—		(29,777)		—		—		(29,777)
Exchange differences and other movements		(159,445)		50,532		39,112		—		(69,802)
Balances as at 31 December 2023		4,743,343		1,316,680		325,482		26		6,385,531


Thousand euro
Deferred tax liabilities	Total
Balances as at 31 December 2021		123,765
(Debit) or credit recorded in the income statement		(10,914)
(Debit) or credit recorded in equity		—
Exchange differences and other movements		866
Balances as at 31 December 2022		113,717
(Debit) or credit recorded in the income statement		(490)
(Debit) or credit recorded in equity		(502)
Exchange differences and other movements		2,245
Balances as at 31 December 2023		114,970

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The sources of the deferred tax assets and liabilities recognised in the consolidated balance sheets as at 31 December 2023 and 2022 are as follows:


Thousand euro
Deferred tax assets	2023		2022

Monetisable		4,743,343		4,995,878
Due to credit impairment		3,369,993		3,323,114
Due to real estate asset impairment		1,248,285		1,547,338
Due to pension funds		125,065		125,426

Non-monetisable		1,316,680		1,242,915

Tax credits for losses carried forward		325,482		390,689

Deductions not applied		26		15,025
Total		6,385,531		6,644,507

Deferred tax liabilities		2023		2022

Property restatements		53,092		54,197
Adjustments to value of wholesale debt issuances arising in business combinations		4,020		7,472
Other financial asset value adjustments		1,657		1,455
Other		56,201		50,593
Total		114,970		113,717

The breakdown by country of deferred tax assets and liabilities is as follows:


Thousand euro
	2023				2022
Country	Deferred tax assets		Deferred tax liabilities		Deferred tax assets		Deferred tax liabilities

Spain		6,174,220		104,364		6,417,930		104,530
United Kingdom		58,037		10,606		82,955		9,187
United States		63,492		—		62,754		—
Mexico		82,608		—		70,198		—
Other		7,174		—		10,670		—
Total		6,385,531		114,970		6,644,507		113,717

As indicated in Note 1.3.20, according to the information available as at year-end and the projections taken from the Group’s business plan for the coming years, the Group estimates that it will be able to generate sufficient taxable income to offset tax loss carry-forwards within a period of four years and non-monetisable tax assets, where these can be deducted according to current tax regulations, within a period of 10 years.

In addition, the Group performs a sensitivity analysis of the most significant variables used in the deferred tax asset recoverability analysis, taking into consideration reasonable changes to the key assumptions on which the projected results of each entity or tax group are based and the estimated reversal of timing differences. With respect to Spain, the variables considered are those used in the sensitivity analysis of the calculation of the recoverable amount of goodwill (see Note 16). The conclusions drawn from that analysis are not significantly different from those reached without stressing the significant variables.

The Constitutional Court declared, in its ruling 11/2024 dated 18 January 2024, published in the Official State Gazette (Boletín Oficial del Estado) on 20 February 2024, that certain measures related to corporation tax introduced by Royal Decree-Law 3/2016 of 2 December were unconstitutional. The effects of this ruling are expected to lead to an earlier use of tax credits, with no significant impact estimated for the Group.

The Group has 61,078 thousand euros of tax credits corresponding to research, development and technological innovation activities, deducted in the years 2016 to 2022, and 9,068 thousand euros of tax credits corresponding to the reinvestment of extraordinary profits, deducted in 2010 and not recognised on the consolidated balance sheet as at 31 December 2023. Tax credits for research, development and technological innovation activities expire 18 years after origination, while tax credits for reinvestments of extraordinary profits expire 15 years after origination.

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On 29 December 2021, the government published Law 22/2021, which sets forth the minimum tax rate for corporation tax in Spain, calculated for financial institutions, as 18% of the taxable base (provided this is positive), as from 2022. The change introduced by this tax regulation does not modify the recoverability period for the Group’s deferred tax assets.

Monetisable tax assets are guaranteed by the State; therefore, their recoverability does not depend on the generation of future tax benefits.

As at 31 December 2023, the Group had deferred tax assets for tax loss carry-forwards pending application amounting to 39.5 million euros not recognised in the balance sheet (generated in financial years prior to the integration of their originating company into the Spanish tax group). The tax-loss carry-forwards do not need to be used before any particular date.

Years subject to tax inspection

As at 31 December 2023, corporation tax for the consolidated tax group in Spain was open to review for 2020 and subsequent years. In relation to value added tax (VAT) corresponding to entities forming part of the VAT group in Spain, 2016, 2017, 2020 and subsequent periods were open to review.

The review of all taxes not verified and not required in accordance with the corresponding tax regulations is still pending for other Group entities that are not taxed within the consolidated tax group or the VAT group in Spain.

Proceedings

In January 2022, the State Agency for Tax Administration (Administración Estatal de Administración Tributaria, or AEAT) gave notice to Banco Sabadell, as the parent company of the consolidated tax group, of the commencement of verification and investigation proceedings in relation to the main taxes affecting the Group and three of its subsidiaries¹. Specifically, the items and periods listed below:

–

Corporation Tax for the years 2015 to 2019.

–

Capital contribution associated with the conversion of deferred tax assets into credit eligible for the Spanish Tax Authority (Capital Contribution) for the years 2016 to 2019.

–

Value Added Tax (VAT) for the years 2018 and 2019.

–

Withholdings and payments on account (employment income, income from movable capital) for the years 2018 and 2019.

–

Tax on deposits of credit institutions (Impuesto sobre Depósitos de las Entidades de Crédito, IDEC) for the years 2017 to 2019.

The corresponding tax assessments were signed on 30 November 2023. Details about the current status of the proceedings are given here below:

–

Corporation Tax and Capital Contribution: the total balance due for both items amounts to 1.6 million euros (refundable amount of 0.9 million euros and amount payable of 2.5 million euros for late-payment interest). The only disputed tax assessment relates to the settlement of a deduction associated with technological innovation projects following the change of criteria of Spain’s National Court (called the Audiencia Nacional, a division of the Supreme Court) announced in its ruling of 23 November 2022, a change of criteria that was applied in that Court’s subsequent rulings and which is currently under appeal at the Supreme Court. In this respect, the corresponding disputes were filed on 28 December 2023. The tax clearance certificate is currently pending release.

–

Value Added Tax: the total balance due comes to 9.5 million euros (of which 1.5 million euros correspond to late-payment interest), as the sector-related matters subject to verification in previous proceedings are under dispute. In this respect, the corresponding disputes were filed on 22 December 2023. The tax clearance certificate is currently pending release.

–

Withholdings, payments on account and tax on deposits of credit institutions: the total amount due comes to 0.6 million euros (of which 97 thousand euros correspond to late-payment interest).

¹	Sabadell Digital, S.A.U., Sabadell Real Estate Development, S.L.U and Tenedora de Inversiones y Participaciones, S.L.

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Furthermore, the verification proceeding opened by the Mexican tax authorities (Servicio de Administración Tributaria, or SAT) in relation to the income tax (Impuesto Sobre la Renta, or ISR) corresponding to 2018 of the Mexican subsidiary Banco Sabadell, S.A., Institución de Banca Múltiple came to an end in June 2023, resulting in a reduction of the tax loss carry-forwards obtained during the year of approximately 10 million euros.

As at 31 December 2023, the Group had arranged sufficient provisions to cover the matters raised during the tax inspections carried out.

Ongoing disputes

The main tax-related disputes that were ongoing as at 31 December 2023 are set out below:

–

Appeal for judicial review before Spain’s National Court in relation to the rebuttal of the settlement of the disputed VAT assessment for Banco Sabadell between 2008-2010 for an amount of tax due of 1,831 thousand euros (2,337 thousand euros in total including late-payment interest), after a tax clearance certificate was issued in execution of a decision made by the Central Tax Appeal Board partially upholding the claim.

–

Appeal for judicial review before Spain’s National Court in relation to Order HFP/94/2023 of 2 February approving, among others, Model 797 “Temporary levy of credit institutions and financial credit establishments. Declaration of payment made” and Model 798 “Temporary levy of credit institutions and financial credit establishments. Advance payment”.

In addition, rectification requests were submitted in relation both to the advance payment of the temporary levy of credit institutions and financial credit establishments carried out in February 2023 (Model 798) and to the declaration of the payment made in September 2023 (Model 797).

The Group has, in any event, made suitable provisions for any contingencies that it is thought could arise in relation to these proceedings.

In relation to items for which the statute of limitations is unexpired, due to potential differences in the interpretation of tax regulations, the results of the tax authority inspections for the years subject to review may give rise to contingent tax liabilities, which it is not possible to quantify objectively. However, the Group considers that the possibility of such liabilities materialising is remote and, if they did materialise, the resulting tax charge would not be such as to have any significant impact on these consolidated annual financial statements.

Note 40 – Related party transactions

In accordance with the provisions of Chapter VII bis. Related Party Transactions, of the Capital Companies Act, introduced by Law 5/2021 of 12 April, amending the restated text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010 of 2 July and other financial regulations, with regard to the promotion of long-term shareholder involvement in listed companies, there are no transactions with officers and directors of the company that could be considered material, other than those considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, carried out following the corresponding approval procedure and, where applicable, reported in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act. Those that did take place were performed in the normal course of the company’s business or were performed on an arm’s-length basis or under the terms generally applicable to any employee. There is no record of any transactions being performed other than on an arm’s-length basis with persons or entities related to directors or senior managers.

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At its meeting of 30 November 2023, having received a favourable report from the Board Audit and Control Committee, the Board of Directors approved a related-party transaction consisting of a 150 million euro factoring facility opened for Puig Brands, S.A., which was formally arranged on 4 December 2023. This is considered to be a related-party transaction as Banco Sabadell’s Chairman, Josep Oliu Creus, was also Chair of the parent company of the Puig Group (Exea Empresarial, S.L., shareholder of Puig, S.L.), as well as being the natural person appointed as representative of that company in the role of Board member of Puig Brands, S.A. As the amount of this transaction, together with two other transactions carried out in the past twelve months, was more than 2.5% of the turnover amount recorded in Banco Sabadell Group’s consolidated annual financial statements for 2022, an “Other Relevant Information” notice, along with the corresponding report by the Board Audit and Control Committee, was sent to the CNMV on the same day, 4 December 2023, and assigned record number 25,658, in accordance with that set forth in Article 529 unvicies of the Capital Companies Act. Information was also provided about the other two aforesaid transactions, which were approved by the Board of Directors on 30 June 2023, after receiving a favourable report from the Board Audit and Control Committee, and attached to the same Other Relevant Information notice of 4 December 2023. The aforesaid transactions consisted of granting a 4-year 100 million euro loan and an interest rate and forex derivatives facility of 10 million euros.

Details of the most significant balances held with related parties as at 31 December 2023 and 2022, as well as the amount recorded on the consolidated income statements for 2023 and 2022 for related party transactions, are shown below:


Thousand euro
	2023
	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related *parties ()**		TOTAL
Assets:
Customer lending and other financial assets		—		99,652		3,757		829,620		933,029

Liabilities:
Customer deposits and other financial liabilities		—		463,292		5,452		218,477		687,221

Off-balance sheet exposures:
Financial guarantees given		—		294		—		29,136		29,430
Loan commitments given		—		54		378		261,702		262,134
Other commitments given		—		6,491		—		84,726		91,217

Income statement:
Interest and similar income		—		4,170		50		18,110		22,330
Interest and similar expenses		—		(4,010)		(75)		(915)		(5,000)
Return on capital instruments										—
Fees and commissions (net)		—		106,253		13		1,452		107,718
Other operating income/expense		—		5,655		3		4		5,662

(*) Includes employee pension plans.

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Thousand euro
	2022
	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related *parties ()**		TOTAL
Assets:
Customer lending and other financial assets		—		139,981		3,917		515,006		658,904

Liabilities:
Customer deposits and other financial liabilities		—		227,023		5,718		75,107		307,848

Off-balance sheet exposures:
Financial guarantees given		—		294		—		15,067		15,361
Loan commitments given		—		47		395		296,880		297,322
Other commitments given		—		6,499		—		82,913		89,412

Income statement:
Interest and similar income		—		3,467		36		5,646		9,149
Interest and similar expenses		—		(18)		(5)		(643)		(666)
Return on capital instruments		—		—		—		—		—
Fees and commissions (net)		—		137,175		25		(64)		137,136
Other operating income/expense		—		5,704		—		1		5,705

(*) Includes employee pension plans.

Note 41 – Remuneration of members of the Board of Directors and Senior Management and their respective balances

The following table shows, for the years ended 31 December 2023 and 2022, the remuneration paid to directors for services provided by them in that capacity:


Thousand euro
	2023		2022

Josep Oliu Creus		1,600		1,600
Pedro Fontana García		342		335
César González-Bueno Mayer (*)		100		100
Anthony Frank Elliott Ball (1)		24		158
Aurora Catá Sala		173		179
Luis Deulofeu Fuguet		175		175
María José García Beato		170		180
Mireya Giné Torrens		165		160
Laura González Molero (2)		145		30
George Donald Johnston III		206		178
David Martínez Guzmán		95		100
José Manuel Martínez Martínez		170		180
José Ramón Martínez Sufrategui (3)		—		91
Alicia Reyes Revuelta		170		150
Manuel Valls Morató		178		140
David Vegara Figueras (*)		100		100
Pedro Viñolas Serra (4)		90		—
Total		3,903		3,856

(*) Perform executive functions.

(1) Resigned from his position as Director, effective as from the date of the Ordinary Annual General Meeting, which took place on 23 March 2023.

(2) On 26 May 2022, the Board of Directors approved her appointment as member of the Board of Directors, in the capacity of Independent Director and she accepted the position on 19 September 2022.

(3) Resigned from his position as Director on 26 May 2022, effective as from the date of obtaining regulatory authorisation to fill the vacancy, which was received on 31 August 2022.

(4) On 23 March 2023, the Annual General Meeting approved his appointment as member of the Board of Directors, in the capacity of Independent Director. He accepted the position on 22 June 2023.

In 2023 and 2022, no contributions were made to meet pension commitments for directors as a result of their duties as members of the Board of Directors.

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Aside from the items mentioned above, members of the Board of Directors received 60 thousand euros as fixed remuneration in 2023 (94 thousand euros in 2022) by reason of their membership of boards of directors in Banco Sabadell Group companies (these amounts are included in the Annual Report on Director Remuneration).

Remuneration earned by directors for performing their executive duties during 2023 amounted to 3,496 thousand euros (3,520 thousand euros in 2022).

Thousand euro

Fixed

remuneration

Variable

remuneration

Long-term

remuneration

Total 2023

Total 2022

Executive Directors

César González-Bueno Mayer

1,134

983

558

2,676

2,722

David Vegara Figueras

592

116

112

820

743

Non-Executive Directors

María José García Beato (*)

—

Total

1,726

1,099

670

3,496

3,520

(*) Remuneration in 2022 corresponds to the long-term remuneration scheme that began in 2019 (see Note 33).

In compliance with the Director Remuneration Policy for the years 2024, 2025 and 2026, in force since its approval by the Annual General Meeting held on 23 March 2023, the remuneration scheme for the Chief Executive Officer was changed. Their annual fixed remuneration is 1,600 thousand euros in cash. After the corresponding personal income tax withholdings, the Chief Executive Officer systematically reinvests 300 thousand euros of his gross fixed remuneration by purchasing an equivalent annual net amount of the Bank’s shares. Every year, a 300 thousand euro annual retirement contribution will be made, as described in the aforesaid Policy. Therefore, the Chief Executive Officer’s annual fixed remuneration is 1,600 thousand euros in cash.

Exceptionally, to begin the plan, an initial contribution to the retirement plan of 600 thousand euros (in addition to those mentioned in the previous paragraph) was made for the 2023 financial year, with the ensuing reduction of an equal amount in his fixed remuneration. As each director’s Remuneration Policy was applied on a pro-rata basis for the corresponding year, the amount of fixed remuneration for 2023 was 1,100 thousand euros plus 34 thousand euros as remuneration in kind and employee benefits.

Taking the foregoing into account, the contributions made in 2023 in insurance premiums covering pension contingencies for Executive Directors amounted to 961 thousand euros (101 thousand euros in 2022).

In addition, for the purposes of comparison, it is worth noting that the first full cycle in which the current Chief Executive Officer could earn long-term remuneration ended in 2023 (as it covered the period from 2021-2023).

For further details on directors’ remuneration, see the Annual Report on Director Remuneration for 2023, which is included for reference purposes in the consolidated Directors’ Report.

The amounts included in the Annual Report on Directors’ Remuneration and in the Annual Corporate Governance Report follow the criteria set forth in CNMV Circular 5/2013, amended by CNMV Circular 2/2018 of 12 June, CNMV Circular 1/2020 of 6 October, and CNMV Circular 3/2021 of 28 September; therefore, those amounts accrued and not subject to deferral are reported. The amounts included in this Note follow the criteria set forth in the accounting standards applicable to the Bank, and therefore take into account the amounts accrued during 2023, irrespective of any deferral schedule to which they may be subject.

Total risk transactions granted by the Bank and consolidated companies to directors of the parent company amounted to 875 thousand euros as at 31 December 2023, of which 738 thousand euros corresponded to loans and receivables and 137 thousand euros related to loan commitments given (907 thousand euros as at 31 December 2022, consisting of 748 thousand euros in loans and receivables and 159 thousand euros in loan commitments given). These transactions form part of the ordinary business of the Bank and are carried out under normal market conditions. As for remuneration, compensation payable amounted to 3,751 thousand euros as at 31 December 2023 (4,376 thousand euros as at 31 December 2022).

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Senior Management

Total Senior Management remuneration earned during 2023 amounted to 8,140 thousand euros. Pursuant to applicable regulations, this amount includes the remuneration of Senior Management members plus that of the Internal Audit Officer. The total remuneration of Senior Management includes amounts received by all those who were members of Senior Management at any time during 2023, in proportion to the time they spent in that position (on average 10 members in 2023 and 8.3 members in 2022).

Thousand euro

2023

2022

Ordinary
remuneration

Severance pay

Total

Ordinary
remuneration

Severance pay

Total

Senior Management and Director of Internal Audit remuneration

8,165

—

8,165

6,675

6,200

12,875

Risk transactions granted by the Bank and consolidated companies to Senior Management members (with the exception of those who are also Executive Directors, for whom details are provided above) amounted to 3,260 thousand euros as at 31 December 2023 (3,405 thousand euros as at 31 December 2022), comprising 3,019 thousand euros in loans and receivables and 241 thousand euros related to loan commitments given (as at 31 December 2022, 3,169 thousand euros related to loans and receivables and 236 thousand euros to loan commitments given). As for remuneration, compensation payable amounted to 1,700 thousand euros as at 31 December 2023 (1,342 thousand euros as at 31 December 2022).

The accrued expenses corresponding to long-term remuneration schemes granted to members of Senior Management, including Executive Directors (see Note 33), amounted to 1,494 thousand euros in 2023 (1,181 thousand euros in 2022).

Details of existing agreements between the company and members of the Board and management staff with regard to severance pay are set out in the Group’s Annual Corporate Governance Report, which is included for reference purposes in the consolidated Directors’ Report.

The Executive Directors and Senior Management staff are specified below, indicating the positions they hold in the Bank as at 31 December 2023:



Executive Directors

César González-Bueno Mayer		Sabadell Group CEO
David Vegara Figueras		Director-General Manager

Senior Management

Leopoldo Alvear Trenor		General Manager
Marc Armengol Dulcet		General Manager
Gonzalo Barettino Coloma		Secretary General
Elena Carrera Crespo		General Manager
Cristóbal Paredes Camuñas		General Manager
Carlos Paz Rubio		General Manager
Sonia Quibus Rodríguez		General Manager
Jorge Rodríguez Maroto		General Manager
Carlos Ventura Santamans		General Manager

At its meeting of 30 November 2023, the Board of Directors appointed Marcos Prat Rojo as a General Manager of Banco Sabadell; he will also take on the role of Strategy Director, reporting to the Chief Executive Officer, subject to obtaining the European Central Bank’s statement of no objection to his suitability and effective as from that moment. The Board also approved his becoming a member of Banco Sabadell’s Management Committee during that same meeting. Given that, as at 31 December 2023, the statement of no objection to his suitability had not yet been received from the European Central Bank, this director was not considered a member of Senior Management for the purpose of these annual financial statements.

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Other information relating to the Board

In accordance with the provisions of Article 229 of Royal Legislative Decree 1/2010 of 2 July, approving the restated text of the Capital Companies Act in relation to the duty to avoid situations of conflict of interest, and without prejudice to the provisions of Article 529 vicies et seq. of the aforesaid Act², directors have reported to the company that, during 2023, they or parties related to them, as defined in Article 231 of the Capital Companies Act:

–

Have not carried out transactions with the company without taking into account usual operations, performed under standard conditions for customers and whose amount is immaterial, understanding such operations to be those that do not need to be reported to give a true and fair view of the company’s equity, financial situation and income, or any operations carried out and considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, having applied the corresponding approval procedure and reporting requirement, in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act.

–

Have not used the name of the company or their position as director to unduly influence the performance of personal transactions.

–

Have not made use of corporate assets, including the company’s confidential information, for personal purposes.

–

Have not taken undue advantage of the company’s business opportunities.

–

Have not obtained advantages or remuneration from third parties other than the company or its Group in connection with the performance of their duties, with the exception of acts of mere courtesy.

–

Have not carried out activities on their own behalf or on behalf of a third party that involve competition with the company, whether on an isolated or potential basis, or that might otherwise place them in permanent conflict with the company’s interests.

The Bank has entered into a civil liability insurance policy for 2023 that covers the Institution’s Directors and Senior Management staff. The total premium paid was 1,395 thousand euros (3,761 thousand euros in 2022).

Note 42 – Other information

Transactions with significant shareholders

No major transactions with significant shareholders were carried out during 2023 and 2022.

Environmental disclosures

In the face of the challenges brought by climate change and in its capacity as a financial institution, the Group believes it has a fundamental role to play in the transition towards a sustainable economy and in the achievement of the goals established in the Paris Agreement and the 2030 Agenda. To that end, Banco Sabadell has an ESG action framework that is aligned with the Sustainable Development Goals (SDGs) and in which climate action (SDG 13) is one of the priority SDGs of its corporate strategy.

Banco Sabadell, with its Sustainability Policy and its Environmental and Social Risk Framework, strives to frame the Group’s activity and organisation within ESG parameters. Environmental, social and governance factors are present both in decision-making and when responding to the needs and concerns of all its stakeholders. As a result of that same goal, Banco Sabadell, TSB and Banco Sabadell Mexico have incorporated the aforesaid parameters into their own commitments.

As a financial institution, Banco Sabadell plays a fundamental role in rebuilding an inclusive and decarbonised economy. On one hand, mobilising resources, identifying technologies and creating opportunities and, on the other, incorporating new capabilities with an in-house transformation to embed sustainability into all agendas, managing the risk of its customer portfolio, minimising its impact on ESG risks and funding a large part of the investments needed to fulfil the Paris Agreement, the European Green Pact and the 2030 Agenda.

²	Related-party transactions are governed by their own special regime.

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In this context, and to continue making progress with its goal of accelerating economic and social transformations that contribute to sustainable development, the Bank already reinforced the ESG dimensions applicable to the strategy, governance and its business model back in 2022, with the launch of its ESG framework, Sabadell’s Commitment to Sustainability, setting specific targets for 2025-2050 across four strategic pillars. This set of commitments includes the alignment of business targets with SDGs and establishes levers for transformation and promotion actions. The main courses of action are the following:

–

Progress as a sustainable institution: the Bank focuses on achieving greenhouse gas (GHG) emissions neutrality, on making progress in diversity, on ensuring talent and on continuing to incorporate ESG criteria into its governance arrangements, in addition to collaborating in key partnerships.

–

Support customers in the transition to a sustainable economy: to that end, the Institution sets decarbonisation pathways, supports customers in the transition with specialised solutions for renewable energies, energy efficiency and sustainable mobility, and it establishes the Environmental and Social Risk Framework, which contains sectoral rules that limit controversial activities and/or activities with a negative impact on social and environmental development.

–

Offer investment opportunities that contribute to sustainability: in the investor ecosystem, the Bank focuses on increasing savings and investment opportunities that contribute to sustainability, rolling out a wide range of social, ethical, green and sustainability bonds and funds, both its own and those of third parties.

–

Work together for a sustainable and cohesive society: in its commitment to society, the Institution believes that it is imperative to take an active role to improve financial education, drive forward inclusion, minimise vulnerabilities and ensure secure transactions and exchanges of information.

To complement this, the Bank continues to make progress in the area of sustainable finance with its ESG Activities Plan, as an operational tool that ensures achievement of the milestones stemming from the new developments and needs generated by the regulatory and supervisory environment, which have implications for the business strategy, business model, governance arrangements, risk management and reporting. Among its main courses of action, which are monitored on an ongoing basis by the Sustainability Committee, it is worth noting the mobilisation of resources and capabilities in the area of sustainable finance, the progress made with the Sustainable Finance Plan, the assurance of market disclosures and the identification of sustainable progress mechanisms in fields such as communication, training and measurement.

All of these actions and goals set out in Sabadell’s Commitment to Sustainability shape the Bank’s ESG roadmap.

Given the activities in which it is engaged, as at 31 December 2023, the Bank does not have any responsibilities, expenses, assets, revenues, provisions or contingencies of an environmental nature that could be deemed significant with respect to its equity, financial position or consolidated results; therefore, no specific disclosures are included in the environmental disclosures document provided for in Order JUS/616/2022 of 30 June, approving the new templates for the submission to the Companies Register of the annual financial statements of institutions required to published them.

For further details, see the Non-Financial Disclosures Report, which is included as part of the consolidated Directors’ Report.

Customer Care Service (SAC)

The Customer Care Service (hereinafter, SAC as per its Spanish acronym) and its head, who is appointed by the Board of Directors, report directly to the Compliance Division and are independent of the Bank’s business and operational lines. The main function of the SAC is to handle and resolve complaints and claims brought forward by customers and users of the financial services of Banco de Sabadell, S.A. and the entities that adhere to the relevant regulations, where these relate to their interests and legally recognised rights arising from contracts, transparency and customer protection regulations or good financial practices and uses, in accordance with the Banco Sabadell Regulations for the Protection of Customers and Users of Financial Services.

The entities that adhere to the SAC Regulations are the following: Sabadell Asset Management, S.A., S.G.I.I.C. Sociedad Unipersonal; Urquijo Gestión, S.G.I.I.C, S.A.; and Sabadell Consumer Finance, S.A.U.

In 2023, Banco Sabadell’s Customer Care Service (SAC) received 54,884 complaints and 54,048 complaints were handled during the year, with 2,301 claims and complaints pending analysis as at 31 December 2023.

A-202

Details of complaints received by the SAC in 2023, broken down by type of product or service, are provided here below:


	Complaints		% of total received

Product
Loans and credit secured with mortgages		17,819		32.5 %
Loans and credit not secured with collateral		8,391		15.3 %
Demand deposits and payment accounts		19,882		36.2 %
Payment instruments and electronic money		3,576		6.5 %
Other payment services		2,156		3.9 %
Other products/services		2,007		3.7 %
Other products		1,053		1.9 %
Total		54,884		100 %

Complaints and claims processed by SAC at first instance

During 2023, the SAC received 51,175 complaints and claims, of which 32,455 were accepted for processing and resolved, in accordance with the provisions of Order ECO 734/2004 of 11 March.

Of the total number of complaints and claims accepted for processing and resolved by the SAC, 17,646 (54.4%) were resolved in the customer’s favour, 14,803 (45.6%) in the Institution’s favour and in 6 cases the customer withdrew their complaint. During 2023, 17,923 complaints and claims were not accepted for processing due to reasons set out in the SAC Regulations.

Of the total number of complaints and claims accepted for processing and resolved by the SAC, 20,823 (64.16%) were processed within a period of 15 working days, 10,321 (31.80%) within a period of less than one month and 1,311 (4.04%) within a period longer than one month.

Complaints and claims managed by the Ombudsman

At Banco Sabadell, the role of Customer Ombudsman is performed by José Luis Gómez-Dégano y Ceballos-Zúñiga. The Ombudsman is responsible for resolving complaints brought forward by the customers and users of Banco de Sabadell, S.A., and those of the other aforementioned entities associated with it, at both first and second instance, and for resolving issues that are passed on by the SAC. The Ombudsman’s decisions are binding on the Institution.

In 2023, the SAC received a total of 2,952 complaints and claims via the Customer Ombudsman, of which 2,933 were handled during the year.

With regard to claims and complaints resolved by the Customer Ombudsman, 24 were resolved in the customer’s favour, 727 were resolved in the Institution’s favour, in 1,149 cases the Bank conceded and in 4 cases the customer withdrew their complaint. 988 complaints were rejected by the Ombudsman in accordance with the regulations governing their activity. As at 31 December 2023, 72 complaints were pending submission of allegations and 41 were pending the Ombudsman’s ruling.

Complaints and claims managed by the Bank of Spain and the CNMV

Under current legislation, customers or users who are dissatisfied with the response received from the SAC or from the Customer Ombudsman may submit their claims and complaints to the Market Conduct and Complaints Department of the Bank of Spain, to the CNMV, or to the Directorate General for Insurance and Pension Funds, subject to the vital prerequisite of having previously addressed their complaint or claim to the Institution.

The SAC received a total of 757 claims referred by the Bank of Spain and the CNMV up to 31 December 2023. In 2023, taking into account claims that remained pending at the end of the previous year, 737 claims were accepted for processing and resolved.

Note 43 – Subsequent events

No significant events meriting disclosure have occurred since 31 December 2023.

A-203

Schedule I – Banco Sabadell Group companies

Banco Sabadell Group companies as at 31 December 2023 consolidated by the full consolidation method



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)
			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets

Aurica Coinvestments, S.L.	Holding	Barcelona - Spain		—		61.76		50,594		(3,205)		4,712		2,614		52,175		50,594		(15,793)		2,420
Banco Atlantico (Bahamas) Bank & Trust Ltd.	Credit institution	Nassau - Bahamas		99.99		0.01		1,598		712		(90)		—		2,952		2,439		(435)		(90)
Banco de Sabadell, S.A.	Credit institution	Alicante - Spain		—		—		680,028		10,247,219		1,088,014		—		179,945,913		—		12,961,312		1,020,744
Banco Sabadell, S.A., Institución de Banca Múltiple	Credit institution	Mexico City - Mexico		99.99		0.01		635,734		65,095		25,755		—		5,721,555		725,419		(42,119)		2,197
BanSabadell Factura, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		100		812		613		—		1,828		799		114		613
BanSabadell Inversió Desenvolupament, S.A.U.	Holding	Sant Cugat del Valles - Spain		100.00		—		16,975		165,564		21,193		—		205,074		108,828		84,911		6,827
Bansabadell Mediación, Operador de Banca-Seguros Vinculado del Grupo Banco Sabadell, S.A.	Other regulated companies	Alicante - Spain		—		100.00		301		60		3,110		8,393		38,485		524		(3,552)		4,259
Bitarte, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		6,506		(2,288)		240		—		4,640		9,272		(4,582)		(173)
BStartup 10, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		4,495		509		—		12,761		1,000		(374)		(185)
Crisae Private Debt, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		—		100.00		3		286		203		—		607		200		88		204
Desarrollos y Participaciones Inmobiliarias 2006, S.L.U. en Liquidación	Real estate	Elche - Spain		—		100.00		1,942		(89,871)		(209)		—		42		1,919		(89,848)		(209)
Duncan Holdings 2022-1 Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		—		5,993		(1,469)
Ederra, S.A.	Real estate	Sant Cugat del Valles - Spain		97.85		—		2,036		34,452		(461)		—		36,486		36,062		(38)		(503)
ESUS Energía Renovable, S.L.	Power generation	Vigo - Spain		—		90.00		50		(1,522)		(313)		—		18,476		45		(1,666)		(584)
Fonomed Gestión Telefónica Mediterráneo, S.A.U.	Other ancillary activities	Alicante - Spain		100.00		—		1,232		20,652		382		—		25,479		19,271		3,477		2,068
Gazteluberri, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		53		(20,795)		(79)		—		1,795		23,891		(44,634)		(79)
Gest 21 Inmobiliaria, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		7,810		1,140		24		—		8,995		80,516		(46,689)		24
Gestión Financiera del Mediterráneo, S.A.U.	Other financial services	Alicante - Spain		100.00		—		13,000		2,596		6,046		9,531		21,818		66,787		(42,846)		(2,296)
Gier Operations 2021, S.L.U.	Other ancillary activities	Andorra - Andorra		100.00		—		730		(9)		(9)		—		712		730		(9)		(9)
Guipuzcoano Promoción Empresarial, S.L.	Holding	Sant Cugat del Valles - Spain		—		100.00		53		(77,109)		(258)		—		5,264		7,160		(84,207)		(258)
Hobalear, S.A.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		60		79		6		—		146		414		79		6
Hondarriberri, S.L.	Holding	Sant Cugat del Valles - Spain		99.99		0.01		41		8,991		61		—		10,100		165,669		93,348		324
Hotel Management 6 Gestión Activa, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		135,730		28,210		(129)		—		163,812		136,335		50,295		45
Hotel Management 6 Holdco, S.L.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		29,074		(24,148)		(178)		—		61,401		27,611		(22,685)		(178)
Interstate Property Holdings, LLC.	Holding	Miami - United States		100.00		—		7,293		(1,152)		211		—		6,439		3,804		7,900		211
Inverán Gestión, S.L. en Liquidación	Real estate	Sant Cugat del Valles - Spain		44.83		55.17		90		(96)		—		—		50		45,090		(45,096)		—
Inversiones Cotizadas del Mediterráneo, S.L.	Holding	Alicante - Spain		100.00		—		308,000		207,830		6,564		—		1,008,718		589,523		(73,054)		6,564
Manston Invest, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		33,357		(13,688)		(95)		—		19,921		33,357		(13,689)		(95)
Mariñamendi, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		62		(11,598)		(43)		—		3,821		109,529		(121,065)		(43)

A-204

Banco Sabadell Group companies as at 31 December 2023 consolidated by the full consolidation method



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)
			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets
Mediterráneo Sabadell, S.L.	Holding	Alicante - Spain		50.00		50.00		85,000		16,567		1,085		—		103,121		510,829		(409,218)		1,085
Paycomet, S.L.U.	Payment institution	Torrelodones - Spain		100.00				200		(19,658)		21,981		—		88,170		80,622		1,021		21,962
Puerto Pacific Vallarta, S.A. de C.V.	Real estate	Mexico City - Mexico		—		100.00		28,947		(14,693)		(74)		—		14,180		29,164		(12,264)		(74)
Ripollet Gestión, S.L.U.	Other financial services	Sant Cugat del Valles - Spain		100.00		—		20		396		(369)		—		625,387		593		(177)		(369)
Rubí Gestión, S.L.U.	Other financial services	Sant Cugat del Valles - Spain		100.00		—		3		14		(6)		—		295,504		53		(36)		(6)
Sabadell Consumer Finance, S.A.U.	Credit institution	Sabadell - Spain		100.00		—		35,720		95,237		5,182		—		2,139,044		72,232		63,647		5,182
Sabadell Information Systems Limited	Provision of technology services	London - United Kingdom		—		100.00		12,036		21,507		422		—		34,469		41,296		(8,160)		422
Sabadell Digital, S.A.U.	Provision of technology services	Sabadell - Spain		100.00		—		40,243		236,148		(45,105)		—		1,473,772		269,695		1,434		(49,813)
Sabadell Innovation Capital, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		8,552		31,752		—		43,824		1,000		(7,607)		(991)
Sabadell Patrimonio Inmobiliario, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		30,116		795,014		(5,789)		—		821,973		863,895		(38,820)		(5,734)
Sabadell Real Estate Activos, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		100,060		234,014		3		—		334,918		500,622		(166,548)		3
Sabadell Real Estate Development, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		15,807		137,336		(5,495)		—		1,036,087		4,748,442		(4,573,410)		(8,263)
Sabadell Real Estate Housing, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		2,073		662		20		—		4,786		23,792		(21,058)		20
Sabadell Securities USA, Inc.	Other financial services	Miami - United States		100.00		—		551		6,197		694		—		7,601		551		5,692		686
Sabadell Strategic Consulting, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		664		226		—		1,625		3		664		226
Sabadell Venture Capital, S. L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		3		14,160		2,818		—		72,709		3		9,552		1,075
Sabcapital, S.A de C.V., SOFOM, E.R.	Credit institution	Mexico City - Mexico		49.00		51.00		127,864		49,577		44,928		51,527		1,420,571		126,007		25,073		41,762
Sinia Capital, S.A. de C.V.	Holding	Mexico City - Mexico		—		100.00		20,830		15,320		(6,405)		—		58,881		22,435		(4,160)		9,721
Sinia Renovables, S.A.U.	UCITS, funds and similar financial corporations	Sant Cugat del Valles - Spain		100.00		—		15,000		2,055		9,591		—		176,162		15,000		4,449		8,047
Sogeviso Servicios Gestión Vivienda Innovación Social, S.L.U.	Real estate	Alicante - Spain		100.00		—		3		10,078		248		—		11,960		3		11,659		(439)
Stonington Spain, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		60,729		(11,826)		(119)		—		49,277		60,729		(11,826)		(119)
Tasaciones de Bienes Mediterráneo, S.A. in liquidation	Other ancillary activities	Alicante - Spain		99.88		0.12		1,000		1,417		87		—		2,507		5,266		(2,850)		87
Tenedora de Inversiones y Participaciones, S.L.	Holding	Alicante - Spain		100.00		—		296,092		(129,129)		(38,776)		—		232,643		2,975,977		(2,739,862)		(38,596)
TSB Bank PLC	Credit institution	Edinburgh - United Kingdom		—		100.00		90,710		1,945,133		196,655		137,839		54,786,747		1,814,636		351,887		212,331
TSB Banking Group PLC	Holding	London - United Kingdom		100.00		—		7,028		1,826,060		138,687		56,749		3,358,703		2,207,741		(245,481)		(21,409)
TSB Banking Group plc Employee Share Trust	Other ancillary activities	Saint Helier - Jersey		—		100.00		1		(15,404)		(25)		—		286		—		(14,787)		1
TSB Covered Bonds (Holdings) Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		—		—		—
TSB Covered Bonds (LM) Limited	Other ancillary activities	London - United Kingdom		—		100.00		1		—		—		—		1		—		—		—
TSB Covered Bonds LLP	UCITS, funds and similar financial corporations	London - United Kingdom		—		100.00		1		20		3		—		72		—		21		3
Urquijo Gestión, S.A.U., S.G.I.I.C.	Funds management activities	Madrid - Spain		100.00		—		3,606		4,858		(1,536)		1,257		8,573		3,084		5,380		(1,536)
VeA Rental Homes , S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		5,000		(222)		(2,229)		—		13,131		22,000		(17,222)		(2,229)
Venture Debt SVC, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		3		—		—		—		5,251		3		—		—

Total														267,910				16,642,461		4,762,129		1,213,370

A-205

Banco Sabadell Group companies as at 31 December 2023 accounted for using the equity method (*)



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data (a)						Group investment		Contribution to reserves or losses in consolidated companies (d) ()**		Contribution to Group consolidated profit/(loss)
			Direct		Indirect		Capital		Other equity		Profit/(loss) (b)		Dividends paid (c)		Total assets

Aurica III, Fondo de Capital Riesgo	UCITS, funds and similar financial corporations	Barcelona - Spain		—		47.50		51,130		81,088		1,306		6,290		64,340		24,318		2,115		4,128
Aurica IIIB, S.C.R., S.A.	UCITS, funds and similar financial corporations	Barcelona - Spain		—		42.85		34,557		79,139		908		1,518		43,386		12,520		3,562		2,507
BanSabadell Pensiones, E.G.F.P., S.A.	Other regulated companies	Madrid - Spain		50.00		—		7,813		34,412		3,343		—		49,106		40,378		(18,915)		1,672
BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		10,000		85,856		21,730		11,000		312,609		34,000		16,997		10,866
BanSabadell Vida, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		43,858		241,380		189,414		—		9,556,627		27,106		82,370		96,365
Doctor Energy Central Services, S.L.	Other business management consulting activities	Granollers - Spain		—		16.66		300		(100)		(166)		—		1,276		75		(50)		(19)
Catalana de Biogás Iberia, S.L.	Power generation	Barcelona - Spain		—		24.90		10		(373)		1		—		1		2		—		(2)
Parque Eólico Casa Vieja S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Parque Eólico Villaumbrales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		832		267		(15)		—
Parque Eólico Perales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Parque Eólico Los Pedrejones S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Energíes Renovables Terra Ferma, S.L.	Power generation	Barcelona - Spain		—		50.00		6		(73)		(15)		—		3,236		3		(3)		—
Financiera Iberoamericana, S.A.	Credit institution	Havana - Cuba		50.00		—		38,288		13,539		9,441		2,753		104,156		19,144		3,825		4,289
Flex Equipos de Descanso, S.A.	Manufacturing	Getafe - Spain		—		19.16		66,071		58,387		6,186		—		365,595		50,930		36,123		—
Murcia Emprende, S.C.R. de R.S., S.A.	Other financial services	Murcia - Spain		28.70		—		2,557		910		(182)		—		3,340		2,026		(910)		(173)
Plaxic Estelar, S.L.	Real estate	Barcelona - Spain		—		45.01		1,762		(15,237)		(11)		—		31,992		3,906		(3,114)		(792)
Portic Barcelona, S.A.	Data processing, hosting and related activities	Barcelona - Spain		25.00		—		291		1,841		25		—		2,391		5		548		(14)
Sydinia, S.L.	Power generation	Albacete - Spain		—		50.00		226		(40)		1		—		1		113		—		(20)
SBD Creixent, S.A.	Real estate	Sabadell - Spain		23.05		—		5,965		(891)		256		—		6,030		3,524		(2,299)		4
Enerlan Solutions, S.L.	Power generation	Biscay - Spain		—		19.00		3		142		80		—		559		274		—		—
Ingubide, S.L.	Power generation	Biscay - Spain		—		19.00		3		43		139		—		520		152		—		—


Total														21,561				219,544		120,189		118,811

(*) Companies accounted for using the equity method as the Group does not have control over them but does have significant influence.

(**) See Note 1.4.

(a) Figures for foreign companies translated to euros at the historical exchange rate; amounts in the consolidated income statement translated at the average exchange rate.

(b) Results pending approval by Annual General Meeting of Shareholders and Partners.

(d) The heading “Reserves or accumulated losses of investments in joint ventures and associates” on the consolidated balance sheet as at 31 December 2023 also includes -65,353 thousand euros corresponding to Promontoria Challenger I, S.A., an entity classified as a non-current asset held for sale.

The balance of total revenue from associates consolidated by the equity method and individually considered to be non-material amounted to 621,313 thousand euros as at 31 December 2023. The balance of liabilities as at the end of 2023 amounted to 540,899 thousand euros. The key figures as at 2023 year-end for BanSabadell Vida, S.A. are included in Note 14 of the consolidated annual financial statements.

A-206

Changes in the scope of consolidation in 2023

Additions to the scope of consolidation:

Thousand euro

Name of entity (or line of business) acquired or merged

Category

Effective date of

the transaction

Fair value of equity instruments issued for the acquisition

% Voting rights
acquired

% Total voting
rights

Type of
shareholding

Method

Reason

Acquisition cost

Fair value of equity instruments
issued for the acquisition

Sydinia, S.L.

Associate

20/7/2023

113

—

50.00

Indirect

Equity method

Enerlan Solutions, S.L.

Associate

21/11/2023

274

—

19.00

Indirect

Equity method

Ingubide, S.L.

Associate

21/11/2023

152

—

19.00

Indirect

Equity method

Total newly consolidated subsidiaries

—

Total newly consolidated associates

539

(a) Acquisition of associates.

Exclusions from the scope of consolidation:


Thousand euro

Name of entity (or line of business) sold, spun off or otherwise disposed of	Category		Effective date of the transaction		% Voting rights disposed of			% Total voting rights following disposal			Profit/(loss) generated		Type of shareholding		Method		Reason

BanSabadell Financiación, E.F.C., S.A.		Subsidiary		10/10/2023		100.00	%		—	%		—		Direct		Full consolidation		b
Business Services for Operational Support, S.A.U.		Subsidiary		19/1/2023		100.00	%		—	%		43		Direct		Full consolidation		a
Duncan de Inversiones S.I.C.A.V., S.A. in liquidation		Subsidiary		11/1/2023		99.81	%		—	%		—		Direct		Full consolidation		a
Galeban 21 Comercial, S.L		Subsidiary		18/10/2023		100.00	%		—	%		64		Direct		Full consolidation		a
Sabadell Innovation Cells, S.L.U.		Subsidiary		28/9/2023		100.00	%		—	%		121		Direct		Full consolidation		a
Compañía de Cogeneración del Caribe Dominicana, S.A.		Subsidiary		15/2/2023		100.00	%		—	%		312		Indirect		Full consolidation		a
Fuerza Eólica De San Matías, S. de R.L. de C.V.		Subsidiary		15/12/2023		100.00	%		—	%		11,892		Indirect		Full consolidation		c
Urumea Gestión, S.L. in liquidation		Subsidiary		28/12/2023		100.00	%		—	%		—		Indirect		Full consolidation		a
Other												(4,237)

Total												8,195

(a) Removed from the scope due to dissolution and/or liquidation.

(b) Removed from the scope due to merger by absorption.

A-207

Banco Sabadell Group companies as at 31 December 2022 consolidated by the full consolidation method



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)
			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets

Aurica Coinvestments, S.L.	Holding	Barcelona - Spain		—		61.76		50,594		(853)		1,880		1,043		51,651		50,594		(5,050)		(10,045)
Banco Atlantico (Bahamas) Bank & Trust Ltd.	Credit institution	Nassau - Bahamas		99.99		0.01		1,598		825		(31)		—		3,155		2,439		(403)		(32)
Banco de Sabadell, S.A.	Credit institution	Alicante - Spain		—		—		703,371		10,009,080		740,551		—		195,620,963		—		12,573,535		593,675
Banco Sabadell, S.A., Institución de Banca Múltiple	Credit institution	Mexico City - Mexico		99.99		0.01		573,492		(16,619)		12,599		—		4,789,408		618,750		(78,166)		(12,409)
BanSabadell Factura, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		100		381		432		—		1,150		799		(318)		432
BanSabadell Financiación, E.F.C., S.A.	Credit institution	Sabadell - Spain		100.00		—		24,040		12,856		683		—		571,813		24,040		12,856		683
BanSabadell Inversió Desenvolupament, S.A.U.	Holding	Barcelona - Spain		100.00		—		16,975		99,786		71,235		—		214,258		108,828		70,161		3,196
Bansabadell Mediación, Operador de Banca-Seguros Vinculado del Grupo Banco Sabadell, S.A.	Other regulated companies	Alicante - Spain		—		100.00		301		60		7,244		8,232		53,073		524		(1,597)		6,437
Bitarte, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		6,506		(2,176)		(113)		—		4,325		9,272		(4,488)		(93)
BStartup 10, S.L.U.	Holding	Barcelona - Spain		—		100.00		1,000		4,107		(315)		—		11,232		1,000		(999)		(169)
Business Services for Operational Support, S.A.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		—		—		—		—		51		—		(8,726)		2,825
Compañía de Cogeneración del Caribe Dominicana, S.A.	Power generation	Santo Domingo - Dominican Republic		—		100.00		5,016		(4,581)		—		—		454		—		(312)		—
Crisae Private Debt, S.L.U.	Other ancillary activities	Barcelona - Spain		—		100.00		3		181		104		—		352		200		(16)		103
Desarrollos y Participaciones Inmobiliarias 2006, S.L.U. en Liquidación	Real estate	Elche - Spain		—		100.00		1,942		(89,826)		(45)		—		3		1,919		(89,803)		(45)
Duncan de Inversiones S.I.C.A.V., S.A. in liquidation	UCITS, funds and similar financial corporations	Sant Cugat del Valles - Spain		99.81		—		7,842		(7,787)		(55)		—		18		—		(345)		(55)
Duncan Holdings 2022-1 Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		—		—		5,993
Ederra, S.A.	Real estate	San Sebastián - Spain		97.85		—		2,036		34,085		371		—		36,563		36,062		(398)		363
ESUS Energía Renovable, S.L.	Power generation	Vigo - Spain		—		90.00		50		(1,279)		(173)		—		2,975		23		(1,361)		(297)
Fonomed Gestión Telefónica Mediterráneo, S.A.U.	Other ancillary activities	Alicante - Spain		100.00		—		1,232		2,913		1,017		—		6,820		2,771		1,962		1,247
Fuerza Eólica De San Matías, S. de R.L. de C.V.	Power generation	Monterrey - Mexico		—		99.99		8,144		(14,919)		(7,095)		—		53,496		5,951		(10,502)		(6,497)
Galeban 21 Comercial, S.L.U.	Services	A Coruña - Spain		100.00		—		10,000		(4,292)		(6)		—		5,702		14,477		(8,769)		(6)
Gazteluberri, S.L.	Real estate	Sant Cugat del Vallès - España		—		100.00		53		(20,789)		(7)		—		1,672		23,891		(44,627)		(7)
Gest 21 Inmobiliaria, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		7,810		1,108		33		—		8,958		80,516		(46,727)		38
Gestión Financiera del Mediterráneo, S.A.U.	Other financial services	Alicante - Spain		100.00		—		13,000		2,573		8,211		12,875		23,963		66,787		(42,959)		1,269
Gier Operations 2021, S.L.U.	Other ancillary activities	Andorra - Andorra		100.00		—		730		—		(9)		—		722		730		—		(9)
Guipuzcoano Promoción Empresarial, S.L.	Holding	San Sebastián - Spain		—		100.00		53		(75,662)		(1,447)		—		5,307		7,160		(82,761)		(1,447)
Hobalear, S.A.U.	Real estate	Barcelona - Spain		—		100.00		60		72		7		—		141		414		72		7

A-208

Banco Sabadell Group companies as at 31 December 2022 consolidated by the full consolidation method



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)
			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets
Hondarriberri, S.L.	Holding	San Sebastián - Spain		99.99		0.01		41		63,158		(54,168)		—		10,037		165,669		95,440		(2,092)
Hotel Management 6 Gestión Activa, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		135,730		28,269		(54)		—		163,945		136,335		50,335		(40)
Hotel Management 6 Holdco, S.L.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		29,074		(24,133)		(15)		—		61,579		27,611		(22,671)		(15)
Interstate Property Holdings, LLC.	Holding	Miami - United States		100.00		—		7,293		(977)		51		—		6,387		3,804		7,849		51
Inverán Gestión, S.L. en Liquidación	Real estate	Sant Cugat del Valles - Spain		44.83		55.17		90		(80)		(15)		—		52		45,090		(45,081)		(15)
Inversiones Cotizadas del Mediterráneo, S.L.	Holding	Alicante - Spain		100.00		—		308,000		195,644		10,690		—		1,005,403		589,523		(83,787)		10,733
Manston Invest, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		33,357		(13,595)		(93)		—		19,939		33,357		(13,595)		(93)
Mariñamendi, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		62		(11,590)		(8)		—		3,882		109,529		(121,057)		(8)
Mediterráneo Sabadell, S.L.	Holding	Alicante - Spain		50.00		50.00		85,000		16,528		(217)		—		101,314		510,829		(409,000)		(217)
Paycomet, S.L.U.	Payment institution	Torrelodones - Spain		—		100.00		200		726		802		—		24,335		9,205		234		787
Puerto Pacific Vallarta, S.A. de C.V.	Real estate	Mexico City - Mexico		—		100.00		28,947		(16,488)		338		—		12,798		29,164		(11,951)		(314)
Ripollet Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		20		272		124		—		458,163		593		(301)		124
Rubí Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		3		20		(6)		—		402,936		53		(30)		(6)
Sabadell Consumer Finance, S.A.U.	Credit institution	Sabadell - Spain		100.00		—		35,720		77,380		17,857		—		1,888,124		72,232		45,790		17,857
Sabadell Information Systems Limited	Provision of technology services	London - United Kingdom		—		100.00		12,036		20,653		169		—		33,228		41,296		(8,332)		169
Sabadell Information Systems, S.A.U.	Provision of technology services	Sabadell - Spain		100.00		—		40,243		60,832		48,796		—		1,387,578		143,695		(47,700)		47,463
Sabadell Innovation Capital, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		11,030		(1,129)		—		53,491		1,000		(8,152)		783
Sabadell Innovation Cells, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		755		155		—		1,354		3,203		(3,361)		528
Sabadell Patrimonio Inmobiliario, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		30,116		795,988		(1,029)		—		828,149		863,895		(27,970)		(10,850)
Sabadell Real Estate Activos, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		100,060		234,204		(190)		—		334,467		500,622		(166,358)		(190)
Sabadell Real Estate Development, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		15,807		157,455		(19,168)		—		1,081,488		4,748,442		(4,552,614)		(20,796)
Sabadell Real Estate Housing, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		2,073		730		(6,068)		—		7,521		17,792		(14,990)		(6,068)
Sabadell Securities USA, Inc.	Other financial services	Miami - United States		100.00		—		551		6,200		265		—		7,219		551		5,412		280
Sabadell Strategic Consulting, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		488		176		—		1,266		3		488		176
Sabadell Venture Capital, S.L.U.	Holding	Barcelona - Spain		—		100.00		3		13,942		3,275		—		69,559		3		4,833		3,983
Sabcapital, S.A de C.V., SOFOM, E.R.	Credit institution	Mexico City - Mexico		49.00		51.00		164,828		69,276		44,696		—		1,618,240		154,568		80,389		44,679

A-209

Banco Sabadell Group companies as at 31 December 2022 consolidated by the full consolidation method



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)
			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets
Sinia Capital, S.A. de C.V.	Holding	Mexico City - Mexico		—		100.00		20,830		10,230		6,899		—		84,776		20,140		5,448		7,391
Sinia Renovables, S.A.U.	UCITS, funds and similar financial corporations	Barcelona - Spain		100.00		—		15,000		2,318		(446)		—		117,076		15,000		3,885		211
Sogeviso Servicios Gestión Vivienda Innovación Social, S.L.U.	Real estate	Alicante - Spain		100.00		—		3		9,963		101		—		11,380		3		11,559		101
Stonington Spain, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		60,729		(11,704)		(122)		—		49,390		60,729		(11,705)		(122)
Tasaciones de Bienes Mediterráneo, S.A. in liquidation	Other ancillary activities	Alicante - Spain		99.88		0.12		1,000		1,416		—		—		2,420		5,266		(2,850)		—
Tenedora de Inversiones y Participaciones, S.L.	Holding	Alicante - Spain		100.00		—		296,092		(128,603)		(532)		—		345,066		2,975,977		(2,738,513)		(1,336)
TSB Bank PLC	Credit institution	Edinburgh - United Kingdom		—		100.00		90,710		1,967,452		111,939		78,531		55,752,618		1,814,636		329,136		99,938
TSB Banking Group PLC	Holding	London - United Kingdom		100.00		—		7,028		1,764,655		80,586		—		3,001,958		2,200,560		(227,995)		(39,268)
TSB Banking Group plc Employee Share Trust	Other ancillary activities	Saint Helier - Jersey		—		100.00		1		(13,106)		(56)		—		343		—		(12,896)		—
TSB Covered Bonds (Holdings) Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		—		—		—
TSB Covered Bonds (LM) Limited	Other ancillary activities	London - United Kingdom		—		100.00		1		—		—		—		1		—		—		—
TSB Covered Bonds LLP	UCITS, funds and similar financial corporations	London - United Kingdom		—		100.00		1		15		4		—		67		—		17		4
Urquijo Gestión, S.A.U., S.G.I.I.C.	Funds management activities	Madrid - Spain		100.00		—		3,606		4,858		1,257		4,213		13,822		3,084		5,380		1,257
Urumea Gestión, S.L. en Liquidación	Other ancillary activities	San Sebastián - Spain		—		100.00		9		(14)		—		—		—		9		(14)		—
VeA Rental Homes , S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		5,000		1,358		(1,580)		—		36,383		22,000		(15,642)		(1,580)
Venture Debt SVC, S.L.U.	Holding	Barcelona - Spain		—		100.00		3		—		—		—		2,578		3		—		—


Total														104,894				16,382,618		4,329,889		738,662

A-210

Banco Sabadell Group companies as at 31 December 2022 accounted for using the equity method (*)



Thousand euro
Company name	Line of business	Registered office	% Shareholding								Company data (a)						Group investment		Contribution to reserves or losses in consolidated companies (d)		Contribution to Group consolidated profit/(loss) (e)
			Direct		Indirect		Capital		Other equity		Profit/(loss) (b)		Dividends paid (c)		Total assets

Aurica III, Fondo de Capital Riesgo	UCITS, funds and similar financial corporations	Barcelona - Spain		—		47.50		51,130		(46,881)		69,348		36,612		75,249		24,318		(1,337)		9,743
Aurica IIIB, S.C.R., S.A.	UCITS, funds and similar financial corporations	Barcelona - Spain		—		42.85		34,557		(56,273)		71,330		22,320		50,765		14,837		199		4,881
BanSabadell Pensiones, E.G.F.P., S.A.	Other regulated companies	Madrid - Spain		50.00		—		7,813		34,569		(740)		—		45,833		40,378		(18,544)		(370)
BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		10,000		78,476		21,390		6,000		308,357		34,000		15,585		12,379
BanSabadell Vida, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		43,858		437,575		117,961		60,000		8,808,926		27,106		(11,734)		94,103
Doctor Energy Central Services, S.L.	Other business management consulting activities	Granollers - Spain		—		24.99		125		(57)		(127)		—		278		50		(33)		(17)
Catalana de Biogás Iberia, S.L.	Power generation	Barcelona - Spain		—		24.90		10		(1)		1		—		1		2		—		—
Parque Eólico Casa Vieja S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Parque Eólico Villaumbrales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Parque Eólico Perales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Parque Eólico Los Pedrejones S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—
Energíes Renovables Terra Ferma, S.L.	Power generation	Barcelona - Spain		—		50.00		6		(65)		(9)		—		1,928		3		(3)		—
Financiera Iberoamericana, S.A.	Credit institution	Havana - Cuba		50.00		—		38,288		13,710		7,579		2,514		102,654		19,144		3,416		3,163
Flex Equipos de Descanso, S.A.	Manufacturing	Getafe - Spain		—		19.16		66,071		66,817		10,262		—		261,388		50,930		11,829		26,210
Murcia Emprende, S.C.R. de R.S., S.A.	Other financial services	Murcia - Spain		28.70		—		2,557		(594)		1,925		—		1,962		2,026		(1,441)		531
Plaxic Estelar, S.L.	Real estate	Barcelona - Spain		—		45.01		3		(15,303)		8		—		31,981		3,114		(3,114)		—
Portic Barcelona, S.A.	Data processing, hosting and related activities	Barcelona - Spain		25.00		—		291		1,812		108		—		2,447		5		539		9
SBD Creixent, S.A.	Real estate	Sabadell - Spain		23.05		—		5,965		(1,073)		421		—		5,571		3,524		(2,397)		98

Total														127,446				220,505		(7,095)		150,730

(*) Companies consolidated by the equity method as the Group does not have control over them but does have significant influence.

(a) Figures for foreign companies translated to euros at the historical exchange rate; amounts in the consolidated income statement translated at the average exchange rate.

(b) Results pending approval by Annual General Meeting of Shareholders and Partners.

(d) The heading “Reserves or accumulated losses of investments in joint ventures and associates” on the consolidated balance sheet as at 31 December 2022 also includes -65,353 thousand euros corresponding to Promontoria Challenger I, S.A., an entity classified as a non-current asset held for sale.

A-211

Changes in the scope of consolidation in 2022

Additions to the scope of consolidation:

Thousand euro

Name of entity (or line of business) acquired
or merged

Category

Effective date of the
transaction

Fair value of equity instruments issued for the
acquisition

% Voting rights
acquired

% Total voting rights

Type of shareholding

Method

Reason

Acquisition cost

Fair value of equity
instruments issued
for the acquisition

Catalana de Biogás Iberia, S.L.

Associate

25/4/2022

—

24.90

Indirect

Equity method

Duncan Holdings 2022-1 Limited

Subsidiary

29/3/2022

—

100.00

Indirect

Full consolidation

Gier Operations 2021, S.L.U.

Subsidiary

21/2/2022

730

—

100.00

Direct

Full consolidation

Total newly consolidated subsidiaries

731

Total newly consolidated associates

(a) Acquisition of subsidiaries.

(b) Change in consolidation method.

Exclusions from the scope of consolidation:


Thousand euro

Name of entity (or line of business) sold, spun off or otherwise disposed of	Category		Effective date of the transaction		% Voting rights disposed of			% Total voting rights following disposal			Profit/(loss) generated		Type of shareholding		Method		Reason

Inversiones en Resorts Mediterráneos, S.L. in liquidation		Subsidiary		20/1/2022		55.06	%		—	%		(800)		Indirect		Full consolidation		a
Aurica Capital Desarrollo, S.G.E.I.C., S.A.		Associate		29/7/2022		20.00	%		—	%		2,585		Direct		Equity method		b
Europea Pall Mall Ltd.		Subsidiary		15/7/2022		100.00	%		—	%		(32)		Direct		Full consolidation		b
Gestora de Aparcamientos del Mediterráneo, S.L. in liquidation		Associate		5/5/2022		40.00	%		—	%		—		Indirect		Equity method		a
Plataforma de Innovación Sabadell, S.L.U.		Subsidiary		11/7/2022		100.00	%		—	%		—		Direct		Full consolidation		a
Sabadell Brasil Trade Services - Assessoria Comercial Ltda.		Subsidiary		30/8/2022		100.00	%		—	%		(733)		Direct		Full consolidation		a
Sabadell Corporate Finance, S.L.U.		Subsidiary		22/6/2022		100.00	%		—	%		(2)		Direct		Full consolidation		a
Arrendamiento de Bienes Inmobiliarios del Mediterráneo, S.L. in liquidation		Subsidiary		14/12/2022		100.00	%		—	%		(24)		Direct		Full consolidation		a
Atrian Bakers, S.L.		Associate		28/12/2022		22.41	%		—	%		1,833		Indirect		Equity method		b
Solvia Servicios Inmobiliarios, S.L.		Associate		2/12/2022		20.00	%		—	%		4,092		Direct		Equity method		b
LSP Finance, S.L.U. in liquidation		Subsidiary		28/10/2022		100.00	%		—	%		(10)		Indirect		Full consolidation		a
Other												2,711

Total												9,620

(a) Disposals from the scope of consolidation due to sale of shareholding.

(b) Disposals from the scope due to dissolution and/or liquidation.

A-212

Schedule II – Structured entities - Securitisation funds


Thousand euro

Year	Securitisation funds fully retained on the balance sheet	Entity		Total securitised assets as at 31/12/2023		Of which: issued via mortgage transfer certificates (*)		Of which: issued via mortgage participations (*)

2005	TDA CAM 4 F.T.A		Banco CAM		83,578		13,608		69,352
2005	TDA CAM 5 F.T.A		Banco CAM		233,752		67,851		164,564
2006	TDA 26-MIXTO, F.T.A		Banco Guipuzcoano		36,380		1,303		34,678
2006	TDA CAM 6 F.T.A		Banco CAM		171,009		73,797		95,552
2006	FTPYME TDA CAM 4 F.T.A		Banco CAM		52,644		41,118		—
2006	TDA CAM 7 F.T.A		Banco CAM		269,629		113,981		153,700
2006	CAIXA PENEDES 1 TDA, FTA		BMN- Penedés		97,182		21,103		75,933
2007	TDA 29, F.T.A		Banco Guipuzcoano		52,988		5,593		46,625
2007	TDA CAM 8 F.T.A		Banco CAM		242,268		63,614		176,747
2007	TDA CAM 9 F.T.A		Banco CAM		255,472		95,129		159,434
2007	CAIXA PENEDES PYMES 1 TDA, FTA		BMN- Penedés		16,654		15,534		—
2008	CAIXA PENEDES FTGENCAT 1 TDA, FTA		BMN- Penedés		29,668		29,161		—
2009	ICO-FTVPO 1, F.T.H (CP)		BMN- Penedés		736		—		736
2017	TDA SABADELL RMBS 4, F.T		Banco Sabadell		3,383,327		3,380,614		—
2022	SABADELL CONSUMO 2, FT		Banco Sabadell		438,863		—		—
2022	DUNCAN FUNDING 2022 PLC		TSB Bank		1,495,200		—		—
2023	SCF AUTOS 1, FT		Sabadell Consumer Finance		587,473		—		—
Total					7,446,823		3,922,406		977,321

(*) Corresponds to the allocation at source of loans when mortgage transfer certificates and mortgage participations were issued.

Thousand euro

Year

Securitisation funds fully
derecognised from the balance
sheet

Entity

Total securitised
assets as at
31/12/2023

Of which: issued
via mortgage
transfer
certificates (*)

Of which: issued
via mortgage
participations (*)

2010

FPT PYMES 1 LIMITED

Banco CAM

212,141

87,703

23,921

2019

SABADELL CONSUMO 1, FT

Banco Sabadell

128,154

—

Total

340,295

87,703

23,921

(*) Corresponds to the allocation at source of loans when mortgage transfer certificates and mortgage participations were issued.

A-213

Schedule III – Details of outstanding issues and subordinated liabilities of the Group

Debt securities in issue

The breakdown of the Group’s issues as at 31 December 2023 and 2022 is as follows:

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2023

Maturity /

termination date

Issue
currency

Target of

offering

31/12/2023

31/12/2022

Banco de Sabadell, S.A.

05/12/2017

—

1,000,000

0.875%

05/03/2023

Euro

Institutional

Banco de Sabadell, S.A.

26/02/2018

—

4,000

MAX(EURIBOR 3M; 0.4%)

27/02/2023

Euro

Retail

Banco de Sabadell, S.A.

16/03/2018

6,000

MAX(EURIBOR 3M; 0.67%)

17/03/2025

Euro

Retail

Banco de Sabadell, S.A.

03/04/2018

—

6,000

MAX(EURIBOR 3M; 0.4%)

03/04/2023

Euro

Retail

Banco de Sabadell, S.A.

31/05/2018

—

3,000

MAX(EURIBOR 3M; 0.3%)

31/05/2023

Euro

Retail

Banco de Sabadell, S.A.

07/09/2018

750,000

1.625%

07/03/2024

Euro

Institutional

Banco de Sabadell, S.A.

14/11/2018

—

1,000

MAX(EURIBOR 3M; 1.1%)

14/11/2023

Euro

Retail

Banco de Sabadell, S.A.

14/11/2018

2,500

MAX(EURIBOR 3M; 1.5%)

14/11/2025

Euro

Retail

Banco de Sabadell, S.A.

10/05/2019

419,600

1,000,000

1.750%

10/05/2024

Euro

Institutional

Banco de Sabadell, S.A.

22/07/2019

1,000,000

0.875%

22/07/2025

Euro

Institutional

Banco de Sabadell, S.A.

27/09/2019

500,000

1.125%

27/03/2025

Euro

Institutional

Banco de Sabadell, S.A. (*)

07/11/2019

500,000

0.625%

07/11/2024

Euro

Institutional

Banco de Sabadell, S.A. (*)

11/09/2020

500,000

1.125%

11/03/2026

Euro

Institutional

Banco de Sabadell, S.A. (*)

16/06/2021

500,000

0.875%

16/06/2027

Euro

Institutional

Banco de Sabadell, S.A.

29/11/2021

67,000

MAX(EURIBOR 12M; 0.77%)

30/11/2026

Euro

Institutional

Banco de Sabadell, S.A. (*)

24/03/2022

750,000

2.625%

24/03/2025

Euro

Institutional

Banco de Sabadell, S.A.

30/03/2022

120,000

3.150%

30/03/2037

Euro

Institutional

TSB Banking Group Plc (*) (**)

13/6/2022

517,807

507,368

SONIA + 2.45%

13/06/2026

Pounds sterling

Institutional

Banco de Sabadell, S.A. (*)

8/9/2022

500,000

5.375%

08/09/2025

Euro

Institutional

Banco de Sabadell, S.A.

2/11/2022

750,000

5.125%

10/11/2027

Euro

Institutional

Banco de Sabadell, S.A. (*)

23/11/2022

75,000

5.500%

23/11/2031

Euro

Institutional

TSB Banking Group Plc (*)(**)

9/12/2022

287,670

281,871

SONIA + 3.40%

09/12/2025

Pounds sterling

Institutional

Banco de Sabadell, S.A. (*)

7/2/2023

750,000

—

5.250%

07/02/2028

Euro

Institutional

Banco de Sabadell, S.A. (*)

07/06/2023

750,000

—

5.000%

07/06/2028

Euro

Institutional

Banco de Sabadell, S.A. (*)

08/09/2023

750,000

—

5.500%

08/09/2028

Euro

Institutional

TSB Banking Group Plc (*) (**)

05/12/2023

230,136

—

SONIA + 3.28%

05/12/2027

Pounds sterling

Institutional

Subscribed by Group companies

(1,095,613)

(874,239)

Total straight bonds

8,630,100

7,949,500

(*) “Maturity/call date” refers to the first call option.

(**) Equivalent amount in euros as at the end of December 2023.

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2023

Maturity date

Issue currency

Target of

offering

31/12/2023

31/12/2022

Banco de Sabadell, S.A.

14/07/2014

10,000

Underlying benchmark

15/07/2024

Euro

Retail

Banco de Sabadell, S.A.

05/11/2018

10,000

Underlying benchmark

01/04/2025

Euro

Institutional

Banco de Sabadell, S.A.

12/11/2018

3,200

Underlying benchmark

01/04/2025

Euro

Institutional

Banco de Sabadell, S.A.

03/06/2022

8,900

MAX (EURIBOR 12M;2.75%)

03/06/2027

Euro

Banco de Sabadell, S.A.

01/08/2022

9,200

MAX (EURIBOR 12M;4%)

02/08/2027

Euro

Total structured bonds

41,300

Thousand euro

Issuer

Issue date

Amount

Average interest rate

Maturity date

Issue currency

Target of

offering

31/12/2023

31/12/2022

31/12/2023

Banco de Sabadell, S.A. (*)

10/05/2022

2,125,763

1,445,701

0.00%

Various

Euro

Institutional

Subscribed by Group companies

(742,935)

(573,805)

Total commercial paper

1,382,828

871,896

(*) Programme with issuance limit of 7,000,000 thousand euros, which can be extended to 9,000,000 thousand euros, registered with Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (IBERCLEAR).

A-214

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2023

Maturity date

Issue
currency

Target of

offering

31/12/2023

31/12/2022

Banco de Sabadell, S.A.

03/10/2014

—

38,000

EURIBOR 3M + 0.68

03/10/2023

Euro

Institutional

Banco de Sabadell, S.A.

04/05/2015

—

250,000

EURIBOR 3M + 0.13

04/05/2023

Euro

Institutional

Banco de Sabadell, S.A.

03/07/2015

—

50,000

EURIBOR 3M + 0.20

03/07/2023

Euro

Institutional

Banco de Sabadell, S.A.

26/01/2016

550,000

EURIBOR 3M + 0.80

26/01/2024

Euro

Institutional

Banco de Sabadell, S.A.

24/05/2016

50,000

EURIBOR 3M + 0.535

24/05/2024

Euro

Institutional

Banco de Sabadell, S.A.

10/06/2016

1,000,000

0.63%

10/06/2024

Euro

Institutional

Banco de Sabadell, S.A.

20/10/2016

—

1,000,000

0.13%

20/10/2023

Euro

Institutional

Banco de Sabadell, S.A.

29/12/2016

250,000

0.97%

27/12/2024

Euro

Institutional

Banco de Sabadell, S.A.

26/04/2017

1,100,000

1.00%

26/04/2027

Euro

Institutional

Banco de Sabadell, S.A.

21/07/2017

500,000

0.89%

21/07/2025

Euro

Institutional

Banco de Sabadell, S.A.

21/12/2018

390,000

1.09%

21/12/2026

Euro

Institutional

Banco de Sabadell, S.A.

20/12/2019

750,000

EURIBOR 12M + 0.074

20/12/2024

Euro

Institutional

Banco de Sabadell, S.A.

20/12/2019

750,000

EURIBOR 12M + 0.104

22/12/2025

Euro

Institutional

Banco de Sabadell, S.A.

20/01/2020

1,000,000

0.13%

10/02/2028

Euro

Institutional

Banco de Sabadell, S.A.

23/06/2020

1,500,000

EURIBOR 12M + 0.080

23/06/2025

Euro

Institutional

Banco de Sabadell, S.A.

30/03/2021

1,000,000

EURIBOR 12M + 0.018

30/03/2026

Euro

Institutional

Banco de Sabadell, S.A.

08/06/2021

1,000,000

EURIBOR 12M + 0.012

08/06/2026

Euro

Institutional

Banco de Sabadell, S.A.

08/06/2021

1,000,000

EURIBOR 12M + 0.022

08/06/2027

Euro

Institutional

Banco de Sabadell, S.A.

21/01/2022

1,500,000

EURIBOR 12M + 0.010

21/09/2027

Euro

Institutional

Banco de Sabadell, S.A.

30/05/2022

1,000,000

1.75%

30/05/2029

Euro

Institutional

Banco de Sabadell, S.A.

12/12/2022

500,000

EURIBOR 12M + 0.140

12/06/2028

Euro

Institutional

Banco de Sabadell, S.A.

21/12/2022

500,000

EURIBOR 3M + 0.600

20/12/2030

Euro

Institutional

Banco de Sabadell, S.A.

28/02/2023

1,000,000

—

3.50%

28/08/2026

Euro

Institutional

Banco de Sabadell, S.A.

22/12/2023

200,000

—

EURIBOR 3M + 0.77

22/12/2031

Euro

Institutional

Subscribed by Group companies

(8,065,000)

(8,115,000)

Total mortgage covered bonds

7,475,000

7,563,000

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2023

Maturity date

Issue currency

Target of

offering

31/12/2023

31/12/2022

TSB Banking Group Plc

15/2/2019

575,342

845,614

SONIA + 0.870

15/2/2024

Pounds sterling

Institutional

TSB Banking Group Plc

22/6/2021

575,341

563,742

SONIA + 0.370

22/6/2028

Pounds sterling

Institutional

TSB Banking Group Plc

14/2/2023

1,150,682

—

SONIA + 0.60

14/2/2027

Pounds sterling

Institutional

TSB Banking Group Plc

15/9/2023

863,011

—

SONIA + 0.65

15/9/2028

Pounds sterling

Institutional

TSB Banking Group Plc

11/10/2023

575,341

—

SONIA + 0.63

10/11/2027

Pounds sterling

Institutional

Subscribed by Group companies

(575,341)

—

Total Covered Bonds

3,164,376

1,409,356

Securitisations

The following table shows the securities issued by asset securitisation funds outstanding as at 31 December 2023 and 2022, respectively:


Thousand euro
			Issue				Outstanding balance of liabilities
Year	*Name of fund ()**	Types of issue	Number of securities		Amount		2023		2022		Yield

2005	TDA CAM 4, F.T.A	RMBS		20,000		2,000,000		25,714		47,009	EURIBOR 3M + (between 0.09% and 0.24%)
2005	TDA CAM 5, F.T.A	RMBS		20,000		2,000,000		85,251		105,476	EURIBOR 3M + (between 0.12% and 0.35%)
2006	TDA CAM 6, F.T.A	RMBS		13,000		1,300,000		55,923		68,970	EURIBOR 3M + (between 0.13% and 0.27%)
2006	TDA CAM 7, F.T.A	RMBS		15,000		1,500,000		65,853		82,944	EURIBOR 3M + (between 0.14% and 0.3%)
2006	CAIXA PENEDES 1 TDA, F.T.A	RMBS		10,000		1,000,000		26,025		31,725	EURIBOR 3M + 0.14%
2006	FTPYME TDA CAM 4, F.T.A	SMEs		15,293		1,529,300		21,662		27,614	EURIBOR 3M + 0.61%
2007	TDA CAM 8, F.T.A	RMBS		17,128		1,712,800		62,769		75,165	EURIBOR 3M + (between 0.13% and 0.47%)
2007	CAIXA PENEDES PYMES 1 TDA, F.T.A	SMEs		7,900		790,000		225		300	EURIBOR 3M + 0.8%
2007	TDA CAM 9, F.T.A	RMBS		15,150		1,515,000		92,011		108,025	EURIBOR 3M + (between 0.19% and 0.75%)
2022	SABADELL CONSUMO 2, F.T.	CONSUMER		7,591		759,100		441,140		655,618	EURIBOR 1M + (between 0.87% and 13.25%)
2023	SCF AUTOS 1, F.T.	VEHICLES		6,595		659,500		494,000		—	EURIBOR 1M + (betweeen 0.69% and 9.23%)

Total securitisation funds								1,370,573		1,202,846

(*) The bonds issued by securitisation funds are listed in the AIAF market.

A-215

Subordinated liabilities

Subordinated liabilities issued by the Group as at 31 December 2023 and 2022 are as follows:

Thousand euro

Issuer

Issue date

Amount

Interest rate
ruling as at

31/12/2023

Maturity/call date

Issue currency

Target of

offering

31/12/2023

31/12/2022

Banco de Sabadell, S.A.

06/05/2016

500,000

5.63%

6/5/2026

Euro

Institutional

Banco de Sabadell, S.A. (*)

12/12/2018

—

500,000

5.38%

12/12/2023

Euro

Institutional

Banco de Sabadell, S.A. (*)

17/01/2020

300,000

2.00%

17/01/2025

Euro

Institutional

Banco de Sabadell, S.A. (*)

15/01/2021

500,000

2.50%

15/04/2026

Euro

Institutional

TSB Banking Group Plc

30/03/2021

345,205

338,245

3.45%

30/03/2026

Pounds sterling

Institutional

Banco de Sabadell, S.A.

16/02/2023

500,000

—

6.00%

16/05/2028

Euro

Institutional

Subscribed by Group companies

(345,205)

(338,245)

Total subordinated bonds

1,800,000

(*) “Maturity/call date” refers to the first call option.

Thousand euro

Issuer

Issue date

Amount

Interest rate
ruling as at

31/12/2023

Maturity/call date

Issue currency

Target of

offering

31/12/2023

31/12/2022

Banco de Sabadell, S.A. (*)

23/11/2017

—

400,000

6.13%

23/02/2023

Euro

Institutional

Banco de Sabadell, S.A. (*)

15/03/2021

500,000

5.75%

15/09/2026

Euro

Institutional

Banco de Sabadell, S.A. (*)

19/11/2021

750,000

5.00%

19/11/2027

Euro

Institutional

Banco de Sabadell, S.A. (*)

18/01/2023

500,000

—

9.375%

18/07/2028

Euro

Institutional

Total preferred securities

1,750,000

1,650,000

(*) Perpetual issue. “Maturity/call date” refers to date of first call option. The aforesaid subordinated securities and undated securities are perpetual, although they may be converted into newly issued Banco Sabadell shares, if either Banco Sabadell or its consolidated group has a Common Equity Tier 1 (CET1) ratio lower than 5.125%, calculated in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, of 26 June, on prudential requirements for credit institutions and investment firms.

The issues included in subordinated liabilities, for the purposes of credit priority, are ranked below all of the Group’s regular creditors.

For the purpose of complying with the requirements of IAS 7, the table below shows the reconciliation of liabilities derived from financing activities, identifying the components of their movements:


Thousand euro
Total subordinated liabilities as at 31 December 2021			4,200,000

Newly issued			—
Amortised			(750,000)
Capitalisation			—
Exchange rate			—
Change in subordinated liabilities subscribed by Group companies			—
Total subordinated liabilities as at 31 December 2022			3,450,000

Newly issued			1,000,000
Amortised			(900,000)
Capitalisation			—
Exchange rate			—
Change in subordinated liabilities subscribed by Group companies			—
Total subordinated liabilities as at 31 December 2023			3,550,000

A-216

Schedule IV – Other risk information

Credit risk exposure

Loans and advances to customers, broken down by activity and type of guarantee

The breakdown of the balance of the heading “Loans and advances – Customers” by activity and type of guarantee, excluding advances not classed as loans, as at 31 December 2023 and 2022, respectively, is as follows:


Thousand euro
							2023
							Secured loans. Carrying amount based on last available valuation. Loan to value

	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Less than or equal to 40%		Over 40% and less than or equal to 60%		Over 60% and less than or equal to 80%		Over 80% and less than or equal to 100%		Over 100%

General governments		8,980,558		23,776		393,229		18,369		6,621		42		857		391,116

Other financial corporations and individual entrepreneurs (financial business activity)		1,315,339		206,658		238,726		233,252		161,757		5,918		9,410		35,047

Non-financial corporations and individual entrepreneurs (non-financial business activity)		57,417,407		11,029,211		5,800,333		5,758,968		4,352,419		1,840,235		1,384,038		3,493,884

Construction and real estate development (including land)		2,253,778		1,262,384		257,299		520,929		516,954		174,633		121,393		185,774
Civil engineering construction		1,007,464		26,668		45,518		39,612		8,729		2,981		7,501		13,363
Other purposes		54,156,165		9,740,159		5,497,516		5,198,427		3,826,736		1,662,621		1,255,144		3,294,747
Large enterprises		29,971,252		2,574,879		2,095,603		1,216,378		914,663		385,915		395,883		1,757,643
SMEs and individual entrepreneurs		24,184,913		7,165,280		3,401,913		3,982,049		2,912,073		1,276,706		859,261		1,537,104

Other households		84,202,656		76,182,679		1,200,701		17,259,349		23,402,095		26,631,313		7,886,433		2,204,190
Home loans		75,264,075		74,941,780		250,150		16,421,911		22,741,620		26,263,113		7,729,403		2,035,883
Consumer loans		5,774,897		40,182		749,578		204,415		294,636		137,011		68,708		84,990
Other purposes		3,163,684		1,200,717		200,973		633,023		365,839		231,189		88,322		83,317
TOTAL		151,915,960		87,442,324		7,632,989		23,269,938		27,922,892		28,477,508		9,280,738		6,124,237

MEMORANDUM ITEM
Refinancing, refinanced and restructured transactions		3,866,784		2,217,794		159,301		807,197		623,992		486,425		204,765		254,716

A-217


Thousand euro
							2022
							Secured loans. Carrying amount based on last available valuation. Loan to value

	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Less than or equal to 40%		Over 40% and less than or equal to 60%		Over 60% and less than or equal to 80%		Over 80% and less than or equal to 100%		Over 100%

General governments		10,112,875		27,806		404,416		21,478		8,006		—		906		401,832

Other financial corporations and individual entrepreneurs (financial business activity)		1,053,004		302,774		362,324		433,339		194,881		21,854		6,451		8,573

Non-financial corporations and individual entrepreneurs (non-financial business activity)		60,962,804		13,324,354		5,961,022		7,596,497		4,652,265		2,200,628		1,546,495		3,289,491
Construction and real estate development (including land)		2,558,107		1,490,609		316,320		756,742		534,819		153,846		147,140		214,382
Civil engineering construction		968,875		25,767		151,094		140,083		11,224		2,729		3,783		19,042
Other purposes		57,435,822		11,807,978		5,493,608		6,699,672		4,106,222		2,044,053		1,395,572		3,056,067
Large enterprises		25,586,942		2,161,488		2,006,076		1,773,688		443,347		276,123		372,204		1,302,202
SMEs and individual entrepreneurs		31,848,880		9,646,490		3,487,532		4,925,984		3,662,875		1,767,930		1,023,368		1,753,865

Other households		85,544,442		77,898,980		1,384,690		17,922,933		24,711,578		26,895,158		6,936,913		2,817,088
Home loans		77,075,115		76,728,550		296,420		17,006,740		24,088,867		26,531,341		6,779,029		2,618,993
Consumer loans		5,440,517		41,627		672,238		126,801		262,036		149,721		74,613		100,694
Other purposes		3,028,810		1,128,803		416,032		789,392		360,675		214,096		83,271		97,401
TOTAL		157,673,125		91,553,914		8,112,452		25,974,247		29,566,730		29,117,640		8,490,765		6,516,984

MEMORANDUM ITEM
Refinancing, refinanced and restructured transactions		4,512,316		2,911,059		272,013		961,790		840,122		534,705		248,379		598,076

In terms of risks with LTV >80%, these mainly correspond to transactions from acquired entities or business operations in which, as a supplement to the valuation of the transaction, a mortgage guarantee is available to cover that transaction. Similarly, there are other additional reasons for approval, which mainly correspond to solvent borrowers with a proven payment capacity, as well as customers with a good profile who provide guarantees (personal guarantees and/or pledges) which are additional to the mortgage guarantees already considered in the LTV ratio.

A-218

Refinancing and restructuring transactions

The outstanding balance of refinancing and restructuring transactions as at 31 December 2023 and 2022 is as follows:


Thousand euro
							2023
	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		Of which: lending for construction and real estate development (including land)		Other households		Total

TOTAL
Not secured with collateral
Number of transactions		—		12		66		28,834		798		59,191		88,103
Gross carrying amount		—		6,338		17,563		1,913,078		131,181		254,385		2,191,364
Secured with collateral
Number of transactions		—		1		8		5,522		276		15,644		21,175
Gross carrying amount		—		75		179		1,464,647		108,041		1,310,756		2,775,657
Impairment allowances		—		429		15,006		726,639		71,333		358,162		1,100,236
*Of which, non-performing loans*
*Not secured with collateral*
Number of transactions		—		2		32		18,946		554		45,576		*64,556*
Gross carrying amount		—		630		16,250		1,030,015		75,717		175,898		*1,222,793*
*Secured with collateral*
Number of transactions				1		4		3,210		197		8,232		*11,447*
Gross carrying amount		—		75		150		621,211		67,899		845,735		*1,467,171*
*Impairment allowances*		—		429		14,970		660,589		69,559		332,799		*1,008,787*
TOTAL
Number of transactions		—		13		74		34,356		1,074		74,835		109,278
Gross value		—		6,413		17,742		3,377,725		239,222		1,565,141		4,967,021
Impairment allowances		—		429		15,006		726,639		71,333		358,162		1,100,236

Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		3,627		352		3,222		6,849

A-219


Thousand euro
							2022
	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		Of which: lending for construction and real estate development (including land)		Other households		Total

TOTAL
Not secured with collateral
Number of transactions		—		13		77		29,290		807		59,586		88,966
Gross carrying amount		—		8,115		24,424		1,910,336		76,455		245,991		2,188,866
Secured with collateral
Number of transactions		—		1		11		7,936		1,238		14,654		22,602
Gross carrying amount		—		100		1,688		2,079,054		180,451		1,323,929		3,404,771
Impairment allowances		—		1,049		15,313		776,751		79,589		288,210		1,081,323
*Of which, non-performing loans*
*Not secured with collateral*
Number of transactions		—		10		35		14,428		478		43,708		*58,181*
Gross carrying amount		—		6,938		16,529		891,441		60,892		173,526		*1,088,434*
*Secured with collateral*
Number of transactions		—		1		5		4,539		1,128		7,202		*11,747*
Gross carrying amount		—		100		218		895,810		75,145		759,672		*1,655,800*
*Impairment allowances*		—		864		15,176		702,017		74,597		262,845		*980,902*
TOTAL
Number of transactions		—		14		88		37,226		2,045		74,240		111,568
Gross value		—		8,215		26,112		3,989,390		256,906		1,569,920		5,593,637
Impairment allowances		—		1,049		15,313		776,751		79,589		288,210		1,081,323

Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—		—

The value of the guarantees received to ensure collection associated with refinancing and restructuring transactions, broken down into collateral and other guarantees, as at 31 December 2023 and 2022, is as follows:


Thousand euro
Guarantees received	2023		2022

Value of collateral		2,374,930		2,893,373
Of which: securing stage 3 loans		1,151,958		1,310,560

Value of other guarantees		942,367		1,061,177
Of which: securing stage 3 loans		427,369		376,624
Total value of guarantees received		3,317,297		3,954,550

Detailed movements in the balance of refinancing and restructuring transactions during 2023 and 2022 are as follows:


Thousand euro
	2023		2022

Opening balance		5,593,638		6,834,437
(+) Forbearance (refinancing and restructuring) in the period		1,381,276		933,461
Memorandum item: impact recognised on the income statement for the period		146,794		116,365
(-) Debt repayments		(686,252)		(919,789)
(-) Foreclosures		(5,086)		(8,044)
(-) Derecognised from the balance sheet (reclassified as write-offs)		(114,835)		(105,546)
(+)/(-) Other changes (*)		(1,201,720)		(1,140,882)
Year-end balance		4,967,021		5,593,637

(*) Includes transactions no longer classified as refinancing, refinanced or restructured due to meeting the requirements for reclassification from stage 2 to stage 1 exposures (see Note 1.3.4).

The table below shows the value of transactions which, after refinancing or restructuring, were classified as stage 3 exposures during 2023 and 2022:

A-220


Thousand euro
	2023		2022

General governments		—		—

Other legal entities and individual entrepreneurs		249,593		374,135
Of which: Lending for construction and real estate development		25,064		20,280

Other natural persons		153,883		90,171
Total		403,476		464,306

The average probability of default on current refinancing and restructuring transactions broken down by activity as at 31 December 2023 and 2022 is as follows:


%
	2023		2022

*General governments ()**		—		—

Other legal entities and individual entrepreneurs		17		14
Of which: Lending for construction and real estate development		17		19

Other natural persons		19		10

(*) Authorisation has not been granted for the use of internal models in the calculation of capital requirements.

Average probability of default calculated as at 30 September 2023.

The change of PD observed in natural persons is due to the update and improvement of the IRB model carried out in 2023. The PDs are now more aligned with those of the companies segment. The previous model had an adjustment to make the estimate more through-the-cycle or long-term, which has been removed in the new version.

Concentration risk

Geographical exposure

Global

The breakdown of risk concentration, by activity and at a global level, as at 31 December 2023 and 2022 is as follows:


Thousand euro
	2023

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and Credit institutions		40,818,131		24,396,259		5,901,206		2,413,890		8,106,776

General governments		34,319,129		25,077,209		4,812,170		2,377,517		2,052,233
Central governments		23,338,073		15,730,694		4,563,364		991,796		2,052,219
Other		10,981,056		9,346,515		248,806		1,385,721		14

Other financial corporations and individual entrepreneurs		4,514,495		1,051,126		201,741		647,539		2,614,089

Non-financial corporations and individual entrepreneurs		60,294,112		44,591,755		3,639,175		9,830,688		2,232,494
Construction and real estate development		2,364,448		1,873,580		74,974		325,046		90,848
Civil engineering construction		1,098,655		766,428		14,205		240,774		77,248
Other purposes		56,831,009		41,951,747		3,549,996		9,264,868		2,064,398
Large enterprises		32,091,522		19,952,554		2,871,965		7,856,577		1,410,426
SMEs and individual entrepreneurs		24,739,487		21,999,193		678,031		1,408,291		653,972

Other households		84,308,370		39,585,977		1,324,896		623,225		42,774,272
Home loans		75,264,075		32,888,290		1,306,620		337,152		40,732,013
Consumer loans		5,774,897		3,907,018		7,319		6,024		1,854,536
Other purposes		3,269,398		2,790,669		10,957		280,049		187,723
TOTAL		224,254,237		134,702,326		15,879,188		15,892,859		57,779,864

A-221


Thousand euro
	2022

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and Credit institutions		47,918,906		34,158,121		3,778,817		2,613,583		7,368,385

General governments		36,026,312		27,319,509		4,865,464		1,685,660		2,155,679
Central governments		25,682,763		18,162,012		4,671,930		693,142		2,155,679
Other		10,343,549		9,157,497		193,534		992,518		—

Other financial corporations and individual entrepreneurs		7,416,023		1,367,666		2,502,161		485,170		3,061,026

Non-financial corporations and individual entrepreneurs		63,587,639		48,156,329		3,400,613		9,597,141		2,433,556
Construction and real estate development		2,680,945		2,205,881		54,640		286,390		134,034
Civil engineering construction		1,043,510		767,633		14,266		236,171		25,440
Other purposes		59,863,184		45,182,815		3,331,707		9,074,580		2,274,082
Large enterprises		27,398,039		16,773,028		1,859,562		7,549,562		1,215,887
SMEs and individual entrepreneurs		32,465,145		28,409,787		1,472,145		1,525,018		1,058,195

Other households		86,241,976		39,850,415		1,193,792		612,502		44,585,267
Home loans		77,672,228		33,741,442		1,170,817		282,090		42,477,879
Consumer loans		5,440,517		3,488,618		8,853		6,998		1,936,048
Other purposes		3,129,231		2,620,355		14,122		323,414		171,340
TOTAL		241,190,856		150,852,040		15,740,847		14,994,056		59,603,913

By autonomous community

The breakdown of risk concentration, by activity and at the level of Spanish autonomous communities, as at

31 December 2023 and 2022, respectively, is as follows:


Thousand euro
	2023
	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragon		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla- La Mancha		Castilla y León		Catalonia

Central banks and Credit institutions		24,396,259		5,410		—		—		—		—		698,942		—		—		430,307

General governments		25,077,209		578,710		241,671		431,346		343,768		664,383		3,215		135,071		1,043,140		760,577
Central governments		15,730,694		—		—		—		—		—		—		—		—		—
Other		9,346,515		578,710		241,671		431,346		343,768		664,383		3,215		135,071		1,043,140		760,577

Other financial corporations and individual entrepreneurs		1,051,126		3,681		1,772		1,996		1,312		850		156		627		32,962		108,516

Non-financial corporations and individual entrepreneurs		44,591,755		2,343,177		963,467		1,178,938		2,121,692		1,076,886		187,623		654,351		1,066,855		12,397,422
Construction and real estate development		1,873,580		84,243		32,392		34,190		70,540		25,438		5,298		17,468		24,539		447,318
Civil engineering construction		766,428		24,615		12,107		18,725		5,653		4,146		2,883		8,684		12,627		136,796
Other purposes		41,951,747		2,234,319		918,968		1,126,023		2,045,499		1,047,302		179,442		628,199		1,029,689		11,813,308
Large enterprises		19,952,554		737,726		414,435		376,522		1,250,346		396,396		79,599		210,930		255,722		4,981,149
SMEs and individual entrepreneurs		21,999,193		1,496,593		504,533		749,501		795,153		650,906		99,843		417,269		773,967		6,832,159

Other households		39,585,977		2,846,721		563,894		1,131,953		1,478,250		625,737		116,920		519,921		752,937		15,228,142
Home loans		32,888,290		2,260,819		480,061		890,596		1,302,328		433,508		96,987		403,927		594,361		13,078,263
Consumer loans		3,907,018		445,359		46,353		100,552		100,212		164,035		13,001		87,486		97,486		1,135,004
Other purposes		2,790,669		140,543		37,480		140,805		75,710		28,194		6,932		28,508		61,090		1,014,875
TOTAL		134,702,326		5,777,699		1,770,804		2,744,233		3,945,022		2,367,856		1,006,856		1,309,970		2,895,894		28,924,964

A-222


Thousand euro
	2023
	AUTONOMOUS COMMUNITIES
	Extremadura		Galicia		Madrid		Murcia		Navarre		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and Credit institutions		—		4,984		22,079,828		1		—		85,085		1,091,702		—		—

General governments		39,126		760,893		2,676,261		60,696		266,743		586,724		682,970		52,617		18,604
Central governments		—		—		—		—		—		—		—		—		—
Other		39,126		760,893		2,676,261		60,696		266,743		586,724		682,970		52,617		18,604

Other financial corporations and individual entrepreneurs		21,180		2,603		282,444		2,130		2,738		537,554		32,564		18,031		10

Non-financial corporations and individual entrepreneurs		121,904		2,007,256		12,716,367		993,898		493,121		4,113,260		1,985,073		153,674		16,791
Construction and real estate development		2,139		89,728		813,387		26,778		9,548		139,160		42,655		7,811		948
Civil engineering construction		1,719		34,342		378,929		14,495		2,295		59,305		46,768		1,044		1,295
Other purposes		118,046		1,883,186		11,524,051		952,625		481,278		3,914,795		1,895,650		144,819		14,548
Large enterprises		21,484		613,494		7,409,234		287,277		249,810		1,624,341		990,456		53,476		157
SMEs and individual entrepreneurs		96,562		1,269,692		4,114,817		665,348		231,468		2,290,454		905,194		91,343		14,391

Other households		149,504		1,002,659		5,347,812		2,089,573		161,017		6,110,308		1,307,172		68,368		85,089
Home loans		113,058		739,180		4,330,340		1,715,650		132,805		5,012,629		1,167,233		57,450		79,095
Consumer loans		28,303		174,860		625,842		201,006		8,536		600,720		69,838		5,371		3,054
Other purposes		8,143		88,619		391,630		172,917		19,676		496,959		70,101		5,547		2,940
TOTAL		331,714		3,778,395		43,102,712		3,146,298		923,619		11,432,931		5,099,481		292,690		120,494


Thousand euro
	2022
	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragon		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla- La Mancha		Castilla y León		Catalonia

Central banks and Credit institutions		34,158,121		5,145		1		13		8		2		349,943		—		—		350,636

General governments		27,319,509		548,524		282,965		377,523		413,874		614,807		5,646		177,985		886,455		806,616
Central governments		18,162,012		—		—		—		—		—		—		—		—		—
Other		9,157,497		548,524		282,965		377,523		413,874		614,807		5,646		177,985		886,455		806,616

Other financial corporations and individual entrepreneurs		1,367,666		4,751		1,754		3,187		1,433		941		247		705		11,318		496,126

Non-financial corporations and individual entrepreneurs		48,156,329		2,461,160		1,077,323		1,355,755		2,131,431		1,162,785		203,928		677,576		1,191,791		13,643,536
Construction and real estate development		2,205,881		97,474		38,811		43,796		73,749		25,553		7,609		16,082		33,632		519,457
Civil engineering construction		767,633		32,037		11,282		21,868		5,224		4,860		4,146		6,674		14,556		156,519
Other purposes		45,182,815		2,331,649		1,027,230		1,290,091		2,052,458		1,132,372		192,173		654,820		1,143,603		12,967,560
Large enterprises		16,773,028		631,451		380,888		383,933		956,528		295,167		73,266		186,787		235,303		4,383,584
SMEs and individual entrepreneurs		28,409,787		1,700,198		646,342		906,158		1,095,930		837,205		118,907		468,033		908,300		8,583,976

Other households		39,850,415		2,814,410		562,841		1,168,698		1,467,079		615,733		116,407		510,091		781,608		15,385,484
For house purchase		33,741,442		2,305,080		487,577		937,797		1,305,843		436,697		99,189		408,621		626,088		13,366,915
Consumer loans		3,488,618		381,060		41,462		93,342		89,192		154,546		10,152		73,193		91,257		1,049,933
Other purposes		2,620,355		128,270		33,802		137,559		72,044		24,490		7,066		28,277		64,263		968,636
TOTAL		150,852,040		5,833,990		1,924,884		2,905,176		4,013,825		2,394,268		676,171		1,366,357		2,871,172		30,682,398


Thousand euro
	2022
	AUTONOMOUS COMMUNITIES
	Extremadura		Galicia		Madrid		Murcia		Navarre		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and Credit institutions		—		11,345		32,841,524		2		—		100,128		499,374		—		—

General governments		73,251		660,025		2,464,005		53,136		308,543		693,533		709,949		56,001		24,659
Central governments		—		—		—		—		—		—		—		—		—
Other		73,251		660,025		2,464,005		53,136		308,543		693,533		709,949		56,001		24,659

Other financial corporations and individual entrepreneurs		93		3,729		778,585		3,310		488		24,084		29,769		7,130		16

Non-financial corporations and individual entrepreneurs		197,915		2,404,086		12,870,370		1,122,284		608,933		4,755,150		2,080,952		191,396		19,958
Construction and real estate development		1,948		94,226		969,667		31,131		11,134		151,009		80,439		9,611		553
Civil engineering construction		2,174		43,328		336,020		14,633		3,006		60,242		47,909		2,279		876
Other purposes		193,793		2,266,532		11,564,683		1,076,520		594,793		4,543,899		1,952,604		179,506		18,529
Large enterprises		51,207		756,107		5,625,249		236,223		236,299		1,469,595		812,271		58,931		239
SMEs and individual entrepreneurs		142,586		1,510,425		5,939,434		840,297		358,494		3,074,304		1,140,333		120,575		18,290

Other households		151,499		975,804		5,433,400		2,050,394		168,933		6,116,889		1,375,881		71,251		84,013
For house purchase		116,510		734,267		4,494,023		1,734,407		139,664		5,177,257		1,233,510		59,076		78,921
Consumer loans		27,443		146,638		567,330		174,643		9,796		502,475		67,443		6,017		2,696
Other purposes		7,546		94,899		372,047		141,344		19,473		437,157		74,928		6,158		2,396
TOTAL		422,758		4,054,989		54,387,884		3,229,126		1,086,897		11,689,784		4,695,925		325,778		128,646

A-223

Sectoral concentration

The breakdown by activity sector of loans and advances to non-financial corporations, as at 31 December 2023 and 2022, is shown below:


Thousand euro
	2023
	Gross carrying amount		Allowances

Agriculture, livestock farming, forestry and fisheries		1,079,949		(55,420	)
Mining and quarrying		437,183		(7,619	)
Manufacturing		8,926,171		(282,974	)
Electricity, gas, steam and air-conditioning supply		4,615,623		(51,549	)
Water supply		330,722		(2,431	)
Construction		3,982,666		(168,404	)
Wholesale and retail trade		8,715,123		(305,582	)
Transportation and storage		3,718,878		(76,819	)
Hotel and catering		4,423,217		(134,623	)
Information and communication		2,063,748		(30,525	)
Financial and insurance activities		4,761,296		(157,430	)
Real estate activities		6,388,897		(163,617	)
Professional, scientific and technical activities		2,290,929		(89,641	)
Administrative and auxiliary services		1,594,423		(37,410	)
Public administration and defence; mandatory social security		452,396		(506	)
Education		304,439		(10,184	)
Healthcare and social services		1,036,992		(20,020	)
Artistic, leisure and entertainment activities		431,773		(22,864	)
Other services		315,642		(160,511	)
Total		55,870,067		(1,778,129	)

Thousand euro
	2022
	Gross carrying amount		Allowances

Agriculture, livestock farming, forestry and fisheries		1,076,502		(42,865	)
Mining and quarrying		369,936		(7,452	)
Manufacturing		9,868,505		(256,971	)
Electricity, gas, steam and air-conditioning supply		4,785,320		(86,295	)
Water supply		352,310		(3,257	)
Construction		4,233,888		(173,834	)
Wholesale and retail trade		8,944,060		(256,582	)
Transportation and storage		3,794,633		(79,969	)
Hotel and catering		4,592,388		(143,964	)
Information and communication		1,836,754		(25,602	)
Financial and insurance activities		4,595,168		(83,165	)
Real estate activities		6,779,311		(162,317	)
Professional, scientific and technical activities		2,358,265		(95,985	)
Administrative and auxiliary services		1,670,244		(36,732	)
Public administration and defence; mandatory social security		378,164		(664	)
Education		321,192		(10,179	)
Healthcare and social services		937,181		(12,758	)
Artistic, leisure and entertainment activities		511,259		(78,890	)
Other services		1,043,584		(126,549	)
Total		58,448,664		(1,684,030	)

A-224

Sovereign risk exposure

Sovereign risk exposure, broken down by type of financial instrument and applying the criteria required by the EBA, as at 31 December 2023 and 2022, is as follows:


Thousand euro
	2023
	Sovereign debt securities												*Of which:*		Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss		Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		Financial assets FVOCI or non- derivative and non-trading financial assets measured at fair value through equity		With positive fair value		With negative fair value		Total		Other off- balance sheet exposures (***)		%

Spain		16,760		(158,175)		—		2,846,230		13,305,462		9,837,310		—		2,860		(6,040)		25,844,407		—		74.0%
Italy		62,269		(9,798)		—		95,074		3,399,329		—		—		—		—		3,546,874		—		10.2%
United States		—		—		12,191		1,105,010		338,484		161		—		—		—		1,455,845		—		4.2%
United Kingdom		—		—		—		411,132		1,628,549		9,053		—		—		—		2,048,734		—		5.9%
Portugal		—		(27,347)		—		—		734,133		—		—		—		—		706,786		—		2.0%
Mexico		—		—		—		713,467		100,411		101,362		—		—		—		915,240		—		2.6%
Rest of the world		6,891		(134,321)		—		72,081		443,811		8,511		—		—		—		396,974		—		1.1%
Total		85,920		(329,641)		12,191		5,242,994		19,950,179		9,956,397		—		2,860		(6,040)		34,914,860		—		100%

(*) Sovereign risk positions shown in accordance with EBA criteria.

(**) Includes those available under credit transactions and other contingent risks (947 million euros at 31 December 2023).

(***) Relates to commitments for cash purchases and sales of financial assets.


Thousand euro
	2022
	Sovereign debt securities												*Of which:*		Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss		Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		Financial assets FVOCI or non- derivative and non-trading financial assets measured at fair value through equity		With positive fair value		With negative fair value		Total		Other off- balance sheet exposures (***)		%

Spain		6,434		(135,382)		—		3,196,334		14,028,933		11,113,371		—		1,903		(9,021)		28,202,572		—		76.6%
Italy		20,284		(79,404)		—		—		3,057,287		—		—		—		—		2,998,168		—		8.1%
United States		—		—		11,851		833,134		257,520		233		—		—		—		1,102,737		—		3.0%
United Kingdom		—		—		—		575,289		1,524,614		24,077		—		—		—		2,123,980		—		5.8%
Portugal		—		—		—		—		740,688		3,042		—		—		—		743,730		—		2.0%
Mexico		—		—		—		428,712		100,303		43,904		—		—		—		572,919		—		1.6%
Rest of the world		293,320		—		—		192,611		586,427		13,508		—		—		—		1,085,866		—		2.9%
Total		320,038		(214,786)		11,851		5,226,080		20,295,772		11,198,135		—		1,903		(9,021)		36,829,972		—		100%

(*) Sovereign risk positions shown in accordance with EBA criteria.

(**) Includes those available under credit transactions and other contingent risks (1,041 million euros as at 31 December 2022).

(***) Relates to commitments for cash purchases and sales of financial assets.

A-225

Exposure to construction and real estate development sector

Details of lending for construction and real estate development and the relevant allowances are set out below. The lending items shown have been classified according to their intended purpose, rather than by the debtor’s NACE code. This means, for example, that if a debtor is (a) a real estate company, but uses the financing for a purpose other than construction or real estate development, it is not included in this table; alternatively, if the debtor is (b) a company whose primary activity is not construction or real estate, but where the loan is used for the financing of properties intended for real estate development, it is included in the table:


Million euro
	2023
	Gross carrying amount	Surplus above value of collateral	Impairment allowances (*)

Lending for construction and real estate development (including land) (business in Spain)	2,208	562	111

Of which: risks classified as stage 3	169	92	94

Million euro
	2022
	Gross carrying amount	Surplus above value of collateral	Impairment allowances (*)

Lending for construction and real estate development (including land) (business in Spain)	2,527	578	123

Of which: risks classified as stage 3	189	82	97

(*) Allowances for the exposure for which the Bank retains the credit risk. Does not include allowances for exposures with transferred risk.


Million euro
Gross carrying amount

*Memorandum item:*	2023	2022
Write-offs (*)	12	21

Million euro

*Memorandum item:*	2023	2022
Loans to customers, excluding General Governments (business in Spain) (carrying amount)	87,451	91,064
Total assets (total business) (carrying amount)	235,173	251,241
Allowances and provisions for exposures classified as stage 2 or stage 1 (total operations)	922	908

(*) Refers to lending for construction and real estate development reclassified as write-offs during the year.

A-226

The breakdown of lending for construction and real estate development for transactions registered by credit institutions (business in Spain) is as follows:


Million euro
	Gross carrying amount		Gross carrying amount
	2023		2022

Not secured with real estate		910		969

Secured with real estate		1,298		1,558
Buildings and other completed works		627		772
Housing		466		567
Other		161		205
Buildings and other works in progress		615		654
Housing		590		621
Other		25		34
Land		56		132
Consolidated urban land		55		95
Other land		1		37
Total		2,208		2,527

The figures presented do not show the total value of guarantees received, but rather the net carrying amount of the associated exposure.

Guarantees received associated with lending for construction and real estate development are shown below, for both periods:


Million euro
Guarantees received	2023		2022

Value of collateral		1,285		1,506
Of which: securing stage 3 loans		44		66

Value of other guarantees		315		347
Of which: securing stage 3 loans		25		19
Total value of guarantees received		1,600		1,853

The breakdown of loans to households for home purchase for transactions recorded by credit institutions (business in Spain) is as follows:


Million euro
	2023
	Gross carrying amount		*Of which: stage 3 exposures*

Loans for home purchase		35,271		872
Not secured with real estate		603		20
Secured with real estate		34,668		852

Million euro
	2022
	Gross carrying amount		*Of which: stage 3 exposures*

Loans for home purchase		35,934		780
Not secured with real estate		596		29
Secured with real estate		35,338		751

A-227

The tables below show home equity loans granted to households for home purchase broken down by the loan-to-value ratio (ratio of total risk to amount of last available property appraisal) of transactions recorded by credit institutions (business in Spain):


Million euro
	2023
	Gross value		*Of which: stage 3 exposures*

LTV ranges		34,668		*852*
LTV <= 40%		6,942		130
40% < LTV <= 60%		9,884		182
60% < LTV <= 80%		12,923		220
80% < LTV <= 100%		3,039		149
LTV > 100%		1,880		171

Million euro
	2022
	Gross value		*Of which: stage 3 exposures*

LTV ranges		35,338		*751*
LTV <= 40%		6,679		118
40% < LTV <= 60%		9,573		153
60% < LTV <= 80%		12,608		193
80% < LTV <= 100%		4,096		130
LTV > 100%		2,382		157

Lastly, the table below gives details of assets foreclosed or received in lieu of debt by the consolidated Group’s entities, for transactions recorded by credit institutions within Spain, as at 31 December 2023 and 2022:


Million euro
	2023
	Gross carrying amount		Allowances		Gross amount (*)		Allowances (*)

Real estate assets acquired through lending for construction and real estate development		358		122		*407*		*176*
Completed buildings		325		107		366		152
Housing		182		47		201		69
Other		144		60		165		83
Buildings under construction		2		1		2		1
Housing		2		1		2		1
Other		—		—		—		—
Land		30		14		38		23
Developed land		16		7		20		11
Other land		14		7		18		11
Real estate assets acquired through mortgage lending to households for home purchase		467		123		*540*		*198*

Other real estate assets foreclosed or received in lieu of debt		18		5		25		11

Capital instruments foreclosed or received in lieu of debt		—		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—
TOTAL		843		249		971		385

(*) Non-performing real estate assets including real estate located outside Spain and the coverage established in the original financing, and excluding the credit risk transferred in portfolio sales (see reconciliation between assets foreclosed or received in payment of debt and non-performing assets, below).

A-228


Million euro
	2022
	Gross carrying amount		Allowances		Gross amount (*)		Allowances (*)

Real estate assets acquired through lending for construction and real estate development		487		158		*531*		*215*
Completed buildings		448		140		485		188
Housing		269		71		286		95
Other		179		69		199		93
Buildings under construction		4		1		5		3
Housing		3		1		5		3
Other		—		—		—		—
Land		35		16		41		24
Developed land		19		8		22		12
Other land		16		8		19		12
Real estate assets acquired through mortgage lending to households for home purchase		522		136		*598*		*218*

Other real estate assets foreclosed or received in lieu of debt		24		5		27		10

Capital instruments foreclosed or received in lieu of debt		—		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—
TOTAL		1,032		299		1,157		443

The table below sets out the reconciliation between assets foreclosed or received in lieu of debt and real estate assets considered non-performing by the Group as at 31 December 2023 and 2022:

Million euro

2023

Gross value

Allowances

Net book value

Total real estate portfolio in the national territory (in books)

843

249

594

Total operations outside the national territory and others

Provision allocated in original loan

147

—

Credit risk transferred in portfolio sales

(21)

(13)

(8)

Total non-performing real estate

971

385

586

Million euro

2022

Gross value

Allowances

Net book value

Total real estate portfolio in the national territory (in books)

1,032

299

734

Total operations outside the national territory and others

Provision allocated in original loan

174

—

Credit risk transferred in portfolio sales

(51)

(30)

(21)

Total non-performing real estate

1,157

443

713

A-229

Schedule V – Annual banking report

INFORMATION REQUIRED UNDER ARTICLE 89 OF DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 26 JUNE 2013

This information has been prepared pursuant to Article 89 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and the transposition thereof into Spanish national legislation in accordance with Article 87 and Transitional Provision 12 of Law 10/2014 of 26 June on the regulation, supervision and solvency of credit institutions, published in the Official State Gazette of 27 June 2014.

In accordance with the above regulations, the following information is presented on a consolidated basis and corresponds to the end of the 2023 financial year:


Thousand euro
	Turnover		No. of employees on a full time equivalent basis		Profit or loss before tax		Corporation tax

Spain		4,101,120		13,013		1,331,993		(412,217	)
United Kingdom		1,279,175		5,088		304,732		(84,715	)
Mexico		196,767		445		62,862		(12,006	)
United States		235,577		236		155,442		(40,016	)
Other		49,293		88		35,749		(8,221	)
Total		5,861,932		18,870		1,890,778		(557,175	)

As at 31 December 2023, the return on Group assets, calculated by dividing consolidated profit or loss for the year by total assets on the consolidated balance sheet, amounts to 0.57%.

The name, geographical location and nature of the business activity of the companies operating in each jurisdiction are set out in Schedule I to these consolidated annual financial statements.

As can be seen in Schedule I, the main activity carried out by the Group in the different jurisdictions in which it operates is banking, and fundamentally commercial banking through a wide range of products and services for large and medium-sized enterprises, SMEs, small retailers and self-employed workers, professional groups, other individuals and bancassurance.

For the purposes of this information, business turnover is regarded as the gross income recognised on the consolidated income statement as at 2023 year-end. Data on full-time equivalent employees have been obtained from the workforce of each company/country as at the end of 2023.

The amount of public subsidies and aid received is not significant.

A-230

Consolidated financial statements of

Banco Sabadell

as of and for the year ended

December 31, 2022

A-231

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2022 and 2021


Thousand euro
Assets	Note	2022		*2021 ()**
Cash, cash balances at central banks and other demand deposits ()**	7		41,260,395		49,213,196
Financial assets held for trading			4,017,253		1,971,629
Derivatives	10		3,600,122		1,378,998
Equity instruments	9		—		2,258
Debt securities	8		417,131		590,373
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			93,000		106,791
Non-trading financial assets mandatorily at fair value through profit or loss			77,421		79,559
Equity instruments	9		23,145		14,582
Debt securities	8		54,276		64,977
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			—		—
Financial assets designated at fair value through profit or loss			—		—
Debt securities			—		—
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			—		—
Financial assets at fair value through other comprehensive income			5,802,264		6,869,637
Equity instruments	9		179,572		184,546
Debt securities	8		5,622,692		6,685,091
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			1,977,469		1,530,351
Financial assets at amortised cost			185,045,452		178,869,317
Debt securities	8		21,452,820		15,190,212
Loans and advances	11		163,592,632		163,679,105
Central banks			162,664		170,881
Credit institutions			4,700,287		6,141,939
Customers			158,729,681		157,366,285
Memorandum item: loaned or pledged as security with sale or pledging rights			6,542,504		3,554,788
Derivatives – Hedge accounting	12		3,072,091		525,382
Fair value changes of the hedged items in portfolio hedge of interest rate risk			(1,545,607)		(3,963)
Investments in joint ventures and associates	14		515,245		638,782
Joint ventures			—		—
Associates			515,245		638,782
Assets under insurance or reinsurance contracts			—		—
Tangible assets	15		2,581,791		2,776,758
Property, plant and equipment			2,282,049		2,397,490
For own use			2,272,705		2,394,698
Leased out under operating leases			9,344		2,792
Investment properties			299,742		379,268
Of which: leased out under operating leases			281,707		379,268
Memorandum item: acquired through finance leases			897,903		1,017,016
Intangible assets	16		2,484,162		2,581,421
Goodwill			1,026,810		1,026,457
Other intangible assets			1,457,352		1,554,964
Tax assets			6,851,068		7,027,123
Current tax assets			206,561		319,596
Deferred tax assets	39		6,644,507		6,707,527
Other assets	17		479,680		619,715
Insurance contracts linked to pensions			89,729		116,453
Inventories			93,835		142,713
Rest of other assets			296,116		360,549
Non-current assets and disposal groups classified as held for sale	13		738,313		778,035
TOTAL ASSETS			251,379,528		251,946,591

(*) Shown for comparative purposes only.

(**) See details in the consolidated cash flow statement of the Group.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated balance sheet as at 31 December 2022.

A-232

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2022 and 2021


Thousand euro
Liabilities	Note		2022		*2021 ()**
Financial liabilities held for trading				3,598,483		1,379,898
Derivatives		10		3,374,036		1,323,236
Short positions				224,447		56,662
Deposits				—		—
Central banks				—		—
Credit institutions				—		—
Customers				—		—
Debt securities issued				—		—
Other financial liabilities				—		—
Financial liabilities designated at fair value through profit or loss				—		—
Deposits				—		—
Central banks				—		—
Credit institutions				—		—
Customers				—		—
Debt securities issued				—		—
Other financial liabilities				—		—
Memorandum item: subordinated liabilities				—		—
Financial liabilities at amortised cost				232,529,932		235,179,222
Deposits				203,293,522		209,306,598
Central banks		18		27,843,687		38,250,031
Credit institutions		18		11,373,390		8,817,114
Customers		19		164,076,445		162,239,453
Debt securities issued		20		22,577,549		21,050,955
Other financial liabilities		21		6,658,861		4,821,669
Memorandum item: subordinated liabilities				3,477,976		4,243,712
Derivatives – Hedge accounting		12		1,242,470		512,442
Fair value changes of the hedged items in portfolio hedge of interest rate risk				(959,106)		19,472
Liabilities under insurance or reinsurance contracts				—		—
Provisions		22		644,509		886,138
Pensions and other post employment defined benefit obligations				63,384		86,020
Other long term employee benefits				170		650
Pending legal issues and tax litigation				89,850		76,848
Commitments and guarantees given				176,823		190,591
Other provisions				314,282		532,029
Tax liabilities				226,711		204,924
Current tax liabilities				112,994		81,159
Deferred tax liabilities		39		113,717		123,765
Share capital repayable on demand				—		—
Other liabilities		17		872,108		768,214
Liabilities included in disposal groups classified as held for sale				—		—
TOTAL LIABILITIES				238,155,107		238,950,310

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated balance sheet as at 31 December 2022.

A-233

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2022 and 2021


Thousand euro
Equity	Note		2022		*2021 ()**
Shareholders’ equity		23		13,840,724		13,356,905
Capital				703,371		703,371
Paid up capital				703,371		703,371
Unpaid capital which has been called up				—		—
Memorandum item: capital not called up				—		—
Share premium				7,899,227		7,899,227
Equity instruments issued other than capital				—		—
Equity component of compound financial instruments				—		—
Other equity instruments issued				—		—
Other equity				21,548		19,108
Retained earnings				5,859,520		5,441,185
Revaluation reserves				—		—
Other reserves				(1,365,777)		(1,201,701)
Reserves or accumulated losses of investments in joint ventures and associates				163,853		235,453
Other				(1,529,630)		(1,437,154)
(-) Treasury shares				(23,767)		(34,523)
Profit or loss attributable to owners of the parent				858,642		530,238
(-) Interim dividends				(112,040)		—
Accumulated other comprehensive income		24		(650,647)		(385,604)
Items that will not be reclassified to profit or loss				(29,125)		(41,758)
Actuarial gains or (-) losses on defined benefit pension plans				(1,969)		917
Non-current assets and disposal groups classified as held for sale				—		—
Share of other recognised income and expense of investments in joint ventures and associates				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income				(27,156)		(42,675)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]				—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk				—		—
Items that may be reclassified to profit or loss				(621,522)		(343,846)
Hedge of net investments in foreign operations [effective portion]				119,348		157,741
Foreign currency translation				(476,030)		(481,266)
Hedging derivatives. Cash flow hedges reserve [effective portion]				(64,224)		(30,163)
Fair value changes of debt instruments measured at fair value through other comprehensive income				(180,199)		(11,724)
Hedging instruments [not designated elements]				—		—
Non-current assets and disposal groups classified as held for sale				—		—
Share of other recognised income and expense of investments in joint ventures and associates				(20,417)		21,566
Minority interests [Non-controlling interests]		25		34,344		24,980
Accumulated other comprehensive income				—		—
Other items				34,344		24,980
TOTAL EQUITY				13,224,421		12,996,281
TOTAL EQUITY AND TOTAL LIABILITIES				251,379,528		251,946,591

Memorandum item: off-balance sheet exposures

Loan commitments given		26		27,460,615		28,403,146
Financial guarantees given		26		2,086,993		2,034,143
Other commitments given		26		9,674,382		7,384,863

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated balance sheet as at 31 December 2022.

A-234

Consolidated income statements of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
	Note	2022		*2021 ()**
Interest income	28		4,988,603		4,147,549
Financial assets at fair value through other comprehensive income			68,608		49,034
Financial assets at amortised cost			4,499,843		3,734,977
Other interest income			420,152		363,538
(Interest expenses)	28		(1,189,877)		(722,093)
(Expenses on share capital repayable on demand)			—		—
Net interest income			3,798,726		3,425,456
Dividend income			2,609		1,262
Profit or loss of entities accounted for using the equity method	14		122,167		100,280
Fee and commission income	29		1,742,311		1,661,610
(Fee and commission expenses)	29		(252,103)		(194,069)
Gains or (-) losses on financial assets and liabilities, net	30		231,612		157,045
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net			13,227		340,985
Financial assets at amortised cost			(9,190)		323,840
Other financial assets and liabilities			22,417		17,145
Gains or (-) losses on financial assets and liabilities held for trading, net			204,691		(183,555)
Reclassification of financial assets from fair value through other comprehensive income			—		—
Reclassification of financial assets from amortised cost			—		—
Other gains or (-) losses			204,691		(183,555)
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net			(4,157)		4,466
Reclassification of financial assets from fair value through other comprehensive income			—		—
Reclassification of financial assets from amortised cost			—		—
Other gains or (-) losses			(4,157)		4,466
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net			—		—
Gains or (-) losses from hedge accounting, net			17,851		(4,851)
Exchange differences [gain or (-) loss], net	30		(127,971)		187,174
Other operating income	31		121,554		154,732
(Other operating expenses)	32		(458,867)		(467,362)
Income from assets under insurance or reinsurance contracts			—		—
(Expenses on liabilities under insurance or reinsurance contracts)			—		—
Gross income			5,180,038		5,026,128

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated income statement for 2022.

A-235

Consolidated income statements of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
	Note	2022		*2021 ()**
(Administrative expenses)			(2,337,415)		(2,780,890)
(Staff expenses)	33		(1,391,608)		(1,776,797)
(Other administrative expenses)	33		(945,807)		(1,004,093)
(Depreciation and amortisation)	15, 16		(545,091)		(526,514)
(Provisions or (-) reversal of provisions)	22		(96,821)		(87,566)
(Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains)	34		(839,579)		(959,507)
(Financial assets at fair value through other comprehensive income)			(182)		697
(Financial assets at amortised cost)			(839,397)		(960,204)
Profit/(loss) on operating activities			1,361,132		671,651
(Impairment or (-) reversal of impairment of investments in joint ventures and associates)			(12,200)		(9,428)
(Impairment or (-) reversal of impairment on non-financial assets)	35		(61,116)		(105,967)
(Tangible assets)			(37,098)		(65,483)
(Intangible assets)			—		(1,570)
(Other)			(24,018)		(38,914)
Gains or (-) losses on derecognition of non-financial assets, net	36		(17,369)		71,121
Negative goodwill recognised in profit or loss			—		—
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	37		(27,801)		(7,388)
Profit or (-) loss before tax from continuing operations			1,242,646		619,989
(Tax expense or (-) income related to profit or loss from continuing operations)	39		(373,256)		(81,282)
Profit or (-) loss after tax from continuing operations			869,390		538,707
Profit or (-) loss after tax from discontinued operations			—		—
PROFIT OR (-) LOSS FOR THE YEAR			869,390		538,707
Attributable to minority interest [non-controlling interests]	25		10,748		8,469
Attributable to owners of the parent			858,642		530,238

Earnings (or loss) per share (euros)	3		0.13		0.08
Basic (euros)			0.13		0.08
Diluted (euros)			0.13		0.08

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated income statement for 2022.

A-236

Consolidated statements of recognised income and expenses of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
	Note		2022		*2021 ()**
Profit or loss for the year				869,390		538,707
Other comprehensive income		24		(265,043)		137,445
Items that will not be reclassified to profit or loss				12,633		22,661
Actuarial gains or (-) losses on defined benefit pension plans				(4,123)		2,299
Non-current assets and disposal groups held for sale				—		—
Share of other recognised income and expense of investments in joint ventures and associates				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income				17,114		18,312
Gains or (-) losses from hedge accounting of equity instruments at fair value through other comprehensive income, net				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]				—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk				—		—
Income tax relating to items that will not be reclassified				(358)		2,050
Items that may be reclassified to profit or loss				(277,676)		114,784
Hedge of net investments in foreign operations [effective portion]				(38,393)		(54,100)
Valuation gains or (-) losses taken to equity				(38,393)		(54,100)
Transferred to profit or loss				—		—
Other reclassifications				—		—
Foreign currency translation				5,238		255,804
Translation gains or (-) losses taken to equity				5,238		255,804
Transferred to profit or loss				—		—
Other reclassifications				—		—
Cash flow hedges [effective portion]				(52,125)		(103,229)
Valuation gains or (-) losses taken to equity				(26,671)		(244,346)
Transferred to profit or loss				(25,493)		141,119
Transferred to initial carrying amount of hedged items				39		(2)
Other reclassifications				—		—
Hedging instruments [not designated elements]				—		—
Valuation gains or (-) losses taken to equity				—		—
Transferred to profit or loss				—		—
Other reclassifications				—		—
Debt instruments at fair value through other comprehensive income				(230,451)		(14,112)
Valuation gains or (-) losses taken to equity				(207,699)		1,300
Transferred to profit or loss				(22,752)		(15,412)
Other reclassifications				—		—
Non-current assets and disposal groups held for sale						—
Valuation gains or (-) losses taken to equity				—		—
Transferred to profit or loss				—		—
Other reclassifications				—		—
Share of other recognised income and expense of investments in joint ventures and associates				(41,985)		(5,567)
Income tax relating to items that may be reclassified to profit or (-) loss				80,040		35,988
Total comprehensive income for the year				604,347		676,152
Attributable to minority interest [non-controlling interests]				10,748		7,928
Attributable to owners of the parent				593,599		668,224

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated statement of recognised income and expenses for 2022.

A-237

Consolidated statements of total changes in equity of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests: Other items		Total
Closing balance 31/12/2021		703,371		7,899,227		—		19,108		5,441,185		—		(1,201,701)		(34,523)		530,238		—		(385,604)		—		24,980		12,996,281
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Opening balance 01/01/2022		703,371		7,899,227		—		19,108		5,441,185		—		(1,201,701)		(34,523)		530,238		—		(385,604)		—		24,980		12,996,281
Total comprehensive income for the period		—		—		—		—		—		—		—		—		858,642		—		(265,043)		—		10,748		604,347
Other equity changes		—		—		—		2,440		418,335		—		(164,076)		10,756		(530,238)		(112,040)		—		—		(1,384)		(376,207)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		(168,809)		—		—				—		(112,040)		—		—		—		(280,849)
Purchase of treasury shares		—		—		—		—		—		—		—		(86,457)		—		—		—		—		—		(86,457)
Sale or cancellation of treasury shares		—		—		—		—		—		—		4,537		97,213		—		—		—		—		—		101,750
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity								—		530,238		—		—		—		(530,238)		—		—		—		—		—
Equity increase or (-) decrease resulting from		—		—		—		—		—		—		—		—		—		—		—		—		—		—
business combinations
Share based payments		—		—		—		2,440		—		—		—		—		—		—		—		—		—		2,440
Other increase or (-) decrease in equity		—		—		—		—		56,906		—		(168,613)		—		—		—		—		—		(1,384)		(113,091)
Closing balance 31/12/2022		703,371		7,899,227		—		21,548		5,859,520		—		(1,365,777)		(23,767)		858,642		(112,040)		(650,647)		—		34,344		13,224,421

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated statement of total changes in equity for 2022.

A-238

Consolidated statements of total changes in equity of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests: Other items		Total
Closing balance 31/12/2020		703,371		7,899,227		—		20,273		5,444,622		—		(1,088,384)		(37,517)		2,002		—		(523,590)		541		71,093		12,491,638
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Opening balance 01/01/2021		703,371		7,899,227		—		20,273		5,444,622		—		(1,088,384)		(37,517)		2,002		—		(523,590)		541		71,093		12,491,638
Total comprehensive income for the period		—		—		—		—		—		—		—		—		530,238		—		137,986		(541)		8,469		676,152
Other equity changes		—		—		—		(1,165)		(3,437)		—		(113,317)		2,994		(2,002)		—		—		—		(54,582)		(171,509)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Purchase of treasury shares		—		—		—		—		—		—		—		(64,378)		—		—		—		—		—		(64,378)
Sale or cancellation of treasury shares		—		—		—		—		—		—		936		67,372		—		—		—		—		—		68,308
Reclassification of financial instruments from equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
to liability
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity		—		—		—		—		2,002		—		—		—		(2,002)		—		—		—		—		—
Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Share based payments		—		—		—		540		—		—		—		—		—		—		—		—		—		540
Other increase or (-) decrease in equity		—		—		—		(1,705)		(5,439)		—		(114,253)		—		—		—		—		—		(54,582)		(175,979)
Closing balance 31/12/2021		703,371		7,899,227		—		19,108		5,441,185		—		(1,201,701)		(34,523)		530,238		—		(385,604)		—		24,980		12,996,281

Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated statement of total changes in equity for 2022.

A-239

Consolidated cash flow statements of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
	Note	2022		*2021 ()**
Cash flows from operating activities			(6,627,920)		12,338,823
Profit or loss for the year			869,390		538,707
Adjustments to obtain cash flows from operating activities			1,854,121		1,700,666
Depreciation and amortisation			545,091		526,514
Other adjustments			1,309,030		1,174,152
Net increase/decrease in operating assets			(8,795,849)		(3,826,355)
Financial assets held for trading			(2,045,624)		707,207
Non-trading financial assets mandatorily at fair value through profit or loss			2,137		34,638
Financial assets designated at fair value through profit or loss			—		—
Financial assets at fair value through other comprehensive income			914,235		(181,941)
Financial assets at amortised cost			(7,063,285)		(5,416,431)
Other operating assets			(603,312)		1,030,172
Net increase/decrease in operating liabilities			(488,059)		13,851,502
Financial liabilities held for trading			2,218,585		(1,273,950)
Financial liabilities designated at fair value through profit or loss			—		—
Financial liabilities at amortised cost			(1,899,289)		16,348,950
Other operating liabilities			(807,355)		(1,223,498)
Cash payments or refunds of income taxes			(67,523)		74,303
Cash flows from investing activities			(64,796)		419,591
Payments			(435,324)		(505,679)
Tangible assets	15		(238,939)		(225,626)
Intangible assets	16		(194,638)		(276,141)
Investments in joint ventures and associates	14		(1,747)		(3,912)
Subsidiaries and other business units			—		—
Non-current assets and liabilities classified as held for sale			—		—
Other payments related to investing activities			—		—
Collections			370,528		925,270
Tangible assets			96,547		444,505
Intangible assets			—		—
Investments in joint ventures and associates	14		210,300		63,086
Subsidiaries and other business units			—		—
Non-current assets and liabilities classified as held for sale			63,681		417,679
Other collections related to investing activities			—		—

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated cash flow statement for 2022.

A-240

Consolidated cash flow statements of Banco Sabadell Group

For the years ended 31 December 2022 and 2021


Thousand euro
	Note	2022		*2021 ()**
Cash flows from financing activities			(1,236,880)		1,095,286

Payments			(1,338,630)		(723,022)

Dividends			(280,849)		—

Subordinated liabilities	4		(750,000)		(443,497)

Redemption of own equity instruments			—		—

Acquisition of own equity instruments			(86,457)		(64,378)

Other payments related to financing activities			(221,324)		(215,147)

Collections			101,750		1,818,308

Subordinated liabilities			—		1,750,000

Issuance of own equity instruments			—		—

Disposal of own equity instruments			101,750		68,308

Other collections related to financing activities			—		—
Effect of changes in foreign exchange rates			-23,205		174,594

Net increase (decrease) in cash and cash equivalents			(7,952,801)		14,028,294

Cash and cash equivalents at the beginning of the year	7		49,213,196		35,184,902

Cash and cash equivalents at the end of the year	7		41,260,395		49,213,196

Memorandum item
CASH FLOWS CORRESPONDING TO:

Interest received			4,869,638		4,144,382

Interest paid			1,029,597		1,209,006

Dividends received			2,609		1,262

COMPONENTS OF CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

Cash on hand	7		686,258		704,105

Cash equivalents in central banks	7		39,236,780		47,741,021

Other demand deposits	7		1,337,357		768,070

Other financial assets			—		—

Less: bank overdrafts repayable on demand			—		—
TOTAL CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR			41,260,395		49,213,196

Of which: held by Group entities but not available for the Group			—		—

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying Schedules I to VI form an integral part of the consolidated cash flow statement for 2022.

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Consolidated annual report of Banco Sabadell Group for the year ended 31 December 2022

Note 1 – Activity, accounting policies and practices

1.1 Activity

Banco de Sabadell, S.A. (hereinafter, also referred to as Banco Sabadell, the Bank, the Institution, or the Company), with registered office in Alicante, Avenida Óscar Esplá, 37, engages in banking business and is subject to the standards and regulations governing banking institutions operating in Spain. The supervision of Banco Sabadell on a consolidated basis is performed by the European Central Bank (ECB).

The Articles of Association and other public information can be viewed both at the Bank’s registered offices and on its website (https://https://www.grupbancsabadell.com/corp/en/home.html).

1.2 Basis of presentation and changes in accounting regulations

The Group’s consolidated annual financial statements for 2022 have been prepared in accordance with the International Financial Reporting Standards adopted by the European Union (EU-IFRS) applicable at the end of 2022, taking into account Bank of Spain Circular 4/2017 of 27 November as well as other provisions of the financial reporting regulations applicable to the Group and considering the formatting and mark-up requirements established in Commission Delegated Regulation EU 2019/815, in order to fairly present the Group’s equity and consolidated financial situation as at 31 December 2022 and the results of its operations, recognised income and expenses, changes in equity and cash flows (all consolidated) in 2022.

The information included in these consolidated annual financial statements is the responsibility of the directors of the Group’s parent company. The Group’s consolidated annual financial statements for 2022 were signed off by the directors of Banco Sabadell at a meeting of the Board of Directors on 16 February 2023 and will be submitted to shareholders at the Annual General Meeting for approval. It is expected that the shareholders will approve the accounts without significant changes.

Standards and interpretations issued by the International Accounting Standards Board (IASB) that entered into force in 2022

In 2022, the standards indicated hereafter, which have entered into force and been adopted by the European Union, have been applied by the Group for the first time:



Standards		Titles
Amendments to IAS 16, IAS 37 and IFRS 3 and annual improvements to IFRS 2018-2020		Narrow-scope amendments

Narrow-scope amendments to IAS 16, IAS 37 and IFRS 3 and annual improvements to IFRS 2018-20

On one hand, these are amendments made in relation to proceeds received before the intended use of an asset governed by IAS 16 “Property, plant and equipment”, the cost of fulfilling an onerous contract pursuant to IAS 37 “Provisions” and references made in IFRS 3 “Business combinations” to the Conceptual Framework for Financial Reporting. The annual improvements to IFRS 2018-20 have also entailed making minor amendments to IFRS 1 “First-time adoption of IFRS”, IFRS 9 “Financial instruments”, IFRS 16 “Leases” and IAS 41 “Agriculture”. The entry into force of these changes has had no significant impact for the Group.

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Standards and interpretations issued by the IASB not yet in force

At 31 December 2022, the most significant standards and interpretations that have been published by the IASB but which have not been applied when preparing these consolidated annual financial statements, either because their effective date is subsequent to the date thereof or because they have not yet been endorsed by the European Union, are as follows:



Standards and Interpretations	Title	Mandatory for years beginning:

Approved for application in the EU

IFRS 17	Insurance contracts	1 January 2023

Amendments to IFRS 17	Initial application of IFRS 17 and IFRS 9: Comparative Information	1 January 2023

Amendments to IAS 1 and IFRS Practice Statement 2	Disclosure of accounting policies	1 January 2023

Amendments to IAS 8	Definition of accounting estimates	1 January 2023

Amendments to IAS 12	Deferred tax related to assets and liabilities arising from a single transaction	1 January 2023

Not approved for application in the EU

Amendments to IAS 1	Presentation of financial statements:	1 January 2024

	- Classification of liabilities as current or non-current
	- Non-current liabilities with covenants

Amendments to IFRS 16	Lease liabilities in sale and leaseback transactions	1 January 2024

The Group has carried out an assessment of the impacts resulting from these standards and decided not to exercise its option to adopt early, where possible. Unless otherwise indicated, management estimates that their adoption would not have a material impact on the Group.

Approved for implementation in the EU

IFRS 17 “Insurance contracts”

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts. The objective of IFRS 17 is to ensure that entities provide relevant information in a way that faithfully represents those contracts.

In accordance with this standard, insurance contracts combine components of financial instruments and service contracts. Furthermore, many insurance contracts generate cash flows that vary substantially and have a long duration. In order to provide useful information on these aspects, IFRS 17:

–

combines the current measurement of future cash flows with the revenue recognised throughout the period during which the services established in the contracts are provided.

–

presents results for services provided separately from the financial expenses and income relating to these contracts.

–

Furthermore, in 2020 some amendments to IFRS 17 were incorporated, designed to reduce implementation costs by simplifying some requirements of this Standard, make financial performance easier to explain and ease transition by deferring the effective date of the Standard to 1 January 2023 and by reducing the requirements to apply the Standard for the first time.

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The initial application of this standard basically affects, at consolidated level, the amount at which insurance undertakings associated with the Group that are controlled by Zürich Seguros (i.e., BanSabadell Vida, S.A. de Seguros y Reaseguros, BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros, y BanSabadell Pensiones, E.G.F.P., S.A.) are recognised.

The impact at the date of entry into force of this regulation (1 January 2023) entails, in approximate terms, a reduction of between 0.9% and 1.2% of the Group’s consolidated equity and of between 12 and 16 basis points in the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio.

Amendment to IFRS 17 “Initial application of IFRS 17 and IFRS 9: Comparative Information”

In the event this option is used, the application of this amendment will be simultaneous with the application of IFRS 17.

Amendments to IAS 1 and IFRS Practice Statement 2 “Disclosure of accounting policies”

These amendments aim to help institutions to improve accounting policy disclosures so that they provide more useful information in their annual financial statements.

The amendments to IAS 1 will be applied prospectively, with early application permitted.

Amendments to IAS 8 “Definition of accounting estimates”

Amendments to IAS 12 “Deferred tax related to assets and liabilities arising from a single transaction”

These amendments introduce an exception to the initial recognition exemption provided in IAS 12 for situations in which a single transaction gives rise to equal deductible and taxable timing differences. These amendments apply to transactions that occur on or after the beginning of the earliest comparative period presented. The early application of these amendments is permitted.

Not approved for application in the EU

Amendments to IAS 1 “Presentation of financial statements”

Classification of liabilities as current or non-current

These amendments are designed to make clear how institutions should classify debts and other liabilities as current and non-current, in particular liabilities with no fixed maturity and those that may be converted to equity. The early application of these amendments is permitted.

Non-current liabilities with covenants

The purpose of these amendments is to clarify how the conditions agreed in a loan (the “covenants”) affect the classification of that loan as either a current or a non-current liability according to whether those conditions must be complied with before or after the date of the financial statements. These amendments change the “Classification of liabilities as current or non-current” and defer their entry into force until 1 January 2024. The early application of these amendments is permitted.

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Amendments to IFRS 16 “Lease liabilities in sale and leaseback transactions”

The amendments to IFRS 16 will be applied retrospectively, with early application permitted.

Judgements and estimates

The preparation of the consolidated annual financial statements requires certain accounting estimates to be made. It also requires management to use its best judgement in the process of applying the Group’s accounting policies. Such judgements and estimates may affect the value of the assets and liabilities and the disclosure of contingent assets and contingent liabilities as at the date of the consolidated annual financial statements, as well as income and expenses in the year.

The main judgements and estimates relate to the following:

–

The determination of the business models under which financial assets are managed (see Notes 1.3.3, 8 and 11).

–

The accounting classification of financial assets according to their credit risk (see Notes 1.3.4, 8 and 11).

–

Losses due to the impairment of certain financial assets (see Notes 1.3.4, 8, 11 and 26).

–

The assumptions used in actuarial calculations of liabilities and post-employment obligations (see Notes 1.3.17 and 22).

–

The measurement of consolidated goodwill (see Notes 1.3.12 and 16).

–

The useful life and impairment losses of tangible assets and other intangible assets (see Notes 1.3.10, 1.3.11, 1.3.12, 15 and 16).

–

The provisions and consideration of contingent liabilities (see Notes 1.3.16 and 22).

–

The fair value of certain unquoted financial assets (see Notes 1.3.3 and 6).

–

The fair value of real estate assets held on the balance sheet (see Notes 1.3.9, 1.3.10, 1.3.13 and 6).

–

The recoverability of non-monetisable deferred tax assets and tax credits (see Notes 1.3.20 and 39).

The conflict between Russia and Ukraine and the European energy crisis have shaped the economic environment and the performance of financial markets in 2022, injecting uncertainty into companies’ activity, which has reinforced the need to use professional judgement when assessing the impact of the existing macroeconomic situation on the aforesaid estimates, fundamentally in relation to the calculation of impairment losses on financial assets.

Although the estimates are based on the information available regarding current and foreseeable circumstances, final results could differ from these estimates.

1.3 Accounting principles and policies and measurement criteria

The accounting principles and policies, as well as the most significant measurement criteria applied in preparing these consolidated annual financial statements, are described below. There have been no cases in which accounting principles or measurement criteria have not been applied because of a material effect on the Group’s consolidated annual financial statements for 2022.

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1.3.1 Consolidation principles

In the consolidation process, a distinction is drawn between subsidiaries, joint ventures, associates and structured entities.

Subsidiaries

Subsidiaries are entities over which the Group has control. This occurs when the Group is exposed, or is entitled, to variable returns as a result of its involvement in the investee and when it has the ability to influence those returns through its power over the investee.

For control to exist, the following criteria must be met:

–

Power: an investor has power over an investee when that investor holds rights which provide them with the ability to lead significant activities, i.e. those that significantly affect the investee’s returns.

–

Returns: an investor is exposed, or is entitled, to variable returns due to their involvement in the investee when the returns obtained from such involvement may vary depending on the investee’s economic performance. The investor’s returns may be only positive, only negative, or both positive and negative.

–

Relationship between power and returns: an investor controls an investee if the investor not only has power over the investee and is exposed, or is entitled, to variable returns due to their involvement with the investee, but also has the ability to use that power to influence the returns obtained due to their involvement with the investee.

The financial statements of subsidiaries are consolidated with the Bank’s financial statements using the full consolidation method.

Joint ventures

These are entities subject to joint control agreements whereby decisions on significant activities are made unanimously by the entities which share control.

Investments in joint ventures are accounted for by the equity method i.e. they are accounted for in terms of the fraction of equity represented by the share held in their capital stock, after taking account of any dividends received from them and any other equity disposals.

The Group has not held investments in joint ventures in 2022 and 2021.

Associates

Associates are entities over which the Group exerts significant influence which generally, although not exclusively, takes the form of a direct or indirect interest representing 20% or more of the investee’s voting rights.

In the consolidated annual financial statements, associates are accounted for using the equity method.

The above notwithstanding, when the Group’s investment in an associate is held directly by, or is held indirectly through, a venture capital organisation or similar entity, it may elect to measure that investment at fair value through profit or loss in accordance with IFRS 9. This election is made separately for each associate on the date of its initial recognition. Similarly, when the Group has an interest in an associate that is an investment entity, it may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate to its subsidiaries. This election is made separately for each associate that is an investment entity, on the later of the following dates: (a) when the associate is first recognised; (b) when the associate becomes an investment entity; and (c) when the associate becomes the parent company of a group of entities.

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Structured entities

A structured entity is an entity that has been designed so that voting or other similar rights are not the dominant factor in deciding who controls the entity.

–

Analysis of the influence of the Group over the significant activities of the entity that could have an influence on the amount of its returns.

–

Implicit or explicit commitments of the Group to provide financial support to the entity.

–

Identification of the entity’s manager and analysis of the remuneration scheme.

–

Existence of removal rights (possibility of dismissing managers).

–

Significant exposure of the Group to the variable returns on the entity’s assets.

Schedule II provides details of the structured entities of the Group.

1.3.2 Business combinations

A business combination is a transaction, or any other event, through which the Group obtains control of one or more businesses. Business combinations are accounted for using the acquisition method.

Under this method, the acquiring entity (acquirer) recognises the assets acquired and liabilities assumed in its financial statements, also considering contingent liabilities, measured at their fair value, including those that the acquired entity (acquiree) had not recognised in its accounts. This method also requires the cost of the business combination to be estimated, which will normally correspond to the consideration paid, defined as the fair value, on the acquisition date, of the assets delivered, the liabilities incurred against the former owners of the acquired business and the equity instruments issued, if any, by the acquirer.

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The Group then recognises goodwill in the consolidated annual financial statements if on the acquisition date there is a positive difference between:

–

the sum of the consideration paid plus the amount of all minority interests and the fair value of prior interests held in the acquired business; and

–

the fair value of recognised assets and liabilities.

If the difference is negative, it is recorded under the heading “Negative goodwill recognised in profit or loss” in the consolidated income statement.

1.3.3 Measurement of financial instruments and recognition of changes arising in their subsequent measurement

In general, all financial instruments are initially recognised at fair value (see definition in Note 6) which, unless evidence to the contrary is available, coincides with the transaction price. For financial instruments not recognised at fair value through profit or loss, the fair value is adjusted either by adding or deducting the transaction costs directly attributable to their acquisition or issuance. In the case of financial instruments at fair value through profit or loss, the directly attributable transaction costs are recognised immediately in the consolidated income statement. As a general rule, conventional purchases and sales of financial assets are recognised at the settlement date.

Instruments which form part of a hedging relationship are treated in accordance with regulations applicable to hedge accounting.

Changes in measurements occurring subsequent to initial recognition for reasons other than those mentioned above are treated based on the classification of financial assets and financial liabilities for the purposes of their measurement. In the case of financial assets, classification is generally based on the following aspects:

–

The business model under which they are managed, and

–

The characteristics of their contractual cash flows.

Business model

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The business models used by the Group are indicated here below:

–

Business model whose objective is to sell financial assets.

–

Contractual cash flows of financial assets

Financial assets should initially be classified in one of the following two categories:

–

Those whose contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

–

All other financial assets.

The most significant judgements used in this evaluation are indicated here below:

–

•

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•

Other clauses that could change the timing or amount of cash flows: clauses that could alter contractual cash flows as a result of changes in credit risk are considered to pass the SPPI test.

–

•

the underlying pool of financial instruments comprises instruments whose contractual cash flows are solely payments of principal and interest on the principal amount outstanding; and

•

the exposure to credit risk corresponding to the tranche being assessed is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments.

–

Portfolios of financial instruments classified for the purpose of their measurement

Financial assets and financial liabilities are classified, for the purposes of their measurement, into the following portfolios, based on the aspects described above:

Financial assets at amortised cost

This category includes financial assets that meet the following two conditions:

–

They are managed with a business model whose objective is to hold financial assets in order to collect contractual cash flows, and

–

Their contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

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The effective interest rate is the discount rate that exactly equals the value of a financial instrument to the estimated cash flows over the instrument’s expected life, on the basis of its contractual terms, such as early repayment options, but without taking into account expected credit losses. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate set at the time of their acquisition, considering, where appropriate, the fees, transaction costs, premiums or discounts which, because of their nature, may be likened to an interest rate. In the case of floating-rate financial instruments, the effective interest rate is the same as the rate of return in respect of all applicable concepts until the first scheduled benchmark revision date.

Financial assets at fair value through other comprehensive income

This category includes financial assets that meet the following two conditions:

–

They are managed with a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and

–

The contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

These financial assets primarily correspond to debt securities.

Furthermore, the Group may opt, at initial recognition and irrevocably, to include in the portfolio of financial assets at fair value through other comprehensive income investments in equity instruments that should not be classed as held for trading and which would otherwise be classified as financial assets mandatorily at fair value through profit or loss. This option is exercised on an instrument-by-instrument basis.

Income and expenses from financial assets at fair value through other comprehensive income are recognised in accordance with the following criteria:

–

Interest accrued or, where applicable, dividends accrued are recognised in the consolidated income statement.

–

Losses due to impairment of debt instruments, or gains due to their subsequent recovery, are recognised in the consolidated income statement.

–

Other changes in value are recognised through other comprehensive income.

When a debt instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, the fair value change recognised under the heading “Accumulated other comprehensive income” of the consolidated statement of equity is reclassified into the consolidated income statement. However, when an equity instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, this amount is not reclassified into the consolidated income statement, but rather to reserves.

Financial assets at fair value through profit or loss

A financial asset is classified in the portfolio of financial assets at fair value through profit or loss whenever the business model used by the Group for its management or the characteristics of its contractual cash flows make it inadvisable to classify it into any of the other portfolios described above.

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This portfolio is in turn subdivided into:

–

Financial assets held for trading

–

Non-trading financial assets mandatorily at fair value through profit or loss

All other financial assets mandatorily at fair value through profit or loss are classified in this portfolio.

In 2022 and 2021, no significant reclassifications took place between the portfolios in which financial assets are recognised for the purpose of their measurement.

Financial liabilities held for trading

Fair value changes are directly recognised in the consolidated income statement, making a distinction, in the case of non-derivative instruments, between the portion attributable to returns accrued on the instrument, which are recognised as interest applying the effective interest rate method, and the remaining portion, which is recognised as gains or (-) losses on financial assets and liabilities under the corresponding heading.

Financial liabilities at amortised cost

Financial liabilities measured at amortised cost are financial liabilities that cannot be classified into any of the above categories and which relate to the typical deposit-taking activity of a financial institution, irrespective of their structure and maturity.

In particular, this category includes capital qualifying as a financial liability, specifically, financial instruments issued by the Group which, given their legal classification as share capital, do not meet the requirements to be classified as consolidated equity for accounting purposes. These are essentially issued shares that do not carry voting rights and whose return is calculated based on a fixed or variable rate of interest.

Hybrid financial instruments

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When the host contract of a hybrid financial instrument is a financial liability, the embedded derivatives of that contract are separated and treated independently for accounting purposes if the characteristics and economic risks of the embedded derivative are not closely related to those of the host contract. A different financial instrument with the same conditions as those of the embedded derivative would qualify as a derivative instrument, therefore the entire hybrid contract would not be designated at its fair value through profit or loss.

The fair value of the Group’s financial instruments as at 31 December 2022 and 2021 is indicated in Note 6.

1.3.4 Impairment of financial assets

A financial asset or a credit exposure is considered to be impaired when there is objective evidence that one or more events have occurred whose direct or combined effect gives rise to:

–

In the case of off-balance sheet exposures that carry credit risk, inflows that are expected to be lower than the contractual cash flows that are due if the holder of a loan commitment draws down the loan or, in the case of financial guarantees given, inflows that are expected to be lower than the payments that are scheduled to be made.

–

In the case of investments in joint ventures and associates, a situation in which their carrying amount cannot be recovered.

1.3.4.1 Debt instruments and off-balance sheet exposures

For risks classified as stage 3 (see the section “Definition of classification categories” in this note), accrued interest is recognised in the consolidated income statement by applying the effective interest rate to its amortised cost adjusted to account for any impairment allowances.

The Group has policies, methods and procedures in place to estimate the losses that it may incur as a result of its credit risks, due to both counterparty insolvency and country risk. These policies, methods and procedures are applied when granting, assessing and arranging debt instruments and off-balance sheet exposures, when identifying their possible impairment and, where applicable, when calculating the amounts necessary to cover these expected losses.

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1.3.4.1.1 Accounting classification on the basis of credit risk attributable to insolvency

The following sections describe the classification principles and methodology used by the Group.

Definition of classification categories

Credit exposures and off-balance sheet exposures are both classified, on the basis of their credit risk, into the following stages:

–

Stage 2: standard exposures under special monitoring, i.e. transactions which, although they do not meet the criteria to be classified individually as stage 3 or write-offs, show significant increases in credit risk (SICR) since initial recognition. This category includes, among other transactions, those in which there are amounts more than 30 days past due, with the exception of non-recourse factoring, for which a threshold of more than 60 days is applied (the amount of non-recourse factoring transactions with arrears of between 30 and 60 days represented 55 million euros at year-end 2022 and 32 million euros at year-end 2021), as well as refinanced and restructured transactions not classified as stage 3 until they are classified into a lower risk category once they meet the established requirements for modifying their classification.

–

•

For reasons other than borrower arrears: transactions which do not meet the conditions for classification as write-offs or stage 3 as a result of borrower arrears, but for which there are reasonable doubts as to the likelihood of obtaining the estimated cash flows of the transaction, as well off-balance sheet exposures not classified as stage 3 as a result of borrower arrears whose payment by the Group is likely but whose recovery is doubtful. This category includes transactions that were classified as stage 3 as a result of borrower arrears, but as they do not present amounts more than 90 days past due they remain in this category for a probation period before reclassification as standard exposures under special monitoring (stage 2).

The accounting definition of stage 3 is in line with the definition used in the Group’s credit risk management activities.

–

Write-off:

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In the situations described above, the Group derecognises from the consolidated balance sheet any amount recorded as a write-off, together with its provision, notwithstanding any actions that may be taken to collect payment until no more rights to collect payment exist, whether due to a credit risk transfer, a debt remission, or for any other reasons.

Purchased or originated credit-impaired transactions

Extent of alignment between the stage 3 accounting category and the prudential definition of default

In general, contracts that are considered impaired from an accounting standpoint are also considered impaired for prudential purposes. The exception to this are contracts that are impaired by reason of the accounting definition of default but whose past-due amounts are equal to or below a materiality threshold (exposures of 100 euros for the retail segment and of 500 euros for the non-retail segment, and where 1% of the total exposures are past-due for both cases).

Notwithstanding the foregoing, the prudential definition is generally more conservative than the accounting definition. The key differing aspects are set out hereafter:

–

Transaction classification criteria

The Group applies various criteria to classify borrowers and transactions into different categories based on their credit risk. These categories include:

–

Automatic criteria;

–

Criteria based on indicators (triggers); and

–

Specific criteria for refinancing transactions.

The automatic factors and specific classification criteria for refinancing make up what the Institution refers to as the classification and cure algorithm and are applied to the entire portfolio.

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Furthermore, to enable an early identification of any significant increase in credit risk or vulnerabilities, or any transaction impairment, the Group establishes different triggers for significant and non-significant borrowers. The details for each borrower group are described in the sections on Individual assessment and Collective assessment, respectively. In particular, non-significant borrowers are assessed by means of a process which aims to identify any significant increase in credit risk since the transaction was first approved and which could result in losses greater than those incurred on other similar transactions classified as stage 1. For significant borrowers, on the other hand, there is an automated system of triggers in place that generates a series of alerts, which serve to indicate, during a borrower’s assessment, that a decision needs to be made with regard to their classification.

As a result of the application of these criteria, the Group either classifies its borrowers as stage 2 or 3 or keeps them in stage 1.

Individual assessment

The Group has established a significance threshold in terms of exposure, which is used to classify certain borrowers as significant, meaning that their risks need to be assessed individually.

The thresholds at the customer level used to classify borrowers as significant have been set at 10 million euros for customers classified in stage 1 and at 3 million euros for customers classified in stages 2 or 3. These thresholds comprise amounts drawn, amounts available and guarantees.

To assess significant borrowers’ transactions, a system of triggers is established. These triggers identify any significant increase in credit risk, as well as any signs of impairment.

A team of expert risk analysts carries out the individual assessment of borrowers, reviewing each transaction and assigning it the corresponding accounting classification.

The system of triggers and automatic criteria for significant borrowers is automated and takes into account the particular characteristics of segments that perform differently within the loan portfolio, with specific triggers in place for certain segments. In any event, the system of triggers does not automatically or individually classify borrowers. Instead, it brings forward the due date for assessment of the borrower by an analyst and prompts decision-making with regard to their classification. The main aspects identified by the system of triggers and automatic criteria are listed here below:

–

A significant increase in credit risk or an impairment event, considering variables that are indicative of a deteriorating or poor economic and financial situation as well as variables that could potentially give rise to impairment or which allow impairment to be anticipated. Examples of stage 2 and stage 3 triggers:

Stage 2 triggers:

•

Adverse changes in the financial situation, such as a significant increase in levels of leverage or a sharp drop in turnover or equity.

•

Adverse changes in the economy or market indicators, such as a significant fall in share prices or a reduction in the price of debt issues.

•

Significant fall in the internal credit rating of the borrower.

•

Significant increase in credit risk of other transactions of the same borrower, or in entities associated with the borrower’s risk group.

•

For transactions secured with collateral, significant decline in the value of the collateral received.

Stage 3 triggers:

•

Negative EBITDA, significant decrease in EBITDA, in turnover, or in general, in the borrower’s recurrent cash flows.

•

Increase in the borrower’s leverage ratios.

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•

Negative equity or equity reduction as a result of the borrower suffering equity losses of 50% or more in the past year.

•

Existence of an internal or external credit rating showing that the borrower is in arrears.

–	Existence of debt remissions or debt reductions to the same borrower or to companies associated with the latter’s risk group in the last 2 years.

–	Existence of a borrower’s past-due commitments of significant value with public bodies.

–

Breach of contract, defaults or delayed payments of principal or interest: in addition to amounts more than 90 days past due, which form part of the automatic classification algorithm, amounts less than 90 days past due are also identified, as these can be a sign of impairment or of a significant increase in credit risk. Non-payments declared in other credit institutions in the financial system are also considered in the assessment.

–

Borrowers experiencing financial difficulties are granted concessions or advantages that would not otherwise be considered: refinancing the debt of an obligor experiencing financial difficulties could prevent or delay their failure to honour their payment obligations, whilst at the same time preventing or delaying the recognition of the impairment associated with the financial asset linked to that obligor.

–

Probability of the borrower becoming insolvent: in cases in which there is a high probability that a borrower will enter bankruptcy or other financial reorganisation, the solvency of the issuers or obligors is ostensibly affected, which could give rise to a loss event depending on the impact on future cash flows pending collection.

The Group carries out an annual review of the reasonableness of its thresholds and of the credit risk captured in the individual assessments carried out using these thresholds.

Collective assessment

For borrowers who have been classed below the significant borrower threshold and who, in addition, have not been classified as stages 2 or 3 by the automatic classification algorithm, the Group has defined a process to identify transactions that show a significant increase in credit risk compared to when the transaction was approved, and which could give rise to greater losses than those incurred on other similar transactions classified as stage 1.

For transactions of borrowers that are assessed collectively, the Group has a statistical model that allows it to determine the Probability of Default (PD) term structure and, therefore, the residual lifetime PD of a contract (or the PD from a given moment in time up to the maturity of the transaction), based on different characteristics:

–

Systemic: macroeconomic characteristics shared by all exposures.

–

Idiosyncratic: aspects specific to each transaction or borrower.

With this specification, the Group is able to measure the annualised residual lifetime PD of a transaction under the conditions that existed at the time the transaction was approved (or originated), or under the conditions existing at the time the provision is calculated. Therefore, the current annualised residual lifetime PD may fluctuate in relation to the PD at the time the transaction was approved, due to changes in the economic environment or in the idiosyncratic characteristics of the transaction or of the borrower.

In March 2022, the Group introduced a new statistical model that estimates significant increase in credit risk for borrowers and transactions subject to collective assessment models. The model generates an estimate using a logistic regression taking the annualised lifetime PD under the economic and idiosyncratic circumstances at the time the provision is calculated, and comparing it against the annualised residual lifetime PD under the circumstances that existed at the time the transaction was approved, considering the difference between PDs in both relative and absolute terms. For this model, thresholds for the increase in annualised lifetime PD, indicating stage 2 classification, have been calibrated using historical data with the aim of maximising efficient and early detection of arrears at 30 days, refinancings and defaults, thereby maximising risk discrimination among borrowers and/or transactions classified as stage 1 and 2.

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The thresholds for significant risk increase vary according to the portfolio, business size, loan product and level of PD upon approval, requiring relatively higher increases if the PD at approval is low.

Exceptionally, these thresholds are not applicable at certain low levels of current PD where there is practically no indication of significant risk increase over a 6-month horizon (Low Credit Risk Exemption); these levels will vary according to the portfolio/segment and have been calibrated using historical data. The current PD thresholds to identify the population exempt from significant risk increases have been calibrated differently for each of the portfolios under the collective model perimeter, i.e. companies differentiated by size, mortgages and consumer loans.

In any case, as a general criterion and in addition to those described previously, borrowers included in the watchlist identified according to risk and all transactions that have a 12-month PD above a given threshold, also calibrated with a sample of historical data and varying according to portfolio/segment, are reclassified to stage 2. Similarly, all transactions with a very high current 12-month PD, that surpass a threshold also calibrated with a sample of historical data and varying according to portfolio/segment, are reclassified to stage 3.

In the case of TSB, the multiplier of lifetime PD upon approval relative to current lifetime PD is also used, complemented with an absolute increase in PD calculated specifically for each portfolio. Both of these thresholds must be reached in order for an exposure to be reclassified as stage 2. In 2022 and 2021, the threshold for the multiplier of current PD relative to PD upon approval applied to all portfolios has been set at 2, while absolute thresholds have ranged from 10 to 770 basis points in both years, with the exception of overdrafts, which only use an absolute threshold of 400 basis points.

Refinancing and restructuring transactions

–

Refinancing transaction: transaction which, irrespective of the borrower or guarantees involved, is approved or used for economic or legal reasons related to current or foreseeable financial difficulties on the part of the borrower (or borrowers) affecting their ability to repay one or more transactions approved by the Group and granted to the borrower (or borrowers) or to another company or companies belonging to their group, or to bring outstanding payments fully or partially up to date, with a view to making it easier for holders of refinanced transactions to repay their debt (principal and interest) when they are unable, or will predictably soon be unable, to honour their payment obligations in good time and in the manner agreed.

–

Restructured transaction: transaction in which, for economic or legal reasons related to current or foreseeable financial difficulties on the part of the borrower (or borrowers), the financial terms and conditions are amended to make it easier for them to repay their debt (principal and interest) when they are unable, or will predictably soon be unable, to honour their payment obligations in good time and in the manner agreed, even when such an amendment is already provided for in the contract. In any case, transactions in which the debt is written down or assets are received to reduce the debt, or those transactions whose terms are amended to extend the term to maturity, or to amend the repayment schedule so as to the reduce repayment instalment amounts in the short term or reduce their payment frequency, or to establish or extend the grace period for the repayment of principal, interest, or both, are all considered restructured transactions, except when it can be proven that the terms are being amended for reasons other than borrowers’ financial difficulties and that the amended terms are analogous to those that would be applied in the market, on the date of such amendment, to transactions with a similar risk profile.

If a transaction is classified into a particular risk category, refinancing does not mean that its risk classification will automatically improve. The algorithm establishes the initial classification of refinanced transactions based on their characteristics: they may be based on an inadequate business plan, they may have specific clauses such as long grace periods, or they may have amounts written off as they are considered to be non-recoverable. The algorithm then changes the initial classification depending on the established cure periods. Reclassification into a lower risk category will only be considered if evidence exists of a continuous and significant improvement in the recovery of the debt over time; therefore, the act of refinancing does not in itself produce any immediate improvements.

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Refinancing, refinanced and restructured transactions remain identified as such during a probation period until all of the following requirements are met:

–

It is concluded, having reviewed the borrower’s assets and financial position, that the borrower is unlikely to experience financial difficulties.

–

A minimum of two years have passed since the date of the restructuring or refinancing or, if later, since the date of reclassification to the stage 3 category.

–

The borrower has no other transactions with amounts more than 30 days past due at the end of the probation period.

Refinancing, refinanced and restructured transactions remain in the stage 3 category until it can be verified that they meet the general criteria for reclassification from stage 3 into a different category, particularly the following requirements:

–

It is concluded, having reviewed the borrower’s assets and financial position, that the borrower is unlikely to experience financial difficulties.

–

One year has passed since the date of the refinancing or restructuring.

–

The borrower has paid the accumulated instalments of principal and interest.

–

The borrower has no other transactions with amounts more than 90 days past due on the date on which the refinancing, refinanced or restructured transaction is reclassified as stage 2.

In the case of refinanced/restructured loans classified as stage 2, in addition to the general classification criteria, certain specific criteria are applicable which, if met, lead to reclassification into one of the higher risk categories described previously (i.e. into stage 3, as a result of borrower arrears, when payments are, in general, over 90 days past due, or for reasons other than borrower arrears, when there are reasonable doubts as to their recoverability).

1.3.4.1.2 Credit loss allowances

The Group applies the following parameters to determine its credit loss allowances:

–

EAD (Exposure at Default): the Institution defines exposure at default as the value to which it expects to be exposed to when a loan defaults.

–

PD (Probability of Default): estimation of the probability that a borrower will default within a given period of time.

The Group has tools in place to help in its credit risk management that predict the probability of default of each borrower and which cover practically all lending activity.

In this context, the Group reviews the quality and stability of the rating tools that are currently in use on an annual basis. The review process includes the definition of the sample used and the methodology to be applied when monitoring rating models.

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The tools used to assess debtors’ probability of default are behavioural credit scores that monitor credit risk in the case of individuals, and early warning indicators and credit ratings in the case of companies:

•

Credit ratings (for companies): in general, credit risks undertaken with companies are rated using a rating system based on the internal estimate of their probability of default (PD). The rating model estimates the risk rating in the medium term, based on qualitative information provided by risk analysts, financial statements and other relevant information. The rating system is based on factors that predict the probability of default over a one-year period. It has been designed for different segments. The rating model is reviewed annually based on the analysis of performance patterns of actual defaulted loans. A predicted default rate is assigned to each credit rating level, which also allows a uniform comparison to be made against other segments and against credit ratings issued by external credit rating agencies using a master ratings scale.

Credit ratings have a variety of uses in risk management. Most notably, they form part of the transaction approval process (system of discretions), risk monitoring and pricing policies.

•

Early warnings tool, known as HAT (for companies): HAT gives a score that estimates the risk of a company defaulting in the near term, determined based on a variety of information (balances, non-payments, information from CIRBE (Spain’s central credit register), external credit bureaux, etc.). HAT aims to capture the short-term risk of a company. The scores that it gives are very sensitive to changes in a company’s status or behaviour and are therefore updated on a daily basis.

•

Credit scores: in general, credit risks undertaken with individuals are rated using credit scoring systems, which are in turn based on a quantitative model of historical statistical data, where the relevant predictive factors are identified. In regions where credit scoring takes place, credit scores are divided into two types:

○

Behavioural credit scores: the system automatically classifies all customers using information regarding their activity based on their financial situation (balances, activity, non-payments), their personal characteristics and the features of each of the products that they have acquired. These credit scores are mainly used to authorise transactions, establish (authorised) overdraft limits, design advertising campaigns and adjust the initial stages of the debt recovery management process.

If no credit scoring system exists, individual assessments supplemented with policies are used instead.

–

Effective Interest Rate (EIR): discount rate that exactly equals the estimated cash flows receivable or payable throughout the expected life of a financial asset or a financial liability to the gross carrying amount of the financial asset or to the amortised cost of the financial liability.

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–

Multiple scenarios: in order to estimate expected losses, the Group applies different scenarios to identify the effect of the non-linearity of losses. To this end, the provisions required are estimated in the different scenarios for which a probability of occurrence has been defined. Specifically, the Group has considered three macroeconomic scenarios: one baseline scenario, the most likely of all (61%), an alternative scenario 1, the most optimistic of the three, which envisages zero supply chain disruption and productivity gains (9%), and an alternative scenario 2, the most adverse, which envisages a synchronised global recession (30%). In each of these scenarios, a 5-year time horizon has been used to carry out the projections. The main variables considered are changes in GDP, the unemployment rate and house prices. In 2021, the Group considered three macroeconomic scenarios with weights of 60%, 15% and 25%, respectively, and the same macroeconomic variables as in 2022.

Baseline scenario

•

Relations between Western countries and Russia remain strained. The conflict between Russia and Ukraine drags on without resolution and sanctions remain in place. The cut-off of Russian gas to Europe continues indefinitely, hampering energy supplies during the winter months. Nevertheless, European governments intervene effectively in the energy markets to cushion the economic impact, avoid major energy rationing and find viable alternatives to Russian gas.

•

Inflation remains at high levels for much of 2023 due to the energy crisis in Europe and specific domestic factors in the United Kingdom and United States, such as the situation concerning labour markets and salaries. Thereafter, inflation gradually eases, but remains somewhat above the central banks’ targets for quite some time. In any event, inflation expectations remain firmly anchored thanks to the monetary policy response.

•

In terms of economic policy, fiscal policy continues to be expansionary and interventionist, based on cushioning the impacts of the energy crisis and high inflation. In the Eurozone, the region begins to harvest the positive effects of rollout of the Next Generation EU (NGEU) funds.

•

The central banks maintain an orthodox stance and, given the high level of inflation, set and keep interest rates at somewhat restrictive levels and move ahead with their balance sheet reduction policies. As long as inflation shows no clear sign of returning to its target level, the central banks will leave considerations about the performance of financial markets and concerns about economic activity on the back burner.

•

All things considered, there is greater concern about economic growth, as the boost to demand seen in 2021 weakens and the impact of recent events is felt (war in Ukraine, energy crisis and Russian gas cut-off, inflation and increased costs, and monetary policy tightening). All this produces an environment of global economic stagnation and the Eurozone and even the United States experience a mild economic recession.

•

In Spain, the economic situation is more secure than in the rest of Europe. Economic activity is supported by the robust balance sheets of economic agents, the return to a normal growth dynamic for the sectors worst affected by the pandemic, use of the Next Generation EU funds and government measures to counteract the energy price increase. The labour market develops positively, with the unemployment rate falling in the coming years.

•

In Spain, private sector lending continues to grow at a slower rate than nominal GDP, constrained by the subdued economic growth, the uncertainty stemming from the conflict in Ukraine and the rising interest rate environment.

•

With regard to the financial markets, yields on long-term government debt become more stable, following the significant repricing observed in 2022. The greater focus on economic growth is another factor limiting further market upturns. Sovereign debt risk premiums in the European periphery remain at contained levels.

•

The US dollar encounters depreciatory pressures against the euro from spring 2023 onwards, in a context of slowing inflation, the improving international economic environment, and the continued resumption of capital inflows to the Eurozone as the ECB’s interest rate policy returns to normal.

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•

As regards Brexit, the scenario envisages a situation in which the United Kingdom and the European Union continue to implement pragmatic solutions to the agreements.

Alternative scenario 1: Zero supply chain disruption and productivity gains

•

The geopolitical environment improves and the conflict in Ukraine is resolved with an agreement that is valid for all parties.

•

The disruptions to supply chains are quickly resolved and the energy crisis is straightened out, producing a general fall in energy prices, thanks to the improved global geopolitical environment and the absence of any further shocks.

•

Global economic growth is vigorous and synchronised, on the strength of an improved business climate and reduced uncertainty related to the geopolitical environment and the energy crisis. In addition, productivity gains stemming from an increasingly digitised and sustainable economy follow in the medium term.

•

Inflation rates slide back rapidly and remain close to the levels targeted in the monetary policy of the respective central banks.

•

The central banks are less hawkish and set interest rates at levels in line with monetary neutrality.

•

Global financing conditions remain lax, with no significant episodes of risk aversion.

•

The macroeconomic and financial environment allows risk premiums on both peripheral debt and corporate bonds to remain contained.

•

In Spain, the economy maintains a significant growth dynamic thanks to the resolution of the Ukraine conflict, prevalence of lax funding conditions and the use of the NGEU funds which are received without problem and used efficiently.

Alternative scenario 2: Synchronised global recession

•

The global economy is faced with new shocks which bring on a recession in the first half of 2023. Specifically, in Europe, all commercial relations with Russia are severed. In addition, global government policies are taken in an uncoordinated fashion and are ineffective at limiting the impacts of the Russian gas cut-off and other disruptions stemming from the worsened relations with Russia. All this ends up causing a severe economic recession.

•

Inflation remains high, initially due to the high starting point reached in 2022 and the additional energy price shock, but eventually falls to the levels targeted by monetary policy due to weak demand.

•

The central banks halt the process to normalise monetary policy in view of the weak demand. The ECB and the Fed implement some interest rate cuts, but these are limited due to the inflation rate which, initially, remains persistently high.

•

Global funding conditions are tightened against a backdrop of increased uncertainty and a global recession. The yields on government debt partially reverse the upward trend of recent months, but they remain at high levels compared with those of recent years.

•

Peripheral risk premiums face some upside pressure, alongside an expansionary fiscal policy and worsening public accounts.

•

Spain is relatively less adversely affected than the Eurozone as a whole due to its lower dependency on Russian gas. However, the economy goes into recession in the first half of 2023 and, subsequently, it enters a prolonged period of stagnation.

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At 31 December 2022 and 2021, the main forecast variables considered for Spain and the United Kingdom are those shown below:


%
									31/12/2022
					Spain								United Kingdom
	2023		2024		2025		2026		2027		2023		2024		2025		2026		2027

GDP growth
Baseline scenario		1.3		2.0		2.0		1.8		1.7		-1.3		-0.2		1.0		1.3		1.4
Alternative scenario 1		4.4		4.4		2.5		2.0		2.0		-0.4		0.8		1.3		1.3		1.4
Alternative scenario 2		-1.1		0.1		1.6		1.8		1.7		-2.5		-1.4		1.0		1.3		1.4

Unemployment rate
Baseline scenario		12.7		12.4		12.1		11.9		11.7		4.4		5.2		5.0		4.6		4.2
Alternative scenario 1		11.6		10.2		9.0		8.6		8.4		3.8		3.8		3.8		3.8		3.8
Alternative scenario 2		15.6		16.7		15.8		14.9		14.2		5.4		6.3		5.7		5.0		4.5

*House price growth ()**
Baseline scenario		1.0		1.6		2.0		2.0		2.0		-3.3		-5.1		0.7		1.9		2.5
Alternative scenario 1		3.0		3.6		3.8		3.6		3.6		-0.9		-2.3		0.7		2.9		3.7
Alternative scenario 2		-2.6		-1.6		2.0		2.0		2.0		-3.4		-11.1		-0.5		4.3		4.3

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.


%
									31/12/2021
					Spain								United Kingdom
	2022		2023		2024		2025		2026		2022		2023		2024		2025		2026

GDP growth
Baseline scenario		6.3		3.3		2.7		2.2		2.0		5.3		1.5		1.4		1.4		1.4
Alternative scenario 1		7.8		4.5		3.6		2.7		2.4		6.7		2.8		1.6		1.6		1.6
Alternative scenario 2		3.4		1.9		1.8		1.5		1.4		1.7		2.4		1.2		1.2		1.2

Unemployment rate
Baseline scenario		14.1		12.9		12.0		11.6		11.4		5.4		4.4		4.0		4.0		4.0
Alternative scenario 1		12.5		10.6		9.5		8.7		8.0		4.3		3.5		3.5		3.5		3.5
Alternative scenario 2		16.9		16.5		15.5		14.6		14.0		6.7		6.1		5.0		4.5		4.5

*House price growth ()**
Baseline scenario		3.8		3.8		3.5		3.2		3.2		-1.0		1.6		2.5		2.5		2.5
Alternative scenario 1		5.7		4.8		4.0		3.8		3.6		3.5		4.3		3.3		2.5		2.5
Alternative scenario 2		-0.5		0.6		1.8		2.0		2.4		-7.3		-7.2		9.6		7.4		4.2

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

When applying the macroeconomic scenarios, the recommendations issued by accounting supervisors and regulators have been taken into account in order to prevent excessive pro-cyclicality as a result of the short-term volatility in the environment, attaching greater importance to longer-term economic outlooks.

In the Group, macroeconomic scenarios have been incorporated into the impairment calculation model.

The Group makes a series of additional adjustments to the results of its credit risk models, referred to as post model adjustments (PMAs) or overlays, in order to address situations in which the results of the models are not sufficiently sensitive to the uncertainty in the macroeconomic environment. These adjustments are temporary and remain in place until the reasons for which they were originally applied cease to exist. The application of these adjustments is subject to the governance principles established by the Group. Specifically, in 2022 a series of additional allowances have been recognised over and above the expected losses and incorporating specific sectoral features related to the current macroeconomic situation and the new inflationary environment, amounting to 170 million euros.

The Group applies the criteria described below to calculate credit loss allowances.

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The amount of impairment allowances is calculated based on whether or not there has been a significant increase in credit risk since initial recognition, and on whether or not there a default event has occurred. This way, the impairment allowance for transactions is equal to:

–

12-month expected credit losses, when the risk of a default event materialising has not significantly increased since initial recognition (assets classified as stage 1).

–

Lifetime expected credit losses, if the risk of a default event materialising has increased significantly since initial recognition (assets classified as stage 2).

–

Expected credit losses, when a default event has materialised (assets classified as stage 3).

12-month expected credit losses are defined as:

LOGO

Where:

EAD_12M is the exposure at default at 12 months, PD_12M is the probability of a default occurring within 12 months and LGD_12M is the expected loss given default.

Lifetime expected credit losses are defined as:

LOGO

Where:

EAD_i is the exposure at default for each year, taking into account both the entry into default and the (agreed) amortisation, PD_i is the probability of a default occurring within the next twelve months for each year, LGD_i is the expected loss given default for each year, and EIR is the effective interest rate of each transaction.

During this estimation process, a calculation is made of the allowance necessary to cover, on one hand, the credit risk attributable to borrowers and, on the other hand, country risk.

The Group includes forward-looking information when calculating expected credit losses and determining whether there has been a significant increase in credit risk, using scenario forecasting models to this end.

The following sections describe the different methodologies applied by the Group to determine impairment loss allowances.

Individual allowance estimates

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Three methods are established to calculate the recoverable amount of assets assessed individually:

–

Discounted cash flow method (going concern): debtors who are estimated to be able to generate future cash flows through their own business activity, thereby allowing them to fully or partially repay the debt owed through the economic and financial activities and structure of the company. This involves estimating the cash flows obtained by the borrower during the course of their business activity.

–

Combined method: debtors who are estimated to be able to generate future cash flows and also have non-core assets. These cash flows can be supplemented with the potential sale of non-core assets, insofar as they are not required for the performance of their activity and, consequently, for the generation of the aforesaid future cash flows.

Collective allowance estimates

Exposures that are not assessed using individual allowance estimates are subject to collective allowance estimates.

When calculating collective impairment losses, the Group, in accordance with IFRS 9, mainly takes the following aspects into account:

–

The impairment estimation process takes all credit exposures into account. The Group recognises an impairment loss equal to the best estimate available from internal models, taking into account all of the relevant information which it holds on the existing conditions at the end of the reported period. For some types of risk, including sovereign risk and exposures with credit institutions and general governments of countries in the European Union and other advanced economies, the Group does not use internal models. These exposures are considered to have negligible risk given that, based on the information available as at the date of signing off the consolidated annual financial statements, and considering past experience with these risks, the impairment allowance that these exposures are estimated to require is not significant as long as they are not reclassified into stage 3.

–

In order to collectively assess impairment, internal models estimate a different PD and LGD for each contract. To this end, various types of historical information are used that allow the risk to be individually classified for each exposure (ratings, non-payments, vintage, exposure, collateral, characteristics of the borrower or contract). Available historical information representative of the Institution and past losses (defaults) is therefore taken into account. It is worth highlighting that the estimation obtained from the models is adjusted to account for the existing economic climate and the forecasts in the scenarios considered, the latter being representative of expected credit losses. The estimates of impairment loss allowance models are directly integrated in some activities related to risk management and the input data that they use (e.g. credit ratings and credit scores) are those used for approving risks, monitoring risks, for pricing purposes and in capital calculations. In addition, recurring back-testing exercises are carried out at least once a year, and the models are adjusted in the event any significant deviations are detected. The models are also reviewed regularly in order to incorporate the most recent information available and to ensure that they perform adequately and that they are suitably representative when applied to the current portfolio for the calculation of impairment loss allowances.

Segmentation of models

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The models for significant increase in credit risk (SICR) carry out calculations at the contract level, in order to consider the characteristics specific to each transaction (such as origination date and maturity date).

Where LGD is concerned, contracts with similar risk characteristics are grouped together for collective assessment, using the following segmentation hierarchy:

–

By type of borrower: companies, developers and natural persons.

–

By type of guarantee: mortgage, unsecured, monetary/financial, and guarantors.

–

By type of product: credit cards, overdrafts, leases, credits and loans.

Risk drivers

The risk drivers or explanatory variables of models are the shared credit risk characteristics. In other words, they are common elements that can be used to rate borrowers in a homogeneous way within a portfolio and which explain the credit risk rating assigned to each exposure. Risk drivers are identified by means of a rigorous process that combines historical data analysis, explanatory power and expert judgement, as well as knowledge about the risk/business.

The main risk drivers are presented hereafter, grouped together by type of model (PD, SICR and LGD).

In both cases, other recent risk events (refinancing, exit from default status, non-payments, lending restrictions) also explain the probability of default.

The explanatory factors mainly used by SICR models are the PD upon approval and the current residual lifetime PD (i.e. for the residual life of the transaction).

LGD models use additional risk drivers that enable a more in-depth segmentation to take place. More specifically, for mortgage guarantees, the LTV (Loan to Value) is used, or the order of priority in the event the mortgage guarantee is enforced. Similarly, the amount of the debt and the type of product are also factors taken into account.

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Summary of criteria for classification and allowances

LOGO

Guarantees

Effective guarantees are collateral and personal guarantees proven by the Group to be a valid means of mitigating credit risk.

Under no circumstances will guarantees whose effectiveness significantly depends on the credit quality of the debtor or, where applicable, the economic group of which the debtor forms part, be accepted as effective guarantees.

Based on the foregoing, the following types of guarantees can be considered to be effective guarantees:

–

Real estate guarantees applied as first mortgage liens:

•

Completed buildings and completed component parts:

○

Housing units.

○

Offices, commercial premises and multi-purpose industrial buildings.

○

Other buildings, such as non-multi-purpose industrial buildings and hotels

•

Urban land and regulated building land.

•

Other real estate.

–

Collateral in the form of pledged financial instruments:

•

Cash deposits.

•

Equity instruments in listed entities and debt securities issued by creditworthy issuers.

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–

Other collateral:

•

Personal property received as collateral.

•

Subsequent mortgages on properties.

–

Personal guarantees such that direct and joint liability to the customer falls to the new guarantors, who are persons or entities whose solvency is sufficiently verified to ensure the full redemption of the transaction under the terms set forth.

Real estate guarantees for loan transactions are valued on the date they are granted, while real estate assets are valued on the date on which they are recognised, whether as a result of a purchase, foreclosure or a payment in kind, and also whenever there is a significant reduction in value. In addition, minimum updating criteria are applied, which ensure that updates take place at least once a year in the case of impaired assets (assets classified as stages 2 or 3 and real estate assets foreclosed or received in lieu of debt), or at least once every three years for large debts classified as stage 1 with no signs of latent credit risk. Similarly, statistical methodologies may be used to update appraisals but only for properties that have a certain level of homogeneity among them, in other words, those with low exposure and low risk whose characteristics are likely to be shared by other properties and which are located in an active market with frequent transactions, although a full appraisal is carried out in accordance with the aforesaid ECO Order (an “ECO appraisal”) at least once every three years.

For assets located in other EU countries, the appraisal is carried out in accordance with that set forth in Royal Decree 716/2009 of 24 April, and in the rest of the world, by companies and/or experts with recognised expertise in the country. Real estate assets located in a foreign country will be appraised using the method approved by the RICS (Royal Institution of Chartered Surveyors), through prudent and independent appraisals carried out by authorised experts in the country where the property is located or, where appropriate, by appraisal firms or services accredited in Spain, and in accordance with the appraisal rules applicable in that country insofar as these are compatible with generally accepted appraisal practices.

The Group has developed internal methodologies to estimate credit loss allowances. These methodologies use the appraisal value as a starting point to determine the amount that can be recovered with the enforcement of real estate guarantees. This appraisal value is adjusted to account for the time required to enforce such guarantees, price trends and the Group’s ability and experience in realising the value of properties with similar prices and time lines, as well as the costs of enforcement, maintenance and sale.

The calculation of credit losses on state-guaranteed loans granted as part of a government support scheme designed to address the impact of COVID-19, irrespective of the credit risk category or categories into which the transaction is classified throughout its life, is based on their expected credit loss less the positive impact of cash flows expected to be recovered with the state guarantee.

Overall comparison between financial asset and real estate asset impairment allowances

The Group has established backtesting methodologies to compare estimated losses against actual losses.

The backtests carried out show that the credit loss allowances are adequate given the portfolio’s credit risk profile.

1.3.4.2 Investments in joint ventures and associates

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The Group considers the following indicators, among others, to determine whether there is evidence of impairment.

–

Significant financial difficulties.

–

Disappearance of an active market for the instrument in question due to financial difficulties.

–

Significant changes in profit or loss, compared to the data included in budgets, business plans or targets.

–

Significant changes in the market in the issuer’s equity instruments, its existing products, or its potential products.

–

Significant changes in the global economy or in the economy of the region in which the issuer operates.

–

Significant changes in the technological or legal environment in which the issuer operates.

The Group determines the value in use of each interest held based on its net asset value, or based on estimates of their profit/loss, pooling them into activity sectors (real estate, renewable energy, industrial, financial, etc.) and evaluating the macroeconomic factors specific to that sector that could affect the performance of such companies. In particular, interests held in insurance investees are valued by applying the market consistent embedded value methodology, those held in companies related to real estate are valued based on their net asset value, and those held in financial investees are valued using multiples of their carrying amount and/or the profit of other comparable listed companies.

1.3.5 Hedging transactions

The Group has elected to continue applying IAS 39 for its hedge accounting until the IFRS 9 macro hedge accounting project has been finalised, as permitted by IFRS 9.

–

It must hedge against the exposure to changes in the value of assets and liabilities caused by interest rate and/or exchange rate fluctuations (fair value hedge), the exposure to variability in estimated cash flows that is attributable to a particular risk of financial assets and financial liabilities, firm commitments and highly probable forecast transactions (cash flow hedge), or the exposure associated with net investments in foreign operations (hedge of net investments in foreign operations).

–

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–

Hedges are applied either to individual items and balances (micro-hedges) or to portfolios of financial assets and financial liabilities (macro-hedges). In the latter case, the set of financial assets and financial liabilities to be hedged must share the same type of risk, a condition that is met when the individual hedged items have a similar interest rate sensitivity.

–

In cash flow hedges, differences in the value of the effective portion of hedging instruments are recognised under the heading “Accumulated other comprehensive income – Hedging derivatives. Cash flow hedges reserve [effective portion]” on the consolidated statement of equity. These differences are recognised in the consolidated income statement when the losses or gains on the hedged item are recognised through profit or loss, when the envisaged transactions are executed, or on the maturity date of the hedged item.

–

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1.3.6 Financial guarantees

The Group recognises financial guarantee contracts under the heading “Financial liabilities at amortised cost – Other financial liabilities” at their fair value which, initially and unless there is evidence to the contrary, is the present value of the expected fees and income to be received. At the same time, fees and similar income received upon commencement of the operations, as well as the accounts receivable, measured at the present value of future cash flows pending collection, are recognised as a credit item on the asset side of the balance sheet.

In the particular case of long-term guarantees given in cash to third parties under service contracts, when the Group guarantees a particular level or volume in terms of the provision of such services, it initially recognises those guarantees at their fair value. The difference between their fair value and the disbursed amount is considered an advance payment made or received in exchange for the provision of the service, and this is recognised in the consolidated income statement for the period in which the service is provided. Subsequently, the Group applies analogous criteria to debt instruments measured at amortised cost.

Financial guarantees are classified according to the risk of incurring loan losses attributable to either customer arrears or the transaction and, where appropriate, an assessment is made of whether provisions need to be allocated for these guarantees by applying criteria similar to the criteria used for debt instruments measured at amortised cost.

1.3.7 Transfers and derecognition of financial instruments from the balance sheet

Note 4 provides details of asset transfers in effect at the end of 2022 and 2021, indicating those that did not involve the derecognition of the asset from the consolidated balance sheet.

1.3.8 Offsetting of financial instruments

1.3.9 Non-current assets and assets and liabilities included in disposal groups classified as held for sale and discontinued operations

The “Non-current assets and disposal groups classified as held for sale” heading on the balance sheet includes the carrying amounts of assets – stated individually or combined in a disposal group, or as part of a business unit intended to be sold (discontinued operations) – which are very likely to be sold in their current condition within one year of the date of the consolidated annual financial statements.

Specifically, real estate or other non-current assets received by the Group for the full or partial settlement of debtors’ payment obligations are treated as non-current assets held for sale, unless the Group has decided to make continued use of these assets or to include them in its rental operations. Similarly, investments in joint ventures or associates that meet these criteria are also recognised as non-current assets held for sale. For all of these assets, the Group has specific units that focus on the management and sale of real estate assets.

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Discontinued operations are components of the institution that have been disposed of or classified as held for sale and which (i) represent a business line or region that is significant and separate from the rest or is part of a single coordinated plan to dispose of that business or region, or (ii) are subsidiaries acquired solely in order to be resold. Income and expenses of any kind generated by discontinued operations, if any, during the year, including those generated before they were classified as discontinued operations, are presented net of the tax effect as a single amount under the heading “Profit or (-) loss after tax from discontinued operations” in the consolidated income statement, regardless of whether the business has been derecognised from or remains on the asset side of the balance sheet as at year-end. This heading also includes the profit or loss obtained from their sale or disposal.

1.3.10 Tangible assets

Tangible assets include (i) property, plant and equipment held by the Group for current or future use that is expected to be used for more than year, (ii) property, plant and equipment leased out to customers under operating leases, and (iii) investment properties, which include land, buildings and other structures held in order to be leased out or to obtain a capital gain on their sale. This heading also includes tangible assets received in payment of debts classified on the basis of their final use.



		Useful life (years)

Land and buildings		17 to 75
Fixtures and fittings		5 to 20
Furniture, office equipment and other		3 to 15
Vehicles		3 to 6
Computers and computer equipment		4

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The Group reviews the estimated useful life of the various components of tangible assets at the end of every year, if not more frequently, in order to detect any significant changes. Should any such changes arise, the useful life is adjusted, correcting the depreciation charge in the consolidated income statements for future years as required to reflect the new estimated useful life.

At each year-end closing, the Group analyses whether there are any internal or external signs that a tangible asset might be impaired. If there is evidence of impairment, the Group assesses whether this impairment actually exists by comparing the asset’s net carrying amount against its recoverable amount (the higher of its fair value less selling costs, and its value in use). When the asset’s carrying amount is higher than its recoverable amount, the Group reduces the carrying amount of the corresponding component to its recoverable amount and adjusts future depreciation charges in proportion to the adjusted carrying amount and new remaining useful life, in the event this needs to be re-estimated. Where there are signs that the value of a component has been recovered, the Group records the reversal of the impairment loss recognised in previous years and adjusts future depreciation charges accordingly. The reversal of an impairment loss on an asset component shall in no circumstances result in its carrying amount being increased to a value higher than the value that the asset component would have had if no impairment loss allowances had been recognised in previous years.

In particular, certain items of property, plant and equipment are assigned to cash-generating units in the banking business. Impairment tests are conducted on these units to verify whether sufficient cash flows are generated to support the assets’ value. To this end, the Group (i) calculates the recurring net cash flow of each branch based on the cumulative contribution margin less the allocated recurring cost of risk, and (ii) this recurring net cash flow is regarded as a perpetual cash flow and a valuation is effected using the discounted cash flow method applying the cost of capital and growth rate to perpetuity determined by the Group (see Note 16).

For real estate investments, the Group uses appraisals carried out by third parties entered i n the Bank of Spain’s Special Register of Appraisal Firms, in accordance with criteria set forth in Order ECO/805/2003.

The costs of preserving and maintaining tangible assets are recognised in the consolidated income statement for the year in which they are incurred.

1.3.11 Leases

Leases in which the Group acts as lessee

The lease term is the non-cancellable period established in the contract, plus the periods covered by an extension option (if the lessee is reasonably certain to exercise that option) and the periods covered by a termination option (if the lessee is reasonably certain not to exercise that option).

–

Fixed payments, less any lease incentives payable.

–

Variable payments that depend on an index or rate.

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–

Amounts expected to be paid for residual value guarantees given to the lessor.

–

The exercise price of a purchase option if the Group is reasonably certain to exercise that option.

–

Payments of penalties for terminating the lease, if the lease term shows that an option to terminate the lease will be exercised.

Lease payments are discounted using the implicit interest rate, if this can be easily determined and, if not, the incremental borrowing rate, understood as the rate of interest that the Group would have to pay to borrow the funds necessary to purchase assets with a value similar to the rights of use acquired over the leased assets for a term equal to the estimated duration of the lease contracts.

The payments settled by the lessee in each period reduce the lease liability and accrue an interest expense that is recognised in the consolidated income statement over the lease term.

The right-of-use asset, which is classified as a fixed asset based on the type of leased property, is initially measured at cost, which comprises the following amounts:

–

The amount of the initial measurement of the lease liability, as described above.

–

Any lease payments made at or before the lease commencement date, less any incentives received.

–

Any initial direct costs.

–

An estimate of costs to be incurred in dismantling and removing the leased asset, restoring the site on which it is located or restoring the asset to the condition required by the terms and conditions of the lease.

The right-of-use asset is depreciated on a straight-line basis at the shorter of the useful life of the asset or the lease term.

The criteria for impairing these assets are similar to those used for tangible assets (see Note 1.3.10).

Sale and leaseback

If the Group retains control over the asset, (i) the asset sold is not derecognised from the balance sheet and (ii) a financial liability is recognised for the amount of consideration received.

Leases in which the Group acts as lessor

Finance leases

Operating leases

In operating leases, ownership of the leased asset and a substantial proportion of all of the risks and rewards incidental to ownership of the asset remain with the lessor.

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1.3.12 Intangible assets

Intangible assets are initially recognised at their acquisition or production cost and are subsequently measured at cost less, where applicable, any accumulated amortisation and any impairment loss that may have been sustained.

Goodwill

–

Estimates of macroeconomic variables and other financial parameters.

–

Discount rate (post-tax): the present value of future dividends, from which a value in use is obtained, is calculated using the Institution’s cost of capital (Ke), from the standpoint of a market participant, as a discount rate. To determine the cost of capital, the CAPM (Capital Asset Pricing Model) is used in accordance with the formula: “Ke = Rf + ß (Pm) + a”, where: Ke = Required return or cost of capital, Rf = Risk-free rate, ß = Company’s systemic risk coefficient, Pm = Market premium and a = Non-systemic risk premium.

–

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Other intangible assets

These intangible assets have a finite useful life and are amortised based on their useful lives, applying similar criteria to those used for tangible assets. The useful life of brands and contractual rights arising from relationships with customers of the acquired businesses varies between 5 and 15 years, while for computer software the useful life ranges from 3 to 15 years. In particular, the applications corresponding to infrastructure, communications, architecture and corporate functions of the banking platforms used by Group entities to carry out their activity generally have a useful life of between 10 and 15 years, while the useful life of applications corresponding to channels and to data & analytics range from 7 to 10 years. The base platform implemented in 2018 that TSB uses to carry out its activity has a useful life of 15 years.

Changes in the estimated useful life of intangible assets are treated in a similar way to changes in the estimated useful life of tangible assets.

1.3.13 Inventories

In general, inventories are measured at either cost value, including all costs of purchase, costs of conversion and other direct and indirect costs incurred in bringing the inventories to their present location and condition, and their net realisable value, whichever is the lower.

Net realisable value means the estimated selling price net of the estimated production and marketing costs to carry out the sale. This value is revised and recalculated on the basis of actual losses incurred on the sale of the assets.

Any value adjustments to inventories, whether caused by impairment due to damage, obsolescence or a fall in selling prices, to reflect their net realisable value, or arising from other losses, are recognised as expenses in the year in which the impairment or other loss occurred. Any subsequent recoveries in value are recognised in the consolidated income statement in the year in which they occur.

Inventories correspond to land and buildings and their net realisable value is calculated based on the appraisal carried out by an independent expert, entered in the Bank of Spain Special Register of Appraisal Firms and performed in accordance with the criteria established in Order ECO/805/2003 on rules for the appraisal of real estate and particular rights for specific financial purposes, which is then adjusted taking into account past experience in selling assets that are similar in terms of prices, the period during which each asset remains on the consolidated balance sheet and other explanatory factors. Nevertheless, statistical methodologies may be used to update appraisals for properties with a fair value or no more than 300,000 euros and which have a certain level of homogeneity among them, in other words, those with low exposure and low risk whose characteristics are likely to be shared by other properties and which are located in an active market with frequent transactions, although a full appraisal is carried out in accordance with the aforesaid ECO Order (an “ECO appraisal”) at least once every three years.

The carrying amount of the inventories is derecognised from the consolidated balance sheet and recognised as an expense during the year in which the income from its sale is recognised.

1.3.14 Own equity instruments

Own equity instruments are defined as equity instruments that meet the following conditions:

–

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–

All transactions involving own equity instruments, including their issuance or redemption, are recognised directly with a balancing entry in consolidated equity.

On the other hand, compound financial instruments, which are those contracts that have both a liability and an equity component from the issuer’s perspective (e.g. convertible bonds that grant their holder the right to convert them into equity instruments of the issuing entity), are recognised at issuance, separating their component parts and presenting them according to their substance.

Assigning the initial carrying amount to the various component parts of the compound instrument shall not imply, under any circumstances, a recognition of earnings. An amount shall first be assigned to the component part that is a financial liability, including any embedded derivative with an underlying asset that is anything other than an own equity instrument. This amount will be obtained based on the fair value of the institution’s financial liabilities that share similar characteristics with the compound instrument, but which are not associated with own equity instruments. The initial carrying amount assigned to the equity instrument will be the residual portion of the initial carrying amount of the compound instrument as a whole, after deducting the fair value assigned to the financial liability.

1.3.15 Remuneration in equity instruments

The delivery of own equity instruments to employees in payment for their services (where these instruments are determined at the start of, and delivered upon completion of, a specified period of service) is recognised as a service cost over the period during which the services are being provided, with a balancing entry under the heading “Other equity” in the consolidated statement of equity. On the date these instruments are awarded, the services received are measured at fair value unless this cannot be reliably estimated, in which case they are measured by reference to the fair value of the committed equity instruments, bearing in mind the tenor and other conditions envisaged in the commitments.

The amounts recognised in consolidated equity cannot subsequently be reversed, even when employees do not exercise their right to receive the equity instruments.

1.3.16 Provisions, contingent assets and contingent liabilities

Contingent liabilities are any possible obligations in the Group that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the Group. Contingent liabilities include present obligations of the Group whose payment is unlikely to originate any reduction in funds, or whose value, in extremely rare cases, cannot be reliably measured. Contingent liabilities are not recognised in the consolidated annual financial statements, rather, they are disclosed in the notes to the consolidated annual financial statements.

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1.3.17 Provisions for pensions

The Group’s pension commitments to its employees are as follows:

Defined contribution plans

These contributions are recognised each year in the consolidated income statement (see Note 33).

Defined benefit plans

Defined benefit plans cover all existing commitments arising from the application of the Collective Bargaining Agreement for Banks (Convenio Colectivo de Banca).

These commitments are financed through the following vehicles: the pension plan, insurance contracts, the voluntary social welfare agency (E.P.S.V.) and internal funds.

Pension plan

Banco Sabadell’s employee pension plan covers benefits payable under the aforesaid collective bargaining agreement with employees belonging to regulated groups, with the following exceptions:

–

Additional commitments due to early retirement, as set out in the Collective Bargaining Agreement for Banks.

–

Disability or incapacity arising in certain circumstances.

–

Widowhood and orphanhood benefits arising from the death of a retired member of staff who began their employment after 8 March 1980.

The Banco Sabadell employee pension plan is regarded to all intents and purposes as a plan asset for the obligations insured by entities outside of the Group. Obligations of the pension plan insured by the Group’s associate entities are not considered plan assets.

Insurance contracts

Insurance contracts generally cover certain commitments arising from the Collective Bargaining Agreement for Banks, including:

–

Commitments that are expressly excluded from the Banco Sabadell employee pension plan (listed in the previous section).

–

Serving employees covered by a collective bargaining agreement of Banco Atlántico.

–

Pension commitments in respect of some serving employees not provided for under the collective bargaining agreement.

–

Commitments towards employees on extended leave of absence not covered with benefits accrued in the Banco Sabadell employee pension plan.

–

Commitments towards early retirees. These may be partly financed with benefits accrued in the Banco Sabadell employee pension plan.

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Voluntary social welfare agency (Entidad de Previsión Social Voluntaria, or E.P.S.V.)

The acquisition and subsequent merger of Banco Guipuzcoano resulted in the takeover of Gertakizun, E.P.S.V., which covers defined benefit commitments in respect of serving and former employees, who are insured by policies. It was set up by the aforesaid bank in 1991 as an agency with a separate legal personality. All of the pension commitments to serving and former employees are insured by entities outside the Group.

Internal funds

Internal funds are used to settle obligations with early retirees up to their legal retirement age and relate to employees previously working for Banco Sabadell.

Accounting record of defined benefit obligations

From the obligations thus calculated, the fair value of the plan assets has been deducted. Plan assets are assets that will be used to settle obligations, including insurance policies, since they meet the following conditions:

–

They are not owned by the Group but by a legally separate third party not qualifying as a related party.

–

They are available only to pay or fund employee benefits and are not available to creditors of the Group, even in the event of insolvency.

–

They cannot be returned to the Group unless the assets remaining in the plan are sufficient to settle all obligations, of the plan or of the Institution, relating to employee benefits, or unless assets are to be returned to the Bank to reimburse it for employee benefits previously paid.

–

They are not non-transferable financial instruments issued by the Group.

Pension commitments are recognised in the following way:

–

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Actuarial assumptions

The most relevant financial/actuarial assumptions used in the measurement of pension commitments at 31 December 2022 and 2021 are as follows:



	2022	2021

Tables	PER2020_Col_1er.orden	PER2020_Col_1er.orden
Discount rate, pension plan	3.25% per annum	1.00% per annum
Discount rate, internal fund	3.25% per annum	1.00% per annum
Discount rate, related insurance	3.25% per annum	1.00% per annum
Discount rate, non-related insurance	3.25% per annum	1.00% per annum
Inflation	2.00% per annum	2.00% per annum
Rate of increase in salaries	3.00% per annum	3.00% per annum
Employee disability	SS90-Absolute	SS90-Absolute
Employee turnover	Not considered	Not considered
Early retirement	Considered	Considered
Normal retirement age	65 or 67 years	65 or 67 years

In 2022 and 2021, the discount rate on all commitments has been determined by reference to the return on AA-rated corporate bonds (iBoxx € Corporates AA 10+), with an average duration of 13 and 13.7 years, respectively.

The early retirement age considered is the earliest retirement date after which pension entitlements cannot be revoked by the employer for 100% of the employees.

The return on long-term assets corresponding to plan assets and insurance policies linked to pensions has been determined by applying the same discount rate used in actuarial assumptions (3.25% and 1.00% in 2022 and 2021, respectively).

1.3.18 Foreign currency transactions and exchange differences

–

Monetary assets and liabilities are translated at the closing rate, defined as the average spot exchange rate as at the reporting date.

–

Non-monetary items measured at historical cost are translated at the exchange rate ruling on the acquisition date.

–

Non-monetary items measured at fair value are translated at the exchange rate ruling on the date on which the fair value was determined.

–

Income and expenses are translated at the exchange rate ruling on the transaction date.

In general, exchange differences arising on the translation of debit and credit balances denominated in foreign currency are recognised in the consolidated income statement. However, for exchange differences arising in non-monetary items measured at fair value where the fair value adjustment is recognised under the heading “Accumulated other comprehensive income” in the consolidated statement of equity, a breakdown is given for the exchange rate component of the remeasurement of the non-monetary item.

The balances of the financial statements of consolidated entities with a functional currency other than the euro are translated into euros in the following manner:

–

Assets and liabilities are translated at the exchange rate ruling at each year-end closing.

–

Income and expenses are translated at the average exchange rate, weighted by the volume of transactions of the company whose income and expenses are being translated.

–

Equity is translated at historical exchange rates.

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The exchange rates applied to translate balances denominated in foreign currency into euros are those published by the European Central Bank on 31 December of each year.

1.3.19 Recognition of income and expenses

Interest income and expenses and other similar items

Commissions, fees and similar items

Generally, income and expense in the form of commissions and similar fees are recognised in the consolidated income statement based on the following criteria:

–

Those linked to financial assets and financial liabilities measured at fair value through profit or loss are recognised at the time of disbursement.

–

Those related to transactions carried out or services rendered over a given period of time are recognised throughout that period.

–

Those related to a transaction or service that is carried out or rendered in a single act are recognised when the originating act takes place.

Non-financial income and expenses

Deferred payments and collections

Deferred payments and collections are accounted for at the carrying amount obtained by discounting expected cash flows at market rates.

Levies

Deposit guarantee schemes

The Bank is a member of the Deposit Guarantee Fund. In 2022, the Management Committee of the Deposit Guarantee Fund of Credit Institutions, in accordance with that established in Royal Decree Law 16/2011 and Royal Decree 2606/1996, set the contribution for all entities covered by the Fund’s deposit guarantee at 0.175% of the value of deposits guaranteed as at 31 December 2021. The contribution of each entity is calculated according to the amount of deposits guaranteed and their risk profile. Furthermore, the contribution to the securities guarantee offered by the Fund has been set at 0.2% of 5% of the value of the securities guaranteed as at 31 December 2022 (see Note 32).

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–

TSB Bank plc makes contributions to the Financial Services Compensation Scheme.

–

Banco Sabadell, S.A. Institución de Banca Múltiple makes contributions to the deposit guarantee scheme established by the Instituto para la Protección del Ahorro Bancario.

Single Resolution Fund

Law 11/2015 of 18 June, together with its implementing regulation through Royal Decree 1012/2015, entailed the transposition into Spanish law of Directive 2014/59/EU. This Directive established a new framework for the resolution of credit institutions and investment firms, and it is also one of the standards that have contributed to the establishment of the Single Resolution Mechanism, created through Regulation (EU) 806/2014. This regulation sets out standard rules and procedures for the resolution of credit institutions and investment firms within the framework of a Single Supervisory Mechanism and a Single Resolution Fund at European level.

1.3.20 Corporation tax

Deferred tax assets and deferred tax liabilities relate to taxes expected to be payable or recoverable arising from differences between the carrying amount of the assets and liabilities appearing in the financial statements and the related tax bases (“tax value”), as well as tax losses carried forward and unused tax credits that might be offset or applied in the future. They are calculated by applying to the relevant timing differences or tax credits the tax rate at which they are expected to be recovered or settled (see Note 39).

A deferred tax asset such as a tax prepayment or a credit in respect of a tax deduction or tax benefit, or a credit in respect of tax-loss carry-forwards, is always recognised provided that the Group is likely to obtain sufficient future taxable profits against which the tax asset can be realised, and that these are not derived from the initial recognition (except in a business combination) of other assets and liabilities in an operation that does not affect either the tax result or the accounting result.

Deferred tax assets arising due to deductible timing differences arising from investments in subsidiaries, branches and associates, or from equity interests in joint ventures, are only recognised insofar as the difference is expected to be reversed due to the dissolution of the investee.

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To conduct the aforesaid review, the following variables are taken into account:

–

Estimate of the reversal of timing differences on the basis of their nature; and

–

The period or limit set forth by prevailing legislation in each country for the reversal of the different tax assets.

1.3.21 TLTRO III programme

Against the backdrop of Covid-19, the European Central Bank announced measures designed to mitigate the impact arising from this situation, including the TLTRO III programme, which offers favourable conditions for banks to borrow funds. More specifically, the TLTRO III programme ensured an interest rate that would be no higher than the average deposit facility rate, provided that the growth targets of eligible net lending established by the European Central Bank were met in certain special reference periods established for 2021 and 2020, which the Bank met. In addition, the interest rate was 50 basis points lower between 24 June 2020 and 23 June 2022, reaching -1% during that period.

Moreover, from 23 June 2022 to 22 November 2022 these transactions earned the average deposit facility rate over the lifetime of the TLTRO III operation. Finally, on 27 October 2022, the European Central Bank decided to recalibrate these funding operations and, since 23 November 2022, the applicable interest rate is index-linked to the average of the applicable official interest rates of the European Central Bank as from that date.

The Group has considered that the use of a more favourable interest rate, i.e. the deposit facility rate, rather than the interest rate on the main refinancing operations, subject to compliance with the lending performance thresholds established by the European Central Bank, does not place the conditions of these operations significantly below market interest rates; therefore, this refinancing has been recognised as a financial liability measured at amortised cost in accordance with IFRS 9.

The further interest rate reduction of 50 basis points for the period from 24 June 2020 to 23 June 2022 was not subject to compliance with any specific net lending target, since it was considered that this reduction could result in the cost of this financing having better conditions than those in the market during the aforesaid time period. Accordingly, this reduction has been considered a discount associated with the Covid-19 pandemic, aimed at reducing the Bank’s borrowing costs, and it has been systematically recognised under net interest margin in the income statement throughout the aforesaid period (see Note 4.4.3.1).

1.3.22 Consolidated statement of recognised income and expenses

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As such, this statement shows:

–

Consolidated profit or loss for the year

–

Changes in “Accumulated other comprehensive income” in consolidated equity, which includes:

•

Gross recognised income and expenses, distinguishing between those that will not be reclassified in the income statement and those which may be reclassified in the income statement.

•

Corporation tax due on recognised income and expenses, with the exception of adjustments arising in equity interests held in associates or joint ventures accounted for using the equity method, which are shown net.

•

Total consolidated recognised income and expenses, calculated as the sum of the two previous sections, showing separately the amount attributed to the controlling entity and the amount corresponding to minority interests (non-controlling interests).

1.3.23 Consolidated statement of total changes in equity

This statement sets out all changes in the Group’s equity, including those arising from accounting changes and correction of errors. It sets out a reconciliation of the carrying amount at the beginning and end of the year of all items that comprise consolidated equity, grouping changes together by type in the following items:

–

Adjustments due to accounting changes and correction of errors: includes the changes in consolidated equity that arise as a result of the retroactive restatement of financial statement balances, distinguishing between those that arise from changes in accounting criteria and those that correspond to the correction of errors.

–

Total recognised income and expenses: includes, in aggregate form, the total of items recognised in the aforesaid consolidated statement of recognised income and expenses.

–

1.3.24 Consolidated cash flow statement

Consolidated cash flow statements have been prepared using the indirect method, in such a way that, based on the Group’s results, the non-monetary transactions and all types of deferred payment items and accruals which have been or will be the cause of operating income and expense have been taken into account, in addition to the income and expenses associated with cash flows from activities classified as investing or financing activities.

The consolidated cash flow statement includes certain items which are defined as follows:

–

Cash flows: inflows and outflows of cash and cash equivalents, where ‘cash equivalents’ are short-term, highly liquid investments with a low risk of changes in value. For these purposes, in addition to cash, deposits held with central banks and demand deposits held with credit institutions are also classified as cash components or equivalents.

–

Operating activities: typical day-to-day activities of the Group and other activities that cannot be classified as investing or financing activities.

–

Investing activities: the acquisition, sale or other disposal of long-term assets and other investments not included in cash and cash equivalents or in operating activities.

–

Financing activities: activities that result in changes in the size and composition of consolidated equity and of liabilities that do not form part of operating activities.

No situations requiring the application of significant judgements to classify cash flows have arisen during the year.

There have been no significant transactions that have generated cash flows not reflected in the consolidated cash flow statement.

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1.4 Comparability

The information presented in these consolidated annual financial statements corresponding to 2021 is provided solely and exclusively for purposes of comparison with the information for the year ended 31 December 2022 and therefore does not constitute the Group’s consolidated annual financial statements for 2021.

Note 2 – Banco Sabadell Group

Subsidiaries and associates as at 31 December 2022 and 2021 are listed in Schedule I, along with their registered offices, primary activities, the Bank’s percentage shareholding in each, key financial data and the consolidation method used (full consolidation or equity method) in each case.

Schedule II provides details of consolidated structured entities (securitisation funds).

A description is provided hereafter of the business combinations, acquisitions and sales or liquidations which are most representative of investments in the capital of other entities (subsidiaries and/or investments in associates) made by the Group during 2022 and 2021. Schedule I also includes details of changes in the scope of consolidation in each financial year and the results obtained by the Group on the disposal of its subsidiaries and associates.

Changes in the scope of consolidation in 2022

Additions to the scope of consolidation:

There were no significant additions to the scope of consolidation in 2022.

Exclusions from the scope of consolidation:

There were no significant exclusions from the scope of consolidation in 2022.

Changes in the scope of consolidation in 2021

Additions to the scope of consolidation:

There were no significant additions to the scope of consolidation in 2021.

Exclusions from the scope of consolidation:

–

On 29 April 2021, Banco Sabadell and ALD Automotive Group entered into a long-term strategic partnership to offer vehicle leasing products, allowing Banco Sabadell to improve its customer value proposition for mobility solutions, with a larger and more innovative range of vehicle leasing products. This transaction was closed on 30 November 2021 after obtaining the necessary authorisations.

The agreement included the sale of 100% of the share capital of BanSabadell Renting, S.L.U. for 59 million euros, adjusted by the change in the company’s equity between the reference date used for ALD Automotive Group’s offer (i.e. 30 September 2020) and the closing date of the transaction. The transaction added 10 basis points to the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio. The Group earned 41,907 thousand euros in profit on this transaction, which was recognised under the “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” heading of the consolidated income statement (see Note 37).

–

On 5 October 2021, Banco Sabadell sold its entire stake held in Banc Sabadell d’Andorra, S.A., which represented 50.97% of its share capital (51.61% including the proportional part of treasury stock) to Mora Banc Grup, S.A. for 68 million euros. The transaction added 7 basis points to the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio. The Group earned 11,725 thousand euros in profit on this transaction, which was recognised under the “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” heading of the consolidated income statement (see Note 37).

With the exception of the transactions described above, there were no significant changes to the scope of consolidation in 2021.

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Other significant transactions in 2022

The Group made no other significant transactions worth mentioning in 2022. Nevertheless, on 22 September 2022, the Bank announced that it was in the process of analysing a possible strategic agreement with an industrial partner specialising in its merchant acquiring business. This process of analysis currently underway aims to reinforce the competitive advantage and expand its value proposition in this area.

Other significant transactions in 2021

On 4 June 2021, having obtained the relevant authorisations and having met all the conditions that needed to be met prior to closing the transaction, set out in the agreement reached by the parties on 28 March 2020, Banco Sabadell sold its institutional depositary business to BNP Paribas Securities Services S.C.A., Sucursal en España (BP2S) for 115 million euros.

The sale agreement envisages additional collections after closing, subject to the achievement of certain objectives linked to the volume of the assets deposited with BP2S and revenues from the deposit fees on those assets.

The transaction will generate net profit of 75 million euros, of which 59 million euros were recognised on the consolidated income statement for 2021 (mainly, an item of income of 84 million euros under the heading “Gains or (-) losses on derecognition of non-financial assets, net” and an item of expense of 25 million euros under the heading “Tax expense or (-) income related to profit or loss from continuing operations”). The remaining 16 million euros will be accrued in the consolidated income statement over a period of 10 years from the date the transaction is closed (see Note 36).

Note 3 – Shareholder remuneration and earnings per share

Set out below is the proposed distribution of the profits earned by Banco de Sabadell, S.A. in 2022, which the Board of Directors will submit to shareholders for approval at the Annual General Meeting, together with the proposed distribution of profits earned by Banco de Sabadell S.A. in 2021, which was approved by shareholders at the Annual General Meeting of 24 March 2022:


Thousand euro
	2022		2021

To dividends		225,079		168,809
To Canary Island investment reserve		279		—
To voluntary reserves		515,193		159,603

Profit for the year of Banco de Sabadell, S.A.		740,551		328,412

On 26 October 2022, the Board of Directors of Banco Sabadell agreed to distribute an interim dividend in cash, to be paid out of its earnings in 2022, of 0.02 euros (gross) per share, which was paid on 30 December 2022.

In fulfilment of the mandatory requirement indicated in Article 277 of Spain’s Capital Companies Act (Ley de Sociedades de Capital), the provisional statement of accounts provided below was created by the Bank to confirm the existence of sufficient liquidity and profit at the time of its approval of the aforesaid interim dividend:


Thousand euro
Available for the payment of dividends according to the interim statement at:			30/09/2022

Banco Sabadell profit as at the date indicated, after provisions for taxes			639,537
Estimated statutory reserve			—
Estimated Canary Island investment reserve			(139)

Maximum amount available for distribution			639,398

Interim dividend proposed			111,806
Cash balance available at Banco de Sabadell, S.A. (*)			36,968,295

(*) Includes the balance of the heading “Cash, cash balances at central banks and other demand deposits”.

Similarly, on 25 January 2023, the Board of Directors of Banco Sabadell agreed to submit a proposal to the Annual General Meeting for the distribution of a supplementary dividend of 0.02 euros (gross) per share, to be paid out of the earnings of 2022, in cash, foreseeably in the month following the Annual General Meeting.

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In addition to the cash dividend, the Board of Directors of Banco Sabadell also agreed to establish a share buyback, to be purchased out of the earnings of 2022, for redemption, subject to the corresponding prior authorisations, at a maximum of 204 million euros, the terms of which will be announced separately prior to launch.

Total shareholder remuneration for the financial year 2022, which combines the cash dividend with the share buyback programme, will be equivalent to 50% of the Group’s profit attributable to the owners of the parent.

At the Annual General Meeting held on 24 March 2022, shareholders agreed to distribute a dividend of 0.03 euros (gross) per share, to be paid out of the earnings of 2021, which was paid on 1 April 2022.

The distributions of profits of subsidiaries are subject to approval by shareholders at their respective Annual General Meetings.

Earnings per share

The Group’s earnings per share calculations are shown below:



	2022		2021

Profit or loss attributable to owners of the parent (thousand euro)		858,642		530,238
Adjustment: Remuneration of other equity instruments (thousand euro)		(110,374)		(100,593)
Profit or (-) loss after tax from discontinued operations (thousand euro)		—		—
Profit or loss attributable to the owners of the parent, adjusted (thousand euros)		748,267		429,646

Weighted average number of ordinary shares outstanding (*)		5,593,885,977		5,586,444,414
Assumed conversion of convertible debt and other equity instruments				—
Weighted average number of ordinary shares outstanding, adjusted		5,593,885,977		5,586,444,414

Earnings (or loss) per share (euros)		0.13		0.08
Basic earnings (or loss) per share adjusted for the effect of mandatory convertible		0.13		0.08
bonds (euros)
Diluted earnings (or loss) per share (euros)		0.13		0.08

(*) Number of shares outstanding, excluding the average number of own shares held in treasury stock during the year.

As at 31 December 2022 and 2021, there were no other financial instruments or share-based commitments with employees with a significant impact on the calculation of diluted earnings (or loss) per share for the periods presented. For this reason, basic earnings per share coincide with diluted earnings (or loss) per share.

Note 4 – Risk management

Throughout 2022, Banco Sabadell Group has continued to strengthen its risk management and control framework by incorporating improvements in accordance with supervisory expectations and market trends.

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4.1. Macroeconomic, political and regulatory environment

Macroeconomic environment

When managing risks, the Group considers the macroeconomic environment. The most significant aspects of 2022 are set out below:

–

The main factors at play in 2022 were the war in Ukraine and the energy crisis in Europe, while increasingly less importance was attached to Covid-19.

–

In the wake of deteriorating geopolitical relations, Russia completely and indefinitely cut of its gas supplies flowing to Europe through the main pipeline linking both regions. This led to an unprecedented increase in the price of natural gas and electricity in Europe and stoked fears that strict energy rationing might be introduced during the winter.

–

Developed countries across the globe saw their economies deteriorate over the year due to the consequences of the conflict in Ukraine, persistently high inflation and tighter financial conditions.

–

In Spain, the economy outperformed the rest of the Eurozone, although it also slowed down over the year. The labour market remained relatively steady, with the lowest unemployment rate since 2008.

–

In terms of economic policy in Spain, the government extended existing measures and rolled out new measures to deal with the energy crisis and high inflation.

–

Spain also made progress in rolling out the Next Generation European funds, although the allocation and execution of these funds fell short of the government’s expectations.

–

Emerging economies proved resilient to the global economic environment, although the risks remained in economies with weaker fundamentals. China abandoned its zero-Covid policy at the end of the year.

–

In Latin America, Mexico saw good economic performance, thanks to its limited exposure to Ukraine, the improvement of problems in global supply chains and its proximity to the United States.

–

Inflation was the macroeconomic variable that aroused the most interest in 2022, reaching new record highs, with inflationary pressures spreading to various components.

–

Inflation was pushed up by the higher costs of energy and commodities as a result of the conflict in Ukraine. In the United States and the United Kingdom, the jump in wages also contributed to higher inflation.

–

Central banks focused on combatting inflation, introducing widespread interest rate hikes.

–

The European Central Bank (ECB) raised interest rates by 250 basis points, introducing hikes of up to 75 basis points in two consecutive meetings. The ECB also discontinued its asset purchase programmes and announced that it would begin to reduce its balance sheet in 2023.

–

The Federal Reserve (Fed) began its most aggressive rate hike cycle in several decades, increasing the range of its Fed funds rate by 425 basis points, coinciding with the launch of its quantitative tightening programme.

–

The Bank of England (BoE) raised its base rate in each of its monetary policy meetings, gradually increasing the scale of these rate hikes. The BoE also began selling assets from its balance sheet in November.

–

2022 was a very negative year for both fixed-income markets and equity markets across the globe.

–

Long-term government bond yields in the main developed countries rebounded sharply, influenced by aspects such as inflation and the interest rate hikes introduced by central banks.

–

Peripheral sovereign debt risk premiums also rebounded in 2022, although they remained at relatively contained levels.

–

The dollar saw widespread appreciation, acting as a safe-haven asset given the global economic landscape. In its currency pair with the euro, it appreciated to levels not seen since 2002, falling below parity for a few weeks.

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–

Emerging currencies generally found support, as the monetary tightening cycle began earlier in these economies. Sovereign risk premiums inched upwards but remained far from record high levels.

–

Financial authorities believed that the risks to financial stability increased over the year due to the deterioration of financial and economic conditions, meaning that the banking industry faces higher risks in the medium term.

Political and regulatory environment

Impacts stemming from the war in Ukraine

The war between Russia and Ukraine, which broke out at the end of February 2022 and which is still ongoing today, prompted governments to adopt plans and measures similar to those proposed during the health emergency in order to mitigate the impacts of the conflict (ICO guarantee lines and direct aid for affected sectors).

Banco Sabadell’s credit risk with both individuals and companies from these countries is limited, and the same is true of its counterparty credit risk with financial institutions from both countries. Specifically, the largest exposures relate to mortgage loans granted to customers of Russian, Ukrainian or Belarusian nationality residing outside Spain, although these amount to less than 300 million euros. The real estate assets securing the aforesaid exposures are located in Spain, with an average loan-to-value of 39%. Furthermore, these are transactions that have been on the balance sheet for an average of six and a half years.

ICO guarantee line in the context of war in Ukraine

On 29 March 2022, the government approved the plan outlining its response to Russia’s invasion of Ukraine through Royal Decree-Law 6/2022. The response plan contained, among other measures, an ICO guarantee line of 10 billion euros, designed to ensure that companies affected by the rise in costs of energy and commodities caused by the conflict could have access to liquidity.

The features of the guarantee line included, among others: all companies and self-employed professionals would be able to benefit from it, with the exception of the financial and insurance sectors; the deadline for applying for these guarantees was 1 December 2022; and banks would need to keep their customers’ working capital lines open until 31 December 2022.

Subsequently, on 10 May 2022, a Council of Ministers’ agreement approved the first tranche of this guarantee line, amounting to 5 billion euros, stating that its granting was subject to the European Commission’s authorisation of the guarantee line, which was eventually received on 2 June 2022.

The continuation of the conflict and its impacts required the initially adopted European Temporary Framework to be revised in order to adapt and extend it. To that end, the European Commission amended the European Temporary Framework on 20 July 2022 and again on 28 October 2022, in order to (i) prolong all the measures set out in the Temporary Crisis Framework until 31 December 2023, (ii) increase the ceilings applicable to state aid and (iii) introduce additional flexibility for liquidity support.

In line with the decision of the European Commission, the Council of Ministers approved Royal Decree-Law 19/2022 of 22 November, which extended the guarantee line included in the response plan to Russia’s invasion of Ukraine, intended to ensure that all self-employed professionals and companies could access liquidity, to 31 December 2023. In addition to extending the aforesaid guarantee line, the agreement of the Council of Ministers introduced certain amendments to the configuration of the first tranche activated in May. Specifically, the first tranche of the guarantee line was divided into two compartments, one amounting to 3.5 billion euros for SMEs and the self-employed and the other amounting to 1.5 billion euros for large enterprises, to ensure that companies of all sizes could continue to have access to finance.

Similarly, the maximum thresholds that limited the guarantee amount for each enterprise were raised to 2,000,000 euros in general, 250,000 euros for primary agricultural holdings and 300,000 for fishing and aquaculture, with no change to the conditions that existed previously.

Lastly, on 27 December, a 450 million euro direct aid scheme was established for the enterprises hit the hardest by the increase of gas prices, such as those involved in the ceramic industry.

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Impacts of interest rate hikes and rising inflation

Measures to ease the mortgage burden

On 22 November 2022, through an agreement of the Council of Ministers, the government introduced a package of measures designed to ease the mortgage burden. The package acts in three ways. Firstly, it amends the 2012 Code of Good Practice, reinforcing the relief measures available to vulnerable households by reducing the applicable interest rate during the five-year grace period (to Euribor minus 0.10% from the current Euribor plus 0.25%), by introducing the option to apply for debt restructuring for a second time and by extending the period during which they can request that their home be surrendered in settlement of the outstanding debt to two years. The scope of application of the aforesaid Code of Good Practice was also extended, so that any households whose effort rate has increased by less than 50% may benefit from a two-year grace period, from a more favourable interest rate during this period and from a term extension on their loans of up to seven years. Secondly, it created a new temporary Code of Good Practice (valid for two years), which will ease the financial burden of mortgages taken out by middle-class families up to 31 December 2022, by freezing repayment instalment amounts and extending the repayment period of the loan to seven years. Thirdly, expenses and fees will be reduced to make it easier to change from a floating rate to a fixed rate and the fees charged for early repayments and for changing from a floating-rate mortgage to a fixed-rate mortgage will be scrapped for the whole of 2023. Uptake of the two Codes of Good Practice by financial institutions is voluntary, although once they become signatories, compliance therewith is mandatory.

Banco Sabadell became a signatory of the new Code of Good Practice on 16 December 2022.

Impacts arising from Covid-19

The public health emergency caused by Covid-19 in March 2020 continued until early 2022 and was gradually overcome in the first half of the year in the main markets in which the Group operates. 2022 saw the application of the support measures approved by governments in 2020 and 2021 to provide the support needed by viable businesses, particularly in the form of public guarantees, as well as a Code of Good Practice specifically for the Covid-19 crisis, of which Banco Sabadell became a signatory in 2021.

Regarding the granting of ICO guarantees, through an agreement of the Council of Ministers on 21 June 2022, the government approved the possibility of applying maturity extensions to the Covid ICO guarantees beyond 30 June 2022, when the EU state aid temporary framework was due to expire. Extending the duration of the guarantees allows companies and self-employed professionals to extend the repayment term of their loans, subject to approval by the relevant financial institution, to up to 8 or 10 years.

In addition, on 28 October 2022, the European Commission also decided to prolong the possibility to grant investment support measures for a sustainable recovery under the State Aid COVID Temporary Framework until 31 December 2023.

Brexit

The Group continues to monitor the developments and consequences of Brexit. Since the Brexit deals came into effect on 1 January 2021, attention has focused mainly on the difficulties identified by certain sectors in relation to the continuation of trade relations between the United Kingdom and the European Union and the way in which companies have been adapting to the new trade arrangements. It is difficult to separate the impacts caused by Brexit from the disruptions observed in global supply chains initially associated with pandemic-related restrictions and subsequently with the reopening of the economy and the recovery of demand as well as, more recently, the conflict in Ukraine and the energy crisis. Another aspect that has attracted attention in 2022 has been the implementation of the Northern Ireland protocol, due to tensions between the United Kingdom and the European Union in spite of the flexibility introduced in border controls for goods crossing between Great Britain and Northern Ireland. Tensions in this regard have continued throughout the year and negotiations between the United Kingdom and the European Union continue in pursuit of a more stable and long-lasting solution.

The United Kingdom has continued with the publication of proposals, for consultation purposes, regarding the regulation of financial services, using the new regulatory freedoms proffered by Brexit. On the other hand, news of financial service activity moving from the United Kingdom to the European Union and the United States continues to trickle through.

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On the other hand, in relation to the specific activity of Banco Sabadell Group in the United Kingdom, and from an operational standpoint, there are no signs of vulnerability in terms of existing contracts between counterparties, cross-dependency on financial market infrastructures, reliance on funding markets, etc. It is also worth noting that TSB has a low risk profile, with one of the most robust capital positions in the United Kingdom (fully-loaded CET1 capital ratio of 17.1%), with a balance sheet that is evenly distributed between loans and deposits (loan-to-deposit ratio of 105%) and with a loan book in which over 90% of loans are mortgage-secured. Furthermore, the quality of this mortgage book is very high, with an average LTV of 42%, and only a relatively small exposure to high-risk segments.

In 2022, the Bank analysed the recoverability of the capital invested in TSB, based on the financial forecasts approved by the Board of Directors. The results of the analysis showed that there are no signs of impairment in this investment, as detailed in Note 16.

4.2 Key milestones during the year

4.2.1 The Group’s risk profile during the year

The following milestones have been achieved in relation to the Group’s risk profile during 2022:

Non-performing assets:

–

Decrease in the NPL ratio in the year, from 3.7% to 3.4%, due to a reduction of stage 3 volumes as a result of improved credit quality.

II.

Lending performance:

–

Gross performing loans continue to increase year-on-year in all geographies, excluding the impact of the evolution of foreign currencies, with annual growth figures of 1.7% in Spain, 3.3% in the UK (TSB) and 1.4% in Mexico.

–

In Spain, the year-on-year growth is primarily driven by loans to individuals (the increase in the mortgage portfolio is noteworthy) and by business loans.

–

In TSB, at a constant exchange rate, annual growth was 3.3%, supported by the positive evolution of the mortgage book.

III.

Concentration:

–

From a sectoral point of view, the loan portfolio is diversified, has limited exposure to the sectors most sensitive to the current environment and follows a downward trend.

–

Similarly, in terms of individual concentration, the risk metrics relating to concentration of large exposures do show a slight upward trend but nevertheless remain within the appetite level. The credit ratings of top segments improve significantly as more recent balance sheets with a more diluted impact of the health crisis are introduced.

–

Geographically speaking, the portfolio is positioned in the most dynamic regions, both in Spain and worldwide. International exposures account for 36% of the loan book.

IV.

Strong capital position:

–

The CET1 ratio improved by 33 basis points to 12.55% in fully-loaded terms as at 2022 year-end (compared to 12.22% as at 2021 year-end).

–

The phase-in Total Capital ratio stood at 17.08% as at the end of 2022, thus remaining above requirements with an MDA buffer of 399 basis points. The leverage ratio was 4.59% (in fully-loaded terms).

Sound liquidity position:

–

The LCR stood at 234% (compared to 221% as at 2021 year-end) and the loan-to-deposit ratio was 96% at the end of 2022.

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4.2.2 Strengthened credit risk management and control environment

2022 has been marked by the monitoring and control of the measures introduced to mitigate the effects of Covid-19, as well as high inflation and the effects of the war in Ukraine.

To that end, particular attention has been paid to monitoring and controlling the measures introduced (mainly ICOs). RAS metrics have also been strengthened and exposure to the sectors most affected by the crisis has been assessed to mitigate its impact.

In the case of individuals, the management and control framework has been reinforced, with changes in RAS metrics and with new origination rules and proposals for interest rate adjustments, effort rates and available income to cope with higher interest rates and the inflationary environment.

Performance of the main solutions offered in Spain

In terms of the ICO Covid lines, as at 31 December 2022, the amount of the loans granted was approximately 7.4 billion euros (8.6 billion euros as at 31 December 2021). As at year-end, the bulk of the payment holidays had already expired.

In 2022, Banco Sabadell took up the new ICO guarantee line in the context of war in Ukraine and undertook to adhere to the new Code of Good Practice, which includes measures to ease the mortgage burden of vulnerable individuals.

Performance of the main solutions offered in the United Kingdom

In the United Kingdom, the main solutions offered during 2020 and 2021 to help SMEs during the Covid-19 pandemic were government-guaranteed loans to companies, known as BBLs (Bounce Back Loans). These loans have been benefitting from extensions (Pay-as-you-Grow) introduced by the government during the year, facilitating repayment conditions for customers. The exposure to these loans as at 2022 year-end amounted to 379 million pounds, representing 64% of the business customer portfolio (546 million pounds as 31 December 2021, representing more than 75% of the business customer portfolio). In response to the more recent cost-of-living crisis, regulators and financial Institutions in the country have focused on establishing adequate communication channels, tools and training to support and proactively help their customers, in particular those in vulnerable situations.

4.3 General principles of risk management

Global Risk Framework

The Global Risk Framework aims to establish the common basic principles relating to the risk management and control activity of Banco Sabadell Group, including, among other things, all actions associated with the identification, decision-making, measurement, assessment, monitoring and control of the different risks to which the Group is exposed. With the Global Risk Framework, the Group aims to:

–

Follow a structured and consistent approach to risk throughout the Group.

–

Foster an open and transparent culture with regard to risk management and control, encouraging the involvement of the entire organisation.

–

Facilitate the decision-making process.

–

Align the accepted risk with the risk strategy and the risk appetite.

–

Understand the risk environment in which it operates.

–

Ensure, following the guidelines of the Board of Directors, that critical risks are identified, understood, managed and controlled efficiently.

The Group’s Global Risk Framework consists of the following elements:

–

The Group’s Global Risk Framework Policy.

–

The Risk Appetite Framework (RAF) of the Group and subsidiaries.

–

The Risk Appetite Statement (RAS) of the Group and subsidiaries.

–

Specific policies for the various material risks to which the Group and subsidiaries are exposed.

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4.3.1 Global Risk Framework Policy

Global Risk Framework principles

For risk management and control to be effective, the Group’s Global Risk Framework must comply with the following principles:

–

Risk governance and involvement of the Board of Directors through the model of three lines of defence, among others;

Similarly, the equivalent bodies of the Group’s various subsidiaries have the same level of involvement in risk management and control activities at the local level.

–

Alignment with the Group’s business strategy, particularly through the implementation of the risk appetite throughout the organisations;

–

Integration of the risk culture, focusing on aligning remuneration with the risk profile;

Corporate culture and corporate values are a key element, as they strengthen the ethical and responsible behaviour of all members of the organisation.

One of the priorities established by the Group is the maintenance of a solid risk culture in the aforesaid terms, on the understanding that this lays the groundwork for appropriate risk-taking, makes it easier to identify and manage emerging risks, and encourages employees to carry out their activities and engage in the business in a legal and ethical manner.

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–

A holistic view of risk that translates into the definition of a taxonomy of first- and second-tier risks based on their nature; and

–

Alignment with the interests of stakeholders

Similarly, risks are managed and controlled with a view to safeguarding the interests of the Group and its shareholders at all times.

4.3.2 Risk Appetite Framework (RAF)

An effective implementation of the RAF requires an adequate combination of policies, processes, controls, systems and procedures that enable a set of defined objectives to not only be achieved, but to be done so in an effective and continuous way.

4.3.3 Risk Appetite Statement (RAS)

Qualitative aspects of the RAS

Quantitative aspects of the RAS

Each of these levels has its own approval, monitoring and action arrangements that should be followed in the event a threshold is ruptured.

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In order to gradually detect possible situations of deterioration of the risk position and thus be able to monitor and control it more effectively, the RAS sets out a system of thresholds associated with the quantitative metrics. These thresholds reflect the desirable levels of risk for each metric, as well as the levels that should be avoided. A breach of these thresholds can trigger the activation of remediation plans designed to rectify the situation.

4.3.4 Specific policies for the different material risks

4.3.5 Overall organisation of the risk function

Governance structure

The Board of Directors of Banco de Sabadell, S.A. is also responsible for approving the Group’s Global Risk Framework.

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–

The participation and involvement of the Group’s governing bodies and Senior Management in decisions regarding risks, and also in their supervision and control.

–

The alignment of targets and objectives at all levels, monitoring their achievement and implementing corrective measures where necessary.

–

The existence of an adequate management and control environment for all risks.

Organisation

For each line of defence, the risk policies describe and assign responsibilities, as appropriate, to the following functions (or any other additional ones that ought to be considered):

–

•

Maintain effective internal controls and perform day-to-day risk assessment and control procedures;

•

Identify, quantify, control and mitigate risks, complying with the established internal policies and procedures and ensuring that activities are consistent with the established goals and objectives;

•

Implement adequate management and oversight processes to ensure compliance with regulations, focusing mainly on control errors, inadequate processes and unforeseen events.

–

Second line of defence: in general, the second line of defence ensures that the first line of defence is well designed and performs its assigned duties. It also puts forward suggestions for its continuous improvement. The core responsibilities attributed to this line are the following:

•

Ensure the existence and promote the update of a Global Risk Framework, which establishes the core principles for adequate risk management and control.

•

Put forward the Institution’s Risk Appetite Statement (RAS) for approval, ensuring it is kept fully up to date at all times and monitoring it on an ongoing basis.

•

Supervise the risk management and control activities carried out by the first line of defence to ensure they conform to the established policies and procedures, bearing in mind the functions specifically assigned this task, and identify areas for improvement within risk management.

•

Formulate independent opinions to lend support in decision-making processes.

•

Periodically analyse and report to the governance and management bodies on the risk profile of the Institution through the RAS.

•

Report to the Board Risk Committee on the status and potential development of the Institution’s risks.

•

Provide guidance and support to identify, assess, monitor, manage and mitigate the Institution’s risks.

•

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–

Third line of defence: helps the Group to achieve its objectives by providing a systematic and disciplined approach to assess the adequacy and effectiveness of the organisation’s governance processes and its risk management and internal control activities.

4.4 Management and monitoring of the main material risks

4.4.1 Strategic risk

Strategic risk includes the management and control of four risks:

–

Reputational risk: this is the current or future risk of losses being incurred as a result of failures related to processes and operations, strategy or corporate governance and which generate a negative perception among customers, counterparties, shareholders, investors or regulators that could negatively affect the Group’s ability to maintain its business relationships or establish new ones, and to continue to access funding sources.

–

Environmental risk: the risk of incurring losses as a result of the impacts, both those existing at present and those that may exist in the future, stemming from the environmental risk factors (associated with climate change and environmental degradation) and affecting counterparties or invested assets, as well as aspects affecting financial institutions as legal entities. Environmental factors can produce negative impacts through different risk drivers, which can be categorised as either physical risks or transition risks.

4.4.1.1 Solvency risk

Banco Sabadell’s ratios are above the minimum capital requirements established by the European Central Bank. Therefore, the Group is not subject to any caps on the distribution of dividends, variable remuneration or coupon payments made to holders of AT1 capital instruments.

Banco Sabadell is also compliant with MREL, which coincides with supervisory expectations and is in line with its funding plans.

Details on the closing data as at 31 December 2022 for solvency risk and capital management are available in Note 5 to these annual financial statements.

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4.4.1.2 Business risk

The economic environment in 2022 has been marked by the conflict between Russia and Ukraine, an energy crisis, continuously climbing rates of inflation, higher interest rates, as well as the slowdown of the main global economies, although in the last few months of the year annual inflation figures in Spain surprised to the downside, becoming more moderate during the month of December for the fifth consecutive month and reaching 5.5%.

Against this backdrop, a number of European governments adopted new tax packages in order to protect households and companies from the sharp rise in energy prices. The exacerbation of the energy crisis also deteriorated the growth-inflation mix, leaving various developed economies in a situation tantamount to stagflation.

In 2022, inflationary pressures resulted in a faster pace of monetary policy normalisation, in turn causing: (i) interest rate hikes, (ii) the discontinuation of central banks’ bond-buying schemes, (iii) the removal of other liquidity stimulus measures such as haircuts applied to assets eligible as collateral and, lastly, (iv) the repayment of long-term borrowings (TLTRO III). All of this increases the risk of returning to a more competitive environment in search of liquidity, with potential increases in financial costs and a reduction of liquidity buffers, which had fallen to record low levels in recent years. This new environment of higher interest rates is causing both institutions and the Supervisor to focus on managing and controlling its associated risks.

The change of course of central banks’ monetary policies has incentivised the Group’s profitability and net interest income, although no significant impact on funding costs has been observed as yet.

In spite of this context, in 2022 the Bank has significantly increased its net profit, with the year-on-year increase of net interest income being particularly worthy of note, and the cost savings delivered by the efficiency plan that began in 2020 and ended in March 2022 have fully come through. This all contributed to year-end ROTE levels standing higher than those disclosed to the market and set as guidance for the Institution in 2023.

4.4.1.3 Reputational risk

In recent years, both customers and society as a whole have attached more importance to the service offered by banks. Vulnerable customers and their specific needs have gained visibility. The change of the Group’s business model, shifting to one in which less of the service is provided in person, increases the materiality of this risk as these stakeholders’ perception of its performance is one of the factors that it considers.

–

Low appetite in the event of threats to the Group’s reputation.

–

Special consideration of restrictions on transactions with borrowers associated with political parties and the media.

–

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4.4.1.4 Environmental risk

The big milestone in the international commitment to fight against climate change materialises in the 2015 Paris Agreement, which promotes the reduction of carbon emissions to limit global warming to “well below” 2°C in 2100 and which aims not to exceed 1.5ºC in relation to pre-industrial average temperatures (1850-1900). The European Union included the Agreement in its legislation, detailing and tightening it through a ‘regulatory tsunami’ whose main initiatives are established in the Action Plan on Sustainable Finance (APSF) of March 2018, as well as in its subsequent restatement in the Renewed Sustainable Finance Strategy (RSFS) of July 2021.

Banco Sabadell Group’s commitment to sustainability has been incorporated into all areas of its strategy and business model, internal governance, risk management and assessment arrangements, steering its activity and processes in order to make a firm contribution to sustainability and the fight against climate change and environmental degradation. The aim is to support the Group’s customers in the transition towards a sustainable future, either by providing them with the appropriate and necessary funding for this or by offering them savings and investment products that help to achieve a world with greenhouse gas emissions neutrality. This is in addition to the Institution’s own aims of achieving greenhouse gas (GHG) emissions neutrality and of continuing to reduce its own consumption.

As part of this corporate goal, throughout 2022 Banco Sabadell Group has continued to implement the Sustainable Finance Plan, which includes a series of initiatives that add to its track record of projects designed to pursue a more sustainable economy.

Furthermore, all these initiatives make it possible to adopt and implement the various sustainability regulations to which Banco Sabadell Group is subject, as well as to comply with supervisory expectations with regard to the management and disclosure of environmental risks established by the European Central Bank (ECB).

In line with our commitment to achieve a sustainable future, since 2021 Banco Sabadell Group has been a member of the Net-Zero Banking Alliance (NZBA), an international banking alliance under the auspices of the United Nations, whose main goal is to achieve the alignment of their loan and investment portfolios with net-zero emissions scenarios by 2050 or earlier. Undertaking this commitment implies being able to achieve one of the most ambitious climate targets established in the Paris Agreement.

Lastly, since 2020 Banco Sabadell Group has also undertaken to follow the recommendations for disclosure of financial information related to climate-related risks established by the Task Force on Climate-related Financial Disclosures (TCFD).

Banco Sabadell Group Sustainable Finance Plan

Since 2020, Banco Sabadell Group has been developing a cross-cutting Sustainable Finance Plan that will allow the Institution to honour its sustainability commitments and adopt all the regulations, regulatory initiatives and supervisory expectations relating to banking in the European Union (EU).

During this year, environmental risk indicators have also continued to be defined and developed and are gradually being converted to metrics that are included in the Risk Appetite Framework in order to manage and monitor these risks. Furthermore, the Climate Risk Policy has been reviewed and its scope of application and content have been expanded in order to include the risks associated with environmental degradation (air pollution, water pollution, water scarcity, land pollution, loss of biodiversity, deforestation, etc.). This is why the Climate Risk Policy has been renamed the Environmental Risk Policy.

Environmental risk management

Environmental risk should be understood as the risk of incurring losses as a result of the impacts, both those existing at present and those that may exist in the future, stemming from the environmental risk factors (associated with climate change and environmental degradation) and affecting counterparties or invested assets, as well as aspects affecting financial institutions as legal entities.

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Environmental factors can produce negative impacts through different risk drivers, which can be categorised as either physical risks or transition risks:

–

Physical risks are those that occur due to the physical effects of climate change (consequence of adverse climate-related and geological events or changes in climate patterns) and due to environmental degradation (consequence of changes and severe effects on the balance of ecosystems). They can in turn be categorised as either acute risks or chronic risks.

–

Transition risks are those that occur due to the uncertainty related with the timing and speed of the process for adjusting to an environmentally sustainable economy. This process can be affected by four drivers: political (regulatory) and legal risks, technology risks, market and economic risks, as well as reputational and social risks.

For more information on environmental risk, please refer to the Non-Financial Disclosures Report (NFDR), which forms part of the consolidated Directors’ report.

In line with the EBA’s Sustainable Finance Plan to be implemented throughout 2020-2025 and under which ESG risks and factors are expected to be included in the EU regulatory framework (Pillars I, II and III of the Basel prudential framework for credit institutions), Banco Sabadell Group is adapting and aligning its internal corporate governance, strategy, structure and risk management and control processes, as well as its disclosures, in order to comply with these planned regulations. This change process is based on the materiality assessment of the impacts of environmental risk (the E in ESG) and on the analysis of the transmission channels that they feed into. In the final instance, environmental risk ultimately acts as an additional risk driver affecting traditional bank risks (e.g. credit, market, liquidity and operational risks). It is therefore important to measure its final impact (e.g. in terms of the solvency of both customers/ counterparties and of the Institution itself).

At present, as the EBA and the ECB themselves acknowledge, the academic world is working intensively and rapidly to develop and define the most suitable methodologies that can be used to tackle technical challenges and the lack of robust data facing the field of sustainability-related risks (with each of the letters of the ESG acronym).

Every year, Banco Sabadell Group carries out a qualitative materiality assessment of the impacts that environmental risks have on the main traditional bank risks affected: credit risk, market risk, liquidity risk, operational risk, reputational risk, strategy risk and business model risk. In 2022, this assessment has been expanded to include not only climate-related risk but also the risk associated with environmental degradation. Thus, the following activities now take place on a regular basis: (i) a quantitative estimate of the impacts stemming from environmental risk on credit risk, market risk, liquidity risk and operational risk, (ii) a quantitative analysis of the exposure of its credit portfolios to the most carbon-intensive sectors and (iii) a measurement of its sustainable exposure (green, social and sustainability-linked transactions).

It is worth noting that the Group has incurred no previous material losses associated with climate-related risk. Furthermore, it is worth mentioning that in an initial qualitative assessment of the materiality of the environmental risk factors for those risks in which those could be considerable, it was concluded that the impacts were concentrated in credit portfolios. Specifically, transition risks were found to be the most material, from a triple point of view: regulations, technological change and market factors. While no impact is expected in the near term, the potential medium- and long-term impacts should continue to be monitored and assessed on an ongoing basis, depending on the sector.

As regards banking activity, a network of teams specialising in environmental risks is being developed and deployed in both risk management and control areas and in the business units themselves, who collect information related to the sustainability of customers and their banking activity through specific ESG questionnaires and indicators. The end goal is to support customers during the transition to a more sustainable economy.

It is also worth noting the implementation of an internal eligibility guide, aligned with the EU’s taxonomy and the ICMA’s Social Bond Principles, which will be updated with the Social Taxonomy and which can be used to validate the sustainability of the credit transactions financed by Banco Sabadell Group, as well as the adoption of sector-specific rules which set out the commitment to sustainability of the Institution when granting finance to certain greenhouse gas-intensive sectors and sectors with the greatest potential social and environmental impact.

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In the same vein, the Sustainable Finance Plan expands the portfolio of sustainable products with the aim of paving the way for the transition of the economy towards sustainability. New financing solutions have been launched, including products such as ‘eco-leases’ and the ‘eco-reformas’ loan for energy-efficient and sustainable home renovations. They have also been integrated across the entire product portfolio, making it possible for a wide range of products to be made sustainable, provided the financed investment meets the stipulated requirements.

In addition, it is worth mentioning that over the year Banco Sabadell Group has continued to issue new green bonds in the capital markets amounting to 1,695 million euros (500 million euros in 2021).

4.4.2. Credit risk

4.4.2.1 Credit risk management framework

Acceptance and monitoring

The implementation of advanced risk management methodologies also benefits the process as it ensures that proactive measures can be taken once a risk has been identified. Of vital importance in this process are tools such as credit rating systems for companies and credit scoring systems for individuals, as well as early warning indicators for monitoring risk. These are integrated into a single tool that provides a comprehensive and forward-looking vision of customers.

Risk monitoring is carried out for all exposures in order to identify potentially problematic situations and prevent credit impairment. In general, this monitoring is based on early warnings system at both the transaction/borrower level and at the portfolio level, and both systems use the firm’s internal information and external information in order to obtain results. Risk monitoring is carried out prior to any default and on a forward-looking basis, i.e. with an outlook based on the foreseeable future development of circumstances, in order to determine both actions to strengthen the business (increase lending) and to prevent risk (risk mitigation, improvement of guarantees, etc.).

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Management of non-performing exposures

–

Limits are applied to the length of grace periods and to the granting of successive refinancing.

The Group continually monitors compliance with the agreed terms and with the above policies.

Internal risk models

The governance framework of internal credit risk and impairment models (management of risk, calculation of regulatory capital and provisions) is based on the following pillars:

–

Effective management of changes to internal models.

–

Ongoing monitoring of the performance of internal models.

–

Regular reporting, both internal and external.

–

Management tools for internal models.

For further quantitative information, see Schedule V “Other risk information: Refinancing and restructuring transactions” to these consolidated annual financial statements.

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Real estate credit risk management

As part of its general policy on risks and, in particular, its policy on the real estate development sector, the Group has a number of specific policies in place for mitigating risks.

The Bank has established three strategic courses of action:

–

New lending: real estate development business

To this end, the Bank has:

•

Two Real Estate Investment Analysis and Monitoring divisions (reporting to the Real Estate Risks Division), whose role is to analyse all real estate projects from a technical and real estate point of view. They analyse both the location and suitability of the product, as well as the potential supply and demand. They also compare them against the figures of the business plan submitted by the customer (particularly costs, income, margin and timelines). This analysis process goes hand in hand with a model used to monitor the real estate developments through monitoring reports, which validate the progress made in each development project in order to keep track of drawdowns and compliance with the business plan (income, costs and timelines).

•

The Real Estate Risks Division, with specialised analysts in each of the Territorial Divisions. This makes it possible to ensure that newly accepted risks are in line with the policies and acceptance framework for this type of risk.

–

Management of non-performing real estate credit

Non-performing exposures are managed in line with the defined policy. In general, they are managed taking into account:

•

The customer.

•

The guarantees.

•

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Cases in which the stabilisation of the loan or its settlement by the customer is not a feasible option are managed using support models depending on the type of loan or financed item.

In the case of completed real estate developments or completed non-residential properties, these can be put on sale at prices that drive market traction.

–

Management of foreclosed assets

Once the loan has been converted into a real estate asset, a management strategy is defined depending on the type of asset, in order to maximise the potential of each asset during the sale.

The main disposal mechanism is the sale of the asset, for which the Bank has developed different channels depending on the type of property and customer.

For further quantitative information, see Schedule V “Other risk information: Exposure to construction and real estate development sector” to these consolidated annual financial statements.

4.4.2.2. Risk management models

Credit ratings

The percentage distribution by credit rating of Banco Sabadell’s portfolio of companies as at 31 December 2022 and 2021 is detailed below:


%
Distribution, by credit rating, of Banco Sabadell’s portfolio of companies 2022
9	8	7	6	5	4	3	2	1	0	TOTAL
0.64%	1.56%	9.02%	18.80%	28.88%	23.20%	13.11%	4.08%	0.62%	0.10%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.


%
Distribution, by credit rating, of Banco Sabadell’s portfolio of companies 2021
9	8	7	6	5	4	3	2	1	0	TOTAL
0.64%	1.65%	6.03%	19.98%	27.70%	23.32%	14.76%	5.10%	0.67%	0.15%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.

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Credit scores

Scoring models are used in both the new risk origination process (reactive scoring) and to monitor portfolio risk (behavioural scoring).

The percentage distribution by behavioural score of Banco Sabadell’s portfolio of individuals as at 31 December 2022 and 2021 is detailed below:


%
Distribution, by behavioural score, of Banco Sabadell’s portfolio of individuals 2022
9	8	7	6	5	4	3	2	1	0	TOTAL
0.89%	8.92%	26.39%	35.56%	17.11%	6.21%	2.50%	1.35%	0.67%	0.40%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.


%
Distribution, by behavioural score, of Banco Sabadell’s portfolio of individuals 2021
9	8	7	6	5	4	3	2	1	0	TOTAL
1.03%	9.85%	25.86%	35.10%	16.63%	6.31%	2.66%	1.43%	0.68%	0.45%	100%

In this scale of 0 to 9, probability of default (PD) goes from high to low. The PD used is the risk management PD.

Warning tools

This warnings system enables:

–

Efficiency to be improved, as monitoring exercises focus on customers with the lowest credit rating or credit score (different cut-off points for each group).

–

The Institution to anticipate actions required to manage any negative change in the situation of the customer (change in rating, new severe warnings, etc.).

–

Customers whose situation remains unchanged and who have been assessed by the Basic Management Team to be regularly monitored.

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4.4.2.3. Credit risk exposure

The table below shows the distribution, by headings of the consolidated balance sheet, of the Group’s maximum gross credit risk exposure as at 31 December 2022 and 2021, without deducting collateral or credit enhancements obtained in order to ensure the fulfilment of payment obligations, broken down by portfolios and in accordance with the nature of the financial instruments:


Thousand euro
Maximum credit risk exposure	Note		2022		2021

Financial assets held for trading				417,131		592,631
Equity instruments		9		—		2,258
Debt securities		8		417,131		590,373

Non-trading financial assets mandatorily at fair value through profit or loss				77,421		79,559
Equity instruments		9		23,145		14,582
Debt securities		8		54,276		64,977

Financial assets at fair value through other comprehensive income				5,923,703		6,999,326
Equity instruments		9		301,011		314,235
Debt securities		8		5,622,692		6,685,091

Financial assets at amortised cost				188,068,718		182,173,414
Debt securities		8		21,453,031		15,190,212
Loans and advances		11		166,615,687		166,983,202

Derivatives		10, 12		6,672,213		1,904,380

Total credit risk due to financial assets				201,159,186		191,749,310

Loan commitments given		26		27,460,615		28,403,146
Financial guarantees given		26		2,086,993		2,034,143
Other commitments given		26		9,674,382		7,384,863

Total off-balance sheet exposures				39,221,990		37,822,152


Total maximum credit risk exposure				240,381,176		229,571,462

Schedule V to these consolidated annual financial statements shows quantitative data relating to credit risk exposures by geographical area and activity sector.

4.4.2.4. Credit risk mitigation

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The Group has not received any significant guarantees which it is authorised to sell or pledge, irrespective of any non-payment by the owner of the referred guarantees, except for those intrinsic in treasury activities, which are mostly repos with maturities of no more than six months, therefore their fair value does not differ substantially from their carrying amount (see Note 6). The fair value of the assets sold in connection with repos is included under the heading “Financial liabilities held for trading” as part of the short positions of securities.

Assets assigned under the same transactions amounted to 417,982 thousand euros (694,554 thousand euros as at 31 December 2021) and are included by type under the repos heading in Notes 18 and 19.

The values of the guarantees received to ensure collection, broken down into collateral and other guarantees, as at 31 December 2022 and 2021 are as follows:


Thousand euro
	2022		2021

Value of collateral		97,340,958		97,877,766
Of which: securing stage 2 loans		8,515,648		6,740,264
Of which: securing stage 3 loans		2,046,793		2,291,061

Value of other guarantees		17,180,550		17,315,699
Of which: securing stage 2 loans		2,635,673		2,886,141
Of which: securing stage 3 loans		1,080,167		604,726
Total value of guarantees received		114,521,508		115,193,465

The main risk concentration in relation to all of these types of collateral and credit enhancements corresponds to the use of mortgage guarantees as a credit risk mitigation technique in exposures of loans intended for the financing or construction of housing or other types of real estate. On a like-for-like basis, as at 31 December 2022, the exposure to home equity loans and credit lines represented 57.2% of total gross performing lending items granted to customers (58.6% as at 31 December 2021).

In addition, the Bank carried out three synthetic securitisation transactions in 2022, 2021 and 2020.

In September 2022, the Bank carried out a synthetic securitisation transaction of a 1 billion euro portfolio of project finance loans, having received an initial guarantee from Sabadell Boreas 1-2022 Designated Activity Company for 105 million euros (103 million euros as at 31 December 2022), which covers losses of up to 10.5% on the securitised portfolio.

In September 2021, the Bank carried out a synthetic securitisation of a 1.5 billion euro portfolio of loans to SMEs and mid-corporates, having received an initial guarantee from Chorus Capital Management in the amount of 75 million euros (50 million euros as at 31 December 2022), covering losses of between 0.9% and 5.9% on the securitised portfolio.

In June 2020, the Bank carried out a synthetic securitisation of a 1.6 billion euro portfolio of loans to SMEs and mid-corporates, having received an initial guarantee from the European Investment Fund in the amount of 96 million euros (63 million euros as at 31 December 2022), covering losses of between 1.5% and 7.5% on the securitised portfolio.

These transactions are given preferential treatment for capital consumption purposes, in accordance with Article 270 of Regulation (EU) 2017/2401 (see Note 5).

In the case of market transactions, counterparty credit risk is managed as explained in section 4.4.2.7 of these consolidated annual financial statements.

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4.4.2.5. Credit quality of financial assets

As stated earlier, in general terms, the Group uses internal models to rate most borrowers (or transactions) through which credit risk is incurred. These models have been designed considering the best practices proposed by the New Basel Capital Accord (NBCA). However, not all portfolios in which credit risk is incurred have internal models, partly due to the fact that these models can only be reasonably designed if a minimum level of experience with cases of non-payment is available. The standardised approach is followed for these portfolios, for solvency purposes.

The exposure percentage calculated by the Group using internal models, for solvency purposes, is 83%. This percentage has been calculated following the specifications of the ECB guide to internal models (Article 26a) published in October 2019.

The breakdown of total exposures, rated based on the various internal rating levels, as at 31 December 2022 and 2021 is as follows:


Million euro
		Loans assigned rating/score
		2022

Breakdown of exposure by rating	Note	Stage 1		Stage 2		Stage 3		Of which: purchased credit-impaired		Total

AAA/AA			20,031		202		7		—		20,240
A			10,905		52		—		—		10,957
BBB			86,498		182		—		—		86,680
BB			30,428		474		1		2		30,903
B			20,728		3,843		4		68		24,575
Other			4,022		8,929		5,414		54		18,365
No rating/score assigned			3,531		20		35		—		3,586
Total gross value	11		176,143		13,702		5,461		124		195,306


Impairment allowances	11		(347)		(480)		(2,196)		*(1)*		(3,023)

Total net amount			175,796		13,222		3,265		*123*		192,283

Million euro

		Loans assigned rating/score

		2021

Breakdown of exposure by rating	Note	Stage 1		Stage 2		Stage 3		Of which: purchased credit-impaired		Total

AAA/AA			18,848		140		11.34		—		19,000
A			12,337		38		0.03		—		12,375
BBB			86,246		220		4.33		1		86,470
BB			23,747		520		2		2		24,269
B			21,667		3,827		18.62		74		25,512
Other			3,979		7,496		5,662		83		17,137
No rating/score assigned			4,515		86		—		—		4,601
Total gross value	11		171,339		12,327		5,698		160		189,364


Impairment allowances	11		(378)		(494)		(2,432)		*(1)*		(3,304)

Total net amount			170,962		11,833		3,266		*159*		186,060

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The breakdown of total off-balance sheet exposures, rated based on the various internal rating levels, as at

31 December 2022 and 2021 is as follows:


Million euro

		Loans assigned rating/score

		2022

Breakdown of exposure by rating	Note	Stage 1		Stage 2		Stage 3		Of which: purchased credit-impaired		Total

AAA/AA			1,433		64		—		—		1,497
A			1,235		—		—		—		1,235
BBB			11,866		40		1		—		11,907
BB			9,791		164		3		—		9,958
B			11,585		867		5		24		12,457
Other			693		959		397		—		2,049
No rating/score assigned			117		2		—		—		119
Total gross value	26		36,720		2,096		406		24		39,222

Provisions recognised on liabilities side of the balance sheet	26		(51)		(30)		(96)		—		(177)

Total net amount			36,669		2,066		310		24		39,045

Million euro

		Loans assigned rating/score

		2021

Breakdown of exposure by rating	Note	Stage 1		Stage 2		Stage 3		Of which: purchased credit-impaired		Total

AAA/AA			1,598		38		—		—		1,636
A			2,546		4		—		—		2,550
BBB			10,642		106		4.35		—		10,752
BB			9,095		158		2.86		0.27		9,255
B			10,323		684		1.65		24		11,009
Other			406		587		550		1		1,543
No rating/score assigned			725		352		—		—		1,077
Total gross value	26		35,335		1,928		559		25		37,822

Provisions recognised on liabilities side of the balance sheet	26		(52)		(18)		(121)		—		(191)

Total net amount			35,283		1,910		438		25		37,631

Further details on the credit rating and credit scoring models are included in section 4.4.2.2 of these consolidated annual financial statements.

For borrowers included within business in Spain whose coverage has been assessed using internal models as at 31 December 2022 and 2021, the following table shows the breakdown by segment of the average EAD-weighted PD and LGD parameters, distinguishing between on-balance sheet and off-balance sheet exposures, and the stage in which the transactions are classified according to their credit risk:



%

							31/12/2022

	Average ECL parameters for on-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.00%		20.70%		21.00%		20.30%		100.00%		56.10%		4.30%		21.20%

Other financial corporations		0.90%		21.10%		20.50%		17.70%		100.00%		84.70%		1.70%		21.10%

Non-financial corporations		1.60%		30.90%		15.70%		25.20%		100.00%		60.60%		4.90%		30.80%
Households		0.50%		13.00%		28.40%		13.50%		100.00%		52.60%		3.90%		13.70%

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%

							31/12/2022

	Average ECL parameters for off-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.40%		32.50%		16.20%		34.20%		100.00%		73.50%		2.10%		32.60%

Other financial corporations		1.20%		35.30%		21.00%		27.10%		0.00%		0.00%		1.30%		35.30%

Non-financial corporations		1.50%		30.80%		15.60%		34.50%		100.00%		74.00%		2.50%		31.10%

Households		0.80%		36.70%		21.40%		31.70%		100.00%		55.00%		1.30%		36.60%

%

							31/12/2021

	Average ECL parameters for on-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.00%		20.10%		17.90%		21.20%		100.00%		42.40%		6.70%		21.20%

Other financial corporations		1.00%		22.10%		18.80%		20.60%		100.00%		60.20%		2.30%		22.20%

Non-financial corporations		1.70%		29.40%		13.20%		24.30%		100.00%		47.10%		6.90%		29.40%

Households		0.50%		13.20%		28.10%		14.30%		100.00%		39.40%		6.70%		14.50%

%

							31/12/2021

	Average ECL parameters for off-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.30%		32.00%		9.90%		29.30%		100.00%		27.80%		2.20%		31.90%

Other financial corporations		1.50%		31.80%		13.20%		32.00%		100.00%		19.50%		1.60%		31.80%

Non-financial corporations		1.50%		30.40%		8.60%		29.90%		100.00%		28.20%		2.40%		30.30%

Households		0.80%		36.70%		24.40%		21.50%		100.00%		31.00%		1.20%		36.50%

The development of new LGD models began in 2020 and continued in 2021 and 2022 in order to renew previous models that were in use since the implementation of IFRS 9 and to improve some aspects that had been previously identified, during either the ongoing monitoring carried out by Banco Sabadell or during the independent reviews conducted by the internal control units (Models Validation and Internal Audit). The adjustment processes follow the internal governance arrangements established for their validation, review and approval by the corresponding units. The new developments primarily affect the LGD of the portfolio in non-performing status (stage 3), in which an increase in LGD is essentially recorded for the exposures that have been in default status the longest.

Details of the PD and LGD parameters for exposures in the business of the subsidiary TSB as at 31 December 2022 and 2021 are shown below:



%

							31/12/2022

	Average ECL parameters for on-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Secured loans		0.34%		3.48%		3.50%		7.97%		100.00%		3.07%		1.44%		4.01%

Credit cards		0.89%		84.08%		5.47%		78.63%		100.00%		51.72%		3.71%		82.53%

Current accounts		0.50%		69.85%		8.76%		67.52%		100.00%		56.78%		3.58%		69.35%

Loans		1.36%		81.02%		5.96%		82.23%		100.00%		80.45%		3.99%		81.21%

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%

							31/12/2022

	Average ECL parameters for off-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Secured loans		0.83%		4.31%		0.00%		0.00%		0.00%		0.00%		0.83%		4.31%

Credit cards		0.89%		84.08%		5.47%		78.63%		100.00%		51.72%		3.71%		82.53%

Current accounts		0.50%		69.85%		8.76%		67.52%		100.00%		56.78%		3.58%		69.35%

Loans		1.36%		81.02%		5.96%		82.23%		100.00%		80.45%		3.99%		81.21%

%

							31/12/2021

	Average ECL parameters for on-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Secured loans		0.21%		2.41%		4.61%		4.48%		100.00%		1.89%		1.28%		2.21%

Credit cards		1.00%		84.90%		9.25%		83.70%		100.00%		67.76%		3.80%		84.44%

Current accounts		0.82%		69.65%		7.71%		70.40%		100.00%		68.56%		3.52%		69.68%

Loans		2.21%		81.35%		8.28%		82.70%		100.00%		80.75%		4.58%		81.52%

%

							31/12/2021

	Average ECL parameters for off-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Secured loans		0.55%		4.89%		0.00%		0.00%		0.00%		0.00%		0.55%		4.89%

Credit cards		1.00%		84.90%		9.25%		83.70%		100.00%		67.76%		3.80%		84.44%

Current accounts		0.82%		69.65%		7.71%		70.40%		100.00%		68.56%		3.52%		69.68%

Loans		2.21%		81.35%		8.28%		82.70%		100.00%		80.75%		4.58%		81.52%

In the case of the United Kingdom, the parameters in general show an improvement compared to 2021, in line with the economic recovery in 2022 compared to previous years, in which negative impacts on PD and LGD materialised as a result of the economic situation.

During 2022, stage 3 assets have decreased by 389 million euros, consequently reducing the Group’s NPL ratio, as shown in the table below:


%

	2022		2021

NPL ratio (*)		3.41		3.65

NPL coverage ratio (*)		39.42		41.16

NPL (stage 3) coverage ratio, with total provisions (*)		55.04		56.34

(*) The NPL ratio ex-TSB stands at 4.13%, the NPL (stage 3) coverage ratio stands at 42.25% and the NPL (stage 3) coverage ratio with total provisions stands at 56.41% (4.44%, 44.66% and 58.45%, respectively, in 2021).

The NPL ratio, broken down by lending segment as at 31 December 2022 and 2021, is set out below:


%

	2022		*Proforma 2022 ()**		2021		*Proforma 2021 ()**

Real estate development and construction		6.95		6.99		9.79		9.86

Non-real estate construction		7.06		7.07		11.95		11.97

Corporates		2.02		2.02		2.35		2.35

SMEs and self-employed		7.62		7.66		6.40		6.43

Individuals with 1st mortgage guarantee		2.08		2.86		2.50		3.60

Banco Sabadell Group NPL ratio		3.41		4.13		3.65		4.44

(*) Corresponds to the NPL ratio excluding TSB.

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4.4.2.6. Concentration risk

Exposures can be concentrated within a single customer or economic group, or within a given sector or geography.

Concentration risk can be caused by two risk subtypes:

–

Sector concentration risk: imperfect diversification of systematic components of risk within the portfolio, which can be sector-based factors, geographical factors, etc.

Banco Sabadell has a series of specific tools and policies in place to ensure its concentration risk is managed efficiently:

–

Quantitative metrics from the Risk Appetite Statement and their subsequent monitoring, including both first-tier (Board) metrics and second-tier (Executive) metrics.

–

Individual limits for risks and customers considered to be significant, which are set by the Delegated Credit Committee.

–

A structure of conferred powers which requires transactions with significant customers to be approved by the Credit Operations Committee, or even by the Delegated Credit Committee.

In order to control its concentration risk, Banco Sabadell Group has deployed the following critical control parameters:

Consistency with the Global Risk Framework

Establishment of limits and metrics for concentration risk control

Given the nature of the Group’s activity and its business model, concentration risk is primarily linked to credit risk, and various metrics are in place, along with their associated limits.

The metrics used to measure such levels, as well as appetite limits and tolerance thresholds for the identified risks, are described in the RAS metrics.

Risk control monitoring and regular reporting

Action plans and mitigation techniques

When dealing with exceptions to internally established limits, the criteria based on which such exceptions can be approved must be included.

The Group will take any measures necessary to match the concentration risk to the levels approved in the RAS by the Board of Directors.

Exposure to customers or significant risks

As at 31 December 2022 and 2021, there were no borrowers with an approved lending transaction that individually exceeded 10% of the Group’s own funds.

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Country risk: geographical exposure to credit risk

Different indicators and tools are used to manage country risk: credit ratings, credit default swaps, macroeconomic indicators, etc.

Schedule V includes quantitative data relating to the breakdown of the concentration of risks by activity and on a global scale.

Exposure to sovereign risk and exposure to the construction and real estate development sector

Schedule V includes quantitative data relating to sovereign risk exposures and exposures to the construction and real estate development sector.

4.4.2.7. Counterparty credit risk

Exposure to counterparty credit risk is mainly concentrated in customers, financial institutions and central counterparty clearing houses.

The following tables show the breakdown of exposures by credit rating and by the geographical areas in which the Group operates, as at 31 December 2022 and 31 December 2021:


%
							2022
AAA	AA+	AA	AA-	A+	A	A-	BBB+	BBB	BBB-	BB+	BB	BB-	B+	Other	TOTAL

17.4%	0.0%	2.4%	31.0%	14.5%	11.8%	9.0%	4.6%	2.5%	1.9%	2.2%	1.5%	0.7%	0.1%	0.4%	100%

%
							2021
AAA	AA+	AA	AA-	A+	A	A-	BBB+	BBB	BBB-	BB+	BB	BB-	B+	Other	TOTAL

0.0%	0.0%	18.2%	30.1%	15.8%	0.9%	8.2%	8.9%	5.7%	1.9%	2.2%	2.4%	1.3%	0.6%	3.8%	100%

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%

	2022		2021

Eurozone		70.7%		71.6%
Rest of Europe		24.5%		18.3%
United States and Canada		3.0%		6.6%
Rest of the world		1.8%		3.5%
Total		100%		100%

As can be seen in the table, the risk is concentrated in counterparties with a high credit quality, with 86% of the risk relating to counterparties rated A, whereas in 2021 this concentration was 73%.


Thousand euro

	2022		2021

Transactions with organised markets		979,533		1,999,937
OTC transactions		183,975,718		149,279,832
Settled through clearing houses		114,649,971		96,403,417
Total		184,955,251		151,279,769

There are currently no transactions that meet the accounting criteria for offsetting transactions involving financial assets and financial liabilities on the balance sheet. The netting of derivative and repo transactions is only material when calculating the amount pending collateralisation, and it is not material in terms of their presentation on the balance sheet.

The following tables show the aggregate amount reflected on the balance sheet for the financial instruments subject to a master netting and collateral agreement for 2022 and 2021:

Thousand euro

2022

Financial assets subject to collateral agreements

Amount recognised

on balance sheet

Amount offset (for
collateral calculations

only)

Guarantee received

Net amount

Cash

Securities

Financial assets

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

6,445,760

3,603,978

2,249,400

129,934

462,448

Repos

3,114,965

—

23,590

3,008,362

83,013

Total

9,560,725

3,603,978

2,272,990

3,138,296

545,461

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Thousand euro

2022

Financial liabilities subject to collateral agreements

Amount recognised

on balance sheet

Amount offset (for
collateral calculations

only)

Guarantee given

Net amount

Cash

Securities

Financial liabilities

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

4,090,024

3,603,978

574,218

489,144

(577,316)

Reverse repos

8,528,435

—

126,059

8,819,189

(416,813)

Total

12,618,459

3,603,978

700,277

9,308,333

(994,129)

Thousand euro

2021

Financial assets subject to collateral agreements

Amount recognised

on balance sheet

Amount offset (for
collateral calculations

only)

Guarantee received

Net amount

Cash

Securities

Financial assets

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

1,603,160

1,338,552

278,944

—

(14,336)

Repos

4,935,785

—

22,350

4,927,409

(13,974)

Total

6,538,945

1,338,552

301,294

4,927,409

(28,310)

Thousand euro

2021

Financial liabilities subject to collateral agreements

Amount recognised

on balance sheet

Amount offset (for
collateral calculations

only)

Guarantee given

Net amount

Cash

Securities

Financial liabilities

(a)

(b)

(c)

(d)

(a)-(b)-(c)-(d)

Derivatives

1,744,351

1,338,552

596,202

159,273

(349,676)

Reverse repos

5,454,650

—

37,643

5,680,214

(263,207)

Total

7,199,001

1,338,552

633,845

5,839,487

(612,883)

The values of derivative financial instruments which are settled through a clearing house as at 31 December 2022 and 2021 are indicated hereafter:


Thousand euro

	2022		2021

Derivative financial assets settled through a clearing house		5,367,736		1,148,242
Derivative financial liabilities settled through a clearing house		3,204,917		949,365

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Exposures are thus subject to daily monitoring and they are controlled in accordance with the limits approved by the Board of Directors. This information is included in risk reports for disclosure to the departments and areas responsible for their management and monitoring.

With regard to counterparty credit risk, the Group has different mitigation techniques. The main techniques are:

–

Netting agreements for derivatives (ISDA and Spain’s Framework Agreement for Financial Transactions, Contrato Marco de Operaciones Financieras, or CMOF).

–

Variation margin collateral agreements for derivatives (CSA and Annex 3 - CMOF), repos (GMRA, EMA) and securities lending (GMSLA).

–

Initial margin collateral agreements for derivatives (CTA and SA).

By default, the Group has netting agreements with all of the counterparties that wish to trade in derivatives.

Initial margin collateral agreements include the provision of guarantees to mitigate the potential future exposure with a counterparty in respect of the transactions subject to such agreements.

The Group has initial margin collateral agreements in place for derivative transactions with financial institutions pursuant to Delegated Regulation (EU) 2251/2016.

4.4.2.8 Assets pledged in financing activities

As at 31 December 2022 and 2021, there were certain financial assets pledged in financing operations, i.e. offered as collateral or guarantees for certain liabilities. These assets correspond mainly to loans linked to the issuance of mortgage covered bonds, public sector covered bonds, TSB covered bonds and long-term asset-backed securities (see Note 20 and Schedules II and III). The remaining pledged assets are debt securities which are submitted in transactions involving assets sold under repurchase agreements, pledged collateral (loans or debt instruments) to access certain financing operations with central banks and all types of collateral provided to secure derivative transactions.

Royal Decree-Law 24/2021, of 2 November, was published on 3 November 2021 and transposes, in its Book One, Directive (EU) 2019/2162 on the issue of covered bonds and covered bond public supervision. The aim of this transposition is to harmonise mortgage market regulations in member states and to make it easier for credit institutions to access funding. In particular, this directive establishes the different types of covered bonds, the regime for their issuance, disclosure obligations and, lastly, it establishes effective mechanisms for investor protection. Its entry into force on 8 July 2022 entails the repeal of Law 2/1981 of 25 March on the regulation of the mortgage market.

Detailed information on home equity loans granted in Spain included in the “Loans and advances –Customers” portfolio and linked to the issuance of mortgage covered bonds can be found in Schedule III on “Information required to be kept by issuers of mortgage market securities”.

The issuing entity Banco Sabadell did not issue any public sector covered bonds in either 2022 or 2021.

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Thousand euro

	2022		2021

Fully derecognised from the balance sheet:		693,853		808,862
Securitised mortgage assets		116,868		118,986
Other securitised assets		319,468		397,367
Other financial assets transferred		257,517		292,509

Fully retained on the balance sheet:		7,753,225		6,950,706
Securitised mortgage assets		7,087,569		6,721,857
Other securitised assets		665,656		228,849
Total		8,447,078		7,759,568

The assets and liabilities associated with securitisation funds of assets originated after 1 January 2004, and for which inherent risks and rewards of ownership have not been transferred to third parties, have been retained on the consolidated balance sheet. As at 31 December 2022 and 2021, there was no significant financial aid from the Group for unconsolidated securitisations.

Schedule II to these consolidated annual financial statements includes certain information regarding the securitisation funds originated by the Group.

4.4.3. Financial risks

Financial risk is defined as the possibility of obtaining inadequate returns or having insufficient levels of liquidity that prevent an institution from meeting future requirements and expectations.

4.4.3.1 Liquidity risk

Liquidity management

The Group follows a structure based on Liquidity Management Units (LMUs) to manage its liquidity. Each LMU is responsible for managing its own liquidity and for setting its own metrics to control liquidity risk, working together with the Group’s corporate functions. At present, these LMUs are Banco Sabadell (includes Banco de Sabadell, S.A., which incorporates activity in foreign branches, as well as the business in Mexico of Banco de Sabadell, S.A., I.B.M. (IBM) and Sabcapital S.A. de C.V., SOFOM, E.R. (SOFOM)) and TSB.

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–

Decentralised liquidity management system for the more significant units but with a centralised risk oversight and management system.

–

Sound processes for the identification, measurement, management, control and disclosure of the different liquidity sub-risks to which the Group is exposed.

–

Existence of a transfer pricing system to transfer the cost of funding.

–

Balanced funding structure with a predominance of customer deposits.

–

Ample base of unencumbered liquid assets that can be used immediately to generate liquidity and which comprise the Group’s first line of liquidity.

–

Diversification of funding sources, with controlled use of short-term wholesale funding without having to depend on individual fund suppliers.

–

Self-funding by the main banking subsidiaries outside Spain.

–

Oversight of the balance sheet volume being used as collateral in funding operations.

–

Maintenance of a second line of liquidity comprising mainly the issuing capacity of covered bonds or assets prepositioned in central banks and not considered in the first line of liquidity.

–

Holistic overview of risk, through first- and second-tier risk taxonomies, and complying with regulatory requirements, recommendations and guidelines.

–

Alignment with the interests of stakeholders through regular public disclosure of liquidity risk information.

–

Availability of a Liquidity Contingency Plan.

In 2022, the mitigating measures introduced by central banks following the outbreak of Covid-19 were partially discontinued; however, some measures are still in place, including support for banks’ loan transactions, allowing them to accept a wider range of credit claims as collateral, and the partial reduction of the temporary collateral haircuts, among others.

Tools/metrics for monitoring and controlling liquidity risk management

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The risk of each LMU is also monitored on a daily basis through the Structural Treasury Report, which measures the daily changes in the funding needs of the balance sheet, the daily changes in the outstanding balance of transactions in capital markets, as well as the daily changes in the first line of liquidity maintained by each LMU.

The metrics reporting and control framework involves, among other things:

–

Monitoring the RAS metrics and their thresholds on a consolidated basis, as well as those established for each LMU, in line with the established monitoring frequency.

–

Reporting on the relevant set of metrics to the governing body, Board committees and management bodies, depending on the tiers into which those metrics have been classified.

–

In the event a threshold breach is detected, activating the communication protocols and necessary plans for its resolution.

Within the Group’s overall budgeting process, Banco Sabadell plans its liquidity and funding requirements over different time horizons, which it aligns with the Group’s strategic objectives and risk appetite. Each LMU has a 1-year and 5-year funding plan in which they set out their potential funding needs and the strategy for their management, and they regularly analyse compliance with that plan, any deviations from the projected budget and the extent to which the plan is appropriate to the market environment.

The Institution also has an internal transfer pricing system to transfer the funding costs to business units.

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Residual maturity periods

The tables below show the breakdown, by contractual maturity, of certain pools of items on the consolidated balance sheet as at 31 December 2022 and 2021, under business-as-usual market conditions:


Thousand euro
							2022

Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

ASSETS

Cash, balances at central banks and other demand deposits		3,681,237		37,009,112		563,743		18		1,043		51		1,206		—		3,986		41,260,395

Financial assets at fair value through other comprehensive income		—		124,536		86,954		855,454		777,596		582,648		196,407		244,104		2,934,565		5,802,264

Debt securities		—		124,536		86,954		855,454		777,596		582,648		196,407		244,104		2,754,993		5,622,692

Loans and advances		—		—		—		—		—		—		—		—		—		—

Customers		—		—		—		—		—		—		—		—		—		—

Financial assets at amortised cost		3,371,931		8,590,617		4,437,359		11,540,390		9,820,139		10,505,170		10,274,823		11,211,714		115,293,310		185,045,452

Debt securities		—		236,772		44,310		1,403,285		1,371,253		1,126,338		459,093		1,935,711		14,876,058		21,452,820

Loans and advances		3,371,932		8,353,845		4,393,049		10,137,104		8,448,886		9,378,833		9,815,730		9,276,002		100,417,252		163,592,632

Central banks		2,221		160,443		—		—		—		—		—		—		—		162,664

Credit institutions		978,063		2,341,986		428,487		753,460		131,473		83		175		34		66,525		4,700,287

Customers		2,391,648		5,851,416		3,964,561		9,383,645		8,317,413		9,378,751		9,815,555		9,275,968		100,350,726		158,729,681
Total assets		7,053,167		45,724,266		5,088,056		12,395,862		10,598,777		11,087,869		10,472,437		11,455,817		118,231,861		232,108,111

LIABILITIES

Financial liabilities at amortised cost		119,453,858		47,461,256		4,223,087		24,152,729		12,151,025		9,370,909		3,903,867		4,233,378		7,579,822		232,529,932

Deposits		113,012,257		47,375,927		2,719,435		22,548,986		7,666,937		6,556,190		650,136		1,855,757		907,897		203,293,522

Central banks		43,223		—		—		17,223,750		4,939,290		4,974,464		—		662,961		—		27,843,687

Credit institutions		843,529		7,506,691		901,048		714,986		329,534		136,998		160,605		117,597		662,402		11,373,390

Customers		112,125,507		39,869,236		1,818,387		4,610,250		2,398,113		1,444,728		489,531		1,075,199		245,495		164,076,445

Debt securities issued		6,213		66,725		1,486,936		1,590,320		4,477,376		2,807,926		3,248,767		2,371,575		6,521,711		22,577,549

Other financial liabilities		6,435,388		18,605		16,717		13,422		6,712		6,793		4,964		6,046		150,214		6,658,861

Total liabilities		119,453,858		47,461,256		4,223,087		24,152,729		12,151,025		9,370,909		3,903,867		4,233,378		7,579,822		232,529,932

Trading and Hedging derivatives

Receivable		—		46,863,268		9,509,600		24,047,648		22,014,057		9,609,213		9,828,147		7,123,277		33,292,235		162,287,446

Payable		—		34,864,873		10,226,762		22,347,484		25,943,323		10,464,426		9,068,820		7,440,695		40,138,871		160,495,254

Contingent risks

Financial guarantees		33,551		39,680		102,916		389,668		188,159		163,372		58,470		50,582		1,060,594		2,086,993

(*)	For details of maturities of issues aimed at institutional investors, see the section entitled “Funding strategy and evolution of liquidity in 2022” in this note.

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Thousand euro
								2021

Time to maturity	On demand			Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

ASSETS

Cash, balances at central banks and other demand deposits		43,287,519			5,323,980		595,040		121		7		1,476		2		1,186		3,866		49,213,196

Financial assets at fair value through other comprehensive income		—			33,689		163,585		149,509		811,365		787,051		511,205		132,308		4,280,926		6,869,637

Debt securities		—			33,689		163,585		149,509		811,365		787,051		511,205		132,308		4,096,380		6,685,091

Loans and advances		—			—		—		—		—		—		—		—		—		—

Customers		—			—		—		—		—		—		—		—		—		—

Financial assets at amortised cost		2,913,878			7,419,781		3,327,551		10,538,647		12,003,901		10,165,453		11,122,305		10,510,625		110,867,176		178,869,317

Debt securities		—			214,269		—		501,837		1,099,888		1,010,560		981,452		131,712		11,250,496		15,190,212

Loans and advances		2,913,878			7,205,512		3,327,551		10,036,810		10,904,014		9,154,893		10,140,853		10,378,913		99,616,681		163,679,105

Central banks		104,066			66,815		—		—		—		—		—		—		—		170,881

Credit institutions		806,766			3,755,350		75,104		775,331		623,260		7,714		311		44		98,060		6,141,939

Customers		2,003,046			3,383,347		3,252,447		9,261,479		10,280,754		9,147,180		10,140,543		10,378,869		99,518,621		157,366,285
Total assets		46,201,397			12,777,450		4,086,175		10,688,277		12,815,274		10,953,980		11,633,511		10,644,119		115,151,968		234,952,150

LIABILITIES

Financial liabilities at amortised cost		112,437,439			47,456,749		4,091,224		8,649,275		32,257,737		10,991,361		9,761,839		2,538,505		6,995,092		235,179,222

Deposits		107,866,967			47,380,609		3,118,324		5,832,223		29,467,405		6,466,431		7,113,160		1,062,777		998,703		209,306,598

Central banks		1,896			159,006		—		—		26,583,000		4,960,694		6,545,435		—		—		38,250,031

Credit institutions		598,147			4,925,571		723,784		710,162		712,193		177,218		138,140		167,065		664,835		8,817,114

Customers		107,266,924			42,296,032		2,394,540		5,122,061		2,172,213		1,328,518		429,586		895,712		333,868		162,239,453

Debt securities issued		(1,090	)		54,733		956,082		2,804,401		2,784,337		4,519,573		2,644,956		1,472,131		5,815,833		21,050,955

Other financial liabilities		4,571,563			21,407		16,818		12,651		5,994		5,358		3,724		3,598		180,556		4,821,669
Total liabilities		112,437,439			47,456,749		4,091,224		8,649,275		32,257,737		10,991,361		9,761,839		2,538,505		6,995,092		235,179,222

Trading and Hedging derivatives

Receivable		—			37,657,192		12,793,414		17,066,751		11,655,363		11,102,861		17,367,136		7,210,749		35,423,997		150,277,464

Payable		—			27,076,014		11,677,128		21,519,242		16,033,022		12,528,729		17,085,968		7,210,312		37,374,924		150,505,339

Contingent risks

Financial guarantees		1,009			42,947		71,565		321,960		133,084		78,916		44,775		34,319		1,305,569		2,034,143

In this analysis, very short-term maturities traditionally represent funding requirements, as they include continuous maturities of short-term liabilities, which in typical banking activities see higher turnover rates than assets, but as they are continuously rolled over they actually end up satisfying these requirements and at times even result in the growth of outstanding balances.

Furthermore, the Group’s funding capacity in capital markets is systematically checked to ensure it can meet its short-, medium- and long-term needs.

The information provided is static and does not reflect foreseeable funding needs.

It should also be noted that cash flow breakdowns in the parent company have not been deducted.

In order to present the contractual maturities of financial liabilities with certain particular characteristics, the parent company has taken the following approach:

–

Transactions are placed in different time brackets according to their contractual maturity date.

–

Demand liabilities are included in the “on demand” tranche, without taking into account their type (stable vs. unstable).

–

There are also contingent commitments which could lead to changes in liquidity needs. These are fundamentally credit facilities with amounts undrawn by the borrowers as at the balance sheet date. The Board of Directors also establishes limits in this regard for control purposes.

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–

Balances related to financial guarantee contracts have been included for the parent company, assigning the maximum amount of the guarantee to the first year in which the guarantee can be enforced.

–

As at 31 December 2022 and 2021, the Group had no instruments in addition to those regulated by master agreements associated with the arrangement of derivatives and repos/reverse repos.

–

Funding strategy and evolution of liquidity in 2022

The Group’s primary source of funding is customer deposits (mainly demand deposits and term deposits acquired through the branch network), supplemented with funding raised through interbank and capital markets in which the Institution has and regularly renews various short-term and long-term funding programmes in order to achieve an adequate level of diversification by type of product, term and investor. The Institution maintains a diversified portfolio of liquid assets that are largely eligible as collateral in exchange for access to funding operations with the European Central Bank (ECB).

On-balance sheet customer funds

As at 31 December 2022 and 2021, on-balance sheet customer funds broken down by maturity were as follows:


Million euro / %

	Note		2022		3 months			6 months			12 months			>12 months			No mat.

*Total on-balance sheet customer funds ()**				164,140		3.9	%		1.1	%		1.9	%		3.2	%		89.9	%
Deposits with agreed maturity				15,690		39.5	%		8.2	%		19.3	%		33.0	%		—	%
Sight accounts		19		147,540		—	%		—	%		—	%		—	%		100.0	%
Retail issues				910		33.9	%		58.4	%		5.6	%		2.1	%		—	%

(*)	Includes customer deposits (excl. repos) and other liabilities placed via the branch network: straight bonds issued by Banco Sabadell, commercial paper and others.


Million euro / %

	Note		2021		3 months			6 months			12 months			>12 months			No mat.

*Total on-balance sheet customer funds ()**				162,020		3.5	%		1.4	%		1.5	%		2.7	%		90.9	%
Deposits with agreed maturity				13,623		36.7	%		13.8	%		17.1	%		32.4	%		—	%
Sight accounts		19		147,268		—	%		—	%		—	%		—	%		100.0	%
Retail issues				1,129		62.9	%		33.9	%		3.2	%		—	%		—	%

(*)	Includes customer deposits (excl. repos) and other liabilities placed via the branch network: straight bonds issued by Banco Sabadell, commercial paper and others.

Despite rising interest rates in financial markets, the composition of on-balance sheet customer funds remains the same.

Details of off-balance sheet customer funds managed by the Group and those sold but not under management are provided in Note 27 to these consolidated annual financial statements.

In 2022, the funding gap has widened, mainly due to a greater growth of customer funds than of lending items, thus placing the Group’s Loan-to-Deposit (LtD) ratio at 95.6% as at 2022 year-end (96.3% as at 2021 year-end).

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Capital markets

In 2022, the level of funding in capital markets has increased, with senior non-preferred debt being the item with the greatest net increase, in order to keep an adequate level of own funds and eligible liabilities above the applicable regulatory requirement or MREL (Minimum Requirement for own funds and Eligible Liabilities). The outstanding nominal balance of funding in capital markets, by type of product, as at 31 December 2022 and 2021, is shown below:


Million euro
	2022		2021

Outstanding nominal balance		22,077		21,086
Covered Bonds		9,409		9,754
Of which: TSB		1,409		2,083
Commercial paper and ECP		7		—
Senior debt		4,440		4,335
Senior non-preferred debt		3,505		2,042
Subordinated debt and preferred securities		3,465		4,215
Asset-backed securities		1,251		738
Other		—		2

Maturities of issues in capital markets, by type of product (excluding securitisations and commercial paper), and considering their legal maturity, as at 31 December 2022 and 2021, are analysed below:


Million euro

	2023		2024		2025		2026		2027		2028		>2028		Balance outstanding

Mortgage bonds and covered bonds (*)		1,388		2,696		836		390		1,100		1549		1450		9,409
Senior debt (**)		975		735		1,480		—		500		750		—		4,440
Senior non-preferred debt (**)		—		975		500		1,317		18		500		195		3,505
Subordinated debt and preferred securities (**)		—		—		—		500		—		500		2,465		3,465
Other medium/long term financial		—		—		—		—		—		—		—		—
instruments (**)
Total		2,363		4,406		2,816		2,207		1,618		3,299		4,110		20,819
(*)Secured issues.
(**)Unsecured issues.

Million euro

	2022		2023		2024		2025		2026		2027		>2027		Balance outstanding

Mortgage bonds and covered bonds (*)		1,717		1,388		2,743		836		390		1,100		1,580		9,754
Senior debt (**)		25		1,475		735		1,600		—		500		—		4,335
Senior non-preferred debt (**)		—		—		975		500		67		—		500		2,042
Subordinated debt and preferred securities (**)		—		—		—		—		500		—		3,715		4,215
Other medium/long term financial		—		—		2		—		—		—		—		2
instruments (**)
Total		1,742		2,863		4,455		2,936		957		1,600		5,795		20,348
(*)Secured issues.
(**)Unsecured issues.

The Group is an active participant in capital markets and has a number of funding programmes in operation, with a view to diversifying its different funding sources.

In terms of short-term funding, as at year-end the Bank had one corporate commercial paper programme in operation, which governs the issuance of commercial paper and is aimed at institutional and retail investors. The Banco Sabadell Commercial Paper Programme for 2022, registered with Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (IBERCLEAR), has an issuance limit of 7 billion euros, which can be extended to 9 billion euros. As at 31 December 2022, the outstanding balance of the programme was 872 million euros (net of commercial paper subscribed by Group companies), compared with 426 million euros as at 31 December 2021.

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Regarding medium- and long-term funding, the Institution has the following programmes in operation:

–

Programme for the issuance of non-equity securities (“Fixed Income Programme”) registered with the CNMV on 17 November 2022, with an issuance limit of 10 billion euros: this programme regulates the issuance of straight, non-preferred, subordinated or structured bonds and debentures, in addition to mortgage covered bonds and public sector covered bonds issued under Spanish law through the CNMV and aimed at institutional and retail investors, both domestic and foreign. As at 31 December 2022, the limit available for new issues under the Banco Sabadell Programme for the issuance of non-equity securities for 2022 was 9,000 million euros (as at 31 December 2021, the available limit under the Fixed Income Programme for 2021 was 9,933 million euros).

In 2022, Banco Sabadell executed five public issues under the current Fixed Income Programme amounting to a total of 1,638 million euros, including one non-preferred debt issue in green format of 120 million euros:

Million euro

ISIN code

Type of investor

Issue date

Amount

Term
(years)

Issue of Straight Non-Preferred

Bonds 1/2022 CNMV

ES0213860341

Institutional

30/03/2022

120

Mortgage covered bonds 2/2022

ES0413860802

Institutional

30/05/2022

1,000

Issue of Straight Non-Preferred

Bonds 2/2022 CNMV

ES03138603I4

Institutional

03/06/2022

8.9

Issue of Straight Non-Preferred

Bonds 3/2022 CNMV

ES0213860358

Institutional

01/08/2022

9.2

Mortgage covered bonds BEI 1/2022

ES0413860828

Institutional

21/12/2022

500

–

Euro Medium Term Notes (EMTN) programme, registered with the Irish Stock Exchange on 1 June 2022 and renewed on 28 July and 28 October 2022. This programme allows senior debt (preferred and non-preferred) and subordinated debt to be issued in various currencies, with a maximum limit of 15 billion euros.

In 2022, Banco Sabadell executed four issues under the EMTN Programme, amounting to a total of 2,075 million euros; one of these was senior preferred debt and the other three were all senior non-preferred debt. Of the four issues, three were in green format, amounting to 1,575 million euros. The issues executed by Banco Sabadell over the year are indicated here below (showing the legal maturity period in the case of issues with an early call option):

Million euro

ISIN code

Type of investor

Issue date

Amount

Term
(years)

Senior Non Preferred 1/2022 issue

XS2455392584

Institutional

24/3/2022

750

Senior Non Preferred 2/2022 issue

XS2528155893

Institutional

8/9/2022

500

Senior Preferred 1/2022 issue

XS2553801502

Institutional

10/11/2022

750

Senior Non Preferred 3/2022 issue

XS2560673829

Institutional

23/11/2022

In 2022, upon receiving the relevant authorisations, Banco Sabadell exercised the early call option for the AT1 1/2017 issue amounting to 750 million euros on 18 May 2022, executed the early redemption of the Senior Preferred 1/2020 issue amounting to 500 million euros on 29 June 2022, as well as the early redemption of the Senior Bonds 3/2020 issue amounting to 120 million euros on 23 November 2022.

In relation to asset securitisation:

–

The Group is a very active participant in this market and it takes part in various securitisation programmes, sometimes acting together with other institutions, granting mortgage loans, loans to small and medium-sized enterprises and consumer loans.

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–

There are currently 16 outstanding traditional asset securitisation transactions fully recognised on the balance sheet. Although some of the securities issued were retained by the Institution as liquid assets eligible as collateral in exchange for access to funding operations with the European Central Bank or with the Bank of England, in the case of TSB Bank, the rest of the securities were placed in capital markets. As at 31 December 2022, the nominal balance of asset-backed securities placed in the market was 1,251 million euros.

–

On 13 July 2022, Banco Sabadell sold all of the tranches that are financing the loan book of the securitisation fund Sabadell Consumo 2, FT to the market, for a nominal amount of 750 million euros. This is Banco Sabadell’s second consumer loan securitisation. This transaction was carried out to manage liquidity and capital.

–

On 18 August 2022, TSB Bank incorporated the RMBS securitisation fund Duncan Funding 2022-1 PLC for the amount of 1,333 million pounds sterling, which was retained in full. The tranches retained by the Institution may be used as collateral for liquidity operations with the Bank of England.

–

In 2022, Banco Sabadell called three securitisation funds early. On 20 June, it called the fund IM Sabadell PYME 11, FT, whose securities had been fully retained. On 22 September if called the multi-seller fund TDA 23, FTA, the clean-up call date having been reached and on 28 October it called the fund Caixa Penedés 2 TDA, FTA, whose securities were also retained in full.

As at the end of 2022, Banco Sabadell had 22 billion euros of outstanding TLTRO III borrowing, of which 17 billion euros mature in June 2023 and 5 billion euros mature in March 2024, having prepaid 10 billion euros of the aforesaid borrowing during the year. In 2022, the Group recognised 162 million euros in interest income on TLTRO III (313 million euros in 2021).

TSB, for its part, also had outstanding amounts borrowed from the Bank of England, namely 5 billion pounds sterling borrowed under the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) and 500 million pounds sterling borrowed under the Indexed Long Term Repo (ILTR), giving rise to a total amount borrowed from the Bank of England as at 31 December 2022 of 5.5 billion pounds sterling.

Liquid assets

In addition to these sources of funding, the Group maintains a liquidity buffer in the form of liquid assets to meet potential liquidity needs:


Million euro
	2022		2021

Cash(*) + Net Interbank Position		35,012		43,189
Funds available in Bank of Spain facility		7,788		1,527
ECB eligible assets not pledged in facility		6,010		4,429
Other non-ECB eligible marketable assets (**)		5,234		4,738

Memorandum item:
Balance drawn from Bank of Spain facility (*)		22,000		32,000
Balance drawn from Bank of England Term Funding Scheme (**)		6,201		6,545
Total Liquid Assets Available		54,044		53,883

(*) Excess reserves and Marginal Deposit Facility in Central Banks.

(***) Correspond to TLTRO-III facility.

(****) At year-end 2022, includes 5 billion pounds to support Small and Medium-sized Enterprises (TFSME) and 500 million pounds of Indexed Long Term Repo (ILTR). At year-end 2021, included 5.5 billion pounds of TFSME borrowing.

In terms of 2022, the Group’s first line has remained stable over the year, increasing by 161 million euros. The balance of reserves and the marginal deposit facility in central banks, as well as the net interbank position, decreased by 8,177 million euros in 2022, while in the case of the volume of liquid assets deemed eligible by the European Central Bank, its balance over the year 2022 increased by 7,842 million euros. These changes can be explained, not only by the reduction of assets’ valuations, but also by the early repayment of the funds borrowed under TLTRO III and by the fixed-income portfolio purchases made. Similarly, assets available and not deemed eligible by the European Central Bank increased by 496 million euros in 2022, due mainly to the increase in available assets of foreign subsidiaries.

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In addition to the first line of liquidity, called the counterbalancing capacity, each LMU monitors its liquidity buffer with an internal conservative criterion. In the case of the BSab LMU (includes Banco de Sabadell S.A., which in turn includes activity in foreign branches as well as the businesses of Banco de Sabadell S.A. in Mexico), this liquidity buffer comprises the first and second lines of liquidity. As at 31 December 2022, the second line of liquidity added a volume of 12,885 million euros to the liquidity buffer, including the covered bond issuing capacity, considering the average valuation applied by the European Central Bank to own-use covered bonds to obtain funding, as well as the deposits held in other financial institutions and immediately available for the business in Mexico not included in the first line of liquidity.

For the TSB LMU, this metric is calculated as the sum of the first line of liquidity and loans pre-positioned with the Bank of England to obtain funding. As at 31 December 2022, the second line of liquidity, considering the amount of loans pre-positioned with the Bank of England, amounted to 3,366 million euros.

There are no significant amounts of cash or cash equivalents that are unavailable for use by the Group.

Compliance with regulatory ratios

In terms of the LCR, since 1 January 2018, the regulatory required minimum LCR has been 100%, a level which is amply surpassed by all of the Group’s LMUs. At the Group level, throughout the year, the LCR has consistently been well above 100%. As at 31 December 2022, the LCR stood at 196% for the TSB LMU, 270% for Banco Sabadell Spain and 234% for the Group.

In terms of the NSFR, the regulatory minimum requirement, effective from June 2021, is 100%, a level amply surpassed by all LMUs of the Institution given their funding structure, in which customer deposits are predominant and where the majority of market funding is in the medium/long term. As at 31 December 2022, the NSFR stood at 151% for the TSB LMU, 132% for Banco Sabadell Spain and 138% for the Group.

4.4.3.2. Market risk

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The items of the consolidated balance sheet as at 31 December 2022 and 2021 are shown below, making a distinction between positions included in trading activity and other positions. In the case of items not included in trading activity, their main risk factor is indicated:


Thousand euro
	31/12/2022

	On-balance sheet balance		Trading activity		Other		Main market risk factor in “Other”

Assets subject to market risk		251,379,528		2,670,824		248,708,704

Cash, cash balances at central banks and other demand deposits		41,260,395		—		41,260,395	Interest rate

Financial assets held for trading		4,017,253		2,670,824		1,346,429	Interest rate
Non-trading financial assets mandatorily at fair value through profit or loss		77,421		—		77,421	Interest rate; credit spread

Financial assets at fair value through other comprehensive income		5,802,264		—		5,802,264	Interest rate; credit spread

Financial assets at amortised cost		185,045,452		—		185,045,452	Interest rate

Derivatives – Hedge accounting		3,072,091		—		3,072,091	Interest rate

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(1,545,607)		—		(1,545,607)	Interest rate

Investments in joint ventures and associates		515,245		—		515,245	Equity

Other assets		13,135,014		—		13,135,014	—

Liabilities subject to market risk		238,155,107		2,149,776		236,005,331

Financial liabilities held for trading		3,598,483		2,149,776		1,448,707	Interest rate

Derivatives – Hedge accounting		1,242,470		—		1,242,470	Interest rate

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(959,106)		—		(959,106)	Interest rate

Financial liabilities at amortised cost		232,529,932		—		232,529,932	Interest rate

Other liabilities		1,743,328		—		1,743,328	—

Equity		13,224,421		—		13,224,421

Thousand euro
	31/12/2021

	On-balance sheet balance		Trading activity		Other		Main market risk factor in “Other”

Assets subject to market risk		251,946,591		1,754,670		250,191,921

Cash, cash balances at central banks and other		49,213,196		—		49,213,196	Interest rate
demand deposits

Financial assets held for trading		1,971,629		1,754,670		216,959	Interest rate; credit spread

Non-trading financial assets mandatorily at fair value through profit or loss		79,559		—		79,559	Interest rate; credit spread

Financial assets at fair value through other comprehensive income		6,869,637		—		6,869,637	Interest rate; credit spread

Financial assets at amortised cost		178,869,317		—		178,869,317	Interest rate

Derivatives – Hedge accounting		525,382		—		525,382	Interest rate

Investments in joint ventures and associates		638,782		—		638,782	Equity

Other assets		13,779,089		—		13,779,089	—

Liabilities subject to market risk		238,950,310		1,180,734		237,769,576

Financial liabilities held for trading		1,379,898		1,180,734		199,164	Interest rate

Derivatives – Hedge accounting		512,442		—		512,442	Interest rate

Financial liabilities at amortised cost		235,179,222		—		235,179,222	Interest rate

Other liabilities		1,878,748		—		1,878,748	—

Equity		12,996,281		—		12,996,281

A-327

The market risk acceptance, management and oversight system is based on managing positions expressly assigned to different trading desks and establishing limits for each one, in such a way that the different trading desks have the obligation to always manage their positions within the limits established by the Board of Directors and the Technical Risk Committee. Market risk limits are aligned with the Group’s targets and risk appetite framework.

Trading activity

The main market risk factors considered by the Group in its trading activity are the following:

–

Equity price risk: risk arising from fluctuations in the value of capital instruments (shares and quoted indices). This risk is reflected in the market prices of the securities and their derivatives.

Changes in commodities prices have not had an impact in the year, as the Group has residual (both direct and underlying) exposures.

Market risk incurred in trading activity is measured using the VaR and stressed VaR methodologies. These allow risks to be standardised across different types of financial market transactions.

Furthermore, specific simulation exercises are carried out considering extreme market scenarios (stress testing). These exercises consist of revaluing the portfolios in scenarios to which different assumptions are applied. Broadly speaking there are two types of scenarios: on one hand, historical scenarios, developed based on historical events that have occurred in the markets in the past and which are relevant to the current position of the portfolios (e.g. the global financial crisis or the Covid-19 crisis) and, on the other hand, hypothetical scenarios, which consider theoretical shifts in risk factors, such as shifts in yield curves, credit spreads or exchange rates, as well as movements in these factors resulting from the application of different macroeconomic forecasts determined based on the current situation. As at the end of 2022, the impact of the most adverse scenario considered was -11 million euros.

A-328

Market risk is monitored on a daily basis and reports are made to supervisory bodies on the existing risk levels and on the compliance with the limits set forth by the Technical Risk Committee for each trading desk (limits based on nominal value, VaR and sensitivity, as applicable). This makes it possible to keep track of changes in exposure levels and measure the contribution of market risk factors.

The market risk incurred on trading activity in terms of 1-day VaR with a 99% confidence interval for 2022 and 2021 was as follows:


Million euro
	2022			2021
	Average	Maximum	Minimum	Average	Maximum	Minimum

Interest rate risk	1.08	2.21	0.61	0.88	1.86	0.55

Foreign exchange risk (trading)	1.30	2.42	0.90	1.61	3.13	0.03

Equity	0.13	1.24	—	0.16	1.89	0.04

Credit spread	0.25	0.57	0.11	0.25	0.62	0.07
Aggregate VaR	2.75	4.81	2.10	2.89	5.39	1.15

During 2022, the overall VaR figures of trading activity have remained at medium-low levels, the exchange rate being the main risk factor, due to a higher exposure of portfolios to this risk factor. In spite of the increased volatility during the year, on average the figures dropped slightly compared to the previous year as the Covid-19 scenarios, which had a considerable impact on the foreign exchange risk factor, no longer fell within the time window considered, although a slight rebound of interest rates and credit spreads was observed.

Structural interest rate risk

–

Automatic optionality risk comprises the risk arising from automatic options (e.g. lending floors and caps), both embedded and explicit, in which the Balance Sheet Management Unit (BSMU) or its customer can alter the level and timing of their cash flows and in which the holder will almost certainly exercise the option when it is in their financial interest to do so.

–

Behavioural optionality risk arises from the flexibility embedded within the terms of certain financial contracts, which allow variations in interest rates to produce a change in customer behaviour.

The Group’s management of this risk pursues two fundamental objectives:

–

To stabilise and protect the net interest margin, preventing interest rate movements from causing excessive variations in the budgeted margin.

–

To minimise the volatility of the economic value of equity, this perspective being complementary to that of the margin.

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The Group’s current interest rate risk management strategy is based on the following principles in particular, in line with the business model and the defined strategic objectives:

–

The existence of a transfer pricing system.

–

The set of systems, processes, metrics, limits, reporting arrangements and governance arrangements included within the IRRBB strategy must comply with regulatory precepts at all times.

The metrics that the Group calculates on a monthly basis are as follows:

–

Duration analysis: a static metric based on the assignment of all cash flows of interest-rate sensitive balance sheet items to time brackets. The duration of each pool of balance sheet items is calculated based on the variation of its net present value due to a parallel shift of 1 basis point in the interest rate curve. This gives the duration of both assets and liabilities.

–

Metric that combines the two above metrics: the effect of changes in value of instruments recognised directly through profit or loss or through equity is added to the net interest margin sensitivity.

A-330

–

Baseline scenario: market interest rate movements based on implied interest rates.

–

Stressed scenario: a shift in interest rates in relation to the baseline scenario, with the extent of this shift varying depending on the scenario to be calculated. A minimum post-disruption interest rate is applied, starting at -100 basis points for current maturities and increasing by 5 basis point intervals, eventually reaching 0% after 20 years or more.

The following table gives details of the Group’s interest rate gap as at 31 December 2022 and 2021:


Thousand euro
							2022

Time to maturity	Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

Money Market		41,797,003		920,472		1,438,829		125,651		—		—		—		—		44,281,955

Loans and advances		24,331,743		19,232,160		40,248,534		19,007,600		13,430,353		10,564,714		10,073,683		20,016,175		156,904,962

Debt securities		1,219,034		450,395		2,078,877		1,769,818		1,496,546		620,315		2,825,650		17,658,927		28,119,562

Other assets		—		—		—		—		—		—		—		—		—

Total assets		67,347,780		20,603,027		43,766,240		20,903,069		14,926,899		11,185,029		12,899,333		37,675,102		229,306,479

Money Market		36,299,672		352,799		2,153,181		133,675		2,964		8,256		—		10,096		38,960,643

Customer deposits		122,637,719		3,113,055		10,248,158		7,513,006		5,980,224		5,372,466		5,938,140		507,717		161,310,485

Issues of marketable securities		3,083,924		2,925,321		1,853,628		3,510,000		3,908,110		2,457,000		3,118,100		2,145,025		23,001,108

Of which: Subordinated liabilities		—		400,000		500,000		—		300,000		1,500,000		750,000		15,025		3,465,025

Other liabilities		55,015		122,537		277,700		217,712		144,908		130,335		113,172		670,277		1,731,656
Total liabilities		162,076,330		6,513,712		14,532,667		11,374,393		10,036,206		7,968,057		9,169,412		3,333,115		225,003,892

Hedging derivatives		11,271,252		(6,214,446)		550,236		283,019		1,334,541		1,383,868		1,086,452		(9,694,922)		—

Interest rate gap		(83,457,298)		7,874,869		29,783,809		9,811,695		6,225,234		4,600,840		4,816,373		24,647,064		4,302,586

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Thousand euro
							2021

Time to maturity	Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

Money Market		51,444,557		642,925		536,886		560,946		—		—		—		—		53,185,314

Loans and advances		21,535,549		17,995,202		44,644,079		21,591,930		13,065,877		10,720,014		8,498,091		18,379,384		156,430,126

Debt securities		857,839		486,726		237,455		1,824,255		1,546,186		1,494,251		972,214		13,124,187		20,543,113

Other assets		—		—		—		—		—		—		—		—		—

Total assets		73,837,945		19,124,853		45,418,420		23,977,131		14,612,063		12,214,265		9,470,305		31,503,571		230,158,553

Money Market		44,399,516		68,987		726,837		562,504		11,387		10,632		9,396		9,521		45,798,780

Customer deposits		120,591,033		3,273,525		9,927,201		6,240,826		5,196,402		4,045,350		4,747,226		5,769,470		159,791,033

Issues of marketable securities		3,268,999		2,336,211		2,137,459		2,539,000		3,510,000		2,658,110		2,457,000		3,350,025		22,256,804

Of which: Subordinated liabilities		—		—		1,150,000		500,000		—		300,000		1,500,000		765,025		4,215,025

Other liabilities		67,713		182,548		343,475		180,694		157,013		129,087		114,763		680,161		1,855,454
Total liabilities		168,327,261		5,861,271		13,134,972		9,523,024		8,874,802		6,843,179		7,328,385		9,809,177		229,702,071

Hedging derivatives		21,026,307		(3,048,310)		(1,768,615)		(9,450,677)		(1,689,870)		655,000		1,488,242		(7,212,077)		—

Interest rate gap		(73,463,008)		10,215,271		30,514,834		5,003,429		4,047,390		6,026,086		3,630,161		14,482,316		456,479

Banco Sabadell has positive exposure to interest rate increases in its net interest income (NII) insofar as higher interest rates are passed through on the asset side and contained on the liabilities side. Assuming that interest rate variations are gradually passed through to the cost of customer funds, Banco Sabadell estimates that the sensitivity of its net interest income to increases of +100 basis points would be +7.9% in the first year and +16.2% in the second year, on the assumption that the pass-through would take place in the same way as it has done thus far.

In addition, the following table shows the interest rate risk levels in terms of the sensitivity of the Group’s main currencies, as at 2022 year-end, to the most frequently used interest rate scenarios in the sector, under stressed pass-through assumptions:


	Instant and parallel interest rate increase
	100 bp	200 bp
Interest rate sensitivity	Net Interest Income impact	Impact on economic value of equity

EUR	0.6%	(6.0)%
GBP	2.6%	1.0%
USD	1.1%	(0.2)%
MXN	0.1%	(0.1)%

In addition to the impact on the net interest income within the time horizon of one year shown in the previous table, the Group calculates the impact on the margin over a time horizon of two and three years, the result of which is considerably more positive for all currencies.

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Cash flow macro-hedges of interest rate risk, the purpose of which is to reduce the volatility of the net interest margin due to changes in interest rates over one-year time horizon.

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Fair value macro-hedges of interest rate risk, the purpose of which is to maintain the economic value of the hedged items, consisting of fixed-rate assets and liabilities.

For each type of macro-hedge, there is a framework document that includes the hedging strategy, defining it in terms of management and accounting and establishing its governance.

In Banco Sabadell, as part of the continuous improvement process, structural interest rate risk management and monitoring activities are implemented and regularly updated, aligning the Institution with best market practices and current regulations. In particular, throughout 2022 work has continued on the review and continuous improvement of the systems and behavioural models in accordance with the guidelines established by the EBA. Among other things, it is worth noting the calibration of the main behavioural modelling assumptions for demand deposits based on the different interest rate scenarios and their ongoing monitoring to ensure the suitability of those assumptions. Further progress has also been made with the definition, from a Group perspective, of the methodological and modelling criteria and principles relating to customers’ behavioural options to enable greater standardisation and coordination with the different BSMUs, and stress testing procedures have also been reinforced.

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In 2022, the Bank’s loan book shifted towards a higher proportion of fixed-rate transactions (mainly mortgages and business loans), while on the liabilities side demand deposit balances increased. In addition, other balance sheet variations in 2022 included: the increase of the fixed-income portfolio on the asset side and the early TLTRO III repayment of 10 billion euros, with the total outstanding amount now standing at 22 billion euros. The repayment conditions were changed in November 2022. This all translated into a smaller net balance of interest-rate sensitive items.

With regard to interest rates, in 2022 benchmark rates have increased sharply in all currencies, in particular in the euro, where they have gone from negative to positive, with the 12-month Euribor, for example, standing above 3% as at the end of 2022. The marginal deposit rate of the European Central Bank (ECB) ended the year at 2% (+250 basis points over the year), while the base rate of the Bank of England (BoE) ended at 3.50% (+325 basis points over the year). The situation envisaged in the short-to-medium term is that rates of the Group’s main currencies (EUR, USD and GBP) will continue to rise, influenced by inflationary pressures.

Taking into account the balance sheet variations detailed previously, as well as episodes of volatility and significant variations in the benchmark interest rates of all the Group’s major currencies, the IRRBB metrics have been affected during the year, although the measures taken have allowed the Group’s IRRBB metrics to be kept within the risk appetite and below the levels considered significant under current legislation.

4.4.3.3. Structural foreign exchange risk

Compliance with, and the effectiveness of, the Group’s targets and policies are monitored and reported on a monthly basis to the Board Risk Committee.

The Bank’s Financial Division, through the Asset and Liability Committee (ALCO), designs and executes strategies to hedge structural FX positions in order to achieve its objectives in relation to the management of structural foreign exchange risk.

The most prominent permanent investments in non-local currencies are made in US dollars, pounds sterling and Mexican pesos.

As regards permanent investments in US dollars, the overall position in this currency has gone from 1,170 million as at 31 December 2021 to 1,278 million as at 31 December 2022. In relation to this position, as at 31 December 2022, a buffer of 33% of total investment is maintained.

In terms of permanent investments in Mexican pesos, the capital buffer has gone from 10,003 million Mexican pesos as at 31 December 2021 (of a total exposure of 14,572 million Mexican pesos) to 9,253 million Mexican pesos as at 31 December 2022 (of a total exposure of 15,261 million Mexican pesos), representing 61% of the total investment made.

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As regards permanent investments in pounds sterling, the capital buffer has increased by 213 million pounds sterling as at 31 December 2021 to 333 million pounds sterling as at 31 December 2022 (total exposure has gone from 1,890 million pounds sterling as at 31 December 2021 to 1,998 million pounds sterling as at 31 December 2022), representing 17% of the total investment made (excluding intangibles).

Currency hedges are continuously reviewed in light of market movements.

The exchange value in euros of assets and liabilities in foreign currencies maintained by the Group as at 31 December 2022 and 2021, classified in accordance with their nature, is as follows:


Thousand euro

			2022
	USD		GBP		Other currencies		Total

Assets denominated in foreign currency:		11,230,828		57,349,488		4,111,351		72,691,667
Cash, cash balances at central banks and		606,605		5,963,971		1,044,938		7,615,514
other demand deposits
Debt securities		1,136,840		2,775,734		423,855		4,336,429
Loans and advances		9,210,413		45,410,799		2,375,221		56,996,433
Central banks and Credit institutions		70,704		514,160		165,627		750,491
Customers		9,139,709		44,896,639		2,209,594		56,245,942
Other assets		276,970		3,198,984		267,337		3,743,291

Liabilities denominated in foreign currency:		6,962,558		53,016,847		3,118,316		63,097,721
Deposits		6,671,410		48,123,748		3,044,677		57,839,835
Central banks and Credit institutions		1,120,977		6,373,980		331,899		7,826,856
Customers		5,550,433		41,749,768		2,712,778		50,012,979
Other liabilities		291,148		4,893,099		73,639		5,257,886


Thousand euro

			2021
	USD		GBP		Other currencies		Total

Assets denominated in foreign currency:		10,063,410		57,229,033		3,577,568		70,870,011
Cash, cash balances at central banks and		464,724		5,825,313		863,459		7,153,496
other demand deposits
Debt securities		1,158,570		3,862,850		478,752		5,500,172
Loans and advances		8,255,149		46,259,554		1,987,782		56,502,485
Central banks and Credit institutions		49,286		258,741		39,984		348,011
Customers		8,205,863		46,000,813		1,947,798		56,154,474
Other assets		184,967		1,281,316		247,575		1,713,858

Liabilities denominated in foreign currency:		7,606,360		53,111,696		2,476,766		63,194,822
Deposits		7,405,911		49,911,932		2,410,628		59,728,471
Central banks and Credit institutions		1,559,034		6,757,419		292,431		8,608,884
Customers		5,846,877		43,154,513		2,118,197		51,119,587
Other liabilities		200,449		3,199,764		66,138		3,466,351

The net position of foreign currency assets and liabilities includes the structural position of the Institution, valued as at 31 December 2022, which amounted to 3,021 million euros, of which 1,877 million euros corresponded to permanent equity holdings in pounds sterling, 808 million euros corresponded to permanent equity holdings in US dollars and 288 million euros to permanent equity holdings in Mexican pesos. Net assets and liabilities valued at historical exchange rates are hedged with currency forwards and currency options in line with the Group’s risk management policy.

As at 31 December 2022, the sensitivity of the equity exposure to a 1.3% exchange rate depreciation against the euro of the main currencies to which exposure exists, calculated based on quarterly exchange rate volatility over the past three years, would amount to 39 million euros, of which 62% would correspond to the pound sterling, 27% to the US dollar and 10% to the Mexican peso.

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4.4.4. Operational risk

Senior Management and the Board of Directors are directly involved and effectively take part in managing this risk by approving the management framework and its implementation as proposed by the Board Risk Committee (formed of Senior Management members from different functional areas within the Institution) and by ensuring that regular audits are carried out of the application of the management framework and of the reliability of the reported information, as well audits of the internal validation tests of the operational risk model. Operational risk is managed through two main courses of action:

At the same time, checks are run to verify that specific business continuity plans have been defined and implemented for processes identified as being highly critical in the event of any service disruption. In terms of the identified risks, a qualitative estimate is made of the reputational impact that they could cause if they were to materialise.

Within operational risk, the following risks are also managed and controlled:

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Conduct risk: defined as the possibility, at present or in the future, of incurring losses as a result of the inadequate provision of financial services, including cases of wilful misconduct or negligence. It is comprehensively managed using the elements defined in the methodological framework for operational risk and through the governance structures and lines of defence defined therein.

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Technology risk: technology risk (or information and communications technology (ICT) risk) is defined as the current or future risk of incurring losses due to inadequacies or failures of technical infrastructures’ hardware and software, which could compromise the availability, integrity, accessibility or security of these infrastructures and data, or make it impossible for IT platforms to be changed at a reasonable cost and within a reasonable timeframe in response to the changing needs of the environment or the business.

It also includes security risks resulting from inadequate or failed internal processes or external events, including cyberattacks or inadequate physical security in data centres.

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Outsourcing risk: the possibility of incurring losses as a result of suppliers failing to provide subcontracted services or discontinuing their provision, weaknesses in their systems’ security, disloyal employees or a breach of applicable regulations. It also includes other related risks such as concentration risk, country risk, legal risk and compliance risk.

–

Model risk: the possibility of incurring losses due to decisions made using inadequate models.

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Tax risk: the probability of failing to achieve the objectives set out in Banco Sabadell’s tax strategy from a dual perspective due to either internal or external factors:

•

On the other hand, the probability of paying taxes not actually due under tax obligations, thus negatively affecting shareholders and other stakeholders.

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Reputational risk, understood as the possibility of incurring losses as a result of negative publicity related to the Institution’s practices and business, is also managed and controlled according to the methodological framework for operational risk, as this is a potentially significant source of reputational risk. This risk also considers the loss of trust in the Institution, which could affect its solvency.

Senior Management and, in particular, the Board Risk Committee, have closely monitored the Group’s risk profile through specific reports containing information and indicators associated with the main operational risks (including those associated with technology, human error, conduct, processes, security and fraud) and reputational impacts that could potentially affect the Group’s different stakeholders (employees and partners, customers, suppliers, supervisors). No noteworthy impacts have been detected.

Detailed information on the risks that the Group deems most material is provided below:

4.4.4.1 Technology risk

In recent years, the importance, complexity and use of technology and data have increased even further in banking processes, especially in remote channels (online banking) as a result of the impact of Covid-19. Consequently, the reliance on information systems and their availability is a key factor, as the Bank is more exposed to cyberattacks just like the other operators in the sector. The conflict between Ukraine and Russia has brought with it the risk of becoming a target for cyberattacks, in reaction to the restrictions imposed on Russia and due to Ukraine’s de facto membership of NATO, requiring the introduction of back-up measures. At the present time, this risk related to this conflict is stable, though latent.

Furthermore, the Institution is currently undergoing a process of transformation, based on the digitisation and automation of processes, which increases the reliance on systems and the exposure to risks associated with this change, including digital fraud. Technology risk therefore remains one of the key focus areas of Banco Sabadell Group’s risk management.

It should be mentioned that this risk is not only applicable to the Group’s own systems and processes, but it is also applicable to suppliers, given the widespread use of third parties for support in technological and business processes, and this therefore represents a significant risk when it comes to managing outsourcing. On the topic of IT outsourcing, with regard to 2022 it is particularly worth noting the implementation of Project Dingle, which has concentrated the outsourcing of application development and testing in three key suppliers and which therefore requires a greater level of control and monitoring of those suppliers, while at the same time reducing the probability of experiencing cybersecurity incidents in this area.

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IT availability (technological resilience): risk of critical services provided to customers and employees becoming affected by systems failures.

–

IT change: risk arising from errors in the change and development processes of information systems.

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Data integrity: risk of data stored and processed by IT systems being incomplete, inaccurate or inconsistent.

–

IT outsourcing: risk that engaging a third party or another Group entity (intra-group outsourcing) to provide IT systems, their management or related services produces a negative effect on the Institution’s performance (including impacts on customers, as well as reputational, regulatory or financial impacts).

–

IT governance: risk arising from inadequate or insufficient management and use of technology, as well as a poor alignment of these technologies and their intended uses with the business strategy.

–

Technological transformation: risk associated with inappropriate adoption or inefficient use of technology within the organisation for the development of new value propositions.

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4.4.4.2 Tax risk

With regard to tax risk, the tax risk policies of Banco Sabadell Group aim to establish the general guidelines for managing and controlling tax risk, specifying the applicable principles and critical parameters and covering all significant elements to systematically identify, assess and manage any risks that may affect the Group’s tax strategy and fiscal objectives, meeting the requirements of the Spanish Capital Companies Act and of Banco Sabadell Group stakeholders.

In terms of tax risk, Banco Sabadell Group aims to fulfil its tax obligations at all times, adhering to the existing legal framework in this regard.

The tax strategy is governed by the principles of efficiency, prudence, transparency and mitigation of tax risk, and it is aligned with the business strategy of Banco Sabadell Group.

–

Setting the Institution’s tax strategy.

–

Approving the creation and acquisition of shareholdings in special purpose entities or entities registered in countries or territories classified as tax havens.

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Approving any transaction which, due to its complexity, might undermine the transparency of the Institution and its Group.

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4.4.4.3 Compliance risk

To this end, the Group has a Compliance Division whose mission is to seek the highest levels of compliance with existing legislation and ensure that professional ethics are present in all areas of the Group’s activity.

This Division assesses and manages compliance risk, understood as the risk of incurring legal or administrative penalties, significant financial losses or reputational damage as a result of an infringement of laws, regulations, internal rules or codes of conduct applicable to banking activity, minimising the possibility of any breaches of the foregoing, and ensuring that any breaches that do occur are identified, reported and diligently resolved. It does this by performing the following tasks:

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Monitoring and overseeing the adaptation to new regulations through proactive management to ensure regular and systematic monitoring of legal updates.

–

Establishing, in accordance with the above, an up-to-date oversight and control programme, with the appropriate tools and methodologies for control.

–

Supervising the risk management activities carried out by the first line of defence to ensure that they are aligned with the established risk policies and procedures.

–

Submitting to the administrative and management bodies the regular or ad hoc reports on compliance that are legally required at any given time.

–

Reporting to the administrative and management bodies on any information relevant to compliance arising from all areas and activities of each Group entity.

–

Assisting the Board of Directors and Senior Management in compliance matters.

–

Controlling and coordinating inspections, as well as responses to the requirements of Supervisors and Regulators, and checking that their recommendations have been acted on accordingly.

–

Assigning functional responsibilities for compliance where necessary.

–

Intervening in the process for establishing remuneration policies and practices.

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With regard to Anti-Money Laundering, Counter-Terrorist Financing (AML/CTF) and International Sanctions, implementing, managing and updating policies and procedures; carrying out the preliminary classification of the AML/CTF risk of customers during the onboarding process; applying enhanced due diligence measures when onboarding high-risk customers so that they may be accepted and duly updated beforehand; managing tracking alerts; detecting matches in lists of designated persons and transactions of countries subject to international sanctions; performing special analyses of suspicious activities and reporting them as necessary; preparing training plans; approving new products, services, channels and business areas; and conducting a periodic risk assessment of internal control procedures in relation to AML/CTF and international sanctions.

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Taking part in the development of training programmes in order to advise and make employees aware of the importance of complying with the established internal procedures.

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The following compliance risks have been identified:

–

Anti-Money Laundering and Counter-Terrorist Financing.

–

Data protection.

–

Market integrity.

–

MiFID.

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EBA.

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Other products and services.

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Publicity.

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New legislation.

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Corporate crime prevention.

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Remuneration.

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Code of Conduct and Ethics.

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Subsidiaries and foreign branches.

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Customer Care Service (Servicio de Atención al Cliente, or SAC).

Note 5 – Minimum own funds and capital management

Minimum own funds requirements

Regulation CRR-II and Directive CRD-IV entered into force on 27 June 2019 and have been implemented in successive stages since that date, although most of the provisions are applicable as from 28 June 2021.

The Spanish government transposed Directive CRD-V into national law through Royal Decree-Law 7/2021, of 27 April, Royal Decree 970/2021, of 8 November, and Circular 5/2021, of 22 December.

In particular, the European Commission, the European Central Bank and the EBA provided clarity as regards the application of the flexibility already embedded in Regulation (EU) 575/2013 by issuing interpretations and guidance on the application of the prudential framework in the context of Covid-19.

This guidance included the European Central Bank (ECB) announcement, released on 18 June 2021, that euro area credit institutions that it directly supervises could continue to exclude certain central bank exposures from the leverage ratio, given the continuing presence of exceptional macroeconomic circumstances due to the Covid-19 pandemic. As a result, the leverage ratio relief originally authorised in September 2020, which was due to end on 27 June 2021, was extended until 31 March 2022. On 10 February 2022, the European Central Bank announced that it would not extend this measure beyond 31 March 2022.

In addition, in line with the ECB’s communication dated 18 June 2021, credit institutions were able to exclude certain exposures to central banks from the leverage ratio until 31 March 2022.

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In this regard, on 2 February 2022, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements applicable to the Bank as from 1 March 2022, as a result of the Supervisory Review and Evaluation Process (SREP). On a consolidated basis, Banco Sabadell was required to keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.46% and a phase-in Total Capital ratio of at least 12.90%. These ratios include the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2R (2.15%, of which 1.21% must be covered with CET1), the capital conservation buffer (2.50%), the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%), and the requirement arising from the calculation of the counter-cyclical capital buffer which, as at December 2021, was 0%. Following this decision, the capital requirement was lowered by 10 basis points compared to 2021.

On 14 December 2022, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements applicable to the Bank as from 1 January 2023, as a result of the Supervisory Review and Evaluation Process (SREP). At a consolidated level, Banco Sabadell is required to keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.65% and a phase-in Total Capital ratio of at least 13.09%. These ratios include the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2 requirement, or Pillar 2R (2.15%, of which 1.21% must be covered with CET1), the capital conservation buffer (2.50%), the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%), and the counter-cyclical buffer (0.19%) that stems from the Bank of England’s Financial Policy Committee (FPC) decision dated 13 December 2021 of increasing the counter-cyclical buffer from 0% to 1% as from 13 December 2022.

As at 31 December 2022, the Group’s phase-in CET1 capital ratio stands at 12.67% (12.50% as at 31 December 2021) and a phase-in total capital ratio of 17.08% (17.98% as at 31 December 2021); therefore, the capital requirements indicated in the preceding points are being comfortably met.

The following table sets out the minimum prudential requirements applicable to Banco Sabadell following the Supervisory Review and Evaluation Process (SREP) for the years 2021-2023:


	2023		2022		2021

Pillar 1 CET1		4.50%		4.50%		4.50%
Pillar 2 Requirement		1.21%		1.21%		1.27%
Capital conservation buffer		2.50%		2.50%		2.50%
Systemic buffer		0.25%		0.25%		0.25%
Countercyclical buffer		0.19%		0.00%		0.00%
Common Equity Tier 1 (CET1) ratio		8.65%		8.46%		8.52%
Dates of communication of the SREP outcome		14/12/2022		2/2/2022		23/11/2020

On a standalone basis, the requisite Common Equity Tier 1 (CET1) ratio resulting from the 2022 SREP was 8.21% and the required Total Capital ratio was 12.65%. This requirement included the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2R (2.15%, of which 1.21% must be covered with CET1), the capital conservation buffer (2.50%) and the requirement arising from the calculation of the specific counter-cyclical capital buffer which, as at December 2021, was 0%.

On 14 December 2022, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements applicable to the Bank as from 1 January 2023, as a result of the Supervisory Review and Evaluation Process (SREP). On a standalone basis, Banco Sabadell is required to keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.35% and a phase-in Total Capital ratio of at least 12.79%. These ratios include the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2R (2.15%, of which 1.21% must be covered with CET1), the capital conservation buffer (2.50%) and the requirement arising from the calculation of the counter-cyclical capital buffer which, as at December 2022, was 0.14%.

As at 31 December 2022, Banco Sabadell’s CET1 capital ratio stands at 13.30%, and its phase-in Total Capital ratio at 17.58%; consequently, with regard to standalone capital requirements, it also comfortably exceeds the SREP requirements.

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Requirements related to the restructuring and resolution of credit institutions

Through the publication of Royal Decree 1012/2015, of 6 November 2015, implementing Law 11/2015, of 18 June 2015, on the recovery and resolution of credit institutions and investment firms, the BRRD was adopted in Spain.

The BRRD arises from the need to establish a framework that provides authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the institution’s critical financial and economic functions, to avoid a significant adverse effect on financial stability, and to adequately protect public funds by minimising reliance on extraordinary public financial support. Likewise, covered depositors enjoy special treatment.

The framework proposed by the BRRD is based on the principle that traditional insolvency proceedings are not, in many cases, the best alternative to achieve the aforementioned objectives. Therefore, the BRRD introduces the resolution procedure, whereby competent resolution authorities obtain administrative powers to manage a failing institution.

In that sense, the preamble of Law 11/2015 defines a resolution process as a unique administrative process, which would manage the insolvency of those credit institutions and investment firms that cannot be undertaken through bankruptcy liquidation for reasons of public interest and financial stability. In order to achieve the aforementioned objectives, the BRRD envisages a series of instruments at the disposal of the relevant resolution authority, including a bail-in mechanism. For these purposes, the BRRD introduces a minimum requirement of own funds and eligible liabilities (MREL) that organisations must comply with at all times in order to ensure their loss-absorbing capacity is sufficient to guarantee the effective implementation of the resolution mechanisms and that, under the current regulatory environment, would be expressed as the amount of own funds and eligible liabilities as a percentage of the total liabilities and own funds of the organisation.

Similarly, in 2015 the FSB defined the TLAC (Total Loss-Absorbing Capacity) requirement, which was designed to ensure that institutions have sufficient capacity to absorb losses and execute a bail-in in the event of resolution. It should be noted that this requirement only applies to global systemically important banks (G-SIBs); therefore, it does not apply to Banco Sabadell Group.

Responsibility for determining MREL falls to the Single Resolution Board (SRB), pursuant to that set forth in Regulation (EU) 806/2014, also revised in 2019 and replaced by Regulation (EU) 2019/877. Thus, the SRB, after consulting with the competent authorities, including the ECB, shall establish MREL for each bank, taking into account aspects such as the size, funding model, risk profile and potential contagion effect for the financial system.

In May 2021, the SRB published the MREL Policy under the Banking Package, which integrates the regulatory changes of the aforesaid resolution framework reform. The new SRB requirements are based on balance sheet data as at December 2021 and set two binding MREL targets: the final MREL target to be binding on 1 January 2024 and an interim target to be met by 1 January 2022. The latter corresponds to an intermediate level that allows for a linear build-up by institutions of their MREL capacity. Therefore, its calibration depends on the institution’s MREL capacity at the time of calibration and its final target.

On 10 January 2023, Banco Sabadell received a communication from the Bank of Spain regarding the decision made by the Single Resolution Board (SRB) concerning the minimum requirement for own funds and eligible liabilities (MREL) and the subordination requirement applicable on a consolidated basis.

The requirements that must be met as from 1 January 2024 are as follows:

–

The minimum requirement for own funds and eligible liabilities (MREL) is 22.22% of the total risk exposure amount (TREA) and 6.36% of the leverage ratio exposure (LRE).

–

The subordination requirement is 17.23% of the TREA and 6.36% of the LRE.

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The decision does not introduce changes on the following intermediate requirements that must be met as from 1 January 2022:

–

The MREL requirement is 21.05% of the TREA and 6.22% of the LRE.

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The subordination requirement is 14.45% of the TREA and 6.06% of the LRE.

The capital used by the Institution to meet the combined buffer requirement (CBR), comprising the capital conservation buffer, the systemic risk buffer and the counter-cyclical buffer, will not be eligible to meet its MREL and subordination requirements expressed in terms of the TREA.

Banco Sabadell already meets the requirements that apply from 1 January 2024 onwards, which are in line with Banco Sabadell’s expectations and with its funding plans. In 2022, the Bank issued 1,463 million euros of MREL-eligible senior non-preferred debt and 750 million euros of senior preferred debt.


	MREL Requirement				Subordination Requirement
	% TREA		% LRE		% TREA		% LRE

Requirement 1 January 2022		21.05%		6.22%		14.45%		6.06%
Requirement 1 January 2024		22.22%		6.36%		17.23%		6.36%
MREL 31 December 2022 (*)		23.41%		8.26%		18.81%		6.82%

(*) The RWAs percentage does not include capital used to meet the CBR (2.93% as at Dec 2022 and estimated at 3.11% for 2024).

Capital management

The management of capital resources is the result of the ongoing capital planning process. This process takes into account the evolution of the economic, regulatory and sectoral environment. It takes into account the expected capital consumption of different activities, under the various envisaged scenarios, and the market conditions that could determine the effectiveness of the various actions being considered for implementation. The process is enshrined within the Group’s strategic objectives and aims to achieve an attractive return for shareholders, whilst also ensuring that its level of own funds is appropriate in terms of the inherent risks of banking activity.

As regards capital management, as a general policy, the Group aims to adjust its overall available capital to the incurred risks.

The Group carries out frequent backtesting exercises on its IRB models, at least once a year. These backtesting exercises are independently reviewed by the Internal Validation unit and reported for their monitoring to the internal governing bodies, such as the Technical Risk Committee and the Board Risk Committee (delegated Board committees). Additionally, the backtesting results that affect the risk parameters and the main conclusions drawn from these results, taking into account the criteria established by the EBA in its Disclosure Guidelines, are included in the annual Pillar III Disclosures report.

Banco Sabadell Group prepares an internal capital adequacy assessment process (ICAAP) on a consolidated basis continuously throughout the year, in order to carry out a full assessment of the risks taken by the Group and generate a relevant, updated, all-encompassing and prospective understanding of the adequacy of the levels of capital.

The ICAAP is developed under a solid governance framework, with high involvement from Senior Management. The Board of Directors is the highest body responsible for its review and approval.

Banco Sabadell Group develops the ICAAP from an all-encompassing perspective, so as to generate an assessment of the adequacy of the level of internal capital, taking into account the Group’s structure and business model from different perspectives.

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The ICAAP process is seen as a complementary tool to Basel Pillar 1 (regulatory capital), which first analyses the Group’s business model within its economic, financial and regulatory environment, and its short- and medium-term sustainability and feasibility. The Group’s business model involves the acceptance of risks and, therefore, the definition of a risk profile. As part of the ICAAP, an identification is made of the material risks derived from the Group’s activities and a self-assessment is carried out of the inherent and residual risk entailed by such risks after considering the risk governance, management and control systems.

Based on the inventory of the Group’s material risks and their management, a comprehensive quantitative assessment of the necessary capital based on internal approaches (economic capital) is established, the scope of which exceeds the risks covered by Pillar 1, integrating the models used by the Group (for example, borrower rating systems, credit ratings and scores) and other internal estimates appropriate to each type of risk.

In addition, the ICAAP includes forward-looking analyses using a 3-year time horizon (or even a 30-year time horizon in the case of scenarios designed to forecast climate risk). These analyses are carried out under a baseline economic scenario, but also under plausible but unlikely adverse scenarios (stress tests), which are relevant to the Group and, therefore, reflect adverse situations that may have a particular effect on the Group. The baseline forecast includes the Group’s business and financial plans. These forecasts are carried out to verify whether the performance of the business, risk and income statement in the event of potential adverse scenarios could pose a risk to the Group’s solvency based on the available own funds or the Group’s compliance with its Risk Appetite Statement. As a result of these exercises, the Bank can detect weaknesses and propose, if necessary, action plans that mitigate the identified risks.

Forward-looking analyses under adverse scenarios are supplemented by reverse stress tests, which identify idiosyncratic characteristics of the Group that may pose a relevant risk to its solvency if they were to materialise.

The combination of the various solvency measures (static or dynamic and regulatory or economic), taking into account the inventory of risks affecting the Group and the main vulnerabilities detected, enables the Board of Directors, as the highest body responsible for the ICAAP, to obtain a conclusion on Group’s solvency position.

The Group has implemented an analytical system of risk-adjusted return on capital (RAROC), which provides an assessment of the capital required and allows measuring the return obtained from the transaction and customer level down to the business unit level, enabling uniform comparisons to be made, as well as its inclusion in the transaction pricing process.

The level and quality of capital are Group RAS metrics and their management and control are governed by the Group’s Risk Appetite Framework (RAF).

For more information on capital management, see the Pillar III Disclosures report, published annually, which is available on the Group’s website (www.grupobancosabadell.com), in the section on Information for shareholders and investors / Financial information.

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Eligible capital and capital ratios

As at 31 December 2022, the Group’s eligible capital amounted to 13,587 million euros (14,501 million euros as at 31 December 2021), representing a surplus of 3,175 million euros (4,014 million euros as at 31 December 2021), as shown below:

Thousand euro

2022

2021

Year-on-year
change (%)

Capital

703,371

—

Reserves (includes profit attributable to the Group, net of dividends)

12,838,901

12,519,248

2.55

Valuation and transitional adjustments

(544,155)

(148,352)

266.80

Deductions

(2,915,365)

(2,994,734)

(2.65)

CET1 capital

10,082,751

10,079,533

0.03

CET1 (%)

12.67

12.50

1.36

Preference shares, convertible bonds and deductions

1,650,000

2,400,000

(31.00)

Additional Tier 1 capital

1,650,000

2,400,000

(31.00)

AT1 (%)

2.07

2.98

(30.54)

Tier 1 capital

11,732,751

12,479,533

(5.98)

Tier 1 (%)

14.75

15.47

(4.65)

Tier 2 capital

1,855,001

2,021,270

(8.23)

Tier 2 (%)

2.33

2.51

(7.17)

Capital base

13,587,753

14,500,802

(6.30)

Minimum capital requirement

10,412,415

10,486,962

(0.71)

Capital surplus

3,175,338

4,013,840

(20.89)

Total capital ratio (%)

17.08

17.98

(5.01)

Risk weighted assets (RWAs)

79,553,809

80,645,593

(1.35)

Common Equity Tier 1 (CET1) capital accounts for 74.20% of eligible capital. Deductions are mainly comprised of intangible assets, goodwill and deferred tax assets. The impact of applying, as from June 2020 onwards, Regulation 2020/873 in the Covid-19 backdrop is deemed transitional. This regulation extends the transitional provisions designed to mitigate the impact of IFRS 9 for two years, allowing institutions to fully add back to their Common Equity Tier 1 capital any increase in new expected credit loss provisions that they recognise after 1 January 2020 for their financial assets that are not credit-impaired.

Tier 1 comprises, in addition to CET1 funds, items that largely make up Additional Tier 1 capital (12.14% of own funds), which are capital items comprised of preferred securities.

Tier 2 capital provides 13.65% of the total capital ratio and is made up largely of subordinated debt.

The voluntary early redemption of the full amount of preferred securities envisaged in the conditions of the AT1 Preferred Securities 1/2017 issue, whose value amounted to 750 million euros, took place in 2022.

In terms of risk-weighted assets, over the period two securitisations have been carried out: the traditional consumer loan securitisation Sabadell Consumo 2 executed on 8 July 2022 and the Boreas synthetic securitisation of project finance exposures executed on 28 September 2022. It is also worth highlighting the improved ratings of businesses, as a result of the improved financial situation and the improvements of house prices in the UK, both of which had a positive impact on risk-weighted assets. During the period, new PD, LGD and CCF calibrations were implemented for the businesses segments, the Foundation IRB approach began to be used to exposures to corporates and groups and the new rating models were implemented for project finance exposures. Furthermore, after receiving approval from the Supervisor, exposures to financial institutions, which in 2021 were calculated under the Foundation IRB approach, began to be calculated under the standardised approach. Lastly, in 2022, impacts linked to the completion of the IRB Repair Programme and due to materialise in the short/medium term have been front-loaded.

In fully-loaded terms, as at 31 December 2022, the Common Equity Tier 1 (CET1) ratio stood at 12.55% and the total capital ratio stood at 17.02%, both well above the regulatory minima.

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The following table shows movements in the various regulatory capital components during 2022 and 2021:


Thousand euro
CET1 balance as at 31 December 2020			9,911,107

Reserves (includes profit attributable to the Group, net of dividends)			241,508
Minority interests			(9,270)
Valuation adjustments			216,115
Deductions and transitory effects			(279,927)
CET1 balance as at 31 December 2021			10,079,533

Reserves (includes profit attributable to the Group, net of dividends)			319,654
Minority interests			—
Valuation adjustments			(273,616)
Deductions and transitory effects			(42,819)
CET1 balance as at 31 December 2022			10,082,751


Thousand euro
Additional Tier 1 balance as at 31 December 2020			1,153,539

Eligible instruments			1,250,000
Minority interests			(3,539)
Additional Tier 1 balance as at 31 December 2021			2,400,000

Eligible instruments			(750,000)
Minority interests			—
Additional Tier 1 balance as at 31 December 2022			1,650,000


Thousand euro
Tier 2 balance as at 31 December 2020			1,664,708

Eligible instruments			89,030
Credit risk adjustments			26,773
Minority interests			(4,719)
Deductions and transitory effects			245,478
Tier 2 balance as at 31 December 2021			2,021,270

Eligible instruments			(99,745)
Credit risk adjustments			(10,193)
Minority interests			—
Deductions and transitory effects			(56,330)
Tier 2 balance as at 31 December 2022			1,855,001

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The table below shows the reconciliation of equity and regulatory capital as at 31 December 2022 and 2021:


Thousand euro
	2022		2021

Shareholders’ equity		13,840,723		13,356,905
Accumulated other comprehensive income		(650,645)		(385,604)
Minority interests		34,343		24,980
Total equity		13,224,421		12,996,281

Goodwill and intangibles		(2,144,909)		(2,227,640)
Dividends (*)		(317,281)		(168,809)
DTAs and thresholds for non-monetisable DTAs		(537,712)		(563,837)
Deductions		(124,898)		(117,503)
Other adjustments		(16,871)		161,041
Regulatory accounting adjustments		(3,141,671)		(2,916,749)

Common Equity Tier 1 capital		10,082,751		10,079,533

Additional Tier 1 capital		1,650,000		2,400,000

Tier 2 capital		1,855,001		2,021,270
Total regulatory capital		13,587,753		14,500,802

(*) Does not consider interim dividend booked

As at 31 December 2022 and 2021, there is no significant difference between the accounting scope of consolidation and the regulatory scope of consolidation.

Risk-weighted assets (RWAs) for the period stood at 79,554 million euros as at 31 December 2022, which represents a change of -1.35% relative to the previous period due to the variation in credit RWAs. It is also worth noting the improvement in the density of the portfolio due to the update and improved ratings of businesses, as a result of the improved financial situation and the improvements of house prices in the UK. In addition, two securitisations carried out in the period are particularly relevant: the conventional securitisation on consumer loans Sabadell Consumo 2 carried out on 8 July 2022 and the synthetic securitisation Boreas on project finance exposures carried out on 28 September 2022.

The breakdown of risk-weighted assets by type of risk, as at 31 December 2022 and 2021, is shown below:


Thousand euro
	2022				2021
	Amount		%		Amount		%

Credit risk (*)		70,387,473		88.48 %		72,134,688		89.45 %
Operational risk		8,160,674		10.26 %		7,931,371		9.83 %
Market risk		1,005,662		1.21 %		579,519		0.72 %
Total		79,553,809		100.00 %		80,645,578		100.00 %

(*) Includes counterparty credit risk, deferred tax assets and the impact on RWAs of applying additional prudential adjustments required by the supervisor (SSM). Certain impacts linked mainly to the completion of the IRB Repair programme, which the Institution has decided to frontload, are also included. Not taking into account the aforementioned supplements, the credit RWAs amount to 66,859 million euros.

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The following table shows the reasons for the variation in credit RWAs occurring during 2022 and 2021:


Thousand euro
	RWA		Capital requirements (*)

Balance as at 31 December 2020		66,696,247		5,335,700

Change in business volume		869,920		69,594
Asset quality		(764,498)		(61,160)
Changes in models		55,000		4,400
Methodology, parameters and policies		(510,161)		(40,813)
Acquisitions and disposals		(11,021)		(882)
Exchange rate		1,129,734		90,379
Other (**)		2,077,912		166,233
Balance as at 31 December 2021		69,543,133		5,563,451

Change in business volume		(769,481)		(61,558)
Asset quality		(3,006,475)		(240,518)
Changes in models		951,398		76,112
Methodology, parameters and policies		1,017,559		81,405
Acquisitions and disposals		(446,665)		(35,733)
Exchange rate		(430,845)		(34,468)
Other		—		—
Balance as at 31 December 2022		66,858,624		5,348,690

(*) Calculated as 8% of RWAs.

(**) The increase in the “Other” category is due to the assignment, at a granular level, of a series of add-ons at TSB, which as at December 2020 were reported as “Other risk exposure amounts”.

The table below shows risk-weighted assets for the most significant risk in terms of volume (credit risk), broken down by region, as at 31 December 2022 and 2021:


%
	2022		2021

Spain		64.95 %		65.13 %
Rest of European Union		4.97 %		5.30 %
United Kingdom		18.24 %		18.47 %
Americas		11.08 %		9.98 %
Rest of the world		0.77 %		1.12 %

Total		100 %		100 %

Includes counterparty credit risk.

The leverage ratio as at 31 December 2022 and 2021 is shown below:


Thousand euro
	2022		2021

Tier 1 capital		11,732,751		12,479,533
Exposure		253,840,350		211,616,215
Leverage ratio		4.62 %		5.90 %

In 2018, following the entry into force of IFRS 9, the Group opted to apply the transitional arrangements set forth in Regulation (EU) 2017/2395.

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During 2022, the leverage ratio decreased by 128 basis points compared to that as at 31 December 2021, mainly due to the voluntary early redemption envisaged in the conditions of the AT1 Preferred Securities 1/2017 issue, whose value amounted to 750 million euros, and to the end of the transitional period that allowed the exclusion of exposures of deposits held at central banks from the leverage ratio. This transitional period began to apply in September 2020 through Decision (EU) 2020/1306, which provided for validity until 27 June 2021. This validity period was subsequently extended until 31 March 2022 through Decision (EU) 2021/1074.

The following table shows the impact that the application of the transitional arrangements in force in 2022 has had on the various capital ratios (in phase-in terms) compared to the impact if the IFRS 9 rules had been applied in full (in fully-loaded terms):


Thousand euro
	2022
Available capital

Common Equity Tier 1 (CET1) capital		10,082,751
Common Equity Tier 1 (CET1) capital if the IFRS 9 or analogous ECL transitional arrangements had not been applied		9,985,006
Tier 1 (T1) capital		11,732,751
Tier 1 (T1) capital if the IFRS 9 or analogous ECL transitional arrangements had not been applied		11,635,006
Total capital		13,587,753
Total capital if the IFRS 9 or analogous ECL transitional arrangements had not been applied		13,546,337
Risk weighted assets

Total risk weighted assets		79,553,809
Total risk weighted assets if the IFRS 9 or analogous ECL transitional arrangements had not been applied		79,568,639
Capital ratios

Common Equity Tier 1 (CET1) capital (expressed as percentage of risk exposure amount)		12.67 %
Common Equity Tier 1 (CET1) capital (expressed as percentage of risk exposure amount) if the IFRS 9 or analogous ECL transitional arrangements had not been applied		12.55 %
Tier 1 (T1) capital (expressed as percentage of risk exposure amount)		14.75 %
Tier 1 (T1) capital (expressed as percentage of risk exposure amount) if the IFRS 9 or analogous ECL transitional arrangements had not been applied		14.62 %
Total capital (expressed as percentage of risk exposure amount)		17.08 %
Total capital (expressed as percentage of risk exposure amount) if the IFRS 9 or analogous ECL transitional arrangements had not been applied		17.02 %
Leverage ratio

Total exposure measure corresponding to leverage ratio		253,840,350
Leverage ratio		4.62 %
Leverage ratio if the IFRS 9 or analogous ECL transitional arrangements had not been applied		4.59 %

The main impact arising from the application of these transitional arrangements has been the inclusion of 98 million euros in CET1, which partly mitigates the decrease in equity resulting from the entry into force of IFRS 9, due to the increase in accounting provisions. The impact generated a reduction in risk-weighted assets of 15 million euros.

For more information on capital ratios and the leverage ratio, their composition, details of parameters and their management, see the Pillar III Disclosures report, which is published annually and is available on the Group’s website (www.grupobancosabadell.com), in the section on Information for shareholders and investors / Financial information.

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Note 6 – Fair value of assets and liabilities

Financial assets and financial liabilities

When there is no market price for a particular financial asset or financial liability, the fair value is estimated from the values established for similar instruments in recent transactions or, alternatively, by using mathematical valuation models that have been suitably tested by the international financial community. When using these models, the particular characteristics of the financial asset or financial liability to be valued are taken into account, particularly the different types of risk that may be associated therewith. The above notwithstanding, the limitations inherent in the valuation models that have been developed and possible inaccuracies in the assumptions and parameters required by these models may result in the estimated fair value of a financial asset or financial liability not exactly matching the price at which the asset or liability could be delivered or settled on the valuation date.

The fair value of financial derivatives quoted on an active market is the daily quoted price.

In the case of instruments for which quoted prices cannot be determined, prices are estimated using internal models developed by the Bank, most of which take data based on observable market parameters as significant inputs. In the remaining cases, the models make use of other inputs which rely on internal assumptions based on generally accepted practices within the financial community.

For financial instruments, the fair values disclosed in the financial statements are classified according to the following fair value levels:

–

Level 1: Fair values are obtained from the (unadjusted) prices quoted on active markets for that instrument.

–

Level 2: Fair values are obtained from the prices being quoted on active markets for similar instruments, the prices of recent transactions, expected payment flows or other valuation techniques in which all significant inputs are directly or indirectly based on observable market data.

–

Level 3: Fair values are obtained through valuation techniques in which some significant inputs are not based on observable market data.

A-350



Financial instruments Level 2	Valuation techniques	Main assumptions	Main inputs used
Debt securities	Net present value method	Calculation of the present value of financial instruments as the present value of future cash flows (discounted at market interest rates), taking into account: - An estimate of pre-payment rates - Issuers’ credit risk	- Issuer credit spreads - Observable market interest rates
Equity instruments	Sector multiples (P/ BV)	Based on the NACE code that best represents the company’s primary activity, the price-to-book value (P/BV) ratio obtained from peers is applied	- NACEs - Quoted prices in organised markets
Simple derivatives (a)	Net present value method	Implicit curves calculated based on quoted market prices	- Observable yield curve - FX swaps and spot curve
Other derivatives (a)	Analytic/semi-analytic formulae	- For equity derivatives, FX or commodities: Black-Scholes model: assumes log normal distribution of underlying with volatility depending on term	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options.
	Analytic/semi-analytic formulae	- For interest rate derivatives: Normal model and shifted Libor Market Model: allow perfect correlation of negative rates and forward rates in the yield curve term structure.	- Term structure of interest rates - Volatility surfaces of Libor rate options (caps) and swap rate options (swaptions)
	Monte Carlo simulations	For valuation of equity derivatives, FX or commodities: Black-Scholes model: assumes log normal distribution of underlying with volatility depending on term For calculation of CVA and DVA adjustments: Normal model and Black- Scholes model.	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options - Probability of default for calculation of CVA and DVA (b)
	Hybrid local volatility models - stochastic	- For FX derivatives: Tremor model: implicit volatility obtained through stochastic differential equations.	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options
	For credit derivatives: - Intensity models	These models assume a default probability structure resulting from term-based default intensity rates	- Credit Default Swaps (CDS) price quotes - Historic volatility of credit spreads

(a) Given the small net position of Banco Sabadell, the funding value adjustment (FVA) is estimated to have a non-material impact on the valuation of derivatives.

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Financial instruments Level 3	Valuation techniques	Main assumptions	Main non-observable inputs
Debt securities	Net present value method	Calculation of the present value of financial instruments as the present value of future cash flows (discounted at market interest rates), taking into account in each case: - An estimate of pre-payment rates - Issuers’ credit risk - Other estimates on variables that affect future flows: claims, losses, redemptions	- Estimated credit spreads of the issuer or a similar issuer - Rates of claims, losses and/or redemptions
Equity instruments	Discounted cash flow method	Calculation of the present value of future cash flows discounted at market interest rates adjusted for risk (CAPM method), taking into account: - An estimate of the company’s projected cash flows - Sector risk of the company - Macroeconomic inputs	The entity’s business plans - Risk premiums of the company’s sector - Adjustment for systemic risk (Beta Parameter)
Derivatives (a)	For credit derivatives: - Intensity models	These models assume a default probability structure resulting from term-based default intensity rates	For credit derivatives: - Estimated credit spreads of the issuer or a similar issuer - Historic volatility of credit spreads

(a) Given the small net position of Banco Sabadell, the funding value adjustment (FVA) is estimated to have a non-material impact on the valuation of derivatives.

Determination of the fair value of financial instruments


Thousand euro
			2022				2021

	Note		Carrying amount		Fair value		Carrying amount		Fair value

Assets:

Cash, cash balances at central banks and other demand deposits		7		41,260,395		41,260,395		49,213,196		49,213,196

Financial assets held for trading		8,9,10		4,017,253		4,017,253		1,971,629		1,971,629

Non-trading financial assets mandatorily at fair value through profit or loss		8		77,421		77,421		79,559		79,559

Financial assets designated at fair value through profit or loss				—		—		—		—

Financial assets at fair value through other comprehensive income		9		5,802,264		5,802,264		6,869,637		6,869,637

Financial assets at amortised cost		8		185,045,452		178,139,213		178,869,317		184,223,595

Derivatives – Hedge accounting		12		3,072,091		3,072,091		525,382		525,382
Total assets				239,274,876		232,368,637		237,528,720		242,882,998

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Thousand euro
			2022				2021
	Note		Carrying amount		Fair value		Carrying amount		Fair value

Liabilities:
Financial liabilities held for trading		10		3,598,483		3,598,483		1,379,898		1,379,898
Financial liabilities designated at fair value				—		—		—		—
through profit or loss
Financial liabilities at amortised cost		18, 19,		232,529,932		221,121,599		235,179,222		234,493,250
		20, 21
Derivatives – Hedge accounting		12		1,242,470		1,242,470		512,442		512,442
Total liabilities				237,370,885		225,962,552		237,071,562		236,385,590

Financial instruments at fair value


Thousand euro
			2022
	Note		Level 1		Level 2		Level 3		Total

Assets:
Financial assets held for trading				417,131		3,597,627		2,495		4,017,253
Derivatives		10		—		3,597,627		2,495		3,600,122
Equity instruments		9		—		—		—		—
Debt securities		8		417,131		—		—		417,131
Loans and advances – Customers				—		—		—		—
Non-trading financial assets mandatorily at				14,861		10,428		52,132		77,421
fair value through profit or loss
Equity instruments				1,945		9,286		11,914		23,145
Debt securities		8		12,916		1,142		40,218		54,276
Loans and advances				—		—		—		—
Financial assets designated at fair value				—		—		—		—
through profit or loss
Debt securities				—		—		—		—
Loans and advances – Credit institutions				—		—		—		—
Financial assets at fair value through other				5,557,280		142,327		102,657		5,802,264
comprehensive income
Equity instruments		9		631		122,400		56,541		179,572
Debt securities		8		5,556,649		19,927		46,116		5,622,692
Loans and advances				—		—		—		—
Derivatives – Hedge accounting		12		—		3,062,111		9,980		3,072,091
Total assets				5,989,272		6,812,493		167,264		12,969,029


Thousand euro
			2022
	Note		Level 1		Level 2		Level 3		Total

Liabilities:
Financial liabilities held for trading				224,447		3,374,036		—		3,598,483
Derivatives		10		—		3,374,036		—		3,374,036
Short positions				224,447		—		—		224,447
Deposits with credit institutions				—		—		—		—
Financial liabilities designated at fair value				—		—		—		—
through profit or loss
Derivatives – Hedge accounting		12		—		1,242,470		—		1,242,470
Total liabilities				224,447		4,616,506		—		4,840,953

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Thousand euro
			2021
	Note		Level 1		Level 2		Level 3		Total

Assets:
Financial assets held for trading				592,631		1,378,998		—		1,971,629
Derivatives		10		—		1,378,998		—		1,378,998
Equity instruments		9		2,258		—		—		2,258
Debt securities		8		590,373		—		—		590,373
Loans and advances – Customers				—		—		—		—
Non-trading financial assets mandatorily at				18,361		1,541		59,657		79,559
fair value through profit or loss
Equity instruments		9		14,544		38		—		14,582
Debt securities				3,817		1,503		59,657		64,977
Loans and advances				—		—		—		—
Financial assets designated at fair value				—		—		—		—
through profit or loss
Debt securities				—		—		—		—
Loans and advances – Credit institutions				—		—		—		—
Financial assets at fair value through other				6,594,926		133,287		141,424		6,869,637
comprehensive income
Equity instruments		9		2,402		106,378		75,766		184,546
Debt securities		8		6,592,524		26,909		65,658		6,685,091
Loans and advances				—		—		—		—
Derivatives – Hedge accounting		12		—		525,382		—		525,382
Total assets				7,205,918		2,039,208		201,081		9,446,207


Thousand euro
			2021
	Note		Level 1		Level 2		Level 3		Total

Liabilities:
Financial liabilities held for trading				56,662		1,323,236		—		1,379,898
Derivatives		10		—		1,323,236		—		1,323,236
Short positions				56,662		—		—		56,662
Deposits with credit institutions				—		—		—		—
Financial liabilities designated at fair value				—		—		—		—
through profit or loss
Derivatives – Hedge accounting		12		—		512,442		—		512,442
Total liabilities				56,662		1,835,678		—		1,892,340

Derivatives with no credit support annexes (CSAs) include the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA) in their fair value, respectively. The fair value of these derivatives represents 5.31% of the total, and their adjustment for credit and debit risks represents 17.30% of their fair value as at 31 December 2022 (4.74% and 5.73%, respectively, as at 31 December 2021).

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The movements in the balances of the financial assets and financial liabilities recognised at fair value and classified as Level 3, disclosed in the accompanying consolidated balance sheets, are shown below:


Thousand euro
	Assets			Liabilities
Balance as at 31 December 2020		160,606			—

Valuation adjustments recognised in profit or loss (*)		4,231			—
Valuation adjustments not recognised in profit or loss		5,015			—
Purchases, sales and write-offs		(30,874	)		—
Net additions/removals in Level 3		58,927			—
Exchange differences and other		3,176			—
Balance as at 31 December 2021		201,081			—

Valuation adjustments recognised in profit or loss (*)		3,662			—
Valuation adjustments not recognised in profit or loss		10,115			—
Purchases, sales and write-offs		(44,502	)		—
Net additions/removals in Level 3		(4,957	)		—
Exchange differences and other		1,865			—
Balance as at 31 December 2022		167,264			—

(*) Relates to securities retained on the balance sheet.

Details of financial instruments that were transferred to different valuation levels in 2022 are as follows:


Thousand euro
	2022
	From: To:	Level 1				Level 2				Level 3
	From: To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			—		—		—		—		—		—
Non-trading financial assets mandatorily at fair			—		—		—		—		—		—
value through profit or loss
Financial assets designated at fair value through			—		—		—		—		—		—
profit or loss
Financial assets at fair value through other			—		—		—		429		4,465		920
comprehensive income
Derivatives			—		—		—		—		—		—

Liabilities:
Financial liabilities held for trading			—		—		—		—		—		—
Financial liabilities designated at fair value through			—		—		—		—		—		—
profit or loss
Derivatives – Hedge accounting			—		—		—		—		—		—
Total			—		—		—		429		4,465		920

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Details of financial instruments that were transferred to different valuation levels in 2021 are as follows:


Thousand euro
	2021
	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			—		—		—		—		—		—
Non-trading financial assets mandatorily at fair			—		—		—		—		—		—
value through profit or loss
Financial assets designated at fair value			—		—		—		—		—		—
through profit or loss
Financial assets at fair value through other			—		58,890		—		37		—		—
comprehensive income
Derivatives			—		—		—		—		—		—

Liabilities:
Financial liabilities held for trading			—		—		—		—		—		—
Financial liabilities designated at fair value			—		—		—		—		—		—
through profit or loss
Derivatives – Hedge accounting			—		—		—		—		—		—
Total			—		58,890		—		37		—		—

Transfers from Level 3 to Level 1 in 2022 are due to the fact that the markets in which these instruments (senior bonds) are traded are now being considered to have an active market; therefore, their valuation was obtained from market prices.

Transfers from Level 1 to Level 3 in 2021 were due to the fact that the markets in which these instruments (mainly asset-backed securities) are traded were no longer considered to have an active market; therefore, their value was hence calculated using valuation techniques in which one of the main significant inputs (early redemption rate) was based on unobservable market data.

As at 31 December 2022 and 2021, the effect of replacing the main assumptions used in the valuation of Level 3 financial instruments with other reasonably possible assumptions, taking the highest value (most favourable assumption) or lowest value (least favourable assumption) of the range that is deemed likely, is not significant.

At year-end in both years, there were no derivatives using equity instruments as underlying assets or material interests in discretionary gains in any companies.

Financial instruments at amortised cost

The following tables show the fair value of the main financial instruments recognised at amortised cost in the accompanying consolidated balance sheets:

Thousand euro

2022

Level 1

Level 2

Level 3

Total

Assets:

Financial assets at amortised cost:

Debt securities

19,264,376

778,098

207,034

20,249,508

Loans and advances

2,776,939

20,211,002

134,901,764

157,889,705

Total assets

22,041,315

20,989,100

135,108,798

178,139,213

Thousand euro

2022

Level 1

Level 2

Level 3

Total

Liabilities:

Financial liabilities at amortised cost (*):

Deposits

—

188,065,858

3,772,522

191,838,380

Debt securities issued

18,674,324

3,950,033

—

22,624,357

Total liabilities

18,674,324

192,015,891

3,772,522

214,462,737

(*) As at 31 December 2022, the Group had other financial liabilities amounting to 6,658,861 thousand euros.

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Thousand euro

2021

Level 1

Level 2

Level 3

Total

Assets:

Financial assets at amortised cost

Debt securities

14,559,083

716,151

67,830

15,343,063

Loans and advances

—

25,446,544

143,433,988

168,880,532

Total assets

14,559,083

26,162,695

143,501,818

184,223,595

Thousand euro

2021

Level 1

Level 2

Level 3

Total

Liabilities:

Financial liabilities at amortised cost (*)

Deposits

—

204,979,429

3,101,017

208,080,446

Debt securities issued

16,490,631

5,097,385

3,119

21,591,135

Total liabilities

16,490,631

210,076,814

3,104,136

229,671,581

(*) As at 31 December 2021, the Group had other financial liabilities amounting to 4,821,669 thousand euros.

The fair value of the heading “Cash, cash balances at central banks and other demand deposits” has been likened to its carrying amount, as these are mainly short-term balances.

Financial instruments at cost

As at the end of 2022 and 2021, there were no equity instruments valued at their cost of acquisition that could be considered significant.

Loans and financial liabilities at fair value through profit or loss

As at 31 December 2022 and 2021, there were no loans or financial liabilities recognised at fair value through profit or loss.

Non-financial assets

Real estate assets

As at 31 December 2022 and 2021, the net carrying values of real estate assets do not differ significantly from the fair values of these assets (see Notes 13, 15 and 17).

The selection criteria for valuation suppliers and the update of appraisals are defined in the section on “Guarantees”, in Note 1.3.4. to these consolidated annual financial statements.

Valuation techniques are generally used by all appraisal companies based on the type of each real estate asset.

As per regulatory requirements, in the valuation techniques used, the appraisal companies maximise the use of observable market data and other factors which would be taken into account by market operators when setting prices, endeavouring to keep the use of subjective considerations and unobservable or non-verifiable data to a minimum.

The main valuation methods used fall into the following measurement levels:

Level 2

–

Rental update method: applicable when the valued property generates or may generate rental income and there is a representative market of comparable data.

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–

Statistical model: this model adjusts the value of the assets based on the date of acquisition and their location, updating the value in accordance with price trends in the area concerned as from the date of purchase. To this end, it includes statistical information on price trends in all provinces, as provided by external appraisal firms, as well as demographic data from the Spanish Office for National Statistics (INE) to calculate sensitivity at a municipality level. The value obtained is in turn adjusted based on the construction progress (finished product, development in progress, plots or land under management) and use (residential, industrial, etc.) of the asset.

Level 3

–

Cost method: applicable to determine the value of buildings being planned, under construction or undergoing renovations.

–

Depending on the type of asset, the methods used in the valuation of the Group’s portfolio are the following:

–

Completed works: valued in comparable terms, based on updates to income or the statistical model (Level 2).

–

Works in progress: valued using the cost method as a sum of the land value and the value of the work carried out (Level 3).

–

Land: valued using the residual method (Level 3).

Determination of the fair value of real estate assets

The following tables show the main real estate assets broken down by the valuation method used in their fair value estimate as at 31 December 2022 and 2021:


Thousand euro
	2022
	Level 1		Level 2		Level 3		Total

Housing		—		672,441		—		672,441
Branches and offices, retail establishments		—		943,251		—		943,251
and other real estate
Land and building plots		—		5,351		25,031		30,382
Work in progress		—		—		2,585		2,585
Total assets		—		1,621,043		27,616		1,648,659


Thousand euro
	2021
	Level 1		Level 2		Level 3		Total

Housing		—		809,601		—		809,601
Branches and offices, retail establishments		—		1,014,204		—		1,014,204
and other real estate
Land and building plots		—		—		30,440		30,440
Work in progress		—		—		3,966		3,966
Total assets		—		1,823,805		34,406		1,858,211

Significant unobservable variables used in valuations classed as Level 3 have not been developed by the Group but by the independent third party valuation companies that performed the appraisals. Given the widespread use of the appraisals, the valuation techniques of which are clearly set out in the regulation governing the valuation of properties, the unobservable variables used reflect the assumptions frequently used by all appraisal firms. In terms of proportional weight, unobservable variables represent almost all of the value of these appraisals.

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The number of plots in the Group’s possession is very fragmented, and they are very varied, both in terms of location and in terms of the stage of development of the urban infrastructure and the possibility of future development. For this reason, no quantitative information can be provided regarding the unobservable variables affecting the fair value of these types of assets.

Movements in the balances of real estate assets classified as Level 3 in 2022 and 2021 are shown below:


Thousand euro

	Housing		Branches and offices, retail establishments and other real estate		Land, building plots and work in progress
Balance as at 31 December 2020		—		—		39,342

Purchases		—		—		11,360
Sales		—		—		(8,704)
Impairments recognised on income statement (*)		—		—		(6,502)
Net additions/removals in Level 3		—		—		(1,090)
Balance as at 31 December 2021		—		—		34,406

Purchases		—		—		329
Sales		—		—		(5,084)
Impairments recognised on income statement (*)		—		—		(1,796)
Net additions/removals in Level 3		—		—		(239)
Balance as at 31 December 2022		—		—		27,616

(*) Relates to assets retained on the balance sheet as at 31 December 2022 and 2021.

During 2022 and 2021, certain real estate assets have been transferred between the different valuation levels, due to the transformation of assets that were in the process of construction into finished products.

The following table shows a comparison between the value at which the Group’s real estate assets were recognised under the headings “Non-current assets and disposal groups classified as held for sale” obtained through foreclosures, “Investment properties” and “Inventories” and their appraisal value, as at the end of 2022 and 2021:


Thousand euro
			2022									2021

	Note		Carrying amount (*)		Impairment			Net carrying amount		Appraisal value		Carrying amount (*)		Impairment			Net carrying amount		Appraisal value

Investment properties		15		383,975		(84,233	)		299,742		354,375		450,644		(71,376	)		379,268		468,641
Inventories		17		170,942		(77,107	)		93,835		145,728		248,345		(105,632	)		142,713		213,470
Non-current assets held for sale				721,078		(183,927	)		537,151		854,546		788,711		(208,322	)		580,389		913,787
Total				1,275,995		(345,267	)		930,728		1,354,649		1,487,700		(385,330	)		1,102,370		1,595,898

(*) Cost less accumulated depreciation.

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The fair values of real estate assets valued by appraisal companies and included in the headings “Non-current assets and disposal groups classified as held for sale”, “Investment properties” and “Inventories” in 2022 are as follows:


Thousand euro

Appraisal firm	Non-current assets held for sale		Investment properties		Inventories

Afes Técnicas de Tasación, S.A.		—		104		—
Alia Tasaciones, S.A.		23,384		21,291		6,984
CBRE Valuation Advisory, S.A.		121,537		1,211		10,107
Eurovaloraciones, S.A.		42,178		59,891		11,242
Gestión de Valoraciones y Tasaciones, S.A.		2,257		301		82
Gloval Valuation, S.A.U.		154,210		5,854		16,268
Ibertasa, S.A.		61		—		—
Sociedad de Tasación, S.A.		103,020		137,808		22,462
Tabimed Gestión de Proyectos, S.L.		412		—		—
Tasalia Sociedad de Tasación, S.A.		—		—		60
Tasiberica, S.A.		—		—		191
Tecnitasa Técnicos en Tasación, S.A		9,905		1,408		1,272
Tinsa Tasaciones Inmobiliarias, S.A.		25,054		53,668		4,724
UVE Valoraciones, S.A.		4,712		—		—
Valoraciones Mediterráneo, S.A.		50,214		17,927		20,175
Other		207		279		268
Total		537,151		299,742		93,835

The fair value of property, plant and equipment for own use does not differ significantly from its net carrying amount.

Note 7 – Cash, cash balances at central banks and other demand deposits

The composition of this asset heading on the consolidated balance sheets as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022		2021

By nature:
Cash		686,258		704,105
Cash balances at central banks		39,236,780		47,741,021
Other demand deposits		1,337,357		768,070
Total		41,260,395		49,213,196

By currency:
In euro		33,644,881		42,059,700
In foreign currency		7,615,514		7,153,496
Total		41,260,395		49,213,196

Cash balances at central banks include balances held to comply with the central bank’s mandatory minimum reserve requirement. Throughout 2022 and 2021, Banco Sabadell has complied with minimum requirements set out in applicable regulations regarding this ratio.

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Note 8 - Debt securities

Debt securities reported in the consolidated balance sheets as at 31 December 2022 and 2021 are broken down below:


Thousand euro
	2022		2021

By heading:
Financial assets held for trading		417,131		590,373
Non-trading financial assets mandatorily at fair value through profit or loss		54,276		64,977
Financial assets designated at fair value through profit or loss		—		—
Financial assets at fair value through other comprehensive income		5,622,692		6,685,091
Financial assets at amortised cost		21,452,820		15,190,212
Total		27,546,919		22,530,653

By nature:
Central banks		—		—
General governments		27,099,465		21,361,299
Credit institutions		1,271,290		689,449
Other sectors		486,731		393,424
Stage 3 assets		73		73
Impairment allowances		(211)		—
Other valuation adjustments (interest, fees and commissions, other)		(1,310,429)		86,408
Total		27,546,919		22,530,653

By currency:
In euro		23,210,490		17,030,481
In foreign currency		4,336,429		5,500,172
Total		27,546,919		22,530,653

In May 2021, the Group decided to sell debt instruments which had a carrying amount of 3,735 million euros and which were recognised on the consolidated balance sheet under the heading “Financial assets at amortised cost”, by arranging forward sale contracts that were settled in the third quarter of 2021. The results obtained from these disposals were recognised under the heading “Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net – Financial assets at amortised cost” of the consolidated income statement (see Note 30). These sales were carried out as part of a series of actions undertaken to improve the Group’s future profitability while preserving its solvency, including the restructuring announced in Spain in the third quarter of 2021 (see Note 33). The Group considered that these sales, while not speculative in nature, did not fit into any of the categories that the regulation considers to be consistent with the business model of “holding financial assets in order to collect their contractual cash flows” under which these assets are managed. Therefore, the Bank decided to refrain from classifying any debt securities it may purchase under the heading “Financial assets at amortised cost” on the consolidated balance sheet, until it once again meets the conditions to do so.

In March 2022, the Bank carried out an assessment to ascertain whether those conditions had been met. In particular, the assessment reviewed past sales from the debt securities portfolio recorded at amortised cost, and the reasons for those sales, as well as the prospects for future sales from that portfolio. Following that assessment, it was concluded that the right circumstances were in place to reactivate the “Holding financial assets in order to collect their contractual cash flows” business model in respect of those financial instruments, so that the allocation of purchased debt securities to that model was resumed as from the second quarter of 2022.

The breakdown of the debt securities classified based on their credit risk and the movement of impairment allowances associated with these instruments are included, together with those of other financial assets, in Note 11.

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Details of debt instruments included under the “Financial assets at fair value through other comprehensive income” heading, as at 31 December 2022 and 2021, are shown below:


Thousand euro
	2022		2021

Amortised cost		5,867,885		6,699,715
Fair value (*)		5,622,692		6,685,091
Accumulated losses recognised in equity		(298,718)		(88,999)
Accumulated capital gains recognised in equity		54,864		75,525
Value adjustments made for credit risk		(1,339)		(1,150)

(*) Includes net impairment losses in the consolidated income statements for 2022 and 2021, in the amount of -182 and 697 thousand euros, of which, -742 and -677 thousand euros correspond to allowances, and 560 and 1,374 thousand euros correspond to provision reversals, respectively (see Note 34).

Details of exposures held in public debt instruments included under the “Financial assets at fair value through other comprehensive income” heading, as at 31 December 2022 and 2021, are as follows:


Thousand euro
	2022		2021

Amortised cost		5,472,721		6,466,128
Fair value		5,226,075		6,446,213
Accumulated losses recognised in equity		(291,636)		(88,156)
Accumulated capital gains recognised in equity		45,097		68,347
Value adjustments made for credit risk		(107)		(106)

Details of the “Financial assets at amortised cost” portfolio as at 31 December 2022 and 2021 are shown below:


Thousand euro
	2022		2021

General governments		20,295,771		14,457,615
Credit institutions		970,492		647,363
Other sectors		186,768		85,234
Impairment allowances		(211)		—
Total		21,452,820		15,190,212

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Note 9 – Equity instruments

Equity instruments reported in the consolidated balance sheets as at 31 December 2022 and 2021 are broken down as follows:


Thousand euro
	2022	2021

By heading:
Financial assets held for trading	—	2,258
Non-trading financial assets mandatorily at fair value through profit or loss	23,145	14,582
Financial assets at fair value through other comprehensive income	179,572	184,546
Total	202,717	201,386

By nature:
Resident sector	176,474	165,405
Credit institutions	8,484	6,659
Other	167,990	158,746
Non-resident sector	15,034	18,548
Credit institutions	—	—
Other	15,034	18,548
Participations in investment vehicles	11,209	17,433
Total	202,717	201,386

By currency:
In euro	202,189	199,778
In foreign currency	528	1,608
Total	202,717	201,386

As at 31 December 2022 and 2021, there were no investments in listed equity instruments for which their quoted market price has not been considered as a reference of their fair value.

In addition, as of the aforesaid dates, there were no Group investments in equity instruments included in the portfolio of “Financial assets at fair value through other comprehensive income” considered to be individually significant.

Details of equity instruments included under the “Financial assets at fair value through other comprehensive income” heading are as follows:


Thousand euro
	2022	2021

Acquisition cost	241,468	257,714
Fair value	179,572	184,546
Accumulated capital losses recognised in equity at reporting date	(146,236)	(149,044)
Accumulated capital gains recognised in equity at reporting date	84,340	75,876
Transfers of gains or losses within equity during the year	(6,799)	(868)
Recognised dividends from investments held at the end of the year	2,609	1,239

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Note 10 – Derivatives held for trading

The breakdown by type of risk of derivatives held for trading as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022			2021
		Assets	Liabilities		Assets	Liabilities

Securities risk		14,807	14,807		29,019	29,019
Interest rate risk		2,954,325	2,943,405		981,743	919,688
Foreign exchange risk		552,656	340,033		218,470	224,868
Other types of risk		78,334	75,791		149,766	149,661
Total		3,600,122	3,374,036		1,378,998	1,323,236

By currency:
In euro		2,060,859	1,740,524		1,061,444	1,027,833
In foreign currency		1,539,263	1,633,512		317,554	295,403
Total		3,600,122	3,374,036		1,378,998	1,323,236

The fair values of derivatives held for trading, broken down by type of derivative instrument as at 31 December 2022 and 2021, are shown below:


Thousand euro
	2022	2021

Assets

Swaps, CCIRS, Call Money Swap	2,940,879	1,104,366
Currency options	126,794	37,819
Interest rate options	85,552	27,143
Index and securities options	14,807	29,019
Currency forwards	425,861	180,651
Fixed income forwards	6,229	—
Equity forwards	—	—
Interest rate forwards	—	—
Total derivatives on asset side held for trading	3,600,122	1,378,998

Liabilities

Swaps, CCIRS, Call Money Swap	2,984,512	1,050,442
Currency options	126,486	42,520
Interest rate options	33,640	11,644
Index and securities options	14,807	36,282
Currency forwards	213,547	182,348
Fixed income forwards	1,044	—
Equity forwards	—	—
Interest rate forwards	—	—
Total derivatives on liability side held for trading	3,374,036	1,323,236

As at 31 December 2022, the Group holds embedded derivatives that have been separated from their host contracts and recognised under the heading “Financial liabilities held for trading – Derivatives” of the consolidated balance sheet in the amount of 278 thousand euros (7,683 thousand euros as at 31 December 2021). The host contracts of those embedded derivatives correspond to customer deposits and debt securities in issue and have been allocated to the portfolio of financial liabilities at amortised cost.

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Note 11 – Loans and advances

Central banks and credit institutions

The breakdown of the headings “Loans and advances – Central banks” and “Loans and advances – Credit institutions” of the consolidated balance sheets as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022	2021

By heading:
Financial assets held for trading	—	—
Non-trading financial assets mandatorily at fair value through profit or loss	—	—
Financial assets designated at fair value through profit or loss	—	—
Financial assets at fair value through other comprehensive income	—	—
Financial assets at amortised cost	4,862,951	6,312,820
Total	4,862,951	6,312,820

By nature:
Deposits with agreed maturity	1,055,449	1,165,623
Repos	3,255,069	4,938,372
Hybrid financial assets	—	—
Other	546,896	206,013
Stage 3 assets	—	1
Impairment allowances	(2,777)	(2,063)
Other valuation adjustments (interest, fees and commissions, other)	8,314	4,874
Total	4,862,951	6,312,820

By currency:
In euro	4,112,460	5,964,809
In foreign currency	750,491	348,011
Total	4,862,951	6,312,820

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Customers

The breakdown of the heading “Loans and advances – Customers” (General governments and other sectors) of the consolidated balance sheets as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022	2021

By heading:
Financial assets held for trading	—	—
Non-trading financial assets mandatorily at fair value through profit or loss	—	—
Financial assets designated at fair value through profit or loss	—	—
Financial assets at fair value through other comprehensive income	—	—
Financial assets at amortised cost	158,729,681	157,366,285
Total	158,729,681	157,366,285

By nature:
Overdrafts, etc.	3,369,675	2,875,764
Commercial loans	7,489,183	6,049,554
Finance leases	2,226,514	2,106,263
Secured loans	92,751,597	94,313,424
Other term loans	50,293,284	49,567,028
Stage 3 assets	5,460,665	5,698,077
Impairment allowances	(3,020,279)	(3,302,033)
Other valuation adjustments (interest, fees and commissions, other) (*)	159,042	58,208
Total	158,729,681	157,366,285

By sector:
General governments	10,072,272	9,401,011
Other sectors	146,057,981	145,511,022
Stage 3 assets	5,460,665	5,698,077
Impairment allowances	(3,020,279)	(3,302,033)
Other valuation adjustments (interest, fees and commissions, other) (*)	159,042	58,208
Total	158,729,681	157,366,285

By currency:
In euro	102,483,739	101,211,811
In foreign currency	56,245,942	56,154,474
Total	158,729,681	157,366,285

By geographical area:
Spain	98,957,073	98,017,676
Rest of European Union	4,680,628	4,534,782
United Kingdom	46,088,800	47,126,912
Americas	10,556,298	9,284,318
Rest of the world	1,467,161	1,704,629
Impairment allowances	(3,020,279)	(3,302,032)
Total	158,729,681	157,366,285

(*) Other valuation adjustments of financial assets classed as stage 3 amount to 29,222 thousand euros as at 31 December 2022 and 30,443 thousand euros as at 31 December 2021.

A-366

Finance leases

Certain information concerning finance leases carried out by the Group in which it acts as lessor is set out below:


Thousand euro
	2022	2021

Finance leases
Total gross investment	2,410,412	2,318,186
Impairment allowances	(98,827)	(97,017)
Interest income	51,607	49,667

As at 31 December 2022 and 2021, the reconciliation of undiscounted payments received on leases against the net investment in the leases is as follows:


Thousand euro
	2022	2021

Undiscounted lease payments received	2,255,402	2,141,325
Residual value	155,010	176,861
Gross investment in the lease	2,410,412	2,318,186
Unearned financial income	(183,898)	(152,922)
Net investment in the lease	2,226,514	2,165,264

The table below shows a breakdown by term of the minimum undiscounted future amounts receivable by the Group during the period of mandatory compliance (assuming that no extensions or existing purchase options will be exercised) as set out in the finance lease contracts:


Thousand euro
	2022	2021

Up to 1 year	502,389	583,536
1-2 years	528,719	439,266
2-3 years	398,780	340,963
3-4 years	264,057	233,268
4-5 years	171,803	154,164
More than 5 years	389,654	390,128
Total	2,255,402	2,141,325

Past-due financial assets

The balance of “Loans and advances – Customers” past-due and pending collection not classified as stage 3 as at 31 December 2022 amounts to 298,466 thousand euros (346,159 thousand euros as at 31 December 2021). Of this total, over 74% of the balance as at 31 December 2022 (75% of the balance as at 31 December 2021) was no more than one month past due.

A-367

Financial assets classified on the basis of their credit risk

The breakdown of the gross carrying amounts, excluding valuation adjustments, of financial assets classified on the basis of their credit risk as at 31 December 2022 and 2021 is as follows:


Thousand euro
Stage 1	31/12/2022	31/12/2021

Debt securities	28,808,314	22,444,172
Loans and advances	147,334,819	148,895,098
Customers	142,483,973	142,607,101
Central banks and Credit institutions	4,850,846	6,287,997
Total stage 1	176,143,133	171,339,270

By sector:
General governments	37,166,529	30,758,253
Central banks and Credit institutions	6,122,136	6,977,447
Other private sectors	132,854,468	133,603,570
Total stage 1	176,143,133	171,339,270

Stage 2

Debt securities	49,173	—
Loans and advances	13,652,848	12,326,943
Customers	13,646,280	12,304,932
Central banks and Credit institutions	6,568	22,011
Total stage 2	13,702,021	12,326,943

By sector:
General governments	5,207	4,057
Central banks and Credit institutions	6,568	22,010
Other private sectors	13,690,246	12,300,876
Total stage 2	13,702,021	12,326,943

Stage 3

Debt securities	73	73
Loans and advances	5,460,665	5,698,078
Customers	5,460,665	5,698,077
Central banks and Credit institutions	—	1
Total stage 3	5,460,738	5,698,151

By sector:
General governments	8,122	9,632
Central banks and Credit institutions	—	1
Other private sectors	5,452,615	5,688,518
Total stage 3	5,460,738	5,698,151

Total stages	195,305,892	189,364,364

A-368

Movements of gross values, excluding valuation adjustments, of assets subject to impairment by the Group during the years ended 31 December 2022 and 2021 were as follows:


Thousand euro

	Stage 1	Stage 2	Stage 3	Of which: purchased credit-impaired	Total
Balance as at 31 December 2020	167,548,321	11,280,620	5,319,947	*174,204*	184,148,888

Transfers between stages	(3,796,767)	2,205,398	1,591,369	—	—
Stage 1	5,440,672	(5,345,852)	(94,820)	—	—
Stage 2	(8,899,067)	9,238,131	(339,064)	—	—
Stage 3	(338,372)	(1,686,881)	2,025,253	—	—
Increases	54,828,535	917,933	508,382	4,800	56,254,850
Decreases	(49,465,456)	(2,370,468)	(1,283,738)	(29,655)	(53,119,662)
Transfers to write-offs	(683)	(1,449)	(474,686)	—	(476,818)
Adjustments for exchange differences	2,225,320	294,909	36,877	10,417	2,557,106
Balance as at 31 December 2021	171,339,270	12,326,943	5,698,151	*159,766*	189,364,364

Transfers between stages	(5,077,901)	3,536,810	1,541,091	—	—
Stage 1	7,237,830	(7,067,385)	(170,445)	—	—
Stage 2	(11,912,792)	12,560,731	(647,939)	—	—
Stage 3	(402,939)	(1,956,536)	2,359,475	—	—
Increases	64,002,931	1,245,295	447,319	9,473	65,695,545
Decreases	(52,904,809)	(3,217,206)	(1,778,439)	(39,602)	(57,900,454)
Transfers to write-offs	(319)	(817)	(419,658)	881	(420,794)
Adjustments for exchange differences	(1,216,039)	(189,004)	(27,726)	(7,334)	(1,432,769)
Balance as at 31 December 2022	176,143,133	13,702,021	5,460,738	*123,184*	195,305,892

The breakdown of assets classified as stage 3 by type of guarantee as at 31 December 2022 and 2021 is as follows:


Thousand euro
	31/12/2022	31/12/2021

Secured with a mortgage (*)	2,347,550	2,708,483
Of which: Stage 3 financial assets with guarantees covering all of the risk	1,571,003	1,617,399
Other collateral (**)	339,516	288,025
Of which: Stage 3 financial assets with guarantees covering all of the risk	166,371	190,379
Other	2,773,672	2,701,643
Total	5,460,738	5,698,151

(*) Assets secured with a mortgage with an outstanding exposure below 100% of their valuation amount.

(**) Includes the rest of assets secured with collateral.

The breakdown by geographical area of the balance of assets classified as stage 3 as at 31 December 2022 and 2021 is as follows:


Thousand euro
	31/12/2022	31/12/2021

Spain	4,216,505	4,846,743
Rest of European Union	456,072	45,538
United Kingdom	593,793	679,817
Americas	165,292	96,950
Rest of the world	29,076	29,103
Total	5,460,738	5,698,151

A-369

Movements in impaired financial assets derecognised from the asset side of the balance sheet because their recovery was deemed remote during 2022 and 2021 are as follows:


Thousand euro
Balance as at 31 December 2020			5,191,132

Additions			903,346
Use of accumulated impairment balance			451,678
Directly recognised on income statement			35,855
Contractually payable interests			151,956
Other items			263,857

Disposals			(195,527)
Collections of principal in cash from counterparties			(63,553)
Collections of interest in cash from counterparties			(1,817)
Debt forgiveness			(17,847)
Expiry of statute-of-limitations period			—
Forbearance			—
Sales			(108,972)
Foreclosure of tangible assets			(2,510)
Other items			(828)

Exchange differences			30,891
Balance as at 31 December 2021			5,929,842

Additions			579,122
Use of accumulated impairment balance			399,682
Directly recognised on income statement			21,112
Contractually payable interests			155,795
Other items			2,533

Disposals			(645,432)
Collections of principal in cash from counterparties			(51,936)
Collections of interest in cash from counterparties			(2,188)
Debt forgiveness			(22,771)
Expiry of statute-of-limitations period			—
Forbearance			—
Sales			(468,369)
Foreclosure of tangible assets			(857)
Other items			(99,311)

Exchange differences			(15,583)
Balance as at 31 December 2022			5,847,949

A-370

Allowances

The values of financial asset impairment allowances under the different headings on the asset side, classified according to their risk, as at 31 December 2022 and 2021 are as follows:


Thousand euro
*Stage 1*	2022	2021

Debt securities	211	—
Loans and advances	347,269	377,703
Central banks and Credit institutions	2,773	2,041
Customers	344,496	375,662
Total stage 1	347,480	377,703

*Stage 2*

Debt securities	—	—
Loans and advances	479,941	494,047
Central banks and Credit institutions	4	22
Customers	479,937	494,025
Total stage 2	479,941	494,047

*Stage 3*

Debt securities	—	—
Loans and advances	2,195,845	2,432,345
Central banks and Credit institutions	—	—
Customers	2,195,845	2,432,345
Total stage 3	2,195,845	2,432,345

Total stages	3,023,266	3,304,096

A-371

Detailed movements in impairment allowances allocated to cover credit risk during 2022 and 2021 are as follows:


Thousand euro
	Individually measured			Collectively measured				Total
		Stage 2	Stage 3		Stage 1	Stage 2	Stage 3	Total

Balance as at 31 December 2020		11,540	590,283		448,092	453,527	1,579,591		3,083,032

*Movements reflected in impairment gains/(losses) ()**		(7,060)	114,141		(86,142)	223,992	608,267		853,198
Increases due to origination		—	—		259,110	1,400	76		260,586
Changes due to credit risk variance		(14,852)	159,904		(270,812)	177,536	571,293		623,069
Changes in calculation approach		—	—		—	—	—		—
Other movements		7,792	(45,763)		(74,440)	45,056	36,898		(30,457)

Movements not reflected in impairment gains/(losses)		(1,885)	(139,793)		(10,598)	(197,849)	(310,485)		(660,610)
Transfers between stages		(1,516)	28,135		4,263	(176,866)	145,984		—
Stage 1		—	2,388		167,249	(143,558)	(26,079)		—
Stage 2		8,907	11,211		(150,882)	165,464	(34,699)		1
Stage 3		(10,423)	14,536		(12,104)	(198,772)	206,763		—
Utilisation of allocated provisions		(368)	(167,929)		(14,795)	(20,944)	(427,654)		(631,690)
Other movements (**)		—	—		(66)	(39)	(28,816)		(28,921)

Adjustments for exchange differences		—	(16,169)		26,352	11,768	6,525		28,476
Balance as at 31 December 2021		2,595	548,461		377,703	491,438	1,883,898		3,304,096

Scope additions / exclusions

*Movements reflected in impairment gains/(losses) ()**		2,256	65,735		42,051	136,575	512,023		758,640
Increases due to origination		—	—		267,330	—	—		267,330
Changes due to credit risk variance		4,841	88,109		(68,080)	158,783	521,049		704,702
Changes in calculation approach		—	—		—	—	—		—
Other movements		(2,585)	(22,374)		(157,199)	(22,208)	(9,026)		(213,392)

Movements not reflected in impairment gains/(losses)		4,830	(60,100)		(72,352)	(153,318)	(749,124)		(1,030,064)
Transfers between stages		4,830	6,202		(57,503)	(142,731)	189,202		—
Stage 1		(171)	(246)		98,181	(80,660)	(17,104)		—
Stage 2		9,782	(5,805)		(139,268)	209,346	(74,055)		—
Stage 3		(4,781)	12,253		(16,416)	(271,417)	280,361		—
Utilisation of allocated provisions		—	(91,556)		(39)	(82)	(922,192)		(1,013,869)
Other movements (**)		—	25,254		(14,810)	(10,505)	(16,134)		(16,195)

Adjustments for exchange differences		29	902		78	(4,463)	(5,951)		(9,405)
Balance as at 31 December 2022		9,710	554,998		347,480	470,232	1,640,846		3,023,266

(**) Corresponds to credit loss allowances transferred to non-current assets held for sale (see Note 13).

The breakdown by geographical area of the balance of impairment allowances as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022	2021

Spain	2,489,789	2,746,076
Rest of European Union	121,016	120,486
United Kingdom	253,629	252,181
Americas	145,458	170,454
Rest of the world	13,374	14,899
Total	3,023,266	3,304,096

A-372

Sensitivity analysis of the key variables of macroeconomic scenarios

An analysis of the sensitivity of the expected loss of the Group and of the main regions and its impact by stage on impairment allowances in the event of a change, ceteris paribus, from the actual macroeconomic environment, relative to the most probable baseline macroeconomic scenario envisaged in the Group’s business plan, is set out below. The results of this analysis are shown below:


			Group
Key explanatory macroeconomic variables	Change in the variable (*)		Impact on stage 1			Impact on stage 2			Impact on stage 3			Total impact
GDP growth deviation		- 100 bp		2.9	%		5.1	%		1.7	%		2.3	%
GDP growth deviation		+ 100 bp		-2.3	%		-4.7	%		-1.6	%		-2.2	%

Unemployment rate deviation		+ 100 bp		1.5	%		4.2	%		0.6	%		1.2	%
Unemployment rate deviation		- 100 bp		-0.8	%		-2.6	%		-0.5	%		-0.9	%

House price growth deviation		- 100 bp		1.3	%		1.8	%		0.6	%		0.9	%
House price growth deviation		+ 100 bp		-0.7	%		-1.6	%		-0.6	%		-0.8	%

			Spain
Key explanatory macroeconomic variables	Change in the variable (*)		Impact on stage 1			Impact on stage 2			Impact on stage 3			Total impact
GDP growth deviation		- 100 bp		3.4	%		6.6	%		1.7	%		2.5	%
GDP growth deviation		+ 100 bp		-2.8	%		-6.0	%		-1.7	%		-2.3	%

Unemployment rate deviation		+ 100 bp		1.2	%		1.6	%		0.4	%		0.7	%
Unemployment rate deviation		- 100 bp		-0.5	%		-1.2	%		-0.4	%		-0.5	%

House price growth deviation		- 100 bp		1.5	%		2.2	%		0.6	%		0.9	%
House price growth deviation		+ 100 bp		-0.8	%		-2.0	%		-0.6	%		-0.8	%

			United Kingdom
Key explanatory macroeconomic variables	Change in the variable (*)		Impact on stage 1			Impact on stage 2			Impact on stage 3			Total impact
Unemployment rate deviation ()**		+ 100 bp		2.9	%		12.7	%		3.9	%		7.3	%
Unemployment rate deviation ()**		- 100 bp		-2.5	%		-7.3	%		-2.7	%		-4.5	%

House price growth deviation		- 100 bp		0.2	%		0.1	%		0.3	%		0.2	%
House price growth deviation		+ 100 bp		-0.2	%		-0.1	%		-0.3	%		-0.2	%

(*) Changes to macroeconomic variables are applied in absolute terms.

(**) In the scenario of a change to the UK employment rate, a standard deviation of +/- 100 bps represents the relative standard deviation of the macroeconomic variable 3 times higher than in Spain.

Note 12 – Derivatives - hedge accounting

Hedging management

The main hedges arranged by the Group are described below:

Interest rate risk hedge

Based on the balance sheet position and the market situation and outlooks, interest rate risk mitigation strategies are proposed and agreed upon to adapt this position to the one desired by the Group. With this aim in mind, Banco Sabadell Group establishes interest rate hedging strategies for positions that are not included in the trading book and, to that end, derivative instruments are used, whether fair value or cash flow hedging instruments, and a distinction is made between them depending on the items hedged:

–

Macro-hedges: hedges intended to mitigate the risk of balance sheet components.

–

Micro-hedges: hedges intended to mitigate the risk of a particular asset or liability.

A-373

When a transaction is designated as a hedging operation, it is classified as such from the outset of the transaction or the inception of the instruments included in the hedge, and a document is prepared which covers the hedging strategy, defining it in management and accounting terms, and setting out its governance. The aforesaid document clearly identifies the item or items hedged and the hedging instrument, the risk that it seeks to hedge and the criteria or methodologies followed by the Group to evaluate its effectiveness.

The Group operates with the following types of hedges intended to mitigate structural interest rate risk:

–

The main types of balance sheet items hedged are:

•

Fixed-rate loans included in the lending portfolio.

•

Debt securities included in the portfolio of “Financial assets at fair value through other comprehensive income” and the portfolio of “Financial assets at amortised cost”.

•

Fixed-rate liabilities, including fixed-term deposits and the Institution’s funding operations in the capital markets.

Banco Sabadell generally uses macro-hedging for balance sheet items, both assets and liabilities, while TSB uses macro-hedging for fixed-rate loans or deposits and micro-hedging for debt securities or the Bank’s funding operations in the capital markets, for which they arrange derivative contracts, typically for a nominal amount identical to the item hedged and with the same financial features.

If the hedge relates to assets, the Group enters into a fixed-for-floating swap, whereas if the macro- hedge relates to liabilities, it enters into a floating-to-fixed interest rate swap. These derivatives can be traded in cash or as forwards. The hedged risk is the interest rate risk arising from a potential change in the risk-free interest rate that gives rise to changes in the value of the hedged balance sheet items. As such, the hedge will not cover any risk inherent in the hedged items other than the risk of a change in the risk-free interest rate.

–

Cash flows: hedging against the exposure to changes in cash flows arising from a particular risk associated with a previously recognised asset or liability, or a forecast transaction that is highly likely to materialise and which could affect the results for the year. They are used to reduce net interest income volatility.

The main types of balance sheet items hedged are:

•

Floating rate mortgage loans indexed to the mortgage Euribor.

•

Floating rate liabilities indexed to the 3-month Euribor.

Banco Sabadell generally uses macro-hedging for balance sheet items, both assets and liabilities, while TSB also uses micro-hedging for floating-rate issues of its own-name securities, for which they arrange derivative contracts, typically for a nominal amount identical to the item hedged and with the same financial features.

If the hedge relates to assets, the Group enters into a floating-to-fixed interest rate swap, whereas if the macro-hedge relates to liabilities, it enters into a fixed-for-floating swap. These derivatives can be traded in cash or as forwards. The hedged risk is the interest rate risk associated with the effect that a potential change in the benchmark interest rate could have on the future interest accrued on hedged balance sheet items. The credit spread and risk premium which, together with the benchmark index, make up the contractual interest rate applicable to the hedged balance sheet items is expressly excluded from the hedge.

A-374

Every month, the Group calculates the interest rate risk metrics and establishes hedging strategies in accordance with the established risk appetite framework. Hedges are therefore managed, establishing hedges or discontinuing them, as required, on the basis of the evolution of the balance sheet items described previously within the management and control framework defined by the Group through its policies and procedures.

Hedging of net investments in foreign operations

The positions of subsidiaries and foreign branches implicitly entail exposure to exchange rate risk, which is managed by creating hedges through the use of forward contracts and options.

The maturities of these instruments are periodically renewed on the basis of prudential and forward-looking criteria.

A-375

2022 hedging disclosures

The nominal values and the fair values of the hedging instruments as at 31 December 2022 and 2021, broken down by risk category and type of hedge, are as follows:


Thousand euro
	2022						2021
	Nominal		Assets		Liabilities		Nominal		Assets		Liabilities

Microhedges:
Fair value hedges		8,353,601		831,005		207,837		7,583,852		168,282		92,692

Foreign exchange risk		—		—		—		—		—		—
Of liability-side transactions		—		—		—		—		—		—
Of permanent investments		—		—		—		—		—		—
Of non-monetary items		—		—		—		—		—		—
Interest rate risk		4,121,267		790,860		32,908		4,293,666		105,455		25,189
Of liability-side transactions (A)		65,304		—		5,532		32,359		309		879
Of asset-side transactions (B)		4,055,963		790,860		27,376		4,261,307		105,146		24,310
Equity risk		4,232,334		40,145		174,929		3,290,186		62,827		67,503
Of liability-side transactions (A)		4,232,334		40,145		174,929		3,290,186		62,827		67,503

Cash flow hedges		5,153,957		172,117		134,543		3,553,777		20,071		44,935

Foreign exchange risk		—		—		—		—		—		—
Of non-monetary items		—		—		—		—		—		—
Interest rate risk		3,915,860		162,137		3,875		2,756,394		13,923		9,041
Of future transactions (C)		332,674		11,466		1,733		238,016		2,686		625
Of liability-side transactions (A)		1,155,712		147,454		1,201		376,708		11,136		6,756
Of securitisation transactions (D)		2,427,474		3,217		941		2,141,670		101		1,660
Other		—		—		—		—		—		—
Equity risk		63,980		—		640		23,383		—		187
Of liability-side transactions (E)		63,980		—		640		23,383		—		187
Other risks		1,174,117		9,980		130,028		774,000		6,148		35,707
Of inflation-linked bonds (F)		1,174,000		—		130,028		774,000		6,148		35,707
Of future transactions (C)		117		9,980		—		—		—		—

Hedge of net investment in foreign operations		1,217,579		31,352		—		932,919		71		18,733
Foreign exchange risk (G)		1,217,579		31,352		—		932,919		71		18,733

Macrohedges:

Fair value hedges		39,183,746		2,037,523		898,400		35,581,142		336,958		356,082

Interest rate risk		39,183,746		2,037,523		898,400		35,581,142		336,958		356,082
For funding operations (H)		15,428,947		14,607		882,905		13,460,963		116,215		106,676
For lending operations (I)		23,754,799		2,022,916		15,495		22,120,179		220,743		249,406

Cash flow hedges		2,050,000		94		1,690		—		—		—
Interest rate risk		2,050,000		94		1,690		—		—		—
Of liability-side transactions		—		—		—		—		—		—
Of asset-side transactions (J)		2,050,000		94		1,690		—		—		—
Total		55,958,883		3,072,091		1,242,470		47,651,690		525,382		512,442

By currency:
In euro		28,752,613		1,303,596		935,274		20,381,698		231,943		353,202
In foreign currency		27,206,270		1,768,495		307,196		27,269,992		293,439		159,240
Total		55,958,883		3,072,091		1,242,470		47,651,690		525,382		512,442

The types of hedges according to their composition that are identified in the table are as follows:

Micro-hedges of interest rate risk on the Institution’s funding operations in capital markets and transactions involving term deposits opened by customers, recognised under the heading “Financial liabilities at amortised cost”.

Micro-hedges of transactions involving customer loans, recognised under the heading “Financial assets at amortised cost” and those involving debt securities under the headings “Financial assets at fair value through other comprehensive income” and “Financial assets at amortised cost”.

A-376

Micro-hedges of future transactions. The Institution designates as a hedging item those derivative contracts that will be settled for their gross amount through the transfer of the underlying asset (generally, fixed-income securities) according to the contract price.

Micro-hedging operations carried out by the Group’s securitisation funds.

Micro-hedges of transactions involving term deposits arranged by customers and which are currently being sold.

Hedges against foreign exchange risk on permanent investments currently cover 333 million pounds sterling and 9,253 million Mexican pesos corresponding to interests held in Group entities (213 million pounds sterling and 10,003 million Mexican pesos as at 31 December 2021) and 425 million US dollars corresponding to interests held in foreign branches (280 million US dollars as at 31 December 2021). All of these hedges are carried out through currency forwards.

Macro-hedges of the Institution’s funding operations in capital markets, transactions involving term deposits and demand deposits arranged by customers and recognised under the heading “Financial liabilities at amortised cost”.

Macro-hedges of debt securities classified under the headings “Financial assets at fair value through other comprehensive income” and “Financial assets at amortised cost”, and of fixed-rate mortgage loans granted to customers, recognised under the heading “Financial assets at amortised cost”.

Macro-hedges of floating rate mortgage loans granted to customers recognised under the heading “Financial assets at amortised cost”. The average rate of interest rate swaps used for this hedge was 3.59% as at 31 December 2022. This last hedge was not in effect as at 31 December 2021.

The maturity profiles of the hedging instruments used by the Group as at 31 December 2022 and 2021 are shown below:


Thousand euro
	2022
	Nominal
		Up to 1 month	1 to 3 months	3 to 12 months	1 and 5 years	More than 5 years	Total

Foreign exchange risk		460,156	737,282	20,141	—	—	1,217,579
Interest rate risk		1,114,907	1,535,196	6,092,608	22,276,713	18,251,449	49,270,873
Equity risk		60,038	90,741	408,348	3,539,198	197,989	4,296,314
Other risks		—	—	449,000	200,000	525,117	1,174,117
Total		1,635,101	2,363,219	6,970,097	26,015,911	18,974,555	55,958,883

Thousand euro
	2021
	Nominal
		Up to 1 month	1 to 3 months	3 to 12 months	1 and 5 years	More than 5 years	Total

Foreign exchange risk		304,396	610,373	18,150	—	—	932,919
Interest rate risk		242,999	238,016	6,871,995	19,164,433	16,113,758	42,631,201
Equity risk		2,501	376,528	463,911	2,192,832	277,797	3,313,569
Other risks		—	—	—	449,000	325,000	774,000
Total		549,896	1,224,917	7,354,056	21,806,265	16,716,555	47,651,689

In 2022 and 2021, there were no reclassifications from equity to the consolidated income statement due to cash flow hedges and hedges of net investments in foreign operations for transactions that were ultimately not executed.

A-377

The following table shows the accounting information of items covered by the fair value micro-hedges arranged by the Group:


Thousand euro
	2022
	Carrying amount of hedged item			Accumulated fair value adjustments in the hedged item			Accumulated amount of adjustments in hedged items for which hedge accounting no longer applies
		Assets	Liabilities		Assets	Liabilities

Micro-hedges:
Fair value hedges
Foreign exchange risk		—	—		—	—		—
Interest rate risk		3,783,282	322,472		(538,313)	(40,517)		(76)
Equity risk		—	2,040,966		—	(92,318)		—
Total		3,783,282	2,363,438		(538,313)	(132,835)		(76)

Thousand euro
	2021
	Carrying amount of hedged item			Accumulated fair value adjustments in the hedged item			Accumulated amount of adjustments in hedged items for which hedge accounting no longer applies
		Assets	Liabilities		Assets	Liabilities

Micro-hedges:
Fair value hedges
Foreign exchange risk		—	—		—	—		—
Interest rate risk		5,384,640	356,924		(65,713)	(9,377)		3,206
Equity risk		—	1,708,590		—	14,149		(7)
Total		5,384,640	2,065,514		(65,713)	4,772		3,199

In terms of fair value macro-hedges, the carrying amount of the hedged items recognised in assets and liabilities for 2022 amounted to 78,804,701 thousand euros and 52,078,774 thousand euros, respectively (29,343,668 thousand euros and 60,195,513 thousand euros in 2021, respectively). Similarly, fair value adjustments of the hedged items amounted to -1,545,607 thousand euros and -959,106 thousand euros as at 31 December 2022, respectively (-3,963 thousand euros and 19,472 thousand euros as at 31 December 2021).

In relation to fair value hedges, the losses and gains recognised in 2022 and 2021 arising from both hedging instruments and hedged items are detailed hereafter:


Thousand euro
	2022			2021
		Hedging instruments	Hedged items		Hedging instruments	Hedged items

Micro-hedges		596,080	(599,425)		33,932	(38,524)
Fixed-rate assets		735,627	(739,915)		89,231	(94,757)
Capital markets and fixed-rate liabilities		(107,478)	108,411		(18,498)	19,386
Assets denominated in foreign currency		(32,069)	32,079		(36,801)	36,847

Macro-hedges		1,126,218	(1,104,218)		297,263	(293,854)
Capital markets and fixed-rate liabilities		(982,993)	990,659		(318,769)	340,540
Fixed-rate assets		2,109,211	(2,094,877)		616,032	(634,394)
Total		1,722,298	(1,703,643)		331,195	(332,378)

A-378

Hedge ineffectiveness in the results for 2022 related to cash flow hedges amounted to losses of 804 thousand euros (losses of 3,668 thousand euros in 2021).

As at 31 December 2022, the Group holds embedded derivatives that have been separated from their host contracts and recognised under the headings “Derivatives – Hedge accounting” on the asset side and on the liabilities side of the consolidated balance sheet in the amount of 33,586 thousand euros and 46,917 thousand euros, respectively (43,707 and 22,683 thousand euros, respectively, as at 31 December 2021). The host contracts of those embedded derivatives correspond to customer deposits and debt securities in issue and have been allocated to the portfolio of financial liabilities at amortised cost.

Note 13 – Non-current assets and disposal groups classified as held for sale

The composition of this heading in the consolidated balance sheets as at 31 December 2022 and 2021 was as follows:


Thousand euro

	2022	2021

Assets	951,792	998,210
Loans and advances	10,337	67
Customers	10,337	67
Equity instruments	159,748	159,853
Real estate exposure	777,108	838,290
Tangible assets for own use	56,030	44,945
Foreclosed assets	721,078	793,345
Leased out under operating leases	—	—
Rest of other assets	4,599	—

Impairment allowances	(213,479)	(220,175)
Non-current assets and disposal groups classified as held for sale	738,313	778,035

Tangible assets for own use relate mainly to commercial premises.

Regarding real estate assets obtained through foreclosures, 93.7% of the balance corresponds to residential properties, 5.8% to industrial properties and 0.5% to agricultural assets.

The average term during which assets remained within the category of “Non-current assets and assets and liabilities included in disposal groups classified as held for sale – Foreclosed assets” was 53 months in 2022 (43 months in 2021). The policies concerning the sale or disposal by other means of these assets are set out in Note 4.4.2.1.

The percentage of foreclosed assets sold with financing granted to the buyer in 2022 was 4.9% (in 2021 it was 4.1%). On the date of sale, these properties had a gross asset value of 5.7 million euros in 2022 (9.6 million euros in 2021).

A-379

Movements in “Non-current assets and disposal groups classified as held for sale” during 2022 and 2021 were as follows:


Thousand euro
	Note	Non-current assets held for sale
Cost:
Balances as at 31 December 2020		1,269,690

Additions		104,087
Disposals		(495,649)
Transfer of credit losses (*)	11	(28,921)
Other transfers/reclassifications		149,003
Balances as at 31 December 2021		998,210

Additions		63,908
Disposals		(114,227)
Transfer of credit losses (*)	11	(16,195)
Other transfers/reclassifications		20,096
Balances as at 31 December 2022		951,792

Impairment allowances:
Balances as at 31 December 2020		294,150

Impairment through profit or loss	37	71,148
Reversal of impairment through profit or loss	37	(53,236)
Utilisations		(88,494)
Other transfers/reclassifications		(3,393)
Balances as at 31 December 2021		220,175

Impairment through profit or loss	37	48,966
Reversal of impairment through profit or loss	37	(45,542)
Utilisations		(26,170)
Other transfers/reclassifications		16,050
Balances as at 31 December 2022		213,479

Net balances as at 31 December 2021		778,035

Net balances as at 31 December 2022		738,313

(*) Allowance arising from provisions allocated to cover credit risk.

Details of the net carrying amount of transfers shown in the table above are as follows:


Thousand euro
	Note	2022	2021

Loans and advances		10,153	—
Tangible assets	15	(5,941)	(17,099)
Inventories		—	17,605
Equity interests		—	159,853
Other		(166)	(7,963)
Total		4,046	152,396

A-380

Note 14 – Investments in joint ventures and associates

Movements in this heading of the consolidated balance sheets as at 31 December 2022 and 2021 are as follows:


Thousand euro

Balance as at 31 December 2020			779,859

Profit/(loss) for the year			100,280
Acquisition or capital increase (*)			3,912
Sale or dissolution			(2,279)
Dividends			(60,824)
Transfer			(160,429)
Impairment, allowances, translation differences and other			(21,737)
Balance as at 31 December 2021			638,782

Profit/(loss) for the year			122,167
Acquisition or capital increase (*)			1,747
Sale or dissolution			(49,972)
Dividends			(151,818)
Impairment, allowances, translation differences and other			(45,661)
Balance as at 31 December 2022			515,245

(*) See consolidated cash flow statement.

The section of the cash flow statement “Cash flows from investing activities – Collections – Investments in joint ventures and associates” shows 210,300 thousand euros, of which 49,972 thousand euros correspond to sales or dissolutions, 151,818 thousand euros to dividends charged and 8,510 thousand euros to derecognitions and settlements included in the breakdown shown in Schedule I. Furthermore, the section “Cash flows from investing activities – Payments – Investments in joint ventures and associates” of this statement shows 1,747 thousand euros, which correspond to the acquisitions and capital increases carried out during 2022.

The main investee companies included for the first time in the balance sheet and those no longer in the balance sheet in 2022 y 2021 are indicated in Schedule I.

As at 31 December 2022 and 2021, no support agreements or other type of significant contractual commitment had been provided by the Bank or its subsidiaries to associates.

The reconciliation between the Group’s investment in investees and the balance recorded under the heading “Investments in joint ventures and associates” is as follows:


Thousand euro
	2022		2021

Group investment in associates (Schedule I)		220,505		267,469
Contributions due to retained earnings		349,187		391,492
Value adjustments		(54,447)		(20,179)
Total		515,245		638,782

A-381

Set out below are the most relevant financial data for the associate, BanSabadell Vida, S.A., as at 31 December 2022 and 2021, through which the Bank extends its customer offering via the distribution of insurance products through its branch network:


Thousand euro
		*BanSabadell Vida ()**
	2022		2021

Total assets		8,808,926		10,418,907
Of which: financial investments		7,802,671		9,455,504
Total liabilities		8,209,481		9,745,468
Of which: technical provisions		8,561,133		8,929,810

Profit/(loss) of Vida’s technical account		125,764		115,465
Of which: premiums earned during the year		1,053,473		1,239,765
Of which: claims paid during the year		(1,276,160)		(1,227,205)
Of which: technical financial yield		155,337		156,927

(*) Figures taken from BanSabadell Vida accounts without taking into consideration consolidation adjustments nor the Group’s percentage holding.

As at 31 December 2022 and 2021, the carrying amount of the investment in BanSabadell Vida, S.A. amounted to 266,155 thousand euros and 289,861 thousand euros, respectively. Furthermore, as at these dates, the aggregate carrying amount of investments in associates not considered individually significant was of 249,090 thousand euros and 348,921 thousand euros, respectively.

Note 15 – Tangible assets

The composition of this heading in the consolidated balance sheets as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022								2021

	Cost		Depreciation		Impairment		Net amount		Cost		Depreciation		Impairment		Net amount

Property, plant and equipment		4,082,057		(1,754,760)		(45,248)		2,282,049		4,173,480		(1,706,114)		(69,876)		2,397,490

For own use:		4,061,108		(1,743,155)		(45,248)		2,272,705		4,168,101		(1,703,527)		(69,876)		2,394,698
Computer equipment and related facilities		727,049		(483,483)		—		243,566		710,316		(471,866)		—		238,450
Furniture, vehicles and other facilities		956,696		(572,885)		—		383,811		1,005,308		(598,167)		—		407,141
Buildings		2,258,790		(675,671)		(45,248)		1,537,871		2,309,743		(619,881)		(66,328)		1,623,534
Work in progress		31,501		—		—		31,501		63,495		(6,013)		(3,548)		53,934
Other		87,072		(11,116)		—		75,956		79,239		(7,600)		—		71,639

Leased out under operating leases		20,949		(11,605)		—		9,344		5,379		(2,587)		—		2,792
Investment properties		438,398		(54,423)		(84,233)		299,742		504,952		(54,308)		(71,376)		379,268

Buildings		438,004		(54,423)		(83,922)		299,659		504,558		(54,308)		(71,067)		379,183
Rural property, plots and sites		394		—		(311)		83		394		—		(309)		85
Total		4,520,455		(1,809,183)		(129,481)		2,581,791		4,678,432		(1,760,422)		(141,252)		2,776,758

A-382

Movements in the balance under this heading during 2022 and 2021 were as follows:


Thousand euro
		Own use - Buildings, work in progress and other		Own use - Computer equipment, furniture and related facilities		Investment properties		Leased out under operating leases		Total

Cost:	Note
Balances as at 31 December 2020			2,481,133		1,797,048		429,367		358,749		5,066,298

Additions (*)			222,489		113,553		7,331		—		343,373
Disposals			(237,770)		(202,541)		(22,589)		(353,979)		(816,879)
Transfers			(46,197)		(296)		90,843		—		44,350
Exchange rate			32,819		7,861		—		610		41,290
Balances as at 31 December 2021			2,452,478		1,715,625		504,952		5,380		4,678,432

Additions			99,878		123,020		190		15,852		238,940
Disposals			(79,904)		(156,271)		(111,219)		—		(347,394)
Transfers			(68,553)		6,077		44,477		—		(17,999)
Exchange rate			(26,536)		(4,704)		—		(283)		(31,523)
Balances as at 31 December 2022			2,377,363		1,683,747		438,400		20,949		4,520,456

Accumulated depreciation:
Balances as at 31 December 2020			597,746		1,084,290		38,610		85,456		1,806,102

Additions			142,693		142,888		10,572		5		296,158
Disposals			(115,494)		(160,490)		(2,167)		(83,184)		(361,335)
Transfers			(5,754)		(1,105)		7,293		—		434
Exchange rate			14,303		4,451		—		310		19,064
Balances as at 31 December 2021			633,494		1,070,034		54,308		2,587		1,760,423

Additions			129,684		137,613		9,616		9,514		286,427
Disposals			(56,639)		(149,642)		(11,937)		—		(218,218)
Transfers			(10,436)		1,387		2,436		—		(6,613)
Exchange rate			(9,317)		(3,023)		—		(496)		(12,836)
Balances as at 31 December 2022			686,786		1,056,369		54,423		11,605		1,809,183

Impairment losses:
Balances as at 31 December 2020			17,144		—		42,665		8		59,816

Impairment through profit or loss	35		58,580		—		36,180		—		94,760
Reversal of impairment through profit or loss	35		(211)		—		(29,066)		—		(29,277)
Utilisations			(10,472)		—		(385)		(8)		(10,865)
Transfers			4,836		—		21,981		—		26,817
Balances as at 31 December 2021			69,877		—		71,375		—		141,251

Impairment through profit or loss	35		2,078		—		58,163		—		60,241
Reversal of impairment through profit or loss	35		(162)		—		(22,981)		—		(23,143)
Utilisations			(4,596)		—		(34,407)		—		(39,003)
Transfers			(21,948)		—		12,084		—		(9,864)
Balances as at 31 December 2022			45,249		—		84,234		—		129,482

Net balances as at 31 December 2021			1,749,108		645,591		379,268		2,793		2,776,758

Net balances as at 31 December 2022			1,645,329		627,378		299,742		9,344		2,581,791

(*) Items reported in ‘Own use—Buildings, work in progress and other’ in 2021 included 117,747 thousand euros of revaluations and new right-of-use assets corresponding to leased properties in which the Group acted as lessee.

Of the net carrying amount of “Transfers” shown in the previous table for 2022, -1,522 thousand euros, -7,463 thousand euros correspond to reclassifications to the heading “Inventories” (see Note 17), and 5,941 thousand euros to reclassifications of assets from or to the heading “Non-current assets and disposal groups classified as held for sale”. In 2021, the net carrying amount of “Transfers” that amounted to 17,099 thousand euros corresponded in full to reclassification of assets from or to the heading “Non-current assets and disposal groups classified as held for sale” (see Note 13).

A-383

Specific information relating to tangible assets as at 31 December 2022 and 2021 is shown hereafter:


Thousand euro
	2022		2021

Gross value of tangible assets for own use in use and fully depreciated		440,137		481,244
Net carrying amount of tangible assets of foreign operations		369,759		401,094

Lease contracts in which the Group acts as lessee

As at 31 December 2022, the cost of property, plant and equipment for own use includes right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee, in the amount of 1,293,944 thousand euros, which have accumulated depreciation of 396,041 thousand euros and are impaired in the amount of 38,657 thousand euros as at the aforesaid date (1,341,931 thousand euros as at 31 December 2021, which had accumulated depreciation of 324,916 thousand euros and were impaired in the amount of 36,666 thousand euros as at that date).

The cost recognised in the consolidated income statement for 2022 for the depreciation and impairment of right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee amounted to 96,017 thousand euros and 1,991 thousand euros, respectively (103,155 thousand euros and 36,666 thousand euros, respectively, in 2021).

Information is set out below concerning the lease contracts in which the Group acts as lessee:


Thousand euro
	2022		2021

Interest expense on lease liabilities		(15,347)		(17,481)
Expense related to short-term low-value leases (*)		(11,592)		(11,537)
Total lease payments in cash (**)		110,950		110,934

(*) Recognised in the “Administrative expenses” heading, in the item on “Of property, plant and equipment” (see Note 33).

(**) Payments of the principal and interest components of the lease liability are recognised as cash flows from financing activities in the Group’s consolidated cash flow statement.

The future cash outflows to which the Group may potentially be exposed as lessee and which are not included under lease liabilities are not significant.

Minimum future payments over the non-cancellable period for lease contracts in effect as at 31 December 2022 are indicated below:


Thousand euro
	2022		2021

Undiscounted lease payments receivable
Up to 1 month		1,348		875
1 to 3 months		25,356		25,417
3 to 12 months		76,513		75,769
1 to 5 years		352,018		352,190
More than 5 years		511,547		569,317

A-384

Sale and leaseback transactions


Operating lease contracts	No. properties sold	No. contracts with purchase option	No. contracts without purchase option	Mandatory term

2009	63	26	37	10 to 20 years
2010	379	378	1	10 to 25 years
2011 (acquisition B.Guipuzcoano)	40	30	10	8 to 20 years
2012 (acquisition Banco CAM)	12	12	—	10 to 25 years
2012	4	4	—	15 years

Specific information in connection with this set of lease contracts as at 31 December 2022 and 2021 is given below:


Thousand euro
	2022		2021

Undiscounted lease payments receivable
Up to 1 month		130		120
1 to 3 months		11,167		10,630
3 to 12 months		34,392		32,702
1 to 5 years		178,154		169,022
More than 5 years		367,262		389,324

In 2022, no significant results were recorded for sale and leaseback transactions. In 2021, gains from sale and leaseback transactions amounted to 25,281 thousand euros and were recognised under the heading “Gains or (-) losses on derecognition of non-financial assets, net” of the consolidated income statement.

Contracts in which the Group acts as lessor

The lease contracts entered into by the Group in which it acts as lessor are mainly operating leases.

With regard to the tangible assets leased out under operating leases, the bulk of the operating lease operations corresponded to vehicle leasing and were carried out through the subsidiary BanSabadell Renting, S.L.U. As indicated in Note 2, this subsidiary was sold during 2021 to a non-Group third party.

As regards the investment properties item, the rental income from these investment properties and the direct costs associated with the investment properties that produced rental income during 2022 amounted to 23,474 thousand euros and 9,768 thousand euros, respectively. Direct costs associated with investment properties that did not produce rental income were not significant in the context of the consolidated annual financial statements.

A-385

Note 16 – Intangible assets

The composition of this heading in the consolidated balance sheets as at 31 December 2022 and 2021 was as follows:


Thousand euro
	2022		2021

Goodwill:		1,026,810		1,026,457
Banco Urquijo		473,837		473,837
Grupo Banco Guipuzcoano		285,345		285,345
From acquisition of Banco BMN Penedés assets		245,364		245,364
Other		22,264		21,911
Other intangible assets:		1,457,352		1,554,964
With a finite useful life:		1,457,352		1,554,964
Private Banking Business, Miami		4,925		8,444
Contractual relations with TSB customers and brand		39,783		84,589
Computer software		1,411,516		1,460,744
Other		1,128		1,187
Total		2,484,162		2,581,421

Goodwill

As set forth in the regulatory framework of reference, Banco Sabadell carried out an analysis in 2022 to evaluate the existence of any potential impairment of its goodwill.

The main transactions that generated goodwill were the acquisition of Banco Urquijo in 2006, of Banco Guipuzcoano in 2010 and of certain assets of BMN-Penedès in 2013.

Banco Sabadell Group has been monitoring the Group’s total goodwill across the ensemble of Cash-Generating Units (CGUs) that make up the Banking Business Spain operating segment. In addition, the Group considers that the United Kingdom operating segment is a CGU.

The projections used to determine the recoverable amount are those set out in the financial projections approved by the Board of Directors. Those projections are based on sound and well-founded assumptions, which represent management’s best estimates of overall upcoming economic conditions. To determine the key variables (basically net interest income, fees and commissions, expenses, cost of risk and solvency levels) that underpin the Financial Projections, management has used microeconomic variables, such as the existing balance sheet structure, market positioning and strategic decisions adopted, and macroeconomic variables, such as the expected evolution of GDP and the forecast evolution of interest rates and unemployment. The macroeconomic variables used for the baseline macroeconomic scenario, described in Note 1, were estimated by the Group’s Research Division.

The approach used to determine the values of assumptions is based on the projections and on past experience. These values are compared against external information sources, if available.

In 2022, to calculate the terminal value, Spain’s nominal GDP in 2027 was taken as reference, using a growth rate in perpetuity of 1.9% (2.0% in 2021), which does not exceed the long-term average growth rate of the market in which the operating segment is active. The discount rate used was 10.4% (9.3% in 2021), determined using the Capital Asset Pricing Model (CAPM); it therefore comprises a risk-free rate (10-year Spanish bond) plus a risk premium which reflects the inherent risk of the operating segment being valued.

The recoverable amount obtained is higher than the carrying amount; therefore, there has been no impairment. The individual recoverable amount for each CGU at the end of 2022 and 2021, before allocating goodwill to the CGUs as a group, was above its carrying amount; therefore, the Group did not recognise any impairment at the CGU level during the aforesaid years.

A-386

The interest rate hikes by central banks and the new monetary policy environment have led to an increase in the discount rate used to estimate the recoverable amount of CGUs, both in Spain and in the UK. However, the estimated positive effect on the cash flows generated by the businesses exceeds the impact of the increase in the discount rate, so that, overall, interest rate hikes had a positive impact on the recoverable amount.

Additionally, the Group has carried out a sensitivity test, making reasonable adjustments to the main assumptions used to calculate the recoverable amount.

This test consisted of adjusting, individually, the following assumptions:

–

Discount rate +/- 0.5%.

–

Growth rate in perpetuity +/- 0.5%.

–

Minimum capital requirement +/-0.5%.

–

NIM/ATAs in perpetuity +/- 5bps.

–

Cost of risk in perpetuity +/- 10bps.

The sensitivity test does not alter the conclusions drawn from the impairment test. In all scenarios defined in that analysis, the recoverable amount obtained is greater than the carrying amount.

In accordance with the specifications of the restated text of the Corporation Tax Law, the goodwill generated is not tax-deductible.

Other intangible assets

Miami Private Banking business

Intangible assets associated with the acquisition in 2008 of the Private Banking business in Miami include the value of contractual rights arising from customer relationships taken over from this business, mainly short-term lending and deposits. These assets are amortised over a period of between 10 and 15 years from their creation.

Contractual relations with TSB customers and brand

The intangible assets associated with the acquisition of TSB include the value of the contractual rights arising from relationships with customers taken over from TSB for demand deposits (core deposits), the initial estimate of which amounted to 353,620 thousand euros. This asset is amortised over 8 years. The valuation of these intangible assets was carried out by calculating the value in use based on the income approach (discounted cash flows) with the multi-period excess earnings technique. To determine whether there is any evidence of impairment, the balance of deposits currently in TSB linked to existing customers at the time of its acquisition by the Bank has been compared against the estimated balance that such customers would have at the end of 2022, forecast at the time of the initial valuation. Based on this comparison, a conclusion can be drawn that there is no evidence of any impairment. The carrying amount of contractual relationships with TSB customers amounted to 17,727 thousand euros as at 31 December 2022 (56,135 thousand euros as at 31 December 2021).

The value of the exclusive right of use of the TSB brand was also estimated at an initial amount of 73,328 thousand euros. The value attributable to this asset was determined through the replacement cost method, consisting of establishing the cost of rebuilding or acquiring an exact replica of the asset in question. This asset is amortised over 12 years. The assessment of the recoverable amount of the TSB CGU included an implicit analysis of the brand and concluded that there is no impairment. The carrying amount of the TSB brand amounted to 22,056 thousand euros as at 31 December 2022 (28,454 thousand euros as at 31 December 2021).

Computer software

Computer software costs include mainly the capitalised costs of developing the Group’s computer software and the cost of purchasing software licences.

R&D expenditure in 2022 and 2021 was not significant.

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Movements

Movements in goodwill in 2022 and 2021 were as follows:


Thousand euro
	Goodwill		Impairment		Total

Balance as at 31 December 2020		1,026,105		—		1,026,105

Additions		352		—		352
Disposals		—		—		—
Balance as at 31 December 2021		1,026,457		—		1,026,457

Additions		353		—		353
Disposals		—		—		—
Balance as at 31 December 2022		1,026,810		—		1,026,810

Movements in other intangible assets in 2022 and 2021 were as follows:


Thousand euro
	Cost				Amortisation		Impairment				Total
	Developed internally	Other	Total	Developed internally	Other	Total	Developed internally	Other	Total
Balance as at 31 December 2020	2,250,521	964,486	3,215,007	(915,893)	(727,111)	(1,643,004)	—	(2,025)	(2,025)		1,569,978

Additions	236,049	40,092	276,141	(166,853)	(63,502)	(230,355)	(1,570)	—	(1.570) (	*)	44,216
Disposals	(63,144)	(172,010)	(235,154)	13,823	155,133	168,956	1,570	2,025	3,595		(62,603)
Other	(22,713)	12	(22,701)	5,937	(3)	5,934	—	—	—		(16,767)
Exchange differences	12,898	29,967	42,865	(2,554)	(20,171)	(22,725)	—	—	—		20,140
Balance as at 31 December 2021	2,413,611	862,547	3,276,158	(1,065,540)	(655,654)	(1,721,194)	—	—	—		1,554,964

Additions	187,533	7,105	194,638	(195,655)	(63,009)	(258,664)	—	—	—		(64,026)
Disposals	(27,296)	(83,657)	(110,953)	6,299	77,859	84,158	—	—	—		(26,795)
Other	(6,554)	5,168	(1,386)	(14,115)	(28)	(14,143)	—	—	—		(15,529)
Exchange differences	6,511	(16,611)	(10,100)	2,693	16,145	18,838	—	—	—		8,738
Balance as at 31 December 2022	2,573,805	774,552	3,348,357	(1,266,318)	(624,687)	(1,891,005)	—	—	—		1,457,352

(*) See Note 35.

The gross value of other intangible assets that were in use and had been fully amortised as at 31 December 2022 and 2021 amounted to 1,078,836 thousand euros and 1,141,823 thousand euros, respectively.

Note 17 – Other assets and liabilities

The “Other assets” heading on the consolidated balance sheets as at 31 December 2022 and 2021 breaks down as follows:


Thousand euro
	Note	2022	2021

Insurance contracts linked to pensions	22	89,729	116,453
Inventories	6	93,835	142,713
Rest of other assets		296,116	360,549
Total		479,680	619,715

The “Rest of other assets” item includes mainly prepaid expenses, the accrual of customer fees and commissions and transactions in progress pending settlement.

A-388

Movements in inventories in 2022 and 2021 were as follows:


Thousand euro
	Note		Land		Buildings under construction		Completed buildings		Total

Balance as at 31 December 2020				9,824		1,786		182,653		194,264

Additions				7,920		255		58,727		66,902
Disposals				(6,006)		(300)		(55,628)		(61,934)
Impairment through profit or loss		35		(4,997)		(381)		(51,763)		(57,141)
Reversal of impairment through profit or loss		35		1,608		156		16,463		18,227
Other transfers		13		60		—		(17,665)		(17,605)
Balance as at 31 December 2021				8,409		1,516		132,787		142,713

Additions				802		3,661		8,946		13,409
Disposals				(2,279)		(558)		(42,895)		(45,732)
Impairment through profit or loss		35		(2,459)		(173)		(33,519)		(36,151)
Reversal of impairment through profit or loss		35		996		71		11,066		12,133
Other transfers		15		—		(3,645)		11,108		7,463
Balance as at 31 December 2022				5,469		872		87,493		93,835

As at 31 December 2022 and 2021, the amount of inventories associated with debt secured with mortgages is 11,318 thousand euros and 14,626 thousand euros, respectively.

The composition of the “Other liabilities” heading as at 31 December 2022 and 2021 is as follows:


Thousand euro
	31/12/2022	31/12/2021

Other accrual/deferral	577,298	626,157
Rest of other liabilities	294,810	142,057
Total	872,108	768,214

The “Rest of other liabilities” item mainly includes transactions in progress pending settlement.

Note 18 – Deposits of central banks and credit institutions

The breakdown of the balance of deposits of central banks and credit institutions in the consolidated balance sheets as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022	2021

By heading:
Financial liabilities at amortised cost	39,217,078	47,067,145
Total	39,217,078	47,067,145

By nature:
Demand deposits	378,442	534,995
Deposits with agreed maturity	30,936,695	41,468,444
Repurchase agreements	8,118,516	5,398,905
Other accounts	125,378	114,975
Valuation adjustments	(341,953)	(450,174)
Total	39,217,078	47,067,145

By currency:
In euro	31,390,222	38,458,261
In foreign currency	7,826,856	8,608,884
Total	39,217,078	47,067,145

A-389

Note 19 – Customer deposits

The balance of customer deposits on the consolidated balance sheets as at 31 December 2022 and 2021 breaks down as follows:


Thousand euro
	2022	2021

By heading:
Financial liabilities at amortised cost	164,076,445	162,239,453
Total	164,076,445	162,239,453

By nature:
Demand deposits	147,539,675	147,268,436
Deposits with agreed maturity	14,066,824	13,131,887
Fixed term	11,985,933	11,205,749
Non-marketable covered bonds and bonds issued	418,835	1,111,603
Other	1,662,056	814,535
Hybrid financial liabilities (see Notes 10 and 12)	2,074,477	1,680,942
Repurchase agreements	404,866	60,312
Other valuation adjustments (interest, fees and commissions, other)	(9,397)	97,876
Total	164,076,445	162,239,453

By sector:
General governments	8,499,245	7,905,699
Other sectors	155,586,597	154,235,878
Other valuation adjustments (interest, fees and commissions, other)	(9,397)	97,876
Total	164,076,445	162,239,453

By currency:
In euro	114,063,466	111,119,866
In foreign currency	50,012,979	51,119,587
Total	164,076,445	162,239,453

Note 20 – Debt securities in issue

The composition of this heading in the consolidated balance sheets as at 31 December 2022 and 2021, by type of issuance, is as follows:


Thousand euro
	2022	2021

Straight bonds/debentures	7,990,800	7,079,915
Straight bonds	7,949,500	7,022,715
Structured bonds	41,300	57,200
Commercial paper	871,896	426,094
Mortgage covered bonds	7,563,000	6,540,400
TSB covered bonds	1,409,356	2,082,640
Asset-backed securities	1,202,846	671,317
Subordinated marketable debt securities	3,450,000	4,200,000
Subordinated liabilities	1,800,000	1,800,000
Preferred securities	1,650,000	2,400,000
Valuation and other adjustments	89,651	50,589
Total	22,577,549	21,050,955

Schedule IV shows details of the outstanding issues as at 2022 and 2021 year-end.

The remuneration for preferred securities that are contingently convertible into ordinary shares amounted to 110,374 thousand euros in 2022 (100,593 thousand euros in 2021) and is recognised under the heading “Other reserves” of consolidated equity.

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Note 21 – Other financial liabilities

The composition of this heading in the consolidated balance sheets as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022	2021

By heading:
Financial liabilities at amortised cost	6,658,861	4,821,669
Total	6,658,861	4,821,669

By nature:
Debentures payable	364,207	356,465
Guarantee deposits received	8,992	11,261
Clearing houses	1,032,869	672,355
Collection accounts	3,322,141	2,214,033
Lease liabilities	969,477	1,037,265
Other financial liabilities	961,175	530,290
Total	6,658,861	4,821,669

By currency:
In euro	4,913,626	4,294,286
In foreign currency	1,745,235	527,383
Total	6,658,861	4,821,669

The following table shows information relating to the average time taken to pay suppliers (days payable outstanding), as required by Additional Provision Three of Law 15/2010, taking into account the amendments introduced by Law 18/2022, of 28 September, on the creation and growth of companies:


	2022	2021

Average payment period and supplier payment ratios (in days)
Average time taken to pay suppliers	28.74	27.30
Ratio of transactions paid (*)	28.72	27.30
Ratio of transactions payable (**)	50.03	17.06

Payments made and pending at year-end (in thousand euro)
Total payments made	1,131,038	957,417
Total payments outstanding	1,131	127

Payments made in < 60 days (in thousand euro) ()*
Monetary volume of paid invoices	1,011,940	882,574
Percentage of total amount of payments to suppliers	89	92

Number of invoices paid in < 60 days ()*
Number of invoices paid	141,339	152,338
Percentage of total number of invoices	92	92

The calculations above only take into account transactions undertaken by the Group’s main Spanish entities, which represent 98.75% of total invoicing.

(*) The ratio of paid transactions is equal to the sum of the amount of each paid transaction multiplied by the number of days elapsed since the date of receipt of the invoice until its payment, divided by the total amount of payments made.

(**) The ratio of transactions payable is equal to the sum of the amount of each transaction payable multiplied by the number of days elapsed since the date of receipt of the invoice until the last day of the period, divided by the total amount of pending payments.

(***) Corresponds to invoices paid within the maximum period established in regulations on late payment.

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Note 22 – Provisions and contingent liabilities

Movements during 2022 and 2021 under the “Provisions” heading are shown below:


Thousand euro

	Pensions and other post employment defined benefit obligations		Other long term employee benefits		Pending legal issues and tax litigation		Commitments and guarantees given		Other provisions		Total

Balance as at 31 December 2020		99,690		3,971		114,097		195,879		569,875		983,512

Scope additions / exclusions		—		—		—		—		(788)		(788)

Interest and similar expenses - pension commitments		1,010		4		—		—		—		1,014

*Allowances charged to income statement - staff expenses ()**		2,859		6		—		—		280,390		283,255

Allowances not charged to income statement		—		—		—		—		—		—

Allowances charged to income statement - provisions		1,305		17		39,608		(9,046)		55,682		87,566
Allocation of provisions		39		—		41,093		197,837		57,363		296,332
Reversal of provisions		—		—		(1,485)		(206,882)		(1,681)		(210,048)
Actuarial losses / (gains)		1,266		17		—		—		—		1,283

Exchange differences		344		—		—		1,629		9,349		11,322

Utilisations:		(8,043)		(1,417)		(76,857)		—		(123,363)		(209,680)
Contributions by the sponsor		281		—		—		—		—		281
Pension payments		(8,324)		(1,417)		—		—		—		(9,741)
Other		—		—		(76,857)		—		(123,363)		(200,220)

Other movements		(11,145)		(1,931)		—		2,129		(259,116)		(270,063)
Balance as at 31 December 2021		86,020		650		76,848		190,591		532,029		886,138

Scope additions / exclusions		—		—		—		—		—		—

Interest and similar expenses - pension commitments		1,958		4		—		—		—		1,962

*Allowances charged to income statement - staff expenses ()**		1,152		5		—		—		(2,790)		(1,633)

Allowances not charged to income statement		—		—		—		—		—		—

Allowances charged to income statement - provisions		228		(32)		45,211		(14,258)		65,672		96,821
Allocation of provisions		84		—		47,619		191,058		65,672		304,433
Reversal of provisions		—		—		(2,408)		(205,316)		—		(207,724)
Actuarial losses / (gains)		144		(32)		—		—		—		112

Exchange differences		688		—		—		(305)		(6,645)		(6,262)

Utilisations:		(7,562)		(457)		(32,209)		—		(172,876)		(213,104)
Net contributions by the sponsor		612		—		—		—		—		612
Pension payments		(8,174)		(457)		—		—		—		(8,631)
Other		—		—		(32,209)		—		(172,876)		(205,085)

Other movements		(19,100)		—		—		795		(101,108)		(119,413)
Balance as at 31 December 2022		63,384		170		89,850		176,823		314,282		644,509

(*) See Note 33.

The headings “Pensions and other post employment defined benefit obligations” and “Other long term employee benefits” include the amount of provisions for the coverage of post-employment remuneration and commitments undertaken with early retirees and similar commitments.

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The heading “Commitments and guarantees given” includes the amount of provisions for the coverage of commitments given and contingent risks arising from financial guarantees or other types of contracts.

During the usual course of business, the Group is exposed to fiscal, legal and regulatory contingencies, among others. All significant contingencies are analysed on a regular basis, with the collaboration of third party experts when necessary and, where appropriate, provisions are recognised under the headings “Pending legal issues and tax litigation” and “Other provisions”. As at 31 December 2022 and 2021, these headings mainly include:

–

Provisions for legal contingencies amounting to 23 million euros as at 31 December 2022 (28 million euros as at 31 December 2021).

–

Other provisions for legal contingencies in Spain arising from customer claims in connection with certain general terms and conditions of agreements amounting to 179 million euros (171 million euros as at 31 December 2021). The most significant provision relates to the possible reimbursement of amounts received as a result of the application of mortgage floor clauses, whether as a result of the hypothetical voiding by the courts of law of floor clauses or whether due to the implementation of Royal Decree-Law 1/2017, of 20 January, on measures to protect consumers regarding floor clauses, for the amount of 99 million euros as at 31 December 2022 (114 million euros as at 31 December 2021). In a highly adverse scenario of potential additional claims being filed, both through the procedures established by the Institution, in accordance with that set forth in the aforesaid Royal Decree, and through court proceedings applying the percentages set forth in the current agreement, the maximum contingency would amount to 114 million euros.

With regard to this provision, the Bank considers its floor clauses to be transparent and clear to customers, and in general, these have not been definitively voided with a final ruling. On 12 November 2018, Section 28 of the Civil Division of the Provincial Court of Madrid issued a ruling in which it partially supported the appeal brought forth by Banco de Sabadell, S.A. against the ruling issued by the Commercial Court no. 11 of Madrid on the invalidity of the restrictive interest rate clauses, considering that some of the clauses established by Banco de Sabadell, S.A. are transparent and valid in their entirety. With regard to the rest of the clauses, the Bank still considers that it has legal arguments which should be reviewed in the legal appeal which the Institution presented to the Supreme Court, with regard to the ruling made by the Provincial Court of Madrid. This appeal has been suspended by the Supreme Court, which has referred the matter to the Court of Justice of the European Union for a preliminary ruling.

The remaining provisions mainly relate to customer claims in connection with the repayment of mortgage arrangement fees, developer deposit funds and revolving card interest, with the provision set aside amounting to 80 million euros as at 31 December 2022 (57 million euros as at 31 December 2021).

–

Provisions allocated to provide compensation to certain TSB customers in arrears who received financial support that could have been detrimental to them during the 2013-2020 period. The estimated potential cost of compensation payable, which includes compensatory interest and associated operational costs, amounted to 78 million euros as at 31 December 2022 (65 million euros as at 31 December 2021).

–

Provisions to cover the anticipated costs relating to restructuring plans in TSB announced in previous years and pending final implementation amounting to 13 million euros as at 31 December 2022 (28 million euros as at 31 December 2021).

The final disbursement amount and the payment schedule are uncertain due to the difficulties inherent in estimating the factors used to determine the amount of the provisions set aside.

A-393

Pensions and similar obligations

The origins of liabilities recognised in respect of post-employment benefits and other similar long-term obligations on the Group’s balance sheet are shown below:


Thousand euro
	2022		2021		2020		2019		2018

Obligations arising from pension and similar commitments		565,046		739,456		819,789		803,905		768,695
Fair value of plan assets		(501,492)		(652,786)		(716,128)		(697,621)		(667,835)
Net liability recognised on balance sheet		63,554		86,670		103,661		106,284		100,860

The return on the Banco Sabadell pension plan was -13.88% and that of the E.P.S.V. was 0.22% in 2022 (4.25% and 2.67%, respectively, in 2021).

Movements during 2022 and 2021 in obligations due to pensions and similar commitments and the fair value of the plan assets are as follows:


Thousand euro
	Obligations arising from pension and similar commitments		Fair value of plan assets		Net liability recognised on balance sheet

Balance as at 31 December 2020		819,789		716,128		103,661

Interest costs		4,503		—		4,503
Interest income		—		3,489		(3,489)
Normal cost in year		1,951		—		1,951
Past service cost		914		—		914
Benefits paid		(47,979)		(38,238)		(9,741)
Settlements, curtailments and terminations		(13,352)		(14,618)		1,266
Net contributions by the Institution		—		(181)		181
Actuarial gains or losses from changes in demographic assumptions		—		—		—
Actuarial gains or losses from changes in financial assumptions		(43,340)		—		(43,340)
Actuarial gains or losses from experience		1,369		—		1,369
Return on plan assets excluding interest income		—		(30,845)		30,845
Other movements		15,601		17,051		(1,450)
Balance as at 31 December 2021		739,456		652,786		86,670

Interest costs		12,800		—		12,800
Interest income		—		10,838		(10,838)
Normal cost in year		1,631		—		1,631
Past service cost		(474)		—		(474)
Benefits paid		(47,415)		(38,784)		(8,631)
Settlements, curtailments and terminations		(3,832)		(3,976)		144
Net contributions by the Institution		—		(644)		644
Actuarial gains or losses from changes in demographic assumptions		(1,126)		—		(1,126)
Actuarial gains or losses from changes in financial assumptions		(143,190)		—		(143,190)
Actuarial gains or losses from experience		(4,208)		—		(4,208)
Return on plan assets excluding interest income		—		(131,322)		131,322
Other movements		10,715		12,594		(1,879)
Exchange differences		689		—		689
Balance as at 31 December 2022		565,046		501,492		63,554

A-394

The breakdown of Group pension obligations and similar obligations as at 31 December 2022 and 2021, based on the financing vehicle, coverage and the interest rate applied in their calculation, is given below:

Thousand euro

2022

Financing vehicle

Coverage

Amount

Interest rate

Pension plans

270,917

Insurance policies with related parties

Matched

26,279

3.25

Insurance policies with unrelated parties

Matched

244,638

3.25

Insurance contracts

288,417

Insurance policies with related parties

Matched

60,555

3.25

Insurance policies with unrelated parties

Matched

227,862

3.25

Internal funds

Without cover

5,712

3.25

Total obligations

565,046

Thousand euro

2021

Financing vehicle

Coverage

Amount

Interest rate

Pension plans

358,922

Insurance policies with related parties

Matched

33,404

1.00

Insurance policies with unrelated parties

Matched

325,518

1.00

Insurance contracts

372,859

Insurance policies with related parties

Matched

78,285

1.00

Insurance policies with unrelated parties

Matched

294,574

1.00

Internal funds

Without cover

7,675

1.00

Total obligations

739,456

The value of the obligations covered by matched insurance policies as at 31 December 2022 amounted to 559,334 thousand euros (731,781 thousand euros as at 31 December 2021); therefore, in 98.99% of its obligations (98.96% as at 31 December 2021) there is no mortality risk (mortality tables) or profitability risk (interest rate) for the Group. Therefore, the evolution of interest rates in 2022 has not had an impact on the Institution’s payment capacity to cope with its pension obligations.

A-395

The sensitivity analysis for the actuarial assumptions of the technical interest rate and the rate of salary increase shown in Note 1.3.17 to these consolidated annual financial statements, as at 31 December 2022 and 2021, illustrates how the obligation and the cost of the services during the current year would have been affected by changes deemed reasonably likely to occur as at that date.


%
	2022			2021
Sensitivity analysis	Percentage change

Interest rate

Interest rate -50 basis points:
Assumption		2.75	%		0.50	%
Change in obligation		5.19	%		5.87	%
Change in current service cost		11.60	%		11.59	%

Interest rate +50 basis points:
Assumption		3.75	%		1.50	%
Change in obligation		(4.47	)%		(5.36	)%
Change in current service cost		(10.13	)%		(10.33	)%

Rate of salary increase

Rate of salary increase -50 basis points:
Assumption		2.50	%		2.50	%
Change in obligation		(0.01	)%		(0.06	)%
Change in current service cost		(3.49	)%		(3.27	)%

Rate of salary increase +50 basis points:
Assumption		3.50	%		3.50	%
Change in obligation		0.01	%		0.06	%
Change in current service cost		3.88	%		3.92	%

The estimate of probable present values, as at 31 December 2022, of benefits payable for the next ten years, is set out below:


Thousand euro
	Years
	2023		2024		2025		2026		2027		2028		2029		2030		2031		2032		Total

Future pension benefit payments		8,572		8,142		8,033		7,616		7,521		8,512		8,216		7,910		7,595		7,274		79,391

The fair value of assets linked to pensions recognised on the consolidated balance sheet amounted to 89,729 thousand euros as at 31 December 2022 (116,453 thousand euros as at 31 December 2021) – see Note 17.

The main categories of the plan’s assets as at 31 December 2022 and 2021 are indicated hereafter:


%
	2022			2021

Mutual funds		2.90	%		2.08	%
Deposits and guarantees		0.42	%		0.14	%
Other (non-linked insurance policies)		96.68	%		97.78	%
Total		100	%		100	%

There are no financial instruments issued by the Bank included in the fair value of the plan’s assets as at

31 December 2022 and 2021.

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Note 23 – Shareholders’ equity

The breakdown of the balance of shareholders’ equity on the consolidated balance sheets as at 31 December 2022 and 2021 is the following:


Thousand euro
	2022		2021

Capital		703,371		703,371
Share premium		7,899,227		7,899,227
Other equity		21,548		19,108
Retained earnings		5,859,520		5,441,185
Other reserves		(1,365,777)		(1,201,701)
(-) Treasury shares		(23,767)		(34,523)
Profit or loss attributable to owners of the parent		858,642		530,238
(-) Interim dividends		(112,040)		—
Total		13,840,724		13,356,905

Capital

The Bank’s share capital as at 31 December 2022 and 2021 stood at 703,370,587.63 euros, represented by 5,626,964,701 registered shares with a par value of 0.125 euros each. All shares are fully paid-up and are numbered in sequential order from 1 through 5,626,964,701, inclusive.

The Bank’s shares are listed on the Madrid, Barcelona, Bilbao and Valencia stock exchanges and on Spain’s electronic market (Mercado Continuo) managed by Sociedad de Bolsas, S.A.

None of the other subsidiary companies included in the scope of consolidation are listed on the stock exchange.

There were no changes in the Bank’s share capital in 2022 and 2021.

Significant investments in the Bank’s capital

As required by Articles 23 and 32 of Royal Decree 1362/2007, of 19 October, implementing the Securities Market Law 24/1988, of 28 July, on transparency requirements relating to information on issuers whose securities have been admitted to trading on an official secondary market or on any other European Union regulated market, the following table gives details of significant investments in the share capital of Banco Sabadell as at 31 December 2022:



Direct owner of the shareholding	% of voting rights assigned to shares			% of voting rights through financial instruments			Total % of voting rights			Indirect owner of the shareholding

Various subsidiaries of BlackRock Inc.		3.23	%		1.38	%		4.61	%	Blackrock Inc.
Funds and accounts advised or sub-advised by Dimensional Fund Advisors LP or its subsidiaries		3.01	%		—%			3.01	%	Dimensional Fund Advisors LP
Fintech Europe S.A.R.L.		3.45	%		—%			3.45	%	David Martínez Guzmán
Sanders Capital LLC		3.47	%		—%			3.47	%	Lewis A. Sanders and clients of Sanders Capital LLC who delegate their voting rights to others

The sources for the information provided are communications sent by shareholders to the National Securities Market Commission (CNMV) or directly to the Institution.

A-397

Retained earnings and Other reserves

The balance of these headings of the consolidated balance sheets as at 31 December 2022 and 2021 breaks down as follows:


Thousand euro
	2022		2021

Restricted reserves:		222,820		206,665
Statutory reserve		140,674		140,674
Reserves for treasury shares pledged as security		68,470		52,315
Reserves for investments in the Canary Islands		10,561		10,561
Reserve for redenomination of share capital		113		113
Capital redemption reserve		3,002		3,002

Unrestricted reserves		4,107,070		3,797,366

Reserves of entities accounted for using the equity method		163,853		235,453
Total		4,493,743		4,239,484

Information on the reserves for each of the consolidated companies is indicated in Schedule I.

Other equity

This heading includes share-based remuneration pending settlement which, as at 31 December 2022 and 2021, amounted to 21,548 thousand euros and 19,108 thousand euros, respectively.

Business involving own equity instruments

The movements of the parent company’s shares acquired by the Bank are as follows:

Nominal value

Average price

No. of shares

(in thousand euro)

(in euro)

% Shareholding

Balance as at 31 December 2020

48,560,867

6,070.11

0.77

0.86

Purchases

115,224,411

14,403.05

0.56

2.05

Sales

123,106,070

15,388.26

0.55

2.19

Balance as at 31 December 2021

40,679,208

5,084.90

0.85

0.72

Purchases

115,797,928

14,474.74

0.75

2.06

Sales

131,704,453

16,463.06

0.77

2.34

Balance as at 31 December 2022

24,772,683

3,096.58

0.96

0.44

Net gains and losses arising from transactions involving own equity instruments have been included under the heading “Shareholders’ equity – Other reserves” on the consolidated balance sheet, and they are shown in the statement of changes in equity, in the row corresponding to the sale or cancellation of treasury shares.

As at 31 December 2022, TSB holds 60,517 Banco Sabadell shares (233,658 as at 31 December 2021), with a cost of 46 thousand euros (104 thousand euros as at 31 December 2021), which are recorded as treasury shares on the consolidated balance sheet.

As at 31 December 2022, the number of shares of the Bank pledged as collateral for transactions was 77,735,661 with a nominal value of 9,717 thousand euros (88,399,047 shares with a nominal value of 11,450 thousand euros as at 31 December 2021).

The number of Banco de Sabadell, S.A. equity instruments owned by third parties, yet managed by the different companies of the Group, amounts to 3,607,904 and 17,183,167 securities as at 31 December 2022 and 2021, respectively. Their nominal value as at the aforesaid dates amounts to 383 thousand euros and 2,148 thousand euros, respectively. In both years, 100% of the securities corresponded to Banco Sabadell shares.

A-398

Note 24 – Accumulated other comprehensive income

The composition of this heading of consolidated equity as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022		2021

Items that will not be reclassified to profit or loss		(29,125)		(41,758)
Actuarial gains or (-) losses on defined benefit pension plans		(1,969)		917
Non-current assets and disposal groups classified as held for sale		—		—
Share of other recognised income and expense of investments in joint ventures and associates		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income		(27,156)		(42,675)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—
Items that may be reclassified to profit or loss		(621,522)		(343,846)
Hedge of net investments in foreign operations [effective portion] (*)		119,348		157,741
Foreign currency translation		(476,030)		(481,266)
Hedging derivatives. Cash flow hedges [effective portion] (**)		(64,224)		(30,163)
Amount deriving from outstanding operations		(93,562)		(67,193)
Amount deriving from discontinued operations		29,338		37,030
Fair value changes of debt instruments measured at fair value through other comprehensive income		(180,199)		(11,724)
Hedging instruments [not designated elements]		—		—
Non-current assets and disposal groups classified as held for sale		—		—
Share of other recognised income and expense of investments in joint ventures and associates		(20,417)		21,566
Total		(650,647)		(385,604)

(*) The value of the hedge of net investments in foreign operations is fully obtained from outstanding transactions (see Note 12).

(**) Cash flow hedges mainly mitigate interest rate risk and other risks (see Note 12).

A-399

The breakdown of the items in the statement of recognised income and expenses as at 31 December 2022 and 2021, indicating their gross and net of tax effect amounts, is as follows:


Thousand euro
	2022						2021
	Gross value		Tax effect		Net		Gross value		Tax effect		Net

Items that will not be reclassified to profit or loss		12,991		(358)		12,633		20,611		2,050		22,661
Actuarial gains or (-) losses on defined benefit pension plans		(4,123)		1,237		(2,886)		2,299		(689)		1,610
Non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—
Share of other recognised income and expense of investments in joint ventures and associates		—		—		—		—		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income		17,114		(1,595)		15,519		18,312		2,739		21,051
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—		—		—		—		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—		—		—		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—		—		—		—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—		—		—		—		—
Items that may be reclassified to profit or loss		(357,716)		80,040		(277,676)		78,796		35,988		114,784
Hedge of net investments in foreign operations [effective portion]		(38,393)		—		(38,393)		(54,100)		—		(54,100)
Foreign currency translation		5,238		—		5,238		255,804		—		255,804
Hedging derivatives. Cash flow hedges reserve [effective portion]		(52,125)		18,064		(34,061)		(103,229)		33,269		(69,960)
Fair value changes of debt instruments measured at fair		(230,451)		61,976		(168,475)		(14,112)		2,719		(11,393)
value through other comprehensive income
Hedging instruments [not designated elements]		—		—		—		—		—		—
Non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—
Share of other recognised income and expense of investments in joint ventures and associates		(41,985)		—		(41,985)		(5,567)		—		(5,567)
Total		(344,725)		79,682		(265,043)		99,407		38,038		137,445

A-400

Note 25 – Minority interests (non-controlling interests)

The companies comprising this consolidated equity heading as at 31 December 2022 and 2021 are the following:


Thousand euro
	2022						2021
	% Minority interests		Amount		Of which: Profit/ (loss) attributed		% Minority interests		Amount		Of which: Profit/ (loss) attributed

BancSabadell d’Andorra, S.A.		—		—		—		—		—		4,700
Aurica Coinvestment, S.L.		38.24 %		33,553		10,009		38.24 %		24,190		4,129
Other		—		791		739		—		790		(360)
Total				34,344		10,748				24,980		8,469

The movements in the balance of this heading in 2022 and 2021 were as follows:


Thousand euro
Balances as at 31 December 2020			71,634

Valuation adjustments			(541)
Other			(46,113)
Scope additions / exclusions (*)			(52,502)
Percentage shareholding and other			(2,080)
Profit or loss for the year			8,469
Balances as at 31 December 2021			24,980

Valuation adjustments			—
Other			9,364
Scope additions / exclusions			—
Percentage shareholding and other			(1,384)
Profit or loss for the year			10,748
Balances as at 31 December 2022			34,344

(*) Corresponds, fundamentally, to disposal of stake held in BancSabadell d’Andorra (see Note 2).

The dividends distributed to minority shareholders of Group entities in 2022 amounted to 646 thousand euros and have been distributed by Aurica Coinvestment, S.L. In 2021, they amounted to 2,118 thousand euros: 1,472 thousand euros to BancSabadell d’Andorra, S.A. and 646 thousand euros to Aurica Coinvestment, S.L.

A-401

Note 26 – Off-balance sheet exposures

The breakdown of this heading for the years ended 31 December 2022 and 2021 is the following:


Thousand euro
Commitments and guarantees given	Note	2022	2021

Loan commitments given		27,460,615	28,403,146
Of which, amount classified as stage 2		1,407,538	1,310,996
Of which, amount classified as stage 3		82,078	84,768
Drawable by third parties		27,460,615	28,403,145
By credit institutions		43	295
By general governments		1,019,180	1,062,490
By other resident sectors		15,815,706	15,553,771
By non-residents		10,625,686	11,786,590

Provisions recognised on liabilities side of the balance sheet	22	71,698	68,136
*Financial guarantees given ()**		2,086,993	2,034,143
Of which, amount classified as stage 2		254,090	143,686
Of which, amount classified as stage 3		58,197	116,373

Provisions recognised on liabilities side of the balance sheet (**)	22	26,817	42,417
Other commitments given		9,674,382	7,384,863
Of which, amount classified as stage 2		434,869	473,436
Of which, amount classified as stage 3		265,507	358,184
Other guarantees given		6,916,058	7,234,081
Assets earmarked for third-party obligations		—	—
Irrevocable letters of credit		722,640	967,766
Additional settlement guarantee		25,000	25,000
Other guarantees and sureties given		6,168,418	6,241,315
Other contingent risks		—	—
Other commitments given		2,758,324	150,782
Financial asset forward purchase commitments		2,639,536	—
Conventional financial asset purchase contracts		—	50,116
Capital subscribed but not paid up		19	19
Underwriting and subscription commitments		—	—
Other loan commitments given		118,769	100,647

Provisions recognised on liabilities side of the balance sheet	22	78,308	80,038
Total		39,221,990	37,822,152

(*) Includes 122,500 and 68,837 thousand euro as of 31 December 2022 and 2021, respectively, corresponding to financial guarantees given in connection with construction and real estate development.

(**) Includes 4,305 and 6,512 thousand euro as of 31 December 2022 and 2021, respectively, in connection with construction and real estate development.

Total commitments drawable by third parties as at 31 December 2022 include home equity loan commitments amounting to 4,566,727 thousand euros (5,778,794 thousand euros as at 31 December 2021). As regards other commitments, in the majority of cases there are other types of guarantees which are in line with the Group’s risk management policy.

Financial guarantees and other commitments given classed as stage 3

The movement of the balance of financial guarantees and other commitments given classed as stage 3 during 2022 and 2021 was the following:


Thousand euro
Balances as at 31 December 2020			456,941

Additions			94,214
Disposals			(76,598)
Balances as at 31 December 2021			474,557

Additions			90,909
Disposals			(241,762)
Balances as at 31 December 2022			323,704

A-402

The breakdown by geographical area of the balance of financial guarantees and other commitments given classed as stage 3 as at 31 December 2022 and 2021 is as follows:


Thousand euro
	2022		2021

Spain		321,296		469,444
Rest of European Union		439		439
United Kingdom		8		4
Americas		14		2,808
Rest of the world		1,947		1,862
Total		323,704		474,557

Credit risk allowances corresponding to financial guarantees and other commitments given as at 31 December 2022 and 2021, broken down by the method used to determine such allowances, are as follows:


Thousand euro
	2022		2021

Specific individually measured allowances:		79,564		86,050
Stage 2		3,753		424
Stage 3		75,811		85,626

Specific collectively measured allowances:		25,560		36,405
Stage 1		4,833		6,317
Stage 2		7,098		5,229
Stage 3		13,234		24,141
Others		395		718
Total		105,124		122,455

The movement of this coverage during 2022 and 2021, together with the coverage of other loan commitments given is shown in Note 22.

Note 27 – Off-balance sheet customer funds

Off-balance sheet customer funds managed by the Group, those sold but not under management and the financial instruments deposited by third parties as at 31 December 2022 and 2021 are shown below:


Thousand euro
	2022		2021

Managed by the Group:		4,234,635		5,160,075
Investment firms and funds		702,580		1,364,922
Asset management		3,532,055		3,795,153

Sold by the Group:		34,257,725		36,517,746
Mutual Funds		21,878,344		23,228,405
Pension funds		3,182,486		3,524,786
Insurance		9,196,895		9,764,555

Financial instruments deposited by third parties		43,286,158		47,881,913
Total		81,778,518		89,559,734

A-403

Note 28 – Interest income and expenses

These headings in the consolidated income statement include interest accrued during the year on all financial assets and liabilities the yield of which, implicit or explicit, is obtained by applying the effective interest rate approach, irrespective of whether they are measured at fair value or otherwise, and using product adjustments due to accounting hedges.

The majority of interest income is generated by the Group’s financial assets measured either at amortised cost or at fair value through other comprehensive income.

The breakdown of net interest income for the years ended 31 December 2022 and 2021 is the following:


Thousand euro
	2022		2021

Interest income
Loans and advances		4,252,331		3,531,780
Central banks		252,274		23,705
Credit institutions		72,999		31,304
Customers		3,927,058		3,476,771
Debt securities (*)		288,540		215,458
Stage 3 assets		21,840		30,271
Correction of income from hedging operations		151,473		(37,039)
Other interest (**)		274,419		407,079
Total		4,988,603		4,147,549

Interest expense
Deposits		(585,695)		(274,684)
Central banks		(99,658)		(5,035)
Credit institutions		(83,742)		(28,365)
Customers		(402,295)		(241,284)
Debt securities issued		(302,023)		(247,818)
Correction of expenses on hedging operations		(147,708)		16,065
Other interest (***)		(154,451)		(215,656)
Total		(1,189,877)		(722,093)

(*) Includes 20,903 thousand euros in 2022 and 7,987 thousand euros in 2021 corresponding to interest on financial assets at fair value through profit or loss (trading book).

(**) Includes positive returns from liability products.

(***) Includes negative returns on asset products.

The average annual interest rate during 2022 and 2021 of the following balance sheet headings is shown below:


%
	2022		2021

Assets
Cash, cash balances at central banks and other demand deposits		0.39		(0.26)
Debt securities		1.11		0.62
Loans and advances
Customers		2.51		2.31

Liabilities
Deposits
Central banks and Credit institutions		0.02		0.71
Customers		(0.19)		(0.09)
Debt securities issued		(1.42)		(1.17)

Positive (negative) figures correspond to income (expenses) for the Group.

A-404

Note 29 – Fee and commission income and expenses

Income and expenses arising from fees and commissions on financial assets and liabilities and the provision of services are as follows:


Thousand euro
	2022		2021

Fees from risk transactions		282,500		270,392
Asset-side transactions		180,403		168,717
Sureties and other guarantees		102,097		101,675

Service fees		869,794		839,528
Payment cards		256,492		222,539
Payment orders		82,935		74,196
Securities		53,145		66,848
Sight accounts		286,471		293,245
Other		190,751		182,700

Asset management and marketing fees		337,914		357,621
Mutual funds		122,218		121,734
Sale of pension funds and insurance products		193,833		198,338
Asset management		21,863		37,549
Total		1,490,208		1,467,541

Memorandum item

Fee and commission income		1,742,311		1,661,610
Fee and commission expenses		(252,103)		(194,069)
Fees and commissions (net)		1,490,208		1,467,541

Note 30 – Gains or (-) losses on financial assets and liabilities (net) and exchange differences (net)

“Gains or (-) losses on financial assets and liabilities, net” groups together a series of headings from the consolidated income statement for the years ended 31 December 2022 and 2021, which are shown below:


Thousand euro
	2022		2021

By heading:
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		13,227		340,985
Financial assets at fair value through other comprehensive income		22,752		15,412
Financial assets at amortised cost		(9,190)		323,840
Financial liabilities at amortised cost		(335)		1,733
Gains or (-) losses on financial assets and liabilities held for trading, net		204,691		(183,555)
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net		(4,157)		4,466
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net		—		—
Gains or (-) losses from hedge accounting, net		17,851		(4,851)
Total		231,612		157,045

By type of financial instrument:
Net gain/(loss) on debt securities		16,131		346,978
Net gain/(loss) on other equity instruments		(877)		2,396
Net gain/(loss) on derivatives		225,548		(192,370)
Net gain/(loss) on other items (*)		(9,190)		41
Total		231,612		157,045

(*) Mainly includes gains/(losses) on the sale of various loan portfolios sold during the year.

A-405

The breakdown of the heading “Exchange differences [gain or (-) loss], net” of the consolidated income statement for the years ended 31 December 2022 and 2021 is shown below:


Thousand euro
	2022			2021

Exchange differences [gain or (-) loss], net		(127,971	)		187,174

During 2022, the Group has carried out sales of certain debt securities which it held in its portfolio of financial assets at fair value through other comprehensive income, generating profits of 22,752 thousand euros (15,412 thousand euros in 2021). 100% of these profits comes from the sale of debt securities held with general governments (4,127 thousand euros in 2021).

In addition, in 2021, the Group sold certain debt securities held in the portfolio of financial assets at amortised cost in order to fortify the Group’s solvency as part of a series of actions taken to improve future profitability and the quality of its balance sheet in response to the economic crisis triggered by Covid-19 (see Notes 8 and 33).

The “Net gain/(loss) on derivatives” heading includes, among other things, the change in the fair value of derivatives used to hedge against the foreign exchange risk of debit and credit balances denominated in foreign currencies. The results obtained from these derivatives are recognised under the heading “Gains or (-) losses on financial assets and liabilities held for trading, net” of the consolidated income statement, while the exchange differences generated by debit and credit balances denominated in foreign currencies hedged with these derivatives are recognised under the heading “Exchange differences [gain or (-) loss], net” of the consolidated income statement.

Note 31 – Other operating income

The composition of this heading of the consolidated income statement for the years ended 31 December 2022 and 2021 is as follows:


Thousand euro
	2022		2021

Income from use of investment properties (*)		23,474		25,785
Sales and other income from the provision of non-financial services		11,522		11,382
Other operating income		86,558		117,565
Total		121,554		154,732

(*)	The amounts relate mainly to income from operating leases in which the Group acts as lessor.

The income recognised in “Other operating income” basically corresponds to income from Group entities engaging in non-financial activities (mostly operating leases). The reduction in the balance recorded in this heading for 2022 is mainly due to the fall in income from the vehicle leasing activity following the sale of the BanSabadell Renting, S.L.U. subsidiary, which took place in the second half of 2021, which was partially offset by the income from the insurance policies referred to in Note 32.

Note 32 – Other operating expenses

The composition of this heading of the consolidated income statement for the years ended 31 December 2022 and 2021 is as follows:


Thousand euro
	2022			2021

Contribution to deposit guarantee schemes		(129,157	)		(128,883	)
Banco Sabadell		(113,832	)		(116,341	)
TSB		(540	)		(879	)
BS IBM Mexico		(14,785	)		(11,663	)

Contribution to resolution fund		(100,151	)		(87,977	)

Other items		(229,559	)		(250,502	)
Total		(458,867	)		(467,362	)

A-406

“Other items” includes expenses corresponding to Tax on Deposits of Credit Institutions, amounting to 34,894 thousand euros in 2022 (33,438 thousand euros in 2021), as well as expenses associated with non-financial activities (mostly operating leases). The balance of this heading decreased due to, among other reasons, the fall in expenses of the vehicle leasing business, following the sale of BanSabadell Renting, S.L.U. in 2021 (See Note 31). Furthermore, on 16 December 2022, the TSB subsidiary reached an agreement with the British regulators regarding the outcome of the investigation into the causes and circumstances that led to the incidents that took place after its IT migration in 2018. This agreement involved a payment from TSB for 48.65 million pounds sterling (approximately, 57 million euros) to the British regulators, which was recorded under this heading, and an estimated impact on capital of 6 basis points on a consolidated basis. However, it is estimated that the insurance policies arranged by the Group will enable this amount and the impact on capital to be offset. In 2022, income amounting to 45 million euros corresponding to compensation arising from the aforesaid arranged insurance policies was recognised under the heading “Other operating income” of the consolidated income statement for 2022 (see Note 31).

Note 33 – Administrative expenses

This heading of the consolidated income statement includes expenses incurred by the Group corresponding to staff and other general administrative expenses.

Staff expenses

The staff expenses recognised in the consolidated income statement for the years ended 31 December 2022 and 2021 are as follows:


Thousand euro
	Nota		2022		2021

Payrolls and bonuses for active staff				(1,050,441)		(1,098,835)
Social Security payments				(212,576)		(231,357)
Contributions to defined benefit pension plans		22		(1,157)		(2,865)
Contributions to defined contribution pension plans				(61,560)		(70,132)
Other staff expenses				(65,874)		(373,608)
Of which: restructuring plans in Spain and United Kingdom				—		(298,272)
Total				(1,391,608)		(1,776,797)

In October 2021, the Bank reached an agreement with all trade union sections involved in the negotiating committee representing workers, under the framework of a collective redundancy procedure in Spain, which affected 1,603 employees (496 in 2021 and 1,107 during the first half of 2022). This agreement involved an expenditure of 274,301 thousand euros, which was funded with income from the sale of debt instruments recognised in the amortised cost portfolio (see Notes 8, 22 and 30).

As at 31 December 2022 and 2021, the breakdown of the average workforce for all companies within the Group by category and sex is as follows:


Average number of employees
	2022						2021
	Men		Women		Total		Men		Women		Total

Senior management		479		208		687		494		190		684
Middle management		1,947		1,381		3,328		2,227		1,363		3,590
Specialist staff		5,307		7,222		12,529		6,024		8,153		14,177
Administrative staff		707		1,817		2,524		739		2,137		2,876
Total		8,440		10,628		19,068		9,484		11,843		21,327

The breakdown of the Group’s average workforce by category as at 31 December 2022 and 2021 with a disability of 33% or more is as follows:


Average number of employees
	2022		2021

Senior management		10		9
Middle management		27		33
Specialist staff		207		238
Administrative staff		78		109
Total		322		389

A-407

As at 31 December 2022 and 2021, the breakdown of the Group’s workforce by category and sex is as follows:


Number of employees
	2022						2021
	Men		Women		Total		Men		Women		Total

Senior management		460		208		668		515		214		729
Middle management		1,944		1,381		3,325		1,988		1,281		3,269
Specialist staff		5,298		7,194		12,492		5,663		7,766		13,429
Administrative staff		683		1,727		2,410		724		1,919		2,643
Total		8,385		10,510		18,895		8,890		11,180		20,070

Of the total workforce as at 31 December 2022, 309 had some form of recognised disability (344 as at 31 December 2021).

Long-term share-based complementary incentive scheme

Pursuant to the Remuneration Policy, the latest version of which was approved by the Board of Directors at its meeting of 16 December 2021, at the proposal of the Board Remuneration Committee, members of the Group’s Identified Staff, with the exception of non-executive directors, were allocated long-term remuneration through the schemes in effect during 2022, as described below:

Share-based complementary incentive scheme

TSB’s Share Incentive Plan (SIP) provides its employees with the opportunity to own shares in Banco Sabadell and grants, where applicable, shares to certain senior employees as part of their hiring arrangements.

Long-term remuneration scheme

The Board of Directors, in its meeting of 20 December 2018, at the proposal of the Board Remuneration Committee, approved Long-Term Remuneration for 2019-2021, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, which consisted of the allocation of a certain amount to each beneficiary, which was determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive was paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of December 2019 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2019 and ended on 31 December 2021, and consisted of two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2019 to 31 December 2019, in which the annual targets of each beneficiary (composed of Group targets, management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2019 to 31 December 2021, in which multi-year Group targets were measured for the purpose of determining the final incentive, which was also subject to the Risk Correction Factor. The Group’s multi-year targets were related to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%). The results were 0% relative to total shareholder return, 100% relative to the Group’s liquidity coverage ratio, 100% relative to the CET1 capital ratio and 0% relative to the Group’s return on risk-adjusted capital (RoRAC). Based on the above, a final pay-out of 50% of the target was determined for management staff who had been allocated to receive this incentive.

In addition to meeting the annual and multi-year targets described above, payment of the incentive is subject to the requirements set out in the General Terms and Conditions of the 2019-2021 Long-Term Remuneration Scheme. As at 31 December 2022, 2,150 thousand euros are pending payment.

A-408

Furthermore, the Board of Directors, in its meeting of 19 December 2019, at the proposal of the Board Remuneration Committee, approved Long-Term Remuneration for 2020-2022, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, which consists of the allocation of a certain amount to each beneficiary, which is determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive will be paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of December 2020 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2020 and ended on 31 December 2022, and consisted of two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2020 to 31 December 2020, in which the annual targets of each beneficiary (composed of Group targets, management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2020 to 31 December 2022, in which multi-year Group targets were measured for the purpose of determining the final incentive, which was also subject to the Risk Correction Factor. The Group’s multi-year targets were related to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%). The results were 50% relative to total shareholder return, 100% relative to the Group’s liquidity coverage ratio, 100% relative to the CET1 capital ratio and 100% relative to the Group’s return on risk-adjusted capital (RoRAC). Based on the above, a final pay-out of 87.5% of the target was determined for management staff who had been allocated to receive this incentive.

Furthermore, the Board of Directors, in its meeting of 17 December 2020, at the proposal of the Board Remuneration Committee, approved Long-Term Remuneration for 2021-2023, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, which consists of the allocation of a certain amount to each beneficiary, which is determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive will be paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of December 2021 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2021 and ends on 31 December 2023, and comprises two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2021 to 31 December 2021, in which the annual targets of each beneficiary (composed of Group targets, management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2021 to 31 December 2023, in which multi-year Group targets were measured for the purpose of determining the final incentive, which was also subject to the Risk Correction Factor. The Group’s multi-year targets relate to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%).

In addition to meeting the annual and multi-year targets described above, payment of the incentive will be subject to the requirements set out in the General Terms and Conditions of the Long-Term Remuneration 2021-2023.

A-409

Finally, the Board of Directors, in its meeting of 16 December 2021, at the proposal of the Board Remuneration Committee, approved Long-Term Remuneration for 2022-2024, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, which consists of the allocation of a certain amount to each beneficiary, which is determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive will be paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of December 2022 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2022 and ends on 31 December 2024, and comprises two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2022 to 31 December 2022, in which the annual targets of each beneficiary (composed of Group targets, management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2022 to 31 December 2024, in which multi-year Group targets were measured for the purpose of determining the final incentive, which was also subject to the Risk Correction Factor. The Group’s multi-year targets relate to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%).

As regards the staff expenses associated with share-based incentive schemes (see Note 1.3.15), the balancing entry for such expenses is recognised in equity in the case of stock options settled with shares (see consolidated statement of total changes in equity – share-based payments), while those settled with cash are recognised in the “Other liabilities” heading of the consolidated balance sheet.

Expenditure recognised in relation to incentive schemes and long-term remuneration granted to employees in 2022 and 2021 is shown below:


Thousand euro
	2022		2021

Settled in shares		4,923		3,962
Settled in cash		693		1,390
Total		5,616		5,352

Other administrative expenses

The composition of this heading in the consolidated income statement for the years 2022 and 2021 was as follows:


Thousand euro
	2022		2021

Property, plant and equipment		(70,614)		(85,358)
Information technology		(391,562)		(415,128)
Communication		(30,231)		(30,929)
Publicity		(71,601)		(79,452)
Subcontracted administrative services		(112,898)		(113,068)
Contributions and taxes		(114,185)		(130,340)
Technical reports		(26,094)		(32,357)
Security services and fund transfers		(18,375)		(16,899)
Entertainment expenses and staff travel expenses		(9,600)		(4,537)
Membership fees		(5,602)		(5,278)
Other expenses		(95,045)		(90,747)
Total		(945,807)		(1,004,093)

A-410

Audit firm fees

The fees received by KPMG Auditores, S.L. in the years ended 31 December 2022 and 2021 for audit and other services were as follows:


Thousand euro
	2022		2021

*Audit services ()**		2,540		2,495
Of which: Audit of the Bank’s annual and interim accounts		2,100		2,049
Of which: Audit of the annual accounts of foreign branches (**)		27		25
Of which: Audit of the annual accounts of subsidiaries		413		421
Audit-related services		281		283
Total		2,821		2,778

(*) Including fees corresponding to the year’s audit, irrespective of the date on which that audit was completed.

(**) Corresponding to the branch located in London.

The fees received by other companies forming part of the KPMG network in the years ended 31 December 2022 and 2021 for audit and other services were as follows:


Thousand euro
	2022		2021

*Audit services ()**		6,861		6,493
Of which: Audit of the annual accounts of foreign branches		343		302
Of which: Audit of the annual accounts of Group subsidiaries		6,518		6,191
Audit-related services		192		219
Other services		383		257
Of which: Other		383		257
Total		7,436		6,969

(*) Including fees corresponding to the year’s audit, irrespective of the date on which that audit was completed.

The main items included under “Audit-related services” correspond to fees related to reports that the auditors are required to produce under the applicable regulations, the issuance of comfort letters and other assurance reports required. Furthermore, “Other services” mainly includes fees related to reviews of the Pillar III Disclosures report and the Non-Financial Disclosures report provided by other companies of the KPMG network.

Finally, the Group engaged auditors other than KPMG to carry out the audits of foreign branches and other Group subsidiaries. Audit and other services provided by those companies amounted to 51 thousand euros and 9 thousand euros in the year ended 31 December 2022, respectively (61 and 5 thousand euros in the year ended 31 December 2021).

All services provided by the auditors and companies forming part of their network comply with the requirements for external auditor independence set forth in the Spanish Audit Law and do not, in any case, include work that is unrelated to auditing.

Other information

The cost-to-income ratio as at 2022 year-end (staff and general expenses/gross income) stood at 45.12% (55.33% in 2021).

Information about the Group’s branches and offices is given below:


Number of branches and offices
	2022		2021

Branches and offices		1,461		1,593

Spain		1,210		1,270
Outside Spain		251		323

A-411

Note 34 – Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and modification losses or (-) gains, net

The composition of this heading of the consolidated income statement for the years ended 31 December 2022 and 2021 is as follows:


Thousand euro
	Note	2022		2021

Financial assets at fair value through other comprehensive income			(182)		697
Debt securities	8		(182)		697
Other equity instruments			—		—
Financial assets at amortised cost	11		(839,397)		(960,204)
Debt securities			(190)		73
Loans and advances			(839,207)		(960,277)
Total			(839,579)		(959,507)

Note 35 – Impairment or (-) reversal of impairment on non-financial assets

The composition of this heading of the consolidated income statement for the years ended 31 December 2022 and 2021 is as follows:


Thousand euro
	Note	2022		2021

Property, plant and equipment for own use	15		(1,916)		(58,369)
Investment properties	15		(35,182)		(7,114)
Goodwill and other intangible assets	16		—		(1,570)
Inventories	17		(24,018)		(38,914)
Total			(61,116)		(105,967)

Impairment on property, plant and equipment for own use recognised in 2021 was mainly due to the termination of commercial activity at premises belonging to the Group’s branch network.

The total allowance for the impairment of investment properties in 2022 and 2021 was calculated based on Level 2 valuations (see Note 6). The fair value of impaired assets amounted to 293,266 thousand euros and 381,261 thousand euros in 2022 and 2021, respectively.

Of the total inventory impairment allowances for 2022 and 2021, 1,564 thousand euros and 20,659 thousand euros were allocated based on Level 2 valuations, respectively, and 22,454 thousand euros and 18,255 thousand euros based on Level 3 valuations, respectively. The fair value of impaired assets amounted to 90,614 thousand euros and 138,216 thousand euros at 2022 and 2021 year-end, respectively.

Note 36 – Gains or (-) losses on derecognition of non-financial assets, net

The composition of this heading of the consolidated income statement for the years ended 31 December 2022 and 2021 is as follows:


Thousand euro
	2022		2021

Property, plant and equipment		3,261		(320)
Investment properties		3,072		145
Intangible assets		(35,132)		(36,936)
Interests (*)		11,449		14,575
Other items		(19)		93,657
Total		(17,369)		71,121

(*) See Schedule I – Exclusions from the scope of consolidation

The “Other items” heading included 84 million euros in 2021 corresponding to profit recognised on the sale of the institutional depository business to BP2S (see Note 2).

A-412

The sale of tangible assets under finance leases in which the Group acts as the lessor did not have a material impact on the 2022 and 2021 consolidated income statements.

Note 37 – Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

The composition of this heading of the consolidated income statement for the years ended 31 December 2022 and 2021 is as follows:


Thousand euro
	Note		2022		2021

Property, plant and equipment				(25,693)		(63,475)
Gains/losses on sales				(22,269)		(45,563)
Impairment/Reversal		13		(3,424)		(17,912)
Investment properties				—		789
Interests (*)				(1,829)		40,172
Other items				(279)		15,126
Total				(27,801)		(7,388)

(*) See Schedule I - Companies no longer consolidated.

The impairment of non-current assets held for sale excludes income from the increase in fair value less selling costs.

The total allowance for the impairment of non-current assets held for sale in 2022 and 2021 was calculated based on Level 2 valuations (see Note 6). The fair value of impaired assets amounted to 585,758 thousand euros and 452,743 thousand euros at 2022 and 2021 year-end, respectively.

Note 38 – Segment reporting

Segmentation criteria

This section gives information regarding earnings and other indicators of the Group’s business units.

For 2022, the criteria that Banco Sabadell Group uses to report on results for each segment are:

–

Three regions: Banking Business Spain, United Kingdom and Mexico. Banking Business Spain includes the foreign branches and the representative offices.

–

Each business unit is allocated capital equivalent to 12% of its risk-weighted assets and the surplus of own funds is allocated to Banking Business Spain.

In terms of the other criteria applied, segment information is first structured with a breakdown by geographical area and then broken down based on the customers to which each segment is aimed.

The information presented is based on the individual accounting records of each Group company, after all consolidation disposals and adjustments have been made.

Each business unit bears its own direct costs, calculated on the basis of general accounting.

A-413

Details of profit attributable to the Group and other key figures for each business unit for the years 2022 and 2021 are shown in the table below, along with a reconciliation of the totals shown in the table with those shown in the consolidated Group accounts:


Million euro
	*2022 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Net interest income		2,499		1,151		149		3,799

Fees and commissions (net)		1,344		134		12		1,490
Core revenue		3,843		1,284		162		5,289

Net trading income and exchange differences		95		6		3		104
Equity-accounted income and dividends		125		—		—		125
Other operating income/expense		(225)		(95)		(17)		(337)
Gross income		3,837		1,195		148		5,180

Operating expenses and depreciation and amortisation		(1,887)		(909)		(86)		(2,883)
Pre-provisions income		1,951		285		62		2,298

Provisions and impairments		(920)		(104)		(9)		(1,032)
Capital gains on asset sales and other revenue		(9)		1		(14.041)		(23)
Profit/(loss) before tax		1,021		182		39		1,243

Corporation tax		(270)		(95)		(8)		(373)
Profit or loss attributed to minority interests		11		—		—		11
Profit attributable to the Group		740		87		31		859

ROTE (net return on tangible equity attributable to the Group)		8.7%		4.2%		6.6%		7.8%
Cost-to-income (general administrative expenses / gross income)		40.3%		63.0%		48.7%		45.1%
NPL ratio		4.2%		1.3%		2.3%		3.4%
Stage 3 exposure coverage ratio (**)		56.2%		42.3%		70.1%		55.0%
Employees		12,991		5,482		422		18,895
Domestic and foreign branches and offices		1,226		220		15		1,461

(*) Exchange rates used in the income statement: GBP 0.8532 (average), MXN 21.0739 (average), USD 1.0538 (average) and MAD 11.1232 (average).

(**) Considering total provisions for losses on transactions in stage 3.

Million euro

2022 (*)

Banking Business
Spain

Banking Business
UK

Banking Business
Mexico

Total Group

Assets

189,545

55,810

6,025

251,380

Gross performing loans to customers

108,889

43,110

4,131

156,130

Non-performing real estate assets (net)

713

—

713

Liabilities

179,402

53,316

5,437

238,155

On-balance sheet customer funds

120,118

40,931

3,090

164,140

Wholesale funding in capital markets

19,444

2,537

—

21,981

Allocated equity

10,143

2,494

587

13,224

Off-balance sheet customer funds

38,492

—

38,492

(*) Exchange rates used in the balance sheet: GBP 0.8869, MXN 20.856, USD 1.066 and MAD 11.1558.

A-414


Million euro
	*2021 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Net interest income		2,302		1,011		113		3,425

Fees and commissions (net)		1,336		121		11		1,468
Core revenue		3,638		1,132		123		4,893

Net trading income and exchange differences		342		2		—		344
Equity-accounted income and dividends		102		—		—		102
Other operating income/expense		(269)		(33)		(10)		(313)
Gross income		3,812		1,101		114		5,026

Operating expenses and depreciation and amortisation		(2,276)		(942)		(89)		(3,307)
Pre-provisions income		1,536		159		24		1,719

Provisions and impairments		(1,193)		—		(32)		(1,225)
Capital gains on asset sales and other revenue		135		(9)		(0.011)		126
Profit/(loss) before tax		478		150		(8)		620

Corporation tax		(58)		(32)		9		(81)
Profit or loss attributed to minority interests		8		—		—		8
Profit attributable to the Group		412		118		1		530

ROTE (net return on tangible equity attributable to the Group)		4.0%		5.0%		-1.0%		4.0%
Cost-to-income (general administrative expenses / gross income)		50.2%		71.3%		71.1%		55.3%
NPL ratio		4.6%		1.4%		1.0%		3.7%
Stage 3 exposure coverage ratio (**)		57.6%		38.1%		265.7%		56.3%

Employees		13,855		5,762		453		20,070
Domestic and foreign branches and offices		1,288		290		15		1,593

(*) Exchange rates used in the income statement: GBP 0.8594 (average), MXN 23.9687 (average), USD 1.1865 (average) and MAD 10.4982 (average).

(**) Considering total provisions for losses on transactions in stage 3.

Million euro

2021 (*)

Banking Business
Spain

Banking Business
UK

Banking Business
Mexico

Total Group

Assets

191,162

55,657

5,128

251,947

Gross performing loans to customers

107,089

44,050

3,773

154,912

Non-performing real estate assets (net)

842

—

842

Liabilities

181,389

53,012

4,550

238,950

On-balance sheet customer funds

116,788

42,779

2,453

162,020

Wholesale funding in capital markets

18,090

2,975

—

21,065

Allocated equity

9,773

2,645

578

12,996

Off-balance sheet customer funds

41,678

—

41,678

(*) Exchange rates used in the balance sheet: GBP 0.8403, MXN 23.1438, USD 1.1326 and MAD 10.518.

The Group’s average total assets as at 31 December 2022 amounted to 257,691,764 thousand euros (245,313,451 thousand euros as at 31 December 2021).

A-415

The types of products and services from which ordinary income is derived are described below for each business unit:

–

Banking Business Spain:

Groups together the Retail Banking, Business Banking and Corporate Banking business units, where individuals and businesses are managed under the same branch network:

–

Retail Banking: offers financial products and services to individuals for personal use. These include investment products and medium- and long-term finance, such as consumer loans, mortgages and leasing or rental services, as well as short-term finance. Funds come mainly from customers’ deposits and sight accounts, savings insurance, mutual funds and pension plans. The main services also include payment methods such as cards and insurance combined with consumer loans and mortgages. High value-added products and services are also offered to Private Banking customers.

–

Business Banking: offers financial products and services to companies and self-employed persons. These include investment and financing products, such as working capital products, loans and medium- and long-term financing. It also offers customised structured finance and capital market solutions, as well as specialised advice for businesses. Funds mainly come from customers’ deposits and sight accounts and mutual funds. The main services also include collection/payment methods such as cards and PoS terminals, as well as import and export services.

–

Corporate Banking (CIB) offers specialised lending services together with a comprehensive offering of solutions, ranging from transaction banking services to more complex and tailored solutions relating to the fields of lending and cash management, as well as import and export activities, among others.

–

Banking Business United Kingdom:

The TSB franchise includes business conducted in the United Kingdom, which includes current and savings accounts, loans, credit cards and mortgages.

–

Banking Business Mexico:

Offers corporate banking and commercial banking financial services.

Details of income from ordinary activities and the pre-tax profit/(loss) generated by each business unit, are set out below for the years 2022 and 2021:


Thousand euro
	Consolidated
	*Income from ordinary activities ()**				Profit/(loss) before tax

SEGMENTS	2022		2021		2022		2021

Banking Business Spain		5,036,309		4,680,955		1,021,395		477,976
Banking Business UK		1,627,943		1,200,385		182,452		150,144
Banking Business Mexico		422,437		240,858		38,799		(8,131)
Total		7,086,689		6,122,198		1,242,646		619,989

A-416

The table below shows the balance of net interest income and net fees and commissions income generated by each business unit as a percentage of the total for 2022 and 2021:


%
							2022
	Breakdown net interest income and net fees and commissions
	Customer loans						Customer deposits						Income from services (*)
	% of average balance			% of total yield			% of average balance			% of total cost			% of total balance
SEGMENTS

Banking Business Spain		69.7	%		63.0	%		73.2	%		54.2	%		90.2	%
Banking Business UK		27.6	%		28.9	%		24.9	%		24.6	%		9.0	%
Banking Business Mexico		2.7	%		8.0	%		1.9	%		21.2	%		0.8	%
Total		100	%		100	%		100	%		100	%		100	%

(*) Segment percentage of total net fees and commissions.


%
	2021
	Breakdown net interest income and net fees and commissions
	Customer loans						Customer deposits						Income from services (*)
	% of average balance			% of total yield			% of average balance			% of total cost			% of total balance
SEGMENTS

Banking Business Spain		69.1	%		69.1	%		71.5	%		80.0	%		91.0	%
Banking Business UK		28.5	%		25.5	%		26.4	%		6.1	%		8.2	%
Banking Business Mexico		2.4	%		5.4	%		2.1	%		13.9	%		0.8	%
Total		100	%		100	%		100	%		100	%		100	%

(*) Segment percentage of total net fees and commissions.

Furthermore, a breakdown by geographical area of the “Interest income” heading of the 2022 and 2021 income statements is shown below:


Thousand euro
	Breakdown of interest income by geographical area
Geographical area	Standalone				Consolidated
	2022		2021		2022		2021

Domestic market		2,874,905		2,601,517		2,869,020		2,625,364
International market		268,772		221,413		2,119,583		1,522,185
European Union		44,755		42,689		44,755		42,689
Eurozone		44,755		42,689		44,755		42,689
Non-Eurozone		—		—		—		—
Other		224,017		178,724		2,074,828		1,479,496
Total		3,143,677		2,822,930		4,988,603		4,147,549

Section 4 of the Consolidated Directors’ Report gives a more detailed assessment of each of these business units.

Note 39 – Tax situation (income tax relating to continuing operations)

Consolidated tax group

Banco de Sabadell, S.A. is the parent company of a consolidated tax group for corporation tax purposes, in Spain, comprising all the Spanish companies in which the Bank holds an interest that meet the requirements of the Spanish Corporation Tax Law.

The other companies in the accounting group, both those that are Spanish and those not resident in Spain, are taxed in accordance with the tax regulations applicable to them.

A-417

Reconciliation

The reconciliation between the Group’s corporation tax expense calculated by applying the general tax rate and the expense recognised for this corporation tax in the consolidated income statements is as follows:


Thousand euro
	2022		2021

Profit or loss before tax		1,242,646		619,989
Corporation tax, applying national tax rate (30%)		(372,794)		(185,997)
Reconciliation:
Gains/(losses) on sale of equity instruments (exempt)		(1,239)		3,432
Remuneration of preferred securities		33,112		30,178
Profit/(loss) of entities accounted for using the equity method		38,125		29,079
Difference in effective tax rate on companies outside Spain () (*)		(15,447)		33,594
Generated deductions/Non-deductible expenses		(22,640)		1,489
Other		(32,373)		6,943

(Tax expense or (-) income related to profit from continuing operations)		(373,256)		(81,282)

(*) Calculated applying the difference between the current tax rate for the Group in Spain (30%) and the effective tax rate applied to the Group’s profit/(loss) in each jurisdiction.

(**) In 2022, the corporation tax surcharge on the banking sector in the United Kingdom was reduced from 8% to 3%, which resulted in a deferred tax asset reduction of 14.8 million euros, recognised with a balancing entry in higher Corporation Tax expense. In 2021, UK corporation tax on companies was changed, from 19% to 25%, which resulted in a deferred tax asset increase of 17.9 million euros, recognised with a balancing entry in lower Corporation Tax expense.

The tax rate in effect calculated as the ratio of corporation tax expense to the pre-tax profit/(loss) amounted to 30.04% and 13.11% in 2022 and 2021, respectively.

Taxable income – increases and decreases

The increases and decreases in taxable income are analysed in the following table on the basis of whether they arose from temporary or permanent differences:


Thousand euro
	2022		2021

Permanent difference		205,979		53,479
Timing difference arising during the year		298,710		349,070
Timing difference arising in previous years		33,704		51,643
Increases		538,393		454,192

Permanent difference		(328,741)		(375,237)
Timing difference arising during the year		—		—
Timing difference arising in previous years		(177,698)		(235,012)
Decreases		(506,439)		(610,249)

Deferred tax assets and liabilities

Under current tax and accounting regulations, certain temporary differences should be taken into account when quantifying the relevant tax expense related to profit from continuing operations.

Monetisable tax assets can be converted into credit enforceable against the Spanish Tax Authority in cases where the taxable person incurs accounting losses or the institution is liquidated or legally declared insolvent. Similarly, they can be exchanged for public debt securities, once the 18-year term has elapsed, calculated from the last day of the tax period in which these assets were recognised in the accounting records. To retain the State guarantee, in order to keep their status as monetisable tax assets, deferred tax assets generated before 2016 are subject to an annual capital contribution of 1.5% of the deferred tax assets that meet the legal requirements.

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Movements of deferred tax assets and liabilities during 2022 and 2021 are shown below:


Thousand euro
Deferred tax assets	Monetisable		Non-monetisable		Tax credits for losses carried forward		Deductions not applied		Total
Balances as at 31 December 2020		5,058,732		1,066,199		483,831		35,975		6,644,737
(Debit) or credit recorded in the income statement		(17,762)		87,183		(13,141)		(6,657)		49,623
(Debit) or credit recorded in equity		—		2,535		—		—		2,535
Exchange differences and other movements		1,422		150		8,136		924		10,632
Balances as at 31 December 2021		5,042,392		1,156,067		478,826		30,242		6,707,527
(Debit) or credit recorded in the income statement		(47,661)		6,607		(87,366)		(16,385)		(144,805)
(Debit) or credit recorded in equity		—		85,337		—		—		85,337
Exchange differences and other movements		1,147		(5,096)		(771)		1,168		(3,552)
Balances as at 31 December 2022		4,995,878		1,242,915		390,689		15,025		6,644,507


Thousand euro
Deferred tax liabilities	Total
Balances as at 31 December 2020		166,518
(Debit) or credit recorded in the income statement		(14,728)
(Debit) or credit recorded in equity		(30,411)
Exchange differences and other movements		2,386
Balances as at 31 December 2021		123,765
(Debit) or credit recorded in the income statement		(10,914)
(Debit) or credit recorded in equity		—
Exchange differences and other movements		867
Balances as at 31 December 2022		113,718

The sources of the deferred tax assets and liabilities recognised in the consolidated balance sheets as at

31 December 2022 and 2021 are as follows:


Thousand euro
Deferred tax assets	2022		2021

Monetisable		4,995,878		5,042,392
Due to credit impairment		3,323,114		3,355,733
Due to real estate asset impairment		1,547,338		1,560,908
Due to pension funds		125,426		125,751

Non-monetisable		1,242,915		1,156,067

Tax credits for losses carried forward		390,689		478,826

Deductions not applied		15,025		30,242
Total		6,644,507		6,707,527

Deferred tax liabilities		2022		2022

Property restatements		54,197		55,838
Adjustments to value of wholesale debt issuances arising in business combinations		7,472		12,916
Other financial asset value adjustments		1,455		1,475
Other		50,593		53,536
Total		113,717		123,765

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The breakdown by country of deferred tax assets and liabilities is as follows:


Thousand euro
	2022				2021
Country	Deferred tax assets		Deferred tax liabilities		Deferred tax assets		Deferred tax liabilities

Spain		6,417,930		104,530		6,461,238		111,904
United Kingdom		82,955		9,187		155,795		11,861
United States		62,754		—		23,781		—
Mexico		70,198		—		60,260		—
Other		10,670		—		6,453		—
Total		6,644,507		113,717		6,707,527		123,765

As indicated in Note 1.3.20, according to the information available as at year-end, and the projections taken from the Group’s business plan for the coming years, the Group estimates that it will be able to generate sufficient taxable income to offset tax loss carry-forwards within a period of six years and non-monetisable tax assets when these can be deducted on the basis of current tax regulations within a period of 10 years.

In addition, the Group performs a sensitivity analysis of the most significant variables used in the deferred tax asset recovery analysis, taking into consideration reasonable changes to the key assumptions on which the projected results of each entity or fiscal group are based and the estimated reversal of temporary differences. With respect to Spain, the variables included are those used in the sensitivity analysis of the calculation of the recoverable amount of goodwill (see Note 16). The conclusions arising from that analysis are not significantly different from those reached without stressing the significant variables.

Monetisable tax assets are guaranteed by the State; therefore, their recoverability does not depend on the generation of future tax benefits.

As at 31 December 2022, the Group had deferred tax assets for tax loss carry-forwards and unused deductions of 50.7 million euros not recognised in the balance sheet (generated in financial years prior to the integration of the company giving rise to them into the Spanish tax group). The maximum time limit for applying unused deductions is 2025, while there is no time limit for the application of tax loss carry-forwards.

Years subject to tax inspection

As at 31 December 2022, corporation tax for the consolidated tax group in Spain is open to review for 2015 and subsequent years. In relation to value added tax (VAT) corresponding to entities forming part of the VAT group in Spain, 2016 and subsequent periods are open to review.

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Procedures

On 11 January 2022, the State Agency for Tax Administration (AEAT by its Spanish acronym) gave notice to Banco Sabadell, as the parent company of the consolidated tax group, of the commencement of verification and investigation procedures in relation to the items and periods listed below:


Entity	Item	Period

Banco de Sabadell, S.A. (parent company of the consolidated tax group 16/91)	Value added tax	January 2018 to December 2019

Banco de Sabadell, S.A. (parent company of the VAT group 2008/74)	Withholding/payment on account on earnings from professional/work/ economic activities	January 2018 to December 2019

Banco de Sabadell, S.A.	Withholding/payment on account on earnings from movable capital	January 2018 to December 2019

Banco de Sabadell, S.A.	Tax on Deposits of Credit Institutions	2017 to 2019

Banco de Sabadell, S.A.	Income tax	2015 to 2019

In addition, in July 2022, a notification was sent of the broadening of the scope of the verification and investigation procedures in respect of the capital contribution due to the conversion of deferred tax assets into credit enforceable against the Spanish Tax Authority for the years 2016 to 2019.

As at 31 December 2022, the Income Tax (Impuesto sobre la Renta, or ISR) corresponding to the Mexican subsidiary, Banco Sabadell. S.A. Institución de Banca Múltiple, for the financial year 2018 is currently undergoing an investigation by the Mexican tax authorities (Servicio de Administración Tributaria, or SAT); the process is currently at the documentation submission stage.

Ongoing disputes

As at 31 December 2022, the main ongoing tax dispute corresponds to an appeal for judicial review before the Spanish National Court in relation to the rebuttal of the settlement of the disputed VAT assessment for Banco Sabadell between 2008-2010 for an amount of tax due of 1,831 thousand euros (2,337 thousand euros in total including late-payment interest), after a tax settlement was issued in execution of a decision made by the Central Tax Appeal Board partially upholding the claim.

The dispute regarding the administrative-financial claim lodged before the Central Tax Appeal Board on 25 March 2019 against the settlement agreement issued in relation to the disputed tax assessment concerning VAT for the period 07/2012 to 12/2014 which contained an adjustment for a tax amount due of 5,638 thousand euros (6,938 thousand euros in total including late-payment interest) in relation to various sector-based issues ended in the 2022 financial year. In June 2022, the Bank received a ruling from this court partially upholding the claim, which notifies the corresponding implementing agreement in December, resulting in a total reimbursement of 9,443 thousand euros.

The Group has, in any event, made suitable provisions for any contingencies that it is considered may arise in relation to these procedures.

In relation to items for which the statute of limitations is unexpired, due to potential differences in the interpretation of tax regulations, the results of the tax authority inspections for the years subject to review may give rise to contingent tax liabilities, which it is not possible to quantify objectively. However, the Group considers that the possibility of such liabilities materialising is remote, and if they did materialise, the resulting tax charge would not be such as to have any significant impact on these consolidated annual financial statements.

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Temporary levy for credit institutions

On 28 December 2022, Law 38/2022, of 27 December, was published which, among other aspects, establishes a temporal levy on credit institutions and financial credit establishments. This levy must be complied with during 2023 and 2024 by credit institutions or financial credit establishments operating in Spain, whose sum of interest income and fees and commissions in 2019 was equal to or greater than 800 million euros. The payment amount was set at 4.8% of the sum of net interest income and net fees and commissions stemming from their activities in Spain recognised in the income statement for the calendar year preceding the year in which the payment obligation arose. The payment obligation arises each 1 January and must be paid during the first 20 calendar days of the month of September of each year, without prejudice to a 50% advance payment of the total levy, which must be paid during the first 20 calendar days of the month of February following the date on which the payment obligation arises.

The estimated impact of this levy for the Group in the consolidated income statement for 2023 amounts to approximately 170 million euros.

Note 40 – Related party transactions

In accordance with the provisions of Chapter VII bis Related Party Transactions, of the Capital Companies Act, introduced by Law 5/2021, of 12 April, amending the restated text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010, of 2 July, and other financial regulations, with regard to the promotion of long-term shareholder involvement in listed companies, there are no transactions with officers and directors of the company that could be considered relevant, other than those considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, carried out following the corresponding approval procedure and, where applicable, reported in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act. Those that did take place were performed in the normal course of the company’s business or were performed on an arm’s-length basis or under the terms generally available to any employee. There is no record of any transactions being performed other than on an arm’s-length basis with persons or entities related to directors or senior managers.

During 2022, the Board of Directors has not approved any significant transactions by reason of their amount or materiality carried out by the Bank with other related parties.

Details of the most significant balances held with related parties as at 31 December 2022 and 31 December 2021, as well as the amount recorded on the consolidated income statements for 2022 and 2021 arising from related party transactions, are shown below:


Thousand euro
					2022

	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related parties (*)		TOTAL

Assets:
Customer lending and other financial		—		139,981		3,917		515,006		658,904
assets

Liabilities:
Customer deposits and other		—		227,023		5,718		75,107		307,848
financial liabilities

Off-balance sheet exposures:
Financial guarantees given		—		294		—		15,067		15,361
Loan commitments given		—		47		395		296,880		297,322
Other commitments given		—		6,499		—		82,913		89,412

Income statement:
Interest and similar income		—		3,467		36		5,646		9,149
Interest and similar expenses		—		(18)		(5)		(643)		(666)
Return on capital instruments		—		—		—		—		—
Fees and commissions (net)		—		137,175		25		(64)		137,136
Other operating income/expense		—		5,704		—		1		5,705

(*) Includes employee pension plans.

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Thousand euro
					2021
	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related parties (*)		TOTAL

Assets:
Customer lending and other financial assets		—		173,423		4,774		540,008		718,205

Liabilities:
Customer deposits and other financial liabilities		—		199,883		7,450		87,272		294,605

Off-balance sheet exposures:
Financial guarantees given		—		302		—		10,042		10,344
Loan commitments given		—		102		449		108,373		108,924
Other commitments given		—		6,749		—		112,112		118,861

Income statement:
Interest and similar income		—		3,625		25		5,004		8,654
Interest and similar expenses		—		(76)		1		(20)		(95)
Return on capital instruments		—		—		—		—		—
Fees and commissions (net)		—		139,930		48		1,444		141,422
Other operating income/expense		—		13,538		(1)		1		13,538

(*) Includes employee pension plans.

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Note 41 – Remuneration of members of the Board of Directors and Senior Management and their respective balances

The following table shows, for the years ended 31 December 2022 and 2021, the amount paid to directors for services provided by them in that capacity:


Thousand euro

	Remuneration
	2022		2021

Josep Oliu Creus (1)		1,600		1,259
Pedro Fontana García (2)		335		257
José Javier Echenique Landiríbar (3)		—		185
César González-Bueno Mayer (*) (4)		100		83
Jaime Guardiola Romojaro (5)		—		17
Anthony Frank Elliott Ball		158		162
Aurora Catá Sala		179		178
Luis Deulofeu Fuguet (6)		175		39
María José García Beato (7)		180		166
Mireya Giné Torrens		160		150
Laura González Molero (8)		30		—
George Donald Johnston III		178		188
David Martínez Guzmán		100		100
José Manuel Martínez Martínez		180		167
José Ramón Martínez Sufrategui (9)		91		135
Alicia Reyes Revuelta		150		164
Manuel Valls Morató		140		145
David Vegara Figueras (*)		100		100
Total		3,856		3,495

(*) Perform executive functions.

(1) Chairman with status of Other External Director since 26 March 2021. (2) Appointed Deputy Chair of the Board on 28 July 2021.

(3) Submitted resignation from position as Director on 28 July 2021.

(4) On 17 December 2020, the Board of Directors approved his appointment as Chief Executive Officer. He accepted the position on 18 March 2021. (5) Submitted resignation from position as Chief Executive Officer on 18 March 2021.

(6) On 28 July 2021, the Board of Directors approved his appointment as member of the Board of Directors, in the capacity of Independent Director. He accepted the position on 26 October 2021.

(7) Other External Director since 31 March 2021.

(8) On 26 May 2022, the Board of Directors approved her appointment as member of the Board of Directors, in the capacity of Independent Director and she accepted the position on 19 September 2022.

(9) Resigned from his position as Director on 26 May 2022, effective as from the date of obtaining regulatory authorisation to fill the vacancy, which was received on 31 August 2022.

In 2021 and 2022, no contributions have been made to meet pension commitments for directors as a result of their duties as members of the Board of Directors.

Aside from the items mentioned above, members of the Board of Directors received 94 thousand euros as fixed remuneration in 2022 (124 thousand euros in 2021) by reason of their membership of boards of directors in Banco Sabadell Group companies (these amounts are included in the Annual Report on Directors’ Remuneration).

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Remuneration earned by directors for discharging their executive duties during 2022 amounted to 3,520 thousand euros (6,563 thousand euros in 2021).


Thousand euro
	Fixed remunerati on		Variable remuneration		Long-term remuneration		Total ordinary remuneration		Compensati on		Total 2022		Total 2021

Josep Oliu Creus (*)		—		—		—		—		—		—		988
Jaime Guardiola Romojaro (**)		—		—		—		—		—		—		697
María José García Beato (*)		—		—		55		55		—		55		2,037

César González-Bueno Mayer		2,024		698		—		2,722		—		2,722		2,155
David Vegara Figueras		573		101		69		743		—		743		686
Total		2,597		799		124		3,520		—		3,520		6,563

(*) In 2022, they have not performed executive duties.

(**) Submitted resignation from position as Chief Executive Officer on 18 March 2021.

For comparative purposes, it is important to note that during 2021, the Chairman, Josep Oliu Creus, following the amendment to the Articles of Association carried out at the Annual General Meeting of 26 March 2021, changed his status to Other External Director. In 2022, he has not received any amount for his executive duties.

The directorship of María José García Beato also changed to the category of Other External Director, effective as of 31 March 2021. In 2022, she received the amount corresponding to long-term remuneration 2020-2022 for the period in which she was an Executive Director.

The contributions made in 2022 in insurance premiums covering pension contingencies amounted to 101 thousand euros (4,381 thousand euros in 2021).

Total risk transactions granted by the Bank and consolidated companies to directors of the parent company amounted to 907 thousand euros as at 31 December 2022, of which 748 thousand euros corresponded to loans and receivables and 159 thousand euros related to loan commitments given (1,068 thousand euros as at 31 December 2021, consisting of 909 thousand euros in loans and receivables and 159 thousand euros in loan commitments given). These transactions form part of the ordinary business of the Bank and are carried out under normal market conditions. Liabilities amounted to 4,376 thousand euros as at 31 December 2022 (5,928 thousand euros as at 31 December 2021).

Total Senior Management remuneration earned during 2022 amounted to 12,875 thousand euros. Pursuant to applicable regulations, this amount includes the remuneration of the Senior Management members plus the Internal Audit Officer. The total remuneration of Senior Management includes amounts received by all those who were members of Senior Management at any time during 2022, in proportion to the time they spent in that position (on average 8.3 members in 2022 and 7.3 members in 2021).

Thousand euro

2022

2021

Ordinary
remuneration

Severance
pay

Total

Ordinary
remuneration

Severance
pay

Total

Senior Management and Director of Internal Audit remuneration

6,675

6,200

12,875

6,418

5,340

11,758

Risk transactions granted by the Bank and consolidated companies to Senior Management staff (with the exception of those who are also Executive Directors, for whom details are provided above) amounted to 3,405 thousand euros as at 31 December 2022 (4,156 thousand euros in 2021), comprising 3,169 thousand euros in loans and receivables and 236 thousand euros related to loan commitments given (in 2021, 3,865 thousand euros related to loans and receivables and 290 thousand euros to loan commitments given). Liabilities amounted to 1,342 thousand euros as at 31 December 2022 (1,520 thousand euros as at 31 December 2021).

The accrued expenses corresponding to long-term remuneration schemes granted to members of Senior Management, including Executive Directors (see Note 33), amounted to 1,181 thousand euros in 2022 (1,952 thousand euros in 2021).

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For further details on Directors’ remuneration, see the Annual Report on Directors’ Remuneration for 2022, which is included for reference purposes in the Consolidated Directors’ Report.

12 June, CNMV Circular 1/2020, of 6 October, and CNMV Circular 3/2021, of 28 September; therefore, those amounts accrued and not subject to deferral are reported. The amounts included in this Note follow the criteria set forth in the accounting standards applicable to the Bank, and therefore take into account the amounts accrued during 2022, irrespective of the deferral schedule to which they are subject.

The Executive Directors and Senior Management are specified below, indicating the positions they hold in the Bank as at 31 December 2022:



Executive Directors

César González-Bueno Mayer		Sabadell Group CEO
David Vegara Figueras		Director-General Manager

Senior Management
Leopoldo Alvear Trenor		General Manager
Cristóbal Paredes Camuñas		General Manager
Jorge Rodríguez Maroto		General Manager
Carlos Ventura Santamans		General Manager
Gonzalo Barettino Coloma		Secretary General
Marc Armengol Dulcet		Deputy General Manager
Elena Carrera Crespo		Deputy General Manager
Carlos Paz Rubio		Deputy General Manager
Sonia Quibus Rodríguez		Deputy General Manager

Other information relating to the Board

In accordance with the provisions of Article 229 of Royal Legislative Decree 1/2010, of 2 July, approving the revised text of the Capital Companies Act (hereinafter, Capital Companies Act) in relation to the duty to avoid situations of conflict of interest, and without prejudice to the provisions of Article 529 vicies et seq. of the aforesaid Act¹, directors have reported to the company that, during 2022, they or persons related to them, as defined in Article 231 of the Capital Companies Act:

–

Have not carried out transactions with the company without taking into account usual operations, performed under standard conditions for customers and whose significance is immaterial, understanding such operations to be those that do not need to be reported to give a true and fair view of the company’s equity, financial situation and income, or any operations carried out and considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, having applied with the corresponding approval procedure and reporting requirement, in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act.

–

Have not used the name of the company or their position as administrator to unduly influence the performance of personal transactions.

–

Have not made use of corporate assets, including the company’s confidential information, for personal purposes.

–

Have not taken undue advantage of the company’s business opportunities.

–

Have not obtained advantages or remuneration from third parties other than the company or group in connection with the discharge of their duties, with the exception of acts of mere courtesy.

¹ Related-party transactions are governed by their own special regime.

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–

The Bank has entered into a civil liability insurance policy for 2022 that covers the Institution’s Directors and Senior Management staff. The total premium paid was 3,761 thousand euros (5,420 thousand euros in 2021).

Note 42 – Other information

Transactions with significant shareholders

No major transactions with significant shareholders have been carried out during 2022 and 2021.

Environmental disclosures

At Banco Sabadell, sustainability is part of the company’s values and the way in which the Institution understands banking; therefore, developments in this area have been gradual, focusing on the business relationship and positively impacting its surrounding environment.

Consequently, during 2022, the Bank has continued to make progress on all these aspects of its activity and organisation by creating an ESG framework, Sabadell’s Commitment to Sustainability. To this end, the Institution continues to align its strategy to the Sustainable Development Goals (SDGs) and the Paris Agreement, with the aim of supporting and accelerating the key economic and social transformations that contribute to sustainable development and the fight against climate change.

With its sustainability strategy, the Group deals with the risks and opportunities posed by the climate and environmental issues that impact the strategic pillars of its ESG framework, Sabadell’s Commitment to Sustainability, from a ‘double materiality’ perspective. To this end, the Bank has set objectives and is carrying out transformation actions. The following actions are worthy of note:

–

Progress as a Sustainable Institution, by environmentally managing premises and by driving forward climate and environmental commitments. The Bank is focused on reducing its carbon footprint and on being carbon neutral.

–

Support customers in the transition towards a sustainable economy, through advisory services and the development of specific solutions aligned with the regulatory environment, as well as the identification of transformation opportunities.

During 2022 and in line with the commitment to reduce CO₂ emissions, the Bank has implemented plans for energy saving, preventive maintenance of HVAC systems, waste management and recycling, and continues to invest in projects to offset its greenhouse gas (GHG) emissions.

In support of the main international commitments to sustainability and net zero, the Bank strengthens its transitional actions by signing new agreements such as the Platform for Carbon Accounting Financials (PCAF) to make progress in the calculation of the carbon footprint of the lending and investment portfolio.

As regards its support of customers in their transition, the Bank continues to learn more about the environmental and climate impact of its activity and classify it accordingly. It is also offering sustainable finance solutions, as well as promoting the energy transition and raising awareness of the importance of the green transition via training activities geared at employees and advice aimed at customers.

Moreover, the Bank has set decarbonisation targets for the most CO₂-intensive sectors to ensure that it meets its portfolio neutrality targets by 2050.

Another framework for action is to offer ESG investment opportunities by increasing the offer of sustainable savings and investment products, either our own or those of third parties, and by driving capital investment in renewable energy projects and promoting green initiatives and technologies.

Given the activities in which it is engaged, as at 31 December 2022, the Bank does not have responsibilities, expenses, assets, revenues or provisions or contingencies of an environmental nature that could be deemed significant with respect to equity, the financial situation and its consolidated results; therefore, there are no specific disclosures in the environmental disclosures document envisaged by Order JUS/616/2022, of 30 June, approving the new templates for the submission to the Companies Register of the annual financial statements of institutions required to published them.

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For further details, see the Non-Financial Disclosures Report, which is included as part of the Consolidated Directors’ Report.

Customer Care Service (SAC)

The Customer Care Service (hereinafter, SAC as per its Spanish acronym) and its head, who is appointed by the Board of Directors, report directly to the Compliance Division and is independent of the Bank’s business and operational lines. Its main function is to handle and resolve complaints and claims brought forward by customers and users of the financial services of Banco de Sabadell, S.A. and member entities, when these relate to their interests and legally recognised rights arising from contracts, transparency and customer protection regulations or good financial practices and uses, in accordance with Banco Sabadell Regulations for the Protection of Customers and Users of Financial Services.

The entities that adhere to the SAC Regulations are the following: BanSabadell Financiación, E.F.C., S.A.; Sabadell Asset Management, S.A., S.G.I.I.C. Sociedad Unipersonal; Urquijo Gestión, S.G.I.I.C, S.A.; and Sabadell Consumer Finance, S.A.U.

In 2022, Banco Sabadell Customer Care Service received 41,887 complaints and 41,332 complaints were handled during the year with 1,465 claims and complaints pending analysis as at 31 December 2022.


	Complaints		% of total received

Product
Loans and credit secured with mortgages		6,870		0.164
Loans and credit not secured with collateral		7,187		0.172
Demand deposits and payment accounts		20,345		0.486
Payment instruments and electronic money		2,271		0.053
Other payment services		1,978		0.047
Other products/services		2,163		0.052
Other products		1,073		0.026
Total		41,887		100 %

Complaints and claims processed by SAC at first instance

During 2022, the SAC received 38,726 complaints and claims and 28,726 were accepted for processing and resolved, in accordance with the provisions of Order ECO 734/2004, of 11 March.

Of the total number of complaints and claims accepted for processing and resolved by the SAC, 15,476 (53.9%) were resolved in the customer’s favour, 13,238 (46.1%) in the Institution’s favour and in 12 cases the customer withdrew their complaint. During 2022, 9,475 complaints and claims were not accepted for processing due to reasons envisaged in the SAC Regulations.

Of the total number of complaints and claims accepted for processing and resolved by the SAC, 15,546 (54.1%) were processed within a period of 15 working days, 11,487 (40.0%) within a period of less than one month and 1,693 (5.9%) within a period longer than one month.

Complaints and claims managed by the Ombudsman

At Banco Sabadell, the role of Customer Ombudsman is assumed by José Luis Gómez-Dégano y Ceballos-Zúñiga. The Ombudsman is responsible for resolving the complaints brought forward by the customers and users of Banco de Sabadell, S.A., and of the other aforementioned entities associated with it, both at first and second instance, and for resolving issues that are passed on by the SAC. The Ombudsman’s decisions are binding on the Institution.

In 2022, the SAC received a total of 2,547 complaints and claims via the Customer Ombudsman, of which 2,524 were handled during the year.

With regard to claims and complaints resolved by the Customer Ombudsman, 8 were resolved in the customer’s favour, 652 were resolved in the Institution’s favour, in 1,099 cases the Bank acquiesced to the claimant’s request and in 9 cases the customer withdrew their complaint. In 666 complaints, the Ombudsman declined to act in accordance with the regulations governing its remit. As at 31 December 2022, 53 complaints are pending submission of allegations and 90 pending resolution by the Customer Ombudsman.

A-428

Complaints and claims managed by the Bank of Spain and the CNMV

Under current legislation, customers or users who are dissatisfied with the response received from the SAC or from the Customer Ombudsman may submit their claims and complaints to the Market Conduct and Complaints Department of the Bank of Spain, to the CNMV or to the Directorate General for Insurance and Pension Funds, subject to the essential prerequisite of having previously addressed their complaint or claim to the Institution.

The SAC received a total of 614 claims referred by the Bank of Spain and the CNMV until 31 December 2022. During 2022, taking into account claims that remained pending at the end of the previous year, 607 claims were accepted and resolved.

Note 43 – Subsequent events

There were no significant events worthy of mention subsequent to 31 December 2022.

A-429

Schedule I – Banco Sabadell Group companies

Banco Sabadell Group companies as at 31 December 2022 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid	Total assets

Aurica Coinvestments, S.L.	Holding	Barcelona - Spain		—		61.76		50,594		(853)		1,880	1,043		51,651		50,594		(5,050)		(10,045)
Banco Atlantico (Bahamas) Bank & Trust Ltd.	Credit institution	Nassau - Bahamas		99.99		0.01		1,598		825		(31)	—		3,155		2,439		(403)		(32)
Banco de Sabadell, S.A.	Credit institution	Alicante - Spain		—		—		703,371		10,009,080		740,551	—		195,620,963		—		12,573,535		593,675
Banco Sabadell, S.A., Institución de Banca Múltiple	Credit institution	Mexico City - Mexico		99.99		0.01		573,492		(16,619)		12,599	—		4,789,408		618,750		(78,166)		(12,409)
BanSabadell Factura, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		100		381		432	—		1,150		799		(318)		432
BanSabadell Financiación, E.F.C., S.A.	Credit institution	Sabadell - Spain		100.00		—		24,040		12,856		683	—		571,813		24,040		12,856		683
BanSabadell Inversió Desenvolupament, S.A.U.	Holding	Barcelona - Spain		100.00		—		16,975		99,786		71,235	—		214,258		108,828		70,161		3,196
Bansabadell Mediación, Operador De Banca-Seguros Vinculado Del Grupo Banco Sabadell, S.A.	Other regulated companies	Alicante - Spain		—		100.00		301		60		7,244	8,232		53,073		524		(1,597)		6,437
Bitarte, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		6,506		(2,176)		(113)	—		4,325		9,272		(4,488)		(93)
BStartup 10, S.L.U.	Holding	Barcelona - Spain		—		100.00		1,000		4,107		(315)	—		11,232		1,000		(999)		(169)
Business Services for Operational Support, S.A.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		—		—		—	—		51		—		(8,726)		2,825
Compañía de Cogeneración del Caribe Dominicana, S.A.	Power generation	Santo Domingo - Dominican Republic		—		100.00		5,016		(4,581)		—	—		454		—		(312)		—
Crisae Private Debt, S.L.U.	Other ancillary activities	Barcelona - Spain		—		100.00		3		181		104	—		352		200		(16)		103
Desarrollos y Participaciones Inmobiliarias 2006, S.L.U. in Liquidation	Real estate	Elche - Spain		—		100.00		1,942		(89,826)		(45)	—		3		1,919		(89,803)		(45)
Duncan de Inversiones S.I.C.A.V., S.A. in Liquidation	UCITS, funds and similar financial corporations	Sant Cugat del Valles - Spain		99.81		—		7,842		(7,787)		(55)	—		18		—		(345)		(55)
Duncan Holdings 2022-1 Limited	Holding	London - United Kingdom		—		100.00		1		—		—	—		1		—		—		5,993
Ederra, S.A.	Real estate	San Sebastián - Spain		97.85		—		2,036		34,085		371	—		36,563		36,062		(398)		363
ESUS Energía Renovable, S.L.	Power generation	Vigo - Spain		—		90.00		50		(1,279)		(173)	—		2,975		23		(1,361)		(297)
Fonomed Gestión Telefónica Mediterráneo, S.A.U.	Other ancillary activities	Alicante - Spain		100.00		—		1,232		2,913		1,017	—		6,820		2,771		1,962		1,247
Fuerza Eólica De San Matías, S. de R.L. de C.V.	Power generation	Monterrey - Mexico		—		99.99		8,144		(14,919)		(7,095)	—		53,496		5,951		(10,502)		(6,497)
Galeban 21 Comercial, S.L.U.	Services	A Coruña - Spain		100.00		—		10,000		(4,292)		(6)	—		5,702		14,477		(8,769)		(6)
Gazteluberri, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		53		(20,789)		(7)	—		1,672		23,891		(44,627)		(7)

A-430

Banco Sabadell Group companies as at 31 December 2022 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid	Total assets
Gest 21 Inmobiliaria, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		7,810		1,108		33	—		8,958		80,516		(46,727)		38
Gestión Financiera del Mediterráneo, S.A.U.	Other financial services	Alicante - Spain		100.00		—		13,000		2,573		8,211	12,875		23,963		66,787		(42,959)		1,269
Gier Operations 2021, S.L.U.	Other ancillary activities	Andorra - Andorra		100.00		—		730		—		(9)	—		722		730		—		(9)
Guipuzcoano Promoción Empresarial, S.L.	Holding	San Sebastián - Spain		—		100.00		53		(75,662)		(1,447)	—		5,307		7,160		(82,761)		(1,447)
Hobalear, S.A.U.	Real estate	Barcelona - Spain		—		100.00		60		72		7	—		141		414		72		7
Hondarriberri, S.L.	Holding	San Sebastián - Spain		99.99		0.01		41		63,158		(54,168)	—		10,037		165,669		95,440		(2,092)
Hotel Management 6 Gestión Activa, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		135,730		28,269		(54)	—		163,945		136,335		50,335		(40)
Hotel Management 6 Holdco, S.L.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		29,074		(24,133)		(15)	—		61,579		27,611		(22,671)		(15)
Interstate Property Holdings, LLC.	Holding	Miami - United States		100.00		—		7,293		(977)		51	—		6,387		3,804		7,849		51
Inverán Gestión, S.L. in Liquidation	Real estate	Sant Cugat del Valles - Spain		44.83		55.17		90		(80)		(15)	—		52		45,090		(45,081)		(15)
Inversiones Cotizadas del Mediterráneo, S.L.	Holding	Alicante - Spain		100.00		—		308,000		195,644		10,690	—		1,005,403		589,523		(83,787)		10,733
Manston Invest, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		33,357		(13,595)		(93)	—		19,939		33,357		(13,595)		(93)
Mariñamendi, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		62		(11,590)		(8)	—		3,882		109,529		(121,057)		(8)
Mediterráneo Sabadell, S.L.	Holding	Alicante - Spain		50.00		50.00		85,000		16,528		(217)	—		101,314		510,829		(409,000)		(217)
Paycomet, S.L.U.	Payment institution	Torrelodones -Spain		—		100.00		200		726		802	—		24,335		9,205		234		787
Puerto Pacific Vallarta, S.A. de C.V.	Real estate	Mexico City - Mexico		—		100.00		28,947		(16,488)		338	—		12,798		29,164		(11,951)		(314)
Ripollet Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		20		272		124	—		458,163		593		(301)		124
Rubí Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		3		20		(6)	—		402,936		53		(30)		(6)
Sabadell Consumer Finance, S.A.U.	Credit institution	Sabadell - Spain		100.00		—		35,720		77,380		17,857	—		1,888,124		72,232		45,790		17,857
Sabadell Information Systems Limited	Provision of technology services	London - United Kingdom		—		100.00		12,036		20,653		169	—		33,228		41,296		(8,332)		169
Sabadell Information Systems, S.A.U.	Provision of technology services	Sabadell - Spain		100.00		—		40,243		60,832		48,796	—		1,387,578		143,695		(47,700)		47,463
Sabadell Innovation Capital, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		11,030		(1,129)	—		53,491		1,000		(8,152)		783
Sabadell Innovation Cells, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		755		155	—		1,354		3,203		(3,361)		528
Sabadell Patrimonio Inmobiliario, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		30,116		795,988		(1,029)	—		828,149		863,895		(27,970)		(10,850)
Sabadell Real Estate Activos, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		100,060		234,204		(190)	—		334,467		500,622		(166,358)		(190)

A-431

Banco Sabadell Group companies as at 31 December 2022 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid	Total assets

Sabadell Real Estate Development, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		15,807		157,455		(19,168)	—		1,081,488		4,748,442		(4,552,614)		(20,796)

Sabadell Real Estate Housing, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		2,073		730		(6,068)	—		7,521		17,792		(14,990)		(6,068)

Sabadell Securities USA, Inc.	Other financial services	Miami - United States		100.00		—		551		6,200		265	—		7,219		551		5,412		280

Sabadell Strategic Consulting, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		488		176	—		1,266		3		488		176

Sabadell Venture Capital, S. L.U.	Holding	Barcelona - Spain		—		100.00		3		13,942		3,275	—		69,559		3		4,833		3,983

Sabcapital, S.A de C.V., SOFOM, E.R.	Credit institution	Mexico City - Mexico		49.00		51.00		164,828		69,276		44,696	—		1,618,240		154,568		80,389		44,679

Sinia Capital, S.A. de C.V.	Holding	Mexico City - Mexico		—		100.00		20,830		10,230		6,899	—		84,776		20,140		5,448		7,391

Sinia Renovables, S.A.U.	UCITS, funds and similar financial corporations	Barcelona - Spain		100.00		—		15,000		2,318		(446)	—		117,076		15,000		3,885		211

Sogeviso Servicios Gestión Vivienda Innovación Social, S.L.U.	Real estate	Alicante - Spain		100.00		—		3		9,963		101	—		11,380		3		11,559		101

Stonington Spain, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		60,729		(11,704)		(122)	—		49,390		60,729		(11,705)		(122)

Tasaciones de Bienes Mediterráneo, S.A. in Liquidation	Other ancillary activities	Alicante - Spain		99.88		0.12		1,000		1,416		—	—		2,420		5,266		(2,850)		—

Tenedora de Inversiones y Participaciones, S.L.	Holding	Alicante - Spain		100.00		—		296,092		(128,603)		(532)	—		345,066		2,975,977		(2,738,513)		(1,336)

TSB Bank PLC	Credit institution	Edinburgh - United Kingdom		—		100.00		90,710		1,967,452		111,939	78,531		55,752,618		1,814,636		329,136		99,938

TSB Banking Group PLC	Holding	London - United Kingdom		100.00		—		7,028		1,764,655		80,586	—		3,001,958		2,200,560		(227,995)		(39,268)

TSB Banking Group plc Employee Share Trust	Other ancillary activities	Saint Helier - Jersey		—		100.00		1		(13,106)		(56)	—		343		—		(12,896)		—

TSB Covered Bonds (Holdings) Limited	Holding	London - United Kingdom		—		100.00		1		—		—	—		1		—		—		—

TSB Covered Bonds (LM) Limited	Other ancillary activities	London - United Kingdom		—		100.00		1		—		—	—		1		—		—		—

TSB Covered Bonds LLP	UCITS, funds and similar financial corporations	London - United Kingdom		—		100.00		1		15		4	—		67		—		17		4

Urquijo Gestión, S.A.U., S.G.I.I.C.	Funds management activities	Madrid - Spain		100.00		—		3,606		4,858		1,257	4,213		13,822		3,084		5,380		1,257

Urumea Gestión, S.L. in Liquidation	Other ancillary activities	San Sebastián - Spain		—		100.00		9		(14)		—	—		—		9		(14)		—

VeA Rental Homes , S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		5,000		1,358		(1,580)	—		36,383		22,000		(15,642)		(1,580)

Venture Debt SVC, S.L.U.	Holding	Barcelona - Spain		—		100.00		3		—		—	—		2,578		3		—		—



TOTAL													104,894				16,382,618		4,329,889		738,662

A-432

Banco Sabadell Group companies as at 31 December 2022 consolidated by the equity method (*)



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data (a)								Group investment		Contribution to reserves or losses in consolidated companies (d)		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss) (b)		Dividends paid (c)		Total assets


Aurica III, Fondo de Capital Riesgo	UCITS, funds and similar financial corporations	Barcelona - Spain		—		47.50		51,130		(46,881)		69,348		36,612		75,249		24,318		(1,337)		9,743

Aurica IIIB, S.C.R., S.A.	UCITS, funds and similar financial corporations	Barcelona - Spain		—		42.85		34,557		(56,273)		71,330		22,320		50,765		14,837		199		4,881

BanSabadell Pensiones, E.G.F.P., S.A.	Other regulated companies	Madrid - Spain		50.00		—		7,813		34,569		(740)		—		45,833		40,378		(18,544)		(370)

BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		10,000		78,476		21,390		6,000		308,357		34,000		14,636		12,744

BanSabadell Vida, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		43,858		437,575		117,961		60,000		8,808,926		27,106		225,516		62,988

Doctor Energy Central Services, S.L.	Other business management consulting activities	Granollers - Spain		—		24.99		125		(57)		(127)		—		278		50		(33)		(17)

Catalana de Biogás Iberia, S.L.	Power generation	Barcelona - Spain		—		24.90		10		(1)		1		—		1		2		—		—

Parque Eólico Casa Vieja S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—

Parque Eólico Villaumbrales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—

Parque Eólico Perales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—

Parque Eólico Los Pedrejones S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		633		267		(15)		—

Energíes Renovables Terra Ferma, S.L.	Power generation	Barcelona - Spain		—		50.00		6		(65)		(9)		—		1,928		3		(3)		—

Financiera Iberoamericana, S.A.	Credit institution	Havana - Cuba		50.00		—		38,288		13,710		7,579		2,514		102,654		19,144		3,416		3,163

Flex Equipos de Descanso, S.A.	Manufacturing	Getafe - Spain		—		19.16		66,071		66,817		10,262		—		261,388		50,930		11,829		26,210

Murcia Emprende, S.C.R. de R.S., S.A.	Other financial services	Murcia - Spain		28.70		—		2,557		(594)		1,925		—		1,962		2,026		(1,441)		531

Plaxic Estelar, S.L.	Real estate	Barcelona - Spain		—		45.01		3		(15,303)		8		—		31,981		3,114		(3,114)		—

Portic Barcelona, S.A.	Data processing, hosting and related activities	Barcelona - Spain		25.00		—		291		1,812		108		—		2,447		5		539		9

SBD Creixent, S.A.	Real estate	Sabadell - Spain		23.05		—		5,965		(1,073)		421		—		5,571		3,524		(2,397)		98



Total														127,446				220,505		229,206		119,980

(*) Companies consolidated by the equity method as the Group does not have control over them but does have significant influence.

(a) Figures for foreign companies translated to euros at the historical exchange rate; amounts in the consolidated income statement translated at the average exchange rate.

(b) Results pending approval by Annual General Meeting of Shareholders and Partners.

(d) The heading “Reserves or accumulated losses of investments in joint ventures and associates” on the consolidated balance sheet as at 31 December 2022 also includes -65,352 thousand euros corresponding to Promontoria Challenger I, S.A., an entity classified as a non-current asset held for sale.

The balance of total revenue from associates consolidated by the equity method and individually considered to be non-material amounted to 561,496 thousand euros as at 31 December 2022. The balance of liabilities as at the end of 2022 amounted to 439,403 thousand euros. The key figures as at 2022 year-end for BanSabadell Vida, S.A. are included in Note 14 of the consolidated annual financial statements.

A-433

Changes in the scope of consolidation in 2022

Additions to the scope of consolidation:

Thousand euro

Name of entity (or line of business) acquired or merged

Category

Effective date of
the transaction

Fair value of equity instruments issued for the acquisition

% Voting rights
acquired

% Total voting
rights

Type of
shareholding

Method

Reason

Acquisition cost

Fair value of equity instruments
issued for the acquisition

Catalana de Biogás Iberia, S.L.

Associate

25/4/2022

—

24.90

Indirect

Equity method

Duncan Holdings 2022-1 Limited

Subsidiary

29/3/2022

—

100.00

Indirect

Full consolidation

Gier Operations 2021, S.L.U.

Subsidiary

21/2/2022

730

—

100.00

Direct

Full consolidation

Total newly consolidated subsidiaries

731

Total newly consolidated associates

(a) Acquisition of associates

(b) Incorporation of subsidiaries

Exclusions from the scope of consolidation:



Thousand euro
Name of entity (or line of business) sold, spun off or otherwise disposed of	Category	Effective date of the transaction	% Voting rights disposed of			% Total voting rights following disposal			Profit/(loss) generated		Type of shareholding	Method	Reason


Inversiones en Resorts Mediterráneos, S.L. in Liquidation	Subsidiary	20/1/2022		55.06	%		—	%		(800)	Indirect	Full consolidation	a

Aurica Capital Desarrollo, S.G.E.I.C., S.A.	Associate	29/7/2022		20.00	%		—	%		2,585	Direct	Equity method	b

Europea Pall Mall Ltd.	Subsidiary	15/7/2022		100.00	%		—	%		(32)	Direct	Full consolidation	b

Gestora de Aparcamientos del Mediterráneo, S.L. in Liquidation	Associate	5/5/2022		40.00	%		—	%		—	Indirect	Equity method	a

Plataforma de Innovación Sabadell, S.L.U.	Subsidiary	11/7/2022		100.00	%		—	%		—	Direct	Full consolidation	a

Sabadell Brasil Trade Services - Assessoria Comercial Ltda.	Subsidiary	30/8/2022		100.00	%		—	%		(733)	Direct	Full consolidation	a

Sabadell Corporate Finance, S.L.U.	Subsidiary	22/6/2022		100.00	%		—	%		(2)	Direct	Full consolidation	a

Arrendamiento de Bienes Inmobiliarios del Mediterráneo, S.L. in Liquidation	Subsidiary	14/12/2022		100.00	%		—	%		(24)	Direct	Full consolidation	a

Atrian Bakers, S.L.	Associate	28/12/2022		22.41	%		—	%		1,833	Indirect	Equity method	b

Solvia Servicios Inmobiliarios, S.L.	Associate	2/12/2022		20.00	%		—	%		4,092	Direct	Equity method	b

LSP Finance, S.L.U. in Liquidation	Subsidiary	28/10/2022		100.00	%		—	%		(10)	Indirect	Full consolidation	a

Other										2,711



TOTAL										9,620

(a) Items removed from the scope due to dissolution and/or liquidation.

(b) Items removed from the scope due to disposal

A-434

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data								Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets


Arrendamiento de Bienes Inmobiliarios del Mediterráneo, S.L. in Liquidation	Real estate	Alicante - Spain		100.00		—		100		339		(10)		—		427		10,538		(10,099)		(10)

Aurica Coinvestments, S.L.	Holding	Barcelona - Spain		—		61.76		50,594		(1,045)		1,880		1,043		51,459		31,247		(1,758)		(4,165)

Banco Atlantico (Bahamas) Bank & Trust Ltd.	Credit institution	Nassau - Bahamas		99.99		0.01		1,598		709		(25)		—		3,001		2,439		(378)		(25)

Banco de Sabadell, S.A.	Credit institution	Alicante - Spain		—		—		703,371		10,271,463		328,412		—		197,187,820		—		12,378,089		366,036

Banco Sabadell, S.A., Institución de Banca Múltiple	Credit institution	Mexico City - Mexico		99.99		0.01		573,492		(57,153)		(12,296)		—		3,851,192		576,941		(54,325)		(24,286)

BanSabadell Factura, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		100		(276)		157		—		2,602		299		(475)		157

BanSabadell Financiación, E.F.C., S.A.	Credit institution	Sabadell - Spain		100.00		—		24,040		12,339		517		—		649,954		24,040		12,339		517

BanSabadell Inversió Desenvolupament, S.A.U.	Holding	Barcelona - Spain		100.00		—		16,975		103,159		(213)		—		198,505		108,828		19,810		(2,401)

BanSabadell Mediación, Operador De Banca-Seguros Vinculado Del Grupo Banco Sabadell, S.A.	Other regulated companies	Alicante - Spain		—		100.00		301		59		8,232		9,288		53,763		524		(4,174)		10,809

Bitarte, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		6,506		(2,117)		(59)		—		4,416		9,272		(4,405)		(83)

BStartup 10, S.L.U.	Holding	Barcelona - Spain		—		100.00		1,000		3,768		384		—		9,605		1,000		(621)		(157)

Business Services for Operational Support, S.A.	Other ancillary activities	Sant Cugat del Valles - Spain		80.00		—		530		(8,052)		(1,938)		—		35,059		1,160		(6,290)		(1,372)

Compañía de Cogeneración del Caribe Dominicana, S.A.	Power generation	Santo Domingo - Dominican Republic		—		100.00		5,016		(4,606)		—		—		427		—		(312)		—

Crisae Private Debt, S.L.U.	Other ancillary activities	Barcelona - Spain		—		100.00		3		196		(14)		—		199		200		(1)		(15)

Desarrollos y Participaciones Inmobiliarias 2006, S.L.U. in Liquidation	Real estate	Elche - Spain		—		100.00		1,942		(90,935)		1,109		—		2		1,919		(90,912)		1,109

Duncan de Inversiones S.I.C.A.V., S.A.	UCITS, funds and similar financial corporations	Sant Cugat del Valles - Spain		99.81		—		7,842		(5,242)		(53)		—		2,553		2,887		(291)		(53)

Ederra, S.A.	Real estate	San Sebastián - Spain		97.85		—		2,036		34,219		(31)		—		36,331		36,062		(405)		108

ESUS Energía Renovable, S.L.	Power generation	Vigo - Spain		—		90.00		50		(727)		(44)		—		3,701		23		(1,367)		(173)

Europea Pall Mall Ltd.	Real estate	London - United Kingdom		100.00		—		20,843		(1,412)		633		—		24,194		20,843		(5,173)		347

Fonomed Gestión Telefónica Mediterráneo, S.A.U.	Other ancillary activities	Alicante - Spain		100.00		—		1,232		2,458		502		—		7,096		2,771		1,763		199

Fuerza Eólica De San Matías, S. de R.L. de C.V.	Power generation	Monterrey - Mexico		—		99.99		8,144		(10,146)		(3,981)		—		51,515		5,951		(4,845)		(4,688)

A-435

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data							Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid	Total assets

Galeban 21 Comercial, S.L.U.	Servicios	A Coruña - España		100.00		—		10,000		(4,292)		—	—		5,708		14,477		(8,769)		—

Gazteluberri, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		53		(20,740)		(49)	—		1,695		23,891		(44,578)		(49)

Gest 21 Inmobiliaria, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		7,810		1,142		(34)	—		8,926		80,516		(46,718)		(8)

Gestión Financiera del Mediterráneo, S.A.U.	Other financial services	Alicante - Spain		100.00		—		13,000		2,551		12,043	2,789		27,903		66,787		(41,914)		3,614

Guipuzcoano Promoción Empresarial, S.L.	Holding	San Sebastián - Spain		—		100.00		53		(75,502)		(161)	—		6,774		7,160		(82,600)		(161)

Hobalear, S.A.U.	Real estate	Barcelona - Spain		—		100.00		60		61		11	—		135		414		61		11

Hondarriberri, S.L.	Holding	San Sebastián - Spain		99.99		0.01		41		18,545		(386)	—		59,216		120,669		95,578		(138)

Hotel Management 6 Gestión Activa, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		135,730		29,104		(835)	—		163,999		136,335		49,803		532

Hotel Management 6 Holdco, S.L.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		29,074		(22,041)		(2,093)	—		61,620		27,611		(20,405)		(2,266)

Interstate Property Holdings, LLC.	Holding	Miami - United States		100.00		—		7,293		(1,349)		5	—		5,951		3,804		6,387		1,462

Inverán Gestión, S.L. in Liquidation	Real estate	Sant Cugat del Valles - Spain		44.83		55.17		90		(34)		(46)	—		70		45,090		(45,034)		(46)

Inversiones Cotizadas del Mediterráneo, S.L.	Holding	Alicante - Spain		100.00		—		308,000		198,920		3,717	—		727,461		589,523		(83,233)		(554)

Inversiones en Resorts Mediterráneos, S.L. in Liquidation	Real estate	Torre Pacheco - Spain		—		55.06		299,090		(302,367)		—	—		68		175,124		—		—

LSP Finance, S.L.U.	Provision of technology services	Sant Cugat del Valles - Spain		—		100.00		252		(1,825)		1,229	—		3,012		6,484		(3,865)		(2,964)

Manston Invest, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		33,357		(12,930)		(665)	—		20,055		33,357		(12,930)		(665)

Mariñamendi, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		62		(65,791)		(316)	—		6,661		55,013		(120,741)		(316)

Mediterráneo Sabadell, S.L.	Holding	Alicante - Spain		50.00		50.00		85,000		16,853		(171)	9		101,685		510,829		(408,829)		(171)

Paycomet, S.L.U.	Payment institution	Torrelodones - Spain		—		100.00		200		223		517	—		8,458		8,853		(275)		509

Plataforma de Innovación Sabadell, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		(1)		(3)	—		4		3		(1)		(3)

Puerto Pacific Vallarta, S.A. de C.V.	Real estate	Mexico City - Mexico		—		100.00		28,947		(16,979)		(150)	—		11,820		29,164		(11,571)		(379)

Ripollet Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		20		(290)		(11)	—		356,364		20		(290)		(11)

Rubí Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		3		(24)		(6)	—		479,591		3		(24)		(6)

Sabadell Brasil Trade Services - Assessoria Comercial Ltda.	Other financial services	São Paulo - Brazil		99.99		0.01		905		(845)		—	—		78		250		393		—

Sabadell Consumer Finance, S.A.U.	Credit institution	Sabadell - Spain		100.00		—		35,720		56,936		20,444	—		1,777,133		72,232		25,069		20,722

A-436

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data								Group investment	Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid		Total assets

Sabadell Corporate Finance, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		70		8,078		(131)		—		8,134	9,373		(1,204)		(152)

Sabadell Information Systems Limited	Provision of technology services	London - United Kingdom		—		100.00		12,036		22,563		(115)		—		61,548	41,296		(8,266)		(115)

Sabadell Information Systems, S.A.U.	Provision of technology services	Sabadell - Spain		100.00		—		40,243		36,312		23,004		—		1,561,069	143,695		(67,662)		15,589

Sabadell Innovation Capital, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		3,824		(2,073)		—		45,555	1,000		(2,651)		(600)

Sabadell Innovation Cells, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		(2,988)		169		—		2,929	3		(3,041)		(320)

Sabadell Patrimonio Inmobiliario, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		30,116		813,910		(17,922)		—		888,175	863,895		(19,869)		(8,101)

Sabadell Real Estate Activos, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		100,060		235,327		(1,123)		—		334,842	500,622		(165,235)		(1,123)

Sabadell Real Estate Development, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		15,807		(2,406,085)		(36,983)		—		1,151,093	2,147,442		(4,513,277)		(39,337)

Sabadell Real Estate Housing, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		2,073		122		(2,893)		—		25,235	14,292		(11,836)		(3,154)

Sabadell Securities USA, Inc.	Other financial services	Miami - United States		100.00		—		551		5,266		530		—		6,547	551		4,873		539

Sabadell Strategic Consulting, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		320		168		—		1,018	3		275		213

Sabadell Venture Capital, S. L.U.	Holding	Barcelona - Spain		—		100.00		3		12,061		1,763		—		56,417	3		2,964		582

Sabcapital, S.A de C.V., SOFOM, E.R.	Credit institution	Mexico City - Mexico		49.00		51.00		164,828		20,841		24,759		4,826		1,493,425	151,709		55,610		24,779

Sinia Capital, S.A. de C.V.	Holding	Mexico City - Mexico		—		100.00		20,830		6,542		(526)		—		75,454	18,150		6,538		(1,563)

Sinia Renovables, S.A.U.	UCITS, funds and similar financial corporations	Barcelona - Spain		100.00		—		15,000		1,338		505		—		60,915	15,000		3,400		718

Sogeviso Servicios Gestión Vivienda Innovación Social, S.L.U.	Real estate	Alicante - Spain		100.00		—		3		9,893		70		—		11,707	3		10,026		(62)

Stonington Spain, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		60,729		(11,092)		(613)		—		49,496	60,729		(11,092)		(613)

Tasaciones de Bienes Mediterráneo, S.A. in Liquidation	Other ancillary activities	Alicante - Spain		99.88		0.12		1,000		1,416		—		—		2,420	5,266		(2,876)		26

Tenedora de Inversiones y Participaciones, S.L.	Holding	Alicante - Spain		100.00		—		296,092		(528,628)		(11,037)		—		351,343	2,564,914		(2,725,376)		(13,159)

TSB Bank PLC	Credit institution	Edinburgh - United Kingdom		—		100.00		90,710		1,981,428		149,533		—		55,583,840	1,814,636		193,342		137,490

TSB Banking Group PLC	Holding	London - United Kingdom		100.00		—		7,028		1,864,273		1,979		—		2,787,944	2,213,148		(189,474)		(38,646)

TSB Banking Group plc Employee Share Trust	Other ancillary activities	Saint Helier - Jersey		—		100.00		1		(12,225)		44		—		526	—		(11,183)		—

TSB Covered Bonds (Holdings) Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1	—		—		—

A-437

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data							Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/ (loss)		Dividends paid	Total assets

TSB Covered Bonds (LM) Limited	Other ancillary activities	London - United Kingdom		—		100.00		1		—		—	—		1		—		—		—

TSB Covered Bonds LLP	UCITS, funds and similar financial corporations	London - United Kingdom		—		100.00		1		14		3	—		61		—		14		3

Urquijo Gestión, S.A.U., S.G.I.I.C.	Funds management activities	Madrid - Spain		100.00		—		3,606		4,858		4,213	2,717		18,542		3,084		5,380		4,213

Urumea Gestión, S.L. in Liquidation	Other ancillary activities	San Sebastián - Spain		—		100.00		9		(13)		(1)	—		1		9		(12)		(1)

VeA Rental Homes , S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		5,000		(17,022)		1,380	—		44,202		5,000		(17,022)		1,380

Venture Debt SVC, S.L.U.	Holding	Barcelona - Spain		—		100.00		3		—		—	—		3		3		—		—


TOTAL													20,672				13,418,379		4,004,030		439,553

A-438

Banco Sabadell Group companies as at 31 December 2021 consolidated by the equity method (*)



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data (a)								Group investment		Contribution to reserves or losses in consolidated companies (d)		Contribution to Group consolidated profit/(loss) (e)

			Direct		Indirect		Capital		Other equity		Profit/(loss) (b)		Dividends paid (c)		Total assets


Atrian Bakers, S.L.	Manufacturing	Castellgalí - Spain		—		22.41		26,249		(11,299)		(1,380)		—		32,988		2,000		(854)		(1,146)

Aurica Capital Desarrollo, S.G.E.I.C., S.A.	Funds management activities	Barcelona - Spain		20.00		—		750		(79)		596		602		2,078		161		119		35

Aurica III, Fondo de Capital Riesgo	UCITS, funds and similar financial corporations	Barcelona - Spain		—		47.50		76,699		(8,760)		217		—		69,308		37,183		1,992		33,282

Aurica IIIB, S.C.R., S.A.	UCITS, funds and similar financial corporations	Barcelona - Spain		—		42.85		51,839		(5,990)		142		—		46,771		22,680		1,207		21,313

BanSabadell Pensiones, E.G.F.P., S.A.	Other regulated companies	Madrid - Spain		50.00		—		7,813		35,176		737		—		49,466		40,378		(18,913)		369

BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		10,000		77,263		22,658		5,000		297,303		34,000		9,311		11,330

BanSabadell Vida, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		43,858		537,011		92,570		52,500		10,418,907		27,106		236,190		49,328

Doctor Energy Central Services, S.L.	Other business management consulting activities	Granollers - Spain		—		24.99		7		(2)		1		—		23		12		(11)		—

Parque Eólico Casa Vieja S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		629		267		(15)		—

Parque Eólico Villaumbrales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		628		267		(15)		—

Parque Eólico Perales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		628		267		(15)		—

Parque Eólico Los Pedrejones S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		628		267		(15)		—

Energíes Renovables Terra Ferma, S.L.	Power generation	Barcelona - Spain		—		50.00		6		(55)		(13)		—		1,531		3		(3)		—

Financiera Iberoamericana, S.A.	Credit institution	Havana - Cuba		50.00		—		38,288		11,436		5,620		1,407		95,226		19,144		3,062		2,868

Flex Equipos de Descanso, S.A.	Manufacturing	Getafe - Spain		—		19.16		66,071		21,237		19,472		1,917		268,777		50,930		2,912		10,834

Gestora de Aparcamientos del Mediterráneo, S.L. in Liquidation	Services	Alicante - Spain		—		40.00		1,000		(10,551)		(207)		—		2,006		7,675		(7,675)		—

Murcia Emprende, S.C.R. de R.S., S.A.	Other financial services	Murcia - Spain		28.70		—		2,557		(316)		(169)		—		2,307		2,026		(1,337)		(103)

Plaxic Estelar, S.L.	Real estate	Barcelona - Spain		—		45.01		3		(15,260)		(25)		—		31,967		3,057		(3,057)		—

Portic Barcelona, S.A.	Data processing, hosting and related activities	Barcelona - Spain		25.00		—		291		1,754		131		—		2,392		486		506		33

SBD Creixent, S.A.	Real estate	Sabadell - Spain		23.05		—		5,965		(1,168)		90		—		5,437		3,524		(2,414)		17

Solvia Servicios Inmobiliarios, S.L.	Real estate	Alicante - Spain		20.00		—		660		143,772		37,703		—		221,138		16,517		32,924		9,432

Total														61,426				267,950		253,899		137,592

(*) Companies consolidated by the equity method as the Group does not have control over them but does have significant influence.

(a) Figures for foreign companies translated to euros at the historical exchange rate; amounts in the consolidated income statement translated at the average exchange rate.

(b) Results pending approval by Annual General Meeting of Shareholders and Partners.

(d) The heading “Reserves or accumulated losses of investments in joint ventures and associates” on the consolidated balance sheet as at 31 December 2021 also includes -18,445 thousand euros corresponding to Promontoria Challenger I, S.A., an entity classified as a non-current asset held for sale.

(e) The contribution of Promontoria Challenger I, S.A. to the Group’s consolidated profit/(loss) in 2021 was -46,907 thousand euros.

The balance of total revenue from associates consolidated by the equity method and individually considered to be non-material amounted to 709,825 thousand euros as at 31 December 2021. The balance of liabilities as at the end of 2021 amounts to 519,694 thousand euros.

A-439

Changes to the scope of consolidation in 2021

Additions to the scope of consolidation:



Thousand euro

Name of entity (or line of business) acquired or merged	Category		Effective date of the transaction		Fair value of equity instruments issued for the acquisition				% Voting rights acquired			% Total voting rights			Type of shareholding		Method		Reason
Name of entity (or line of business) acquired or merged	Category		Effective date of the transaction		Acquisition cost		Fair value of equity instruments issued for the acquisition		% Voting rights acquired			% Total voting rights			Type of shareholding		Method		Reason


Parque Eólico Casa Vieja S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%		Indirect		Equity method		a

Parque Eólico Villaumbrales S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%		Indirect		Equity method		a

Parque Eólico Perales S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%		Indirect		Equity method		a

Parque Eólico Los Pedrejones S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%		Indirect		Equity method		a

Aurica Capital Desarrollo, S.G.E.I.C., S.A.		Associate		6/5/2021		248		—		20.00	%		20.00	%		Direct		Equity method		b

Doctor Energy Central Services, S.L.		Associate		5/10/2021		12		—		24.99	%		24.99	%		Indirect		Equity method		a

Portic Barcelona, S.A.		Associate		1/7/2021		486		—		25.00	%		25.00	%		Direct		Equity method		a

Venture Debt SVC, S.L.U.		Subsidiary		24/11/2021		3		—		100.00	%		100.00	%		Indirect		Full consolidation		c


Total newly consolidated subsidiaries						3

Total newly consolidated associates						1,814

(a) Acquisition of subsidiaries.

(b) Change in consolidation method.

A-440

Exclusions from the scope of consolidation:

Thousand euro



Name of entity (or line of business) sold, spun off or otherwise disposed of	Category		Effective date of the transaction		% Voting rights disposed of			% Total voting rights following disposal			Profit/(loss) generated		Type of shareholding		Method		Reason


Caminsa Urbanismo, S.A.U. in Liquidation		Subsidiary		20/1/2021		100.00	%		—	%		—		Indirect		Full consolidation		b

Gestión de Proyectos Urbanísticos del Mediterráneo, S.L.U. in Liquidation		Subsidiary		19/1/2021		100.00	%		—	%		—		Indirect		Full consolidation		b

Guipuzcoano Valores, S.A. in Liquidation		Subsidiary		8/2/2021		100.00	%		—	%		(37)		Direct		Full consolidation		b

Tierras Vega Alta del Segura, S.L. in Liquidation		Subsidiary		19/1/2021		100.00	%		—	%		—		Indirect		Full consolidation		b

Mercurio Alicante Sociedad de Arrendamientos 1, S.L.		Subsidiary		2/6/2021		100.00	%		—	%		(31)		Direct		Full consolidation		b

Verum Inmobiliaria Urbanismo y Promoción, S.A.		Subsidiary		14/5/2021		97.20	%		—	%		(2)		Indirect		Full consolidation		b

Duncan Holdings 2020-1 Limited		Subsidiary		23/7/2021		100.00	%		—	%		—		Indirect		Full consolidation		b

Sociedad de Cartera del Vallés, S.I.C.A.V., S.A.		Associate		5/8/2021		47.81	%		—	%		(17)		Direct		Equity method		b

Termosolar Borges, S.L.		Associate		5/8/2021		47.50	%		—	%		(13,920)		Direct		Equity method		a

Villoldo Solar, S.L.		Associate		5/8/2021		50.00	%		—	%		52		Direct		Equity method		a

Aurica Capital Desarrollo, S.G.E.I.C., S.A.U.		Subsidiary		6/5/2021		80.00	%		20.00	%		(99)		Direct		Full consolidation		c

Assegurances Segur Vida, S.A.U.		Subsidiary		5/10/2021		50.97	%		—	%		—		Indirect		Full consolidation		a

BancSabadell d’Andorra, S.A.		Subsidiary		5/10/2021		50.97	%		—	%		11,725		Direct		Full consolidation		a

Sabadell d’Andorra Inversions, S.G.O.I.C., S.A.U.		Subsidiary		5/10/2021		50.97	%		—	%		—		Indirect		Full consolidation		a

Serveis i Mitjans de Pagament XXI, S.A.		Associate		5/10/2021		20.00	%		—	%		—		Indirect		Equity method		a

BanSabadell Renting, S.L.U.		Subsidiary		30/11/2021		100.00	%		—	%		41,907		Direct		Full consolidation		a

Duncan Holdings 2016 -1 Limited		Subsidiary		21/12/2021		100.00	%		—	%		—		Indirect		Full consolidation		b

Duncan Holdings 2015-1 Limited		Subsidiary		21/12/2021		100.00	%		—	%		—		Indirect		Full consolidation		b

Other												15,169


TOTAL												54,747

(a) Disposals from the scope of consolidation due to sale of shareholding.

(b) Disposals from the scope due to dissolution and/or liquidation.

A-441

Schedule II – Structured entities – Securitisation funds

Thousand euro



Year	Securitisation funds fully retained on the balance sheet	Entity	Total securitised assets as at 31/12/2022		Of which: issued via mortgage transfer certificates (*)		Of which: issued via mortgage participations *()**


2005	TDA CAM 4 F.T.A	Banco CAM		111,784		17,038		94,062

2005	TDA CAM 5 F.T.A	Banco CAM		277,873		78,556		197,886

2006	TDA 26-MIXTO, F.T.A	Banco Guipuzcoano		45,146		1,747		43,000

2006	TDA CAM 6 F.T.A	Banco CAM		199,257		86,012		111,383

2006	FTPYME TDA CAM 4 F.T.A	Banco CAM		63,600		51,897		—

2006	TDA CAM 7 F.T.A	Banco CAM		312,333		130,537		179,427

2006	CAIXA PENEDES 1 TDA, FTA	BMN- Penedés		118,640		24,935		93,552

2007	TDA 29, F.T.A	Banco Guipuzcoano		63,348		6,561		56,024

2007	TDA CAM 8 F.T.A	Banco CAM		288,874		73,544		213,084

2007	TDA CAM 9 F.T.A	Banco CAM		295,849		109,153		185,636

2007	CAIXA PENEDES PYMES 1 TDA, FTA	BMN- Penedés		21,670		20,550		—

2008	CAIXA PENEDES FTGENCAT 1 TDA, FTA	BMN- Penedés		36,945		36,437		—

2009	GAT-ICO-FTVPO 1, F.T.H (CP)	BMN- Penedés		1,571		—		1,571

2017	TDA SABADELL RMBS 4, FT	Banco Sabadell		3,842,401		3,838,383		—

2022	SABADELL CONSUMO 2 FDT	Banco Sabadell		637,343		—		—
2022	DUNCAN FUNDING 2022 PLC	TSB		1,436,592		—		—
Total				7,753,225		4,475,352		1,175,625

(*) Corresponds to the allocation at source of loans when mortgage transfer certificates and mortgage participations were issued.

Thousand euro



Year	Securitisation funds fully derecognised from the balance sheet	Entity		Total securitised assets as at 31/12/2022		Of which: issued via mortgage transfer certificates (**)		Of which: issued via mortgage participations (**)


2006	TDA 25, FTA (*)		Banco Gallego		2,913		1,176		1,737

2010	FPT PYMES 1 LIMITED		Banco CAM		214,204		87,727		26,228
2019	SABADELL CONSUMO 1, FT		Banco Sabadell		219,219		—		—
Total					436,335		88,903		27,965

(*) Securitisation fund in process of early liquidation.

(**) Corresponds to the allocation at source of loans when mortgage transfer certificates and mortgage participations were issued.

A-442

Schedule III – Information required to be kept by issuers of mortgage market securities

On 3 November 2021, Royal Decree-Law 24/2021, of 2 November, was published, transposing in book one Directive (EU) 2019/2162 of the European Parliament and of the Council, of 27 November 2019, on the issuance and public supervision of covered bonds. The aim of this transposition was to harmonise the legislation on the mortgage markets of member states and give easy access to financing from credit institutions. The entry into force of this Royal Decree-Law on 8 July 2022 has brought about a change in the way in which the assets that serve as collateral for outstanding issues of covered bonds are considered.

In line with the new methodology for assets, at the end of 2022, the Bank held a total of 24,187 million euros of mortgage loans and credits compared to 16,114 million euros of mortgage covered bonds issued. This entails an over-collateralisation level of 150% for mortgage covered bonds, with all their collateral denominated in euro.

The following information is provided below (for information and comparison purposes only) on mortgage-backed loans that would be linked to the issuance of mortgage covered bonds as at 2022 and 2021 year-end, in accordance with the legislation repealed by the aforementioned Royal Decree 24/2021 (primarily, Law 2/1981, of 25 March, on the mortgage market) and Rule 60 of Bank of Spain Circular 4/2017, which makes it mandatory for this information to be reported to the Bank of Spain at close of these consolidated annual financial statements.

A) Asset-side transactions

Details of the aggregate nominal values of mortgage loans and credit as at 31 December 2022 and 2021 used as collateral for issues, their eligibility and the extent to which they qualify as such for mortgage market purposes, would be as follows:

Thousand euro



Breakdown of overall mortgage loan & credit portfolio; eligibility and qualifying amounts (nominal values)
	2022		2021

Total mortgage loan and credit portfolio		49,785,504		50,225,414

Participation mortgages issued		1,203,590		1,535,765

Of which: Loans held on balance sheet		1,175,625		1,502,504

Mortgage transfer certificates		4,717,842		5,466,788

Of which: Loans held on balance sheet		4,475,352		5,219,354

Mortgage loans pledged as security for financing received		—		—

Loans backing issues of mortgage bonds and covered bonds		43,864,072		43,222,861

Ineligible loans		7,902,005		8,794,185

Fulfil eligibility requirements except for limit under Article 5.1 of Royal Decree		7,311,513		8,429,918
716/2009		7,311,513		8,429,918

Other		590,492		364,267

Eligible loans		35,962,067		34,428,676

Non-qualifying portions		63,623		59,146

Qualifying portions		35,898,444		34,369,530

Loans covering mortgage bond issues				—

Loans eligible as coverage for covered bond issues		35,898,444		34,369,530

Replacement assets subject to covered bond issues		—		—

A-443

A breakdown of these nominal values according to different classifications is given below:

Thousand euro

Breakdown of total mortgage loan and credit portfolio backing mortgage market issues

2022

2021

Total

Of which:
Eligible loans

Total

Of which: Eligible
loans

Total mortgage loan and credit portfolio

43,864,072

35,962,067

43,222,861

34,428,676

Origin of operations

43,864,072

35,962,067

43,222,861

34,428,676

Originated by the Institution

43,294,159

35,488,626

42,655,304

34,016,806

Subrogated from other entities

391,841

366,620

292,307

256,014

Other

178,072

106,821

275,250

155,856

Currency

43,864,072

35,962,067

43,222,861

34,428,676

Euro

43,832,854

35,935,560

43,173,341

34,386,431

Other currencies

31,218

26,507

49,520

42,245

Payment status

43,864,072

35,962,067

43,222,861

34,428,676

Satisfactory

40,278,656

33,574,531

39,681,234

32,280,269

Other

3,585,416

2,387,536

3,541,627

2,148,407

Average residual maturity

43,864,072

35,962,067

43,222,861

34,428,676

Up to 10 years

9,510,104

8,403,102

9,789,964

8,350,104

10 to 20 years

16,710,609

14,041,084

16,907,433

13,923,891

20 to 30 years

17,417,939

13,441,173

16,088,183

11,979,015

More than 30 years

225,420

76,708

437,281

175,666

Interest rate

43,864,072

35,962,067

43,222,861

34,428,676

Fixed

24,402,318

20,372,560

21,087,632

17,206,952

Variable

19,461,754

15,589,507

22,135,229

17,221,724

Mixed

Borrowers

43,864,072

35,962,067

43,222,861

34,428,676

Legal entities and individual entrepreneurs

11,416,719

8,975,562

11,403,204

8,578,554

Of which: Real estate developers

1,769,356

1,183,218

1,805,426

1,062,649

Other individuals and NPISHs

32,447,353

26,986,505

31,819,657

25,850,122

Type of guarantee

43,864,072

35,962,067

43,222,861

34,428,676

Completed assets/buildings

43,226,453

35,541,201

42,517,282

33,960,470

Residential

35,980,366

29,848,881

35,052,356

28,295,021

Of which: Social housing

1,329,898

1,090,829

1,360,692

1,120,368

Commercial

7,055,271

5,557,543

7,238,866

5,491,003

Other

190,816

134,777

226,060

174,446

Assets/ buildings under construction

159,876

154,367

139,896

132,851

Residential

133,587

128,091

125,565

118,595

Of which: Social housing

Commercial

26,040

26,027

13,977

13,902

Other

249

354

Land

477,743

266,499

565,683

335,355

Developed

51,410

19,374

68,582

22,181

Rest

426,333

247,125

497,101

313,174

The nominal value of available funds (undrawn commitments) of mortgage loans and credit as at 31 December 2022 and 2021 would be as follows:


Thousand euro
Undrawn balances (nominal value). Total mortgage loans and credit backing issues of mortgage bonds and covered bonds

	2022		2021

Potentially eligible		2,220,700		1,051,888

Ineligible		991,567		1,969,968

A-444

The breakdown of nominal values based on the loan-to-value (LTV) ratio measuring the risk based on the last available valuation of the mortgage lending portfolio eligible for the issuance of mortgage bonds and mortgage covered bonds as at 31 December 2022 and 2021 would be as set out below:


Thousand euro

LTV ratio by type of security. Loans eligible for the issuance of mortgage bonds and covered bonds

	2022		2021

Secured on residential property		29,972,232		28,408,838

Of which LTV <= 40%		8,282,779		8,015,059

Of which LTV 40%-60%		10,270,663		9,912,812

Of which LTV 60%-80%		11,418,790		10,480,967

Of which LTV > 80%		—		—

Secured on other property		5,989,835		6,019,838

Of which LTV <= 40%		3,608,965		3,666,010

Of which LTV 40%-60%		2,380,870		2,353,828
Of which LTV > 60%		—		—

Changes during 2022 and 2021 in the nominal values of mortgage loans that would secure issues of mortgage bonds and mortgage covered bonds (eligible and ineligible) would be as follows:


Thousand euro

Changes in nominal values of mortgage loans

	Eligible		Ineligible
Balance as at 31 December 2020		32,580,946		10,169,340

Disposals during the period		(5,351,119)		(3,764,409)

Terminations upon maturity		(2,694,833)		(523,277)

Early terminations		(2,037,072)		(1,205,645)

Subrogations by other entities		(47,071)		(6,509)

Derecognised due to securitisations		—		—

Other		(572,143)		(2,028,978)

Additions during the period		7,198,849		2,389,254

Originated by the Institution		4,816,896		1,835,061

Subrogations by other entities		56,991		2,358

Other		2,324,962		551,835
Balance as at 31 December 2021		34,428,676		8,794,185

Disposals during the period		(5,272,051)		(2,798,469)

Terminations upon maturity		(2,557,971)		(468,270)

Early terminations		(1,770,460)		(496,843)

Subrogations by other entities		(47,309)		(6,004)

Derecognised due to securitisations

Other		(896,311)		(1,827,352)

Additions during the period		6,805,442		1,906,289

Originated by the Institution		4,915,527		1,627,536

Subrogations by other entities		122,565		593

Other		1,767,350		278,160
Balance as at 31 December 2022		35,962,067		7,902,005

A-445

B) Liability-side transactions

Information on issues carried out and secured with Banco Sabadell’s mortgage loans and credit portfolio included in the cover pool of mortgage covered bonds is provided in the following table, broken down according to whether the sale was by public offering or otherwise and by their residual maturity:


Thousand euro

Nominal value	2022		2021

Mortgage covered bonds issued		16,114,410		14,986,254

Of which: Not recognised on liabilities side of the balance sheet		8,115,000		7,315,000

Debt securities. Issued through public offering		5,100,000		4,100,000

Residual maturity up to one year		1,000,000		—

Residual maturity from one to two years		1,000,000		1,000,000

Residual maturity from two to three years		—		1,000,000

Residual maturity from three to five years		1,100,000		—

Residual maturity from five to ten years		2,000,000		2,100,000

Residual maturity more than ten years		—		—

Debt securities. Other issues		10,578,000		9,755,400

Residual maturity up to one year		338,000		1,677,400

Residual maturity from one to two years		1,600,000		338,000

Residual maturity from two to three years		2,750,000		1,600,000

Residual maturity from three to five years		4,890,000		5,140,000

Residual maturity from five to ten years		1,000,000		1,000,000

Residual maturity more than ten years		—		—

Deposits		436,410		1,130,854

Residual maturity up to one year		100,000		694,444

Residual maturity from one to two years		—		100,000

Residual maturity from two to three years		336,410		—

Residual maturity from three to five years		—		336,410

Residual maturity from five to ten years		—		—

Residual maturity more than ten years		—		—



	2022		2021

	Nominal value	Average residual maturity	Nominal value	Average residual maturity

	(thousand euro)	(years)	(thousand euro)	(years)

Mortgage transfer certificates	4,717,842	20	5,466,788	20

Issued through public offering

Other issues	4,717,842	20	5,466,788	20

Participation mortgages	1,203,590	11	1,535,765	12

Issued through public offering

Other issues	1,203,590	11	1,535,765	12

Other matters

Royal Decree-Law 24/2021 provides that covered bonds will have a cover pool consisting of a portfolio of assets whose sole purpose is to serve as collateral for the holders of these issues. To that end, the Group has control procedures in place to monitor its entire loan portfolio, the amount drawn down from the loans, any assets that replace them and assets to cover the liquidity requirement and the derivative instruments that comprise each of the cover pools, as well as any collateral received in connection with positions in derivative instruments and any credit right arising from damage insurance policies referred to in Article 23.6 of the abovementioned Royal Decree-Law, as well as to verify compliance with the suitability criteria for allocation to the issuance of mortgage covered bonds, and to comply at all times with the maximum issuance limit. These procedures are all regulated by current mortgage market regulations.

In order to ensure compliance with the regulations governing the mortgage market for covered bonds, the Group has policies and procedures relating to the Group’s activity in the mortgage market, with the Board of Directors being responsible for the Group’s risk management and control processes (see Note 4.3 “General principles of risk management”). In terms of credit risk, in particular, the Board of Directors confers powers and discretions to the Delegated Credit Committee, which then sub-delegates authority to the various decision-making levels. The internal procedures set up to handle the origination and monitoring of assets that make up the Group’s lending, and particularly those secured by mortgages, which back the Group’s mortgage covered bond issues, are described in detail below for each type of loan applicant.

A-446

Individuals

Loans to individuals are approved and decided on using the credit scoring tools described in Note 4.4.2.2 “Risk management models”. Where necessary, these tools are complemented with the work of a risk analyst, who carries out more in-depth studies of supplementary materials and reports. Furthermore, a series of other information and parameters are considered, such as the consistency of customers’ applications and how well their requested products match their repayment possibilities; customers’ ability to pay based on their current and future circumstances; the value of the property provided as security for the loan (as determined by an appraisal carried out by a valuation firm authorised by Bank of Spain and which the institution’s own internal approval processes will, additionally, have shown to be free of any association with the Group); the availability of any additional guarantees; examinations of internal and external databases of defaulters, etc.

One aspect of the decision-making process involves establishing the maximum amount of the loan, based on the appraisal value of the assets pledged as guarantees, as well as the purchase value if that is the purpose of the loan. As a general rule, under internal Group policies, the maximum amount of the loan relative to the appraisal value or the purchase value, whichever is lower, is applicable to purchases by individuals of properties for use as their primary residence and is fixed at 80%. This provides an upper limit below which a range of other maximum ratios of less than 80% are set, having regard to the purpose of the loan.

In addition, it should be noted that, if the application is accepted and as part of the process of completing the transaction, the charges associated with the assets provided as collateral for the loan granted are reviewed, as well as the insurance policies arranged on the aforementioned collateral, and the corresponding mortgage is registered in the Property Registry.

Concerning approval discretions, the credit scoring tools are the main reference for determining the feasibility of the transaction. Where the loan being sought is above a certain amount, or where factors are present that are not readily captured by a credit scoring procedure, a risk analyst will be involved. The limit for each discretion is based on credit scores and the amount of the transaction/risk of the customer, with additional conditions being specified at each level to determine when special intervention is required. A list of exceptions has been drawn up, based on the particular circumstances of the borrower and the transaction, and these exceptions are covered in the Group’s internal rules and procedures.

As mentioned in Note 4.4.2.2 “Risk management models”, the Group has a comprehensive monitoring system in place which uses early warning tools that enable the early detection of borrowers that could be predisposed to compliance issues. A key part of this process consists of well-established procedures to review and validate the guarantees given.

Corporates engaging in construction and/or real estate development

The Bank includes the management of real estate developer loans in the Real Estate Business Division. This unit has its own organisational structure geared towards a specialised management of these assets based on knowledge of the situation and development of the real estate market. Managing the risks in this portfolio is the responsibility of the Real Estate Risk Division, a specialist unit which forms part of the Risk Management Division.

Risk assessments are carried out by teams of specialised analysts who operate in conjunction with the Real Estate Business Division to ensure that a risk management perspective is combined with a view based on direct contact with customers and knowledge of them.

The decision is reached by assessing both the developer and the project and a set of supplementary information. The developer is assessed on their experience, the current status of ongoing projects, equity situation and financial capacity. The project is assessed in terms of location, distribution and qualities, supply versus demand and forecasts of income and expenses, among other aspects.

Furthermore, the Institution validates that own funds are contributed at the start, that the land is owned and the building permit is in force, that there is a building agreement in place with a solvent construction company and sale agreements (date of signature, date of delivery, payments on account, penalties, etc.).

Loans for real estate development purposes are conditional upon the progress of the project. To that end, an external Project Monitor is engaged that validates the progress of the development item by item and the destination of the funds.

A-447

Depending on the quality of the developer and the internal assessment of the project, the maximum loan rate (loan-to-cost, or LTC) is capped and a minimum level of sales is set. This allows the loan to be matched to the risk profile of the transaction.

Decision-making powers and discretions are assigned according to the specific types of portfolios handled within this business segment, which may be related to new projects, sales, purchases or action plans, as established in internal regulations.

The management of these risks is constantly monitored. For development projects, the Project Monitor issues regular reports that give an update on the progress of the works, the level of sales, costs, potential deviations, the planned calendar and potential project concerns. In the case of finished products, the level of sales or rentals is monitored, as well as remaining up-to-date with payment commitments. As in the case of other companies, a key part of this process consists of well-established procedures to review and validate the guarantees given.

Corporates unrelated to construction and/or real estate development

Analyses and decisions concerning the approval of risks (lending and guarantees) are based on rating tools and “core risk management teams”, formed by one person from the business side and one from the risks side at different decision-making levels, both described in Note 4.4.2.2 “Risk management models”. A range of other data and parameters are also taken into account, such as the consistency of the application, ability to pay and the nature of the security provided (as determined by an appraisal carried out by a Bank of Spain-authorised valuation firm which Banco Sabadell’s own approval processes will, additionally, have shown to be free of any association with the Group) and considering any supplementary guarantees, the “fit” between the company’s working capital and its total sales; the appropriateness of the total amount borrowed from the Group based on the business’s capital strength, examinations of internal and external databases of defaulters, etc. The profitability associated with the level of risk of each customer is also included in the analysis, with minimum levels to be achieved.

Reviews of charges and liens associated with the security provided and the registration of mortgages with the Property Registry are also applicable in this case.

Discretion figures are assigned based on the expected loss on the transaction/customer/risk group and the total risk of the customer or risk group. There are several levels in the approval process. In each such level there is a “core management team”, one member of which will be on the business side and one on the risk management side. All loan approvals must be the result of a joint decision. As with retail customers, a set of exceptional circumstances has been specified for borrowers and sectors, and these are provided for in the Group’s internal procedures.

As in the case of retail customers, transactions are monitored using early warning tools. There are also procedures to ensure that the securities and guarantees provided are constantly being reviewed and validated.

A-448

Schedule IV – Details of outstanding issues and subordinate liabilities of the Group

Debt securities in issue

The breakdown of the Group’s issues as at 31 December 2022 and 2021 is as follows:

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2022

Maturity/call date

Issue

currency

Target of

offering

31/12/2022

31/12/2021

Banco de Sabadell, S.A.

03/07/2017

—

10,000

MAX(EURIBOR 3M + 0.30; 0.3%)

04/07/2022

Euros

Retail

Banco de Sabadell, S.A.

28/07/2017

—

26,800

MAX(EURIBOR 3M; 0.60%)

28/07/2022

Euros

Retail

Banco de Sabadell, S.A.

28/09/2017

—

10,000

MAX(EURIBOR 3M + 0.30; 0.3%)

28/09/2022

Euros

Retail

Banco de Sabadell, S.A.

05/12/2017

1,000,000

0.875%

05/03/2023

Euros

Institutional

Banco de Sabadell, S.A.

26/02/2018

4,000

MAX(EURIBOR 3M; 0.4%)

27/02/2023

Euros

Retail

Banco de Sabadell, S.A.

16/03/2018

6,000

MAX(EURIBOR 3M; 0.67%)

17/03/2025

Euros

Retail

Banco de Sabadell, S.A.

03/04/2018

6,000

MAX(EURIBOR 3M; 0.4%)

03/04/2023

Euros

Retail

Banco de Sabadell, S.A.

31/05/2018

3,000

MAX(EURIBOR 3M; 0.3%)

31/05/2023

Euros

Retail

Banco de Sabadell, S.A.

07/09/2018

750,000

1.625%

07/03/2024

Euros

Institutional

Banco de Sabadell, S.A.

14/11/2018

1,000

MAX(EURIBOR 3M; 1.1%)

14/11/2023

Euros

Retail

Banco de Sabadell, S.A.

14/11/2018

2,500

MAX(EURIBOR 3M; 1.5%)

14/11/2025

Euros

Retail

Banco de Sabadell, S.A.

28/03/2019

—

601,415

0.700%

28/03/2022

Euros

Retail

Banco de Sabadell, S.A.

10/05/2019

1,000,000

1.750%

10/05/2024

Euros

Institutional

Banco de Sabadell, S.A.

22/07/2019

1,000,000

0.875%

22/07/2025

Euros

Institutional

Banco de Sabadell, S.A.

27/09/2019

500,000

1.125%

27/03/2025

Euros

Institutional

Banco de Sabadell, S.A. (*)

07/11/2019

500,000

0.625%

07/11/2024

Euros

Institutional

Banco de Sabadell, S.A. (*)

29/06/2020

—

500,000

1.750%

29/06/2022

Euros

Institutional

Banco de Sabadell, S.A. (*)

11/09/2020

500,000

1.125%

11/03/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

15/10/2020

—

120,000

EURIBOR 3M + 0.646%

15/05/2024

Euros

Institutional

TSB Banking Group Plc (*) (**)

29/12/2020

—

535,536

SONIA + 2.1%

29/06/2022

Pounds sterling

Institutional

Banco de Sabadell, S.A. (*)

16/06/2021

500,000

0.875%

16/06/2027

Euros

Institutional

Banco de Sabadell, S.A.

29/11/2021

67,000

MAX(EURIBOR 12M; 0.77%)

30/11/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

24/03/2022

750,000

—

2.625%

24/03/2025

Euros

Institutional

Banco de Sabadell, S.A.

30/3/2022

120,000

—

3.15%

30/03/2037

Euros

Institutional

TSB Banking Group Plc (*)

13/6/2022

507,368

—

SONIA + 2.45%

13/06/2026

Pounds sterling

Institutional

Banco de Sabadell, S.A. (*)

8/9/2022

500,000

—

5.375%

08/09/2025

Euros

Institutional

Banco de Sabadell, S.A. (*)

2/11/2022

750,000

—

5.125%

10/11/2027

Euros

Institutional

Banco de Sabadell, S.A. (*)

23/11/2022

75,000

—

5.500%

23/11/2031

Euros

Institutional

TSB Banking Group Plc (*)

9/12/2022

281,871

—

SONIA + 3.40%

09/12/2025

Pounds sterling

Institutional

Subscribed by Group companies

(874,239)

(620,536)

Total straight bonds

7,949,500

7,022,715

(*) “Maturity/call date” refers to the first call option.

(**) Equivalent amount in EUR as at end December 2022.

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2022

Maturity date

Issue

currency

Target of

offering

31/12/2022

31/12/2021

Banco Guipuzcoano, S.A. (*)

18/04/2007

—

25,000

1.70%

18/04/2022

Euros

Institutional

Banco de Sabadell, S.A.

25/07/2012

—

3,000

Underlying benchmark

25/07/2022

Euros

Retail

Banco de Sabadell, S.A.

14/07/2014

10,000

Underlying benchmark

15/07/2024

Euros

Retail

Banco de Sabadell, S.A.

05/11/2018

10,000

Underlying benchmark

01/04/2025

Euros

Retail

Banco de Sabadell, S.A.

12/11/2018

3,200

Underlying benchmark

01/04/2025

Euros

Retail

Banco de Sabadell, S.A.

18/02/2019

—

3,000

Underlying benchmark

18/02/2022

Euros

Retail

Banco de Sabadell, S.A.

04/04/2019

—

3,000

Underlying benchmark

04/10/2022

Euros

Retail

Banco de Sabadell, S.A.

03/06/2022

8,900

—

MAX (EURIBOR 12M;2.75%)

03/06/2027

Euros

Institutional

Banco de Sabadell, S.A.

01/08/2022

9,200

—

MAX (EURIBOR 12M;4%)

02/08/2027

Euros

Institutional

Subscribed by Group companies

Total structured bonds

41,300

57,200

(*) Company merged with Banco Sabadell.

A-449

Thousand euro

Issuer

Issue date

Amount

Average interest rate

Maturity date

Issue

currency

Target of

offering

31/12/2022

31/12/2021

31/12/2022

Banco de Sabadell, S.A. (*)

10/05/2022

1,445,701

903,897

0.00%

Various

Euros

Institutional

Subscribed by Group companies

(573,805)

(477,803)

Total commercial paper

871,896

426,094

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2022

Maturity date

Issue

currency

Target of

offering

31/12/2022

31/12/2021

Banco de Sabadell, S.A.

05/10/2012

—

77,400

EURIBOR 3M + 4.80

05/10/2022

Euros

Institutional

Banco de Sabadell, S.A.

26/09/2014

—

250,000

EURIBOR 3M + 0.70

26/09/2022

Euros

Institutional

Banco de Sabadell, S.A.

03/10/2014

38,000

EURIBOR 3M + 0.68

03/10/2023

Euros

Institutional

Banco de Sabadell, S.A.

05/12/2014

—

100,000

EURIBOR 3 M + 0.40

05/12/2022

Euros

Institutional

Banco de Sabadell, S.A.

04/05/2015

250,000

EURIBOR 3 M + 0.13

04/05/2023

Euros

Institutional

Banco de Sabadell, S.A.

03/07/2015

50,000

EURIBOR 3 M + 0.20

03/07/2023

Euros

Institutional

Banco de Sabadell, S.A.

26/01/2016

550,000

EURIBOR 3M + 0.80

26/01/2024

Euros

Institutional

Banco de Sabadell, S.A.

24/05/2016

50,000

EURIBOR 3M + 0.535

24/05/2024

Euros

Institutional

Banco de Sabadell, S.A.

10/06/2016

1,000,000

0.63%

10/06/2024

Euros

Institutional

Banco de Sabadell, S.A.

20/10/2016

1,000,000

0.13%

20/10/2023

Euros

Institutional

Banco de Sabadell, S.A.

29/12/2016

250,000

0.97%

27/12/2024

Euros

Institutional

Banco de Sabadell, S.A.

26/04/2017

1,100,000

1.00%

26/04/2027

Euros

Institutional

Banco de Sabadell, S.A.

21/07/2017

500,000

0.89%

21/07/2025

Euros

Institutional

Banco de Sabadell, S.A.

21/12/2018

390,000

1.09%

21/12/2026

Euros

Institutional

Banco de Sabadell, S.A.

30/01/2019

—

1,250,000

EURIBOR 12M + 0.130

30/01/2022

Euros

Institutional

Banco de Sabadell, S.A.

20/12/2019

750,000

EURIBOR 12M + 0.074

20/12/2024

Euros

Institutional

Banco de Sabadell, S.A.

20/12/2019

750,000

EURIBOR 12M + 0.104

22/12/2025

Euros

Institutional

Banco de Sabadell, S.A.

20/01/2020

1,000,000

0.13%

10/02/2028

Euros

Institutional

Banco de Sabadell, S.A.

23/06/2020

1,500,000

EURIBOR 12M + 0.080

23/06/2025

Euros

Institutional

Banco de Sabadell, S.A.

30/03/2021

1,000,000

EURIBOR 12M + 0.018

30/03/2026

Euros

Institutional

Banco de Sabadell, S.A.

08/06/2021

1,000,000

EURIBOR 12M + 0.012

08/06/2026

Euros

Institutional

Banco de Sabadell, S.A.

08/06/2021

1,000,000

EURIBOR 12M + 0.022

08/06/2027

Euros

Institutional

Banco de Sabadell, S.A.

21/01/2022

1,500,000

—

EURIBOR 12M + 0.010

21/09/2027

Euros

Institutional

Banco de Sabadell, S.A.

30/05/2022

1,000,000

—

1.75%

30/05/2029

Euros

Institutional

Banco de Sabadell, S.A.

12/12/2022

500,000

—

EURBOR 12M + 0.140

12/06/2028

Euros

Institutional

Banco de Sabadell, S.A.

21/12/2022

500,000

—

EURIBOR 3M + 0.600

20/12/2030

Euros

Institutional

Subscribed by Group companies

(8,115,000)

(7,315,000)

Total mortgage covered bonds

7,563,000

6,540,400

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling as at

31/12/2021

Maturity date

Issue currency

Target of

offering

31/12/2022

31/12/2021

TSB Banking Group Plc

7/12/2017

—

595,040

SONIA + 0.372

7/12/2022

Pounds sterling

Institutional

TSB Banking Group Plc

15/2/2019

845,614

892,560

SONIA + 0.870

15/2/2024

Pounds sterling

Institutional

TSB Banking Group Plc

22/6/2021

563,742

595,040

SONIA + 0.370

22/6/2028

Pounds sterling

Institutional

Subscribed by Group companies

—

Total Covered Bonds

1,409,356

2,082,640

A-450

Securitisations

The following table shows the bonds issued by asset securitisation funds outstanding as at 31 December 2022 and 2021, respectively:


Thousand euro
				Issue				Outstanding balance of liabilities

		Types of		Number of

Year	*Name of fund ()**	issue		securities		Amount		2022		2021		Yield

2005	TDA CAM 4, F.T.A		RMBS		20,000		2,000,000		47,009		72,293	EURIBOR 3M + (between 0.09% and 0.24%)

2005	TDA CAM 5, F.T.A		RMBS		20,000		2,000,000		105,476		126,029	EURIBOR 3M + (between 0.12% and 0.35%)

2006	TDA CAM 6, F.T.A		RMBS		13,000		1,300,000		68,970		83,863	EURIBOR 3M + (between 0.13% and 0.27%)

2006	TDA CAM 7, F.T.A		RMBS		15,000		1,500,000		82,944		101,682	EURIBOR 3M + (between 0.14% and 0.3%)

2006	CAIXA PENEDES 1 TDA, F.T.A		RMBS		10,000		1,000,000		31,725		37,882	EURIBOR 3M + 0.14%

2006	FTPYME TDA CAM 4, F.T.A		SMEs		15,293		1,529,300		27,614		33,739	EURIBOR 3M + (between 0.29% and 0.61%)

2007	TDA CAM 8, F.T.A		RMBS		17,128		1,712,800		75,165		87,919	EURIBOR 3M + (between 0.13% and 0.47%)

2007	CAIXA PENEDES PYMES 1 TDA, F.T.A		SMEs		7,900		790,000		300		300	EURIBOR 3M + 0.8%

2007	TDA CAM 9, F.T.A		RMBS		15,150		1,515,000		108,025		124,231	EURIBOR 3M + (between 0.19% and 0.75%)

2017	IM SABADELL PYME 11, F.T		SMEs		19,000		1,900,000		—		3,379	EURIBOR 3M + 0.75%

2022	SABADELL CONSUMO 2, F.T.		CONSUMER		7,591		759,100		655,618		—	EURIBOR 1M + (between 0.87% and 13.25%)
Total securitisation funds									1,202,846		671,317

(*) The bonds issued by securitisation funds are listed in the AIAF market.

Subordinated liabilities

Subordinated liabilities issued by the Group as at 31 December 2022 and 2021 are as follows:

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling

as at 31/12/2022

Maturity/call

date

Issue

currency

Target of

offering

31/12/2022

31/12/2021

Banco de Sabadell, S.A.

06/05/2016

500,000

5.625%

6/5/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

12/12/2018

500,000

5.38%

12/12/2023

Euros

Institutional

Banco de Sabadell, S.A. (*)

17/01/2020

300,000

2.00%

17/01/2025

Euros

Institutional

Banco de Sabadell, S.A. (*)

15/01/2021

500,000

2.50%

15/04/2026

Euros

Institutional

TSB Banking Group Plc (*)

30/03/2021

338,245

357,024

3.45%

30/03/2026

GBP

Institutional

Subscribed by Group companies

(338,245)

(357,024)

Total subordinated bonds

1,800,000

(*) “Maturity/call date” refers to the first call option.

Thousand euro

Issuer

Issue date

Amount

Interest rate ruling

as at 31/12/2022

Maturity/call

date

Issue

currency

Target of

offering

31/12/2022

31/12/2021

Banco de Sabadell, S.A. (*)

18/05/2017

—

750,000

6.50%

18/05/2022

Euros

Institutional

Banco de Sabadell, S.A. (*)

23/11/2017

400,000

6.13%

23/02/2023

Euros

Institutional

Banco de Sabadell, S.A. (*)

15/03/2021

500,000

5.75%

15/09/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

19/11/2021

750,000

5.00%

19/11/2027

Euros

Institutional

Total preferred securities

1,650,000

2,400,000

The issues included in subordinated liabilities, for the purposes of credit priority, are ranked below all of the Group’s regular creditors.

A-451

For the purpose of complying with the requirements of IAS 7, the table below shows the reconciliation of liabilities derived from funding activities, identifying the components that have entailed their movements:


Thousand euro
Total subordinated liabilities as at 31 December 2020			2,873,239

Newly issued			1,750,000
Amortised			(443,497)
Capitalisation			—
Exchange rate			15,258
Change in subordinated liabilities subscribed by Group companies			5,000
Total subordinated liabilities as at 31 December 2021			4,200,000

Newly issued			—
Amortised			(750,000)
Capitalisation			—
Exchange rate			—
Change in subordinated liabilities subscribed by Group companies			—
Total subordinated liabilities as at 31 December 2022			3,450,000

A-452

Schedule V – Other risk information

Credit risk exposure

Loans and advances to customers broken down by activity and type of guarantee

The breakdown of the balance of the heading “Loans and advances – Customers” by activity and type of guarantee, excluding advances not classed as loans, as at 31 December 2022 and 2021, respectively, is as follows:


Thousand euro
							2022
							Secured loans. Carrying amount based on last available valuation. Loan to
											value
			Of which:		Of which:
	TOTAL		secured with		secured with				Over 40%		Over 60%		Over 80%
			real estate		other		Less than or		and less		and less		and less
					collateral		equal to 40%		than or equal		than or equal		than or equal		Over 100%
									to 60%		to 80%		to 100%


General governments		10,112,875		27,806		404,416		21,478		8,006		—		906		401,832

Other financial corporations and individual entrepreneurs (financial business activity)		1,053,004		302,774		362,324		433,339		194,881		21,854		6,451		8,573

Non-financial corporations and individual entrepreneurs (non-financial business activity)		60,962,804		13,324,354		5,961,022		7,596,497		4,652,265		2,200,628		1,546,495		3,289,491

Construction and real estate development (including land)		2,558,107		1,490,609		316,320		756,742		534,819		153,846		147,140		214,382

Civil engineering construction		968,875		25,767		151,094		140,083		11,224		2,729		3,783		19,042

Other purposes		57,435,822		11,807,978		5,493,608		6,699,672		4,106,222		2,044,053		1,395,572		3,056,067

Large enterprises		25,586,942		2,161,488		2,006,076		1,773,688		443,347		276,123		372,204		1,302,202

SMES and individual entrepreneurs		31,848,880		9,646,490		3,487,532		4,925,984		3,662,875		1,767,930		1,023,368		1,753,865

Other households		85,544,442		77,898,980		1,384,690		17,922,933		24,711,578		26,895,158		6,936,913		2,817,088

Home loans		77,075,115		76,728,550		296,420		17,006,740		24,088,867		26,531,341		6,779,029		2,618,993

Consumer loans		5,440,517		41,627		672,238		126,801		262,036		149,721		74,613		100,694

Other purposes		3,028,810		1,128,803		416,032		789,392		360,675		214,096		83,271		97,401
TOTAL		157,673,125		91,553,914		8,112,452		25,974,247		29,566,730		29,117,640		8,490,765		6,516,984

MEMORANDUM ITEM Refinancing, refinanced and restructured transactions		4,512,316		2,911,059		272,013		961,790		840,122		534,705		248,379		598,076

A-453


Thousand euro
							2021
							Secured loans. Carrying amount based on last available valuation. Loan to
					Of which:						value
			Of which:		secured with
	TOTAL		secured with		other				Over 40%		Over 60%		Over 80%
			real estate		collateral		Less than or		and less		and less		and less
							equal to 40%		than or equal		than or equal		than or equal		Over 100%
									to 60%		to 80%		to 100%


General governments		9,408,771		33,916		553,176		13,891		11,091		—		963		561,147

Other financial corporations and individual entrepreneurs (financial business activity)		948,435		188,751		370,675		394,379		119,440		26,501		6,063		13,043

Non-financial corporations and individual entrepreneurs (non-financial business activity)		60,321,572		13,494,991		5,387,073		7,661,213		4,648,179		2,596,527		1,397,013		2,579,132

Construction and real estate development (including land)		2,652,955		1,569,215		320,736		829,524		496,816		248,870		144,481		170,260

Civil engineering construction		819,200		32,852		25,371		26,128		12,252		2,556		2,803		14,484

Other purposes		56,849,417		11,892,924		5,040,966		6,805,561		4,139,111		2,345,101		1,249,729		2,394,388

Large enterprises		24,465,428		1,893,913		1,944,357		1,992,477		332,307		294,649		505,815		713,022

SMES and individual entrepreneurs		32,383,989		9,999,011		3,096,609		4,813,084		3,806,804		2,050,452		743,914		1,681,366

Other households		86,247,200		78,518,084		1,316,948		16,755,153		23,692,853		28,115,931		7,955,458		3,315,637

Home loans		77,741,032		77,267,421		324,331		15,851,014		23,061,319		27,752,944		7,775,459		3,151,016

Consumer loans		5,387,338		48,559		622,025		164,816		245,859		127,265		74,417		58,227

Other purposes		3,118,830		1,202,104		370,592		739,323		385,675		235,722		105,582		106,394
TOTAL		156,925,978		92,235,742		7,627,872		24,824,636		28,471,563		30,738,959		9,359,497		6,468,959

MEMORANDUM ITEM Refinancing, refinanced and restructured transactions		5,503,333		3,117,314		397,856		955,550		949,483		742,577		409,411		458,149

In terms of risks with LTV >80%, these mainly correspond to transactions from acquired entities or business operations in which, as a supplement to the valuation of the transaction, a mortgage guarantee is available to cover that transaction. Similarly, there are other additional reasons for approval, which mainly correspond to solvent borrowers with a proven payment capacity, as well as customers with a good profile who contribute guarantees (personal guarantees and/or pledges) which are additional to the mortgage guarantees already considered in the LTV ratio.

A-454

Refinancing and restructuring transactions

The outstanding balance of refinancing and restructuring transactions as at 31 December 2022 and 2021 is as follows:


Thousand euro
							2022

	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		Of which: lending for construction and real estate development (including land)		Other households		Total

TOTAL

Not secured with collateral

Number of transactions		—		13		77		29,290		807		59,586		88,966

Gross carrying amount		—		8,115		24,424		1,910,336		76,455		245,991		2,188,866

Secured with collateral

Number of transactions		—		1		11		7,936		1,238		14,654		22,602

Gross carrying amount		—		100		1,688		2,079,054		180,451		1,323,929		3,404,771

Impairment allowances		—		1,049		15,313		776,751		79,589		288,210		1,081,323

*Of which, non-performing loans*

*Not secured with collateral*

Number of transactions		—		10		35		14,428		478		43,708		*58,181*

Gross carrying amount		—		6,938		16,529		891,441		60,892		173,526		*1,088,434*

*Secured with collateral*

Number of transactions		—		1		5		4,539		1,128		7,202		*11,747*

Gross carrying amount		—		100		218		895,810		75,145		759,672		*1,655,800*

*Impairment allowances*		—		864		15,176		702,017		74,597		262,845		*980,902*


TOTAL

Number of transactions		—		14		88		37,226		2,045		74,240		111,568

Gross value		—		8,215		26,112		3,989,390		256,906		1,569,920		5,593,637

Impairment allowances		—		1,049		15,313		776,751		79,589		288,210		1,081,323

Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—		—

A-455


Thousand euro

					2021
	Credit institutions	General governments	Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		Of which: lending for construction and real estate development (including land)		Other households		Total

TOTAL

Not secured with collateral

Number of transactions	—	14		173		35,608		688		64,850		100,645

Gross carrying amount	—	9,055		28,192		2,571,808		138,613		332,020		2,941,075

Secured with collateral

Number of transactions	—	2		17		8,732		1,367		14,957		23,708

Gross carrying amount	—	203		2,492		2,329,048		170,870		1,561,620		3,893,363

Impairment allowances	—	1,255		16,215		972,963		78,863		340,664		1,331,097

*Of which, non-performing loans*

*Not secured with collateral*

Number of transactions	—	12		58		17,603		410		44,497		*62,170*

Gross carrying amount	—	8,133		17,719		977,368		64,623		210,091		*1,213,311*

*Secured with collateral*

Number of transactions	—	1		9		5,543		1,253		8,417		*13,970*

Gross carrying amount	—	126		627		916,569		78,527		879,217		*1,796,539*

*Impairment allowances*	—	1,255		15,978		823,960		69,424		302,977		*1,144,170*


TOTAL

Number of transactions	—	16		190		44,340		2,055		79,807		124,353

Gross value	—	9,258		30,684		4,900,856		309,483		1,893,640		6,834,438

Impairment allowances	—	1,255		16,215		972,963		78,863		340,664		1,331,097

Additional information: lending included under non-current assets and disposal groups classified as held for sale	—	—		—		—		—		—		—


Thousand euro

Guarantees received	2022		2021

Value of collateral		2,893,373		3,430,237
Of which: securing stage 3 loans		1,310,560		1,382,700

Value of other guarantees		1,061,177		1,281,854

Of which: securing stage 3 loans		376,624		316,047
Total value of guarantees received		3,954,550		4,712,091

Detailed movements of the balance of refinancing and restructuring transactions during 2022 and 2021 are as follows:


Thousand euro

	2022		2021

Opening balance		6,834,437		5,337,617

(+) Forbearance (refinancing and restructuring) in the period		933,461		3,190,252

Memorandum item: impact recognised on the income statement for the period		116,365		227,263

(-) Debt repayments		(919,789)		(854,208)

(-) Foreclosures		(8,044)		(13,460)

(-) Derecognised from the balance sheet (reclassified as write-offs)		(105,546)		(137,743)

(+)/(-) Other changes (*)		(1,140,882)		(688,020)
Year-end balance		5,593,637		6,834,438

(*) Includes transactions no longer classified as refinancing, refinanced or restructured due to meeting the requirements for reclassification from stage 2 to stage 1 exposures (see Note 1.3.4).

A-456

The table below shows the value of transactions which, after refinancing or restructuring, have been classified as stage 3 exposures during 2022 and 2021:


Thousand euro

	2022		2021

General governments		—		—

Other legal entities and individual entrepreneurs		374,135		297,088
Of which: Lending for construction and real estate development		20,280		15,882

Other natural persons		90,171		209,610
Total		464,306		506,698

The average probability of default on current refinanced and restructured transactions broken down by activity as at 31 December 2022 and 2021 is as follows:


%

	2022		2021

*General governments ()**				—

Other legal entities and individual entrepreneurs		14		13
Of which: Lending for construction and real estate development		19		12

Other natural persons		10		10

(*) Authorisation has not been granted for the use of internal models in the calculation of capital requirements.

Average probability of default calculated as at 30 September 2022.

Concentration risk

Geographical exposure

Global

The breakdown of risk concentration, by activity and at a global level, as at 31 December 2022 and 2021 is as follows:


Thousand euro
					2022

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and Credit institutions		47,918,906		34,158,121		3,778,817		2,613,583		7,368,385

General governments		36,026,312		27,319,509		4,865,464		1,685,660		2,155,679

Central governments		25,682,763		18,162,012		4,671,930		693,142		2,155,679

Other		10,343,549		9,157,497		193,534		992,518		—

Other financial corporations and individual entrepreneurs		7,416,023		1,367,666		2,502,161		485,170		3,061,026

Non-financial corporations and individual entrepreneurs		63,587,639		48,156,329		3,400,613		9,597,141		2,433,556

Construction and real estate development		2,680,945		2,205,881		54,640		286,390		134,034

Civil engineering construction		1,043,510		767,633		14,266		236,171		25,440

Other purposes		59,863,184		45,182,815		3,331,707		9,074,580		2,274,082

Large enterprises		27,398,039		16,773,028		1,859,562		7,549,562		1,215,887

SMEs and individual entrepreneurs		32,465,145		28,409,787		1,472,145		1,525,018		1,058,195

Other households		86,241,976		39,850,415		1,193,792		612,502		44,585,267

Home loans		77,672,228		33,741,442		1,170,817		282,090		42,477,879

Consumer loans		5,440,517		3,488,618		8,853		6,998		1,936,048

Other purposes		3,129,231		2,620,355		14,122		323,414		171,340
TOTAL		241,190,856		150,852,040		15,740,847		14,994,056		59,603,913

A-457


Thousand euro
					2021

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and Credit institutions		56,135,227		42,901,463		4,324,590		1,937,097		6,972,077

General governments		30,944,737		23,058,110		2,905,921		1,521,875		3,458,831

Central governments		22,243,892		15,386,550		2,905,917		492,765		3,458,660

Other		8,700,845		7,671,560		4		1,029,110		171

Other financial corporations and individual entrepreneurs		3,029,456		1,281,242		773,852		478,222		496,140

Non-financial corporations and individual entrepreneurs		62,991,664		48,323,248		3,330,753		8,599,608		2,738,055

Construction and real estate development		2,721,772		2,296,122		3,961		300,391		121,298

Civil engineering construction		916,490		872,392		19,718		5,013		19,367

Other purposes		59,353,402		45,154,734		3,307,074		8,294,204		2,597,390

Large enterprises		26,326,637		15,295,916		2,159,755		7,218,989		1,651,977

SMEs and individual entrepreneurs		33,026,765		29,858,818		1,147,319		1,075,215		945,413

Other households		86,396,456		39,304,626		979,842		515,497		45,596,491

Home loans		77,782,121		33,274,507		952,291		218,760		43,336,563

Consumer loans		5,387,338		3,297,195		6,812		5,521		2,077,810

Other purposes		3,226,997		2,732,924		20,739		291,216		182,118
TOTAL		239,497,540		154,868,689		12,314,958		13,052,299		59,261,594

By autonomous communities

The breakdown of risk concentration, by activity and at the level of Spanish autonomous communities, as at

31 December 2022 and 2021, respectively, is as follows:


Thousand euro
											2022

	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragón		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla- La Mancha		Castilla y León		Catalonia

Central banks and Credit institutions		34,158,121		5,145		1		13		8		2		349,943		—		—		350,636

General governments		27,319,509		548,524		282,965		377,523		413,874		614,807		5,646		177,985		886,455		806,616

Central governments		18,162,012		—		—		—		—		—		—		—		—		—

Other		9,157,497		548,524		282,965		377,523		413,874		614,807		5,646		177,985		886,455		806,616

Other financial corporations and individual entrepreneurs		1,367,666		4,751		1,754		3,187		1,433		941		247		705		11,318		496,126

Non-financial corporations and individual entrepreneurs		48,156,329		2,461,160		1,077,323		1,355,755		2,131,431		1,162,785		203,928		677,576		1,191,791		13,643,536

Construction and real estate development		2,205,881		97,474		38,811		43,796		73,749		25,553		7,609		16,082		33,632		519,457

Civil engineering construction		767,633		32,037		11,282		21,868		5,224		4,860		4,146		6,674		14,556		156,519

Other purposes		45,182,815		2,331,649		1,027,230		1,290,091		2,052,458		1,132,372		192,173		654,820		1,143,603		12,967,560

Large enterprises		16,773,028		631,451		380,888		383,933		956,528		295,167		73,266		186,787		235,303		4,383,584

SMEs and individual entrepreneurs		28,409,787		1,700,198		646,342		906,158		1,095,930		837,205		118,907		468,033		908,300		8,583,976

Other households		39,850,415		2,814,410		562,841		1,168,698		1,467,079		615,733		116,407		510,091		781,608		15,385,484

Home loans		33,741,442		2,305,080		487,577		937,797		1,305,843		436,697		99,189		408,621		626,088		13,366,915

Consumer loans		3,488,618		381,060		41,462		93,342		89,192		154,546		10,152		73,193		91,257		1,049,933

Other purposes		2,620,355		128,270		33,802		137,559		72,044		24,490		7,066		28,277		64,263		968,636

TOTAL		150,852,040		5,833,990		1,924,884		2,905,176		4,013,825		2,394,268		676,171		1,366,357		2,871,172		30,682,398

A-458


Thousand euro
									2022

	AUTONOMOUS COMMUNITIES

	Extremadura		Galicia		Madrid		Murcia		Navarre		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and Credit institutions		—		11,345		32,841,524		2		—		100,128		499,374		—		—

General governments		73,251		660,025		2,464,005		53,136		308,543		693,533		709,949		56,001		24,659

Central governments		—		—		—		—		—		—		—		—		—

Other		73,251		660,025		2,464,005		53,136		308,543		693,533		709,949		56,001		24,659

Other financial corporations and individual entrepreneurs		93		3,729		778,585		3,310		488		24,084		29,769		7,130		16

Non-financial corporations and individual entrepreneurs		197,915		2,404,086		12,870,370		1,122,284		608,933		4,755,150		2,080,952		191,396		19,958

Construction and real estate development		1,948		94,226		969,667		31,131		11,134		151,009		80,439		9,611		553

Civil engineering construction		2,174		43,328		336,020		14,633		3,006		60,242		47,909		2,279		876

Other purposes		193,793		2,266,532		11,564,683		1,076,520		594,793		4,543,899		1,952,604		179,506		18,529

Large enterprises		51,207		756,107		5,625,249		236,223		236,299		1,469,595		812,271		58,931		239

SMEs and individual entrepreneurs		142,586		1,510,425		5,939,434		840,297		358,494		3,074,304		1,140,333		120,575		18,290

Other households		151,499		975,804		5,433,400		2,050,394		168,933		6,116,889		1,375,881		71,251		84,013

Home loans		116,510		734,267		4,494,023		1,734,407		139,664		5,177,257		1,233,510		59,076		78,921

Consumer loans		27,443		146,638		567,330		174,643		9,796		502,475		67,443		6,017		2,696

Other purposes		7,546		94,899		372,047		141,344		19,473		437,157		74,928		6,158		2,396

TOTAL		422,758		4,054,989		54,387,884		3,229,126		1,086,897		11,689,784		4,695,925		325,778		128,646


Thousand euro
											2021

			AUTONOMOUS COMMUNITIES

	TOTAL		Andalusia		Aragón		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla- La Mancha		Castilla y León		Catalonia

Central banks and Credit institutions		42,901,463		5,610		8		2		—		2		290,083		1		—		270,562

General governments		23,058,110		350,471		119,243		360,503		383,630		299,697		6,647		105,290		709,478		904,436

Central governments		15,386,550		—		—		—		—		—		—		—		—		—

Other		7,671,560		350,471		119,243		360,503		383,630		299,697		6,647		105,290		709,478		904,436

Other financial corporations and individual entrepreneurs		1,281,242		5,325		2,810		3,642		1,323		837		287		833		14,705		536,990

Non-financial corporations and individual entrepreneurs		48,323,248		2,477,885		1,027,327		1,490,319		2,294,312		1,261,855		201,262		625,905		1,106,996		14,226,345

Construction and real estate development		2,296,122		84,280		40,585		46,909		90,043		26,854		10,497		15,220		26,690		556,249

Civil engineering construction		872,392		33,172		9,461		20,230		7,502		3,639		5,580		6,740		17,163		143,110

Other purposes		45,154,734		2,360,433		977,281		1,423,180		2,196,767		1,231,362		185,185		603,945		1,063,143		13,526,986

Large enterprises		15,295,916		520,792		312,677		446,085		932,259		351,140		55,657		143,991		199,151		4,413,074

SMEs and individual entrepreneurs		29,858,818		1,839,641		664,604		977,095		1,264,508		880,222		129,528		459,954		863,992		9,113,912

Other households		39,304,626		2,764,232		547,729		1,163,902		1,435,534		596,049		114,198		496,557		773,274		15,321,766

For house purchase		33,274,507		2,285,812		470,373		929,102		1,276,716		424,622		96,902		401,705		617,482		13,241,197

Consumer loans		3,297,195		344,663		42,835		89,927		85,105		147,048		9,043		64,404		86,338		1,020,198

Other purposes		2,732,924		133,757		34,521		144,873		73,713		24,379		8,253		30,448		69,454		1,060,371

TOTAL		154,868,689		5,603,523		1,697,117		3,018,368		4,114,799		2,158,440		612,477		1,228,586		2,604,453		31,260,099


Thousand euro
								2021

	AUTONOMOUS COMMUNITIES

	Extremadura	Galicia		Madrid		Murcia		Navarre		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and Credit institutions	—		5,136		42,024,234		2		180		116,748		188,895		—		—

General governments	87,251		419,626		1,876,784		55,766		291,266		701,521		859,215		110,090		30,646

Central governments	—		—		—		—		—		—		—		—		—

Other	87,251		419,626		1,876,784		55,766		291,266		701,521		859,215		110,090		30,646

Other financial corporations and individual entrepreneurs	99		4,380		655,805		3,107		477		27,658		22,862		84		18

Non-financial corporations and individual entrepreneurs	176,135		2,348,363		12,190,026		1,133,579		601,156		4,889,933		2,063,837		187,401		20,612

Construction and real estate development	2,071		64,311		1,023,028		35,361		20,977		146,930		96,077		9,698		342

Civil engineering construction	2,039		47,318		429,982		12,463		2,607		63,133		65,976		1,815		462

Other purposes	172,025		2,236,734		10,737,016		1,085,755		577,572		4,679,870		1,901,784		175,888		19,808

Large enterprises	19,967		726,793		4,587,849		235,642		205,908		1,392,587		705,700		46,124		520

SMEs and individual entrepreneurs	152,058		1,509,941		6,149,167		850,113		371,664		3,287,283		1,196,084		129,764		19,288

Other households	139,718		900,696		5,226,038		2,038,198		171,896		6,183,773		1,274,889		80,285		75,892

For house purchase	103,585		669,564		4,339,875		1,735,994		138,787		5,283,696		1,128,245		59,509		71,341

Consumer loans	28,185		137,929		533,090		157,659		12,085		451,813		69,924		14,684		2,265

Other purposes	7,948		93,203		353,073		144,545		21,024		448,264		76,720		6,092		2,286

TOTAL	403,203		3,678,201		61,972,887		3,230,652		1,064,975		11,919,633		4,409,698		377,860		127,168

A-459

Sectoral concentration

The breakdown by activity sector of loans and advances to non-financial corporations is shown below:


Thousand euro
	2022
	Gross carrying amount		Allowances

Agriculture, livestock farming, forestry and fisheries		1,076,502		(42,865	)

Mining and quarrying		369,936		(7,452	)

Manufacturing		9,868,505		(256,971	)

Electricity, gas, steam and air-conditioning supply		4,785,320		(86,295	)

Water supply		352,310		(3,257	)

Construction		4,233,888		(173,834	)

Wholesale and retail trade		8,944,060		(256,582	)

Transportation and storage		3,794,633		(79,969	)

Hotel and catering		4,592,388		(143,964	)

Information and communication		1,836,754		(25,602	)

Financial and insurance activities		4,595,168		(83,165	)

Real estate activities		6,779,311		(162,317	)

Professional, scientific and technical activities		2,358,265		(95,985	)

Administrative and auxiliary services		1,670,244		(36,732	)

Public administration and defence; mandatory social security		378,164		(664	)

Education		321,192		(10,179	)

Healthcare and social services		937,181		(12,758	)

Artistic, leisure and entertainment activities		511,259		(78,890	)

Other services		1,043,584		(126,549	)

Total		58,448,664		(1,684,030	)


Thousand euro
	2021
	Gross carrying amount		Allowances

Agriculture, livestock farming, forestry and fisheries		1,012,584		(42,464	)

Mining and quarrying		493,468		(12,852	)

Manufacturing		9,571,740		(295,943	)

Electricity, gas, steam and air-conditioning supply		4,366,081		(90,250	)

Water supply		525,395		(10,470	)

Construction		4,337,141		(197,600	)

Wholesale and retail trade		8,276,117		(289,990	)

Transportation and storage		3,807,434		(123,248	)

Hotel and catering		5,257,216		(177,921	)

Information and communication		1,851,024		(36,135	)

Financial and insurance activities		4,207,742		(111,808	)

Real estate activities		7,093,051		(165,108	)

Professional, scientific and technical activities		2,537,007		(125,444	)

Administrative and auxiliary services		2,009,404		(36,096	)

Public administration and defence; mandatory social security		347,411		(769	)

Education		311,378		(10,631	)

Healthcare and social services		747,882		(15,428	)

Artistic, leisure and entertainment activities		545,161		(30,968	)

Other services		323,455		(20,191	)

Total		57,620,691		(1,793,316	)

A-460

Sovereign risk exposure

Sovereign risk exposures, broken down by type of financial instrument and applying the criteria required by the EBA, as at 31 December 2022 and 2021, are as follows:


Thousand euro

										2022

	Sovereign debt securities											*Of which:*	Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss	Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		Financial assets FVOCI or non- derivative and non-trading financial assets measured at fair value to equity	With positive fair value		With negative fair value		Total		Other off- balance sheet exposures (***)	%

Spain		6,434		(135,382)	—		3,196,334		14,028,933		11,113,371	—		1,903		(9,021)		28,202,572	—		76.6%

Italy		20,284		(79,404)	—		—		3,057,287		—	—		—		—		2,998,168	—		8.1%

United States		—		—	11,851		833,134		257,520		233	—		—		—		1,102,737	—		3.0%

United Kingdom		—		—	—		575,289		1,524,614		24,077	—		—		—		2,123,980	—		5.8%

Portugal		—		—	—		—		740,688		3,042	—		—		—		743,730	—		2.0%

Mexico		—		—	—		428,712		100,303		43,904	—		—		—		572,919	—		1.6%

Rest of the world		293,320		—	—		192,611		586,427		13,508	—		—		—		1,085,866	—		2.9%

Total		320,038		(214,786)	11,851		5,226,080		20,295,772		11,198,135	—		1,903		(9,021)		36,829,972	—		100%

(*) Sovereign exposure positions shown in accordance with EBA criteria.

(**) Includes undrawn balances of credit transactions and other contingent risks (1,041 million euros as at 31 December 2022).

(***) Relates to commitments for cash purchases and sales of financial assets.


Thousand euro

										2021

	Sovereign debt securities											*Of which:*	Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss	Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		Financial assets FVOCI or non- derivative and non-trading financial assets measured at fair value to equity	With positive fair value		With negative fair value	Total		Other off- balance sheet exposures (***)	%

Spain		74,979		(46,751)	—		3,807,149		9,747,536		10,486,762	—		15,323	(16)		24,084,982	—		75.3%

Italy		202,456		—	—		49,021		2,135,300		—	—		—	—		2,386,777	—		7.5%

United States		—		—	2,727		887,114		197,875		233	—		—	—		1,087,949	—		3.4%

United Kingdom		—		—	—		1,284,232		1,921,159		34,011	—		—	—		3,239,402	—		10.1%

Portugal		5		—	—		—		355,552		1,949	—		—	—		357,506	—		1.1%

Mexico		—		—	—		311,831		100,194		12,499	—		—	—		424,524	—		1.3%

Rest of the world		261,156		—	—		106,623		—		22,704	—		—	—		390,483	—		1.2%

Total		538,596		(46,751)	2,727		6,445,970		14,457,616		10,558,158	—		15,323	(16)		31,971,623	—		100%

(*) Sovereign exposure positions shown in accordance with EBA criteria.

(**) Includes undrawn balances of credit transactions and other contingent risks (1,084 million euros as at 31 December 2021).

(***) Relates to commitments for cash purchases and sales of financial assets.

Exposure to construction and real estate development sector

Details of lending for construction and real estate development and the relevant allowances are set out below. The lending items shown have been classified in terms of their intended purpose, rather than by the debtor’s NACE code. This implies, for example, that if a debtor is (a) a real estate company, but uses the financing for a purpose other than construction or real estate development, it is not included in this table. Alternatively, if the debtor is (b) a company whose primary activity is not construction or real estate, but where the loan is used for the financing of properties intended for real estate development, it is included in the table:

Million euro

2022

Gross carrying amount

Surplus above value of
collateral

Impairment
allowances (*)

Lending for construction and real estate

development (including land) (business in Spain)

2,527

578

123

Of which: risks classified as stage 3

189

A-461


Million euro

	2021
	Gross carrying amount	Surplus above value of collateral	Impairment allowances (*)

Lending for construction and real estate development (including land) (business in Spain)	2,554	607	135

Of which: risks classified as stage 3	218	93	111

(*) Allowances for the exposure for which the Bank retains the credit risk. Does not include allowances for exposures with transferred risk.


Million euro

Gross carrying amount

*Memorandum item:*	2022		2021
Write-offs (*)		21		15

Million euro

*Memorandum item:*	2022		2021

Loans to customers, excluding General Governments (business in Spain) (carrying amount)		91,064		90,569

Total assets (total business) (carrying amount)		251,380		251,947

Allowances and provisions for exposures classed as stage 2 or stage 1 (total operations)		908		942

(*) Refers to lending for construction and real estate development reclassified as write-offs during the year.

The breakdown of lending for construction and real estate development for transactions registered by credit institutions (business in Spain) is as follows:


Million euro

	Gross carrying amount	Gross carrying amount
	2022	2021

Not secured with real estate	969	745

Secured with real estate	1,558	1,809

Buildings and other completed works	772	835

Housing	567	596

Other	205	239

Buildings and other works in progress	654	784

Housing	621	751

Other	34	33

Land	132	190

Consolidated urban land	95	154

Other land	37	36
Total	2,527	2,554

The figures presented do not show the total value of guarantees received, but rather the net carrying amount of the associated exposure.

Guarantees received associated with lending for construction and real estate development are shown hereafter, for both periods:


Million euro
Guarantees received	2022		2021

Value of collateral		1,506		1,727

Of which: securing stage 3 loans		66		88

Value of other guarantees		347		321

Of which: securing stage 3 loans		19		13
Total value of guarantees received		1,853		2,048

A-462

The breakdown of loans to households for home purchase for transactions recorded by credit institutions (business in Spain) is as follows:


Million euro

	2022

	Gross carrying amount		*Of which: stage 3 exposures*

Loans for home purchase		35,934		780

Not secured with real estate		596		29

Secured with real estate		35,338		751


Million euro

	2021

	Gross carrying amount		*Of which: stage 3 exposures*

Loans for home purchase		35,253		924

Not secured with real estate		553		44

Secured with real estate		34,700		880

The tables below show mortgage-secured lending to households for house purchases broken down by the loan-to-value ratio from the most recent appraisal available of transactions recorded by credit institutions (business in Spain):


Million euro

	2022

	Gross value		*Of which: stage 3 exposures*

LTV ranges		35,338		*751*

LTV <= 40%		6,679		118

40% < LTV <= 60%		9,573		153

60% < LTV <= 80%		12,608		193

80% < LTV <= 100%		4,096		130

LTV > 100%		2,382		157


Million euro

	2021

	Gross value		*Of which: stage 3 exposures*

LTV ranges		34,700		880

LTV <= 40%		6,500		120

40% < LTV <= 60%		9,112		180

60% < LTV <= 80%		11,783		210

80% < LTV <= 100%		4,443		160

LTV > 100%		2,862		210

A-463

Lastly, the table below gives details of assets foreclosed or received in lieu of debt by the consolidated Group entities, for transactions recorded by credit institutions within Spain, as at 31 December 2022 and 2021:


Million euro
	2022
	Gross carrying amount		Allowances		Gross value (*)		Allowances (*)

Real estate assets acquired through lending for construction and real estate development		487		158		*531*		*215*

Completed buildings		448		140		485		188

Housing		269		71		286		95

Other		179		69		199		93

Buildings under construction		4		1		5		3

Housing		3		1		5		3

Other		—		—		—		—

Land		35		16		41		24

Developed land		19		8		22		12

Other land		16		8		19		12

Real estate assets acquired through mortgage lending to households for home purchase		522		136		*598*		*218*

Other real estate assets foreclosed or received in lieu of debt		24		5		27		10

Capital instruments foreclosed or received in lieu of debt		—		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

TOTAL		1,032		299		1,157		443


Million euro
	2021
	Gross carrying amount		Allowances		Gross value (*)		Allowances (*)

Real estate assets acquired through lending for construction and real estate development		639		204		*686*		*264*

Completed buildings		594		185		631		236

Housing		378		114		400		145

Other		216		71		230		91

Buildings under construction		5		2		7		4

Housing		5		2		6		4

Other		—		—		—		—

Land		40		17		48		24

Developed land		23		9		30		13

Other land		17		8		19		11

Real estate assets acquired through mortgage lending to households for home purchase		566		154		*646*		*242*

Other real estate assets foreclosed or received in lieu of debt		24		5		30		13

Capital instruments foreclosed or received in lieu of debt		3		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

TOTAL		1,232		363		1,362		520

A-464

The table below sets out the reconciliation between assets foreclosed or received in lieu of debt and real estate assets considered non-performing by the Group as at 31 December 2022 and 2021:

Million euro

2022

Gross value

Allowances

Net book value

Total real estate portfolio in the national territory (in books)

1,032

299

734

Total operations outside the national territory and others

Provision allocated in original loan

174

—

Credit risk transferred in portfolio sales

(51)

(30)

(21)

Total non-performing real estate

1,157

443

713

Million euro

2021

Gross value

Allowances

Net book value

Total real estate portfolio in the national territory (in books)

1,229

363

867

Total operations outside the national territory and others

Provision allocated in original loan

194

—

Credit risk transferred in portfolio sales

(69)

(40)

(29)

Total non-performing real estate

1,362

520

842

Loans and advances subject to statutory and sector moratoria and financing granted subject to government guarantee schemes and operations modified in accordance with the Code of Good Practice

Information concerning loans and credit granted by the Group that are subject to statutory or sector moratoria, as well as financing granted that has benefited from the government guarantee schemes established to enable the Group’s customers to cope with the impact of Covid-19, as at 31 December 2022 and 2021, is set out below:

Thousand euro

31/12/2022

Gross carrying
amount

With no
breaches

Of which:

refinanced

exposures

Of which:
Instruments with
significant
increase in credit
risk since initial
recognition but
not credit-
impaired (Stage 2)

With breaches

Of which:

refinanced

exposures

Of which:
less than
90 days
past due

Loans and advances subject to moratoria

—

Of which: Households

—

Of which: Secured by residential property

—

Of which: Non-financial corporations

—

Of which: SMEs

—

Of which: Secured by commercial property

—

Thousand euro

31/12/2022

Accumulated
impairment,
accumulated
negative
changes in fair
value due to
credit risk

With no
breaches

Of which:
refinanced
exposures

Of which:
Instruments with
significant
increase in credit
risk since initial
recognition but
not credit-
impaired (Stage 2)

With breaches

Of which:
refinanced
exposures

Of which:
less than
90 days
past due

Loans and advances subject to moratoria

—

Of which: Households

—

Of which: Secured by residential property

—

Of which: Non-financial corporations

—

Of which: SMEs

—

Of which: Secured by commercial property

—

A-465

Thousand euro

31/12/2021

Gross carrying
amount

With no
breaches

Of which:

refinanced

exposures

Of which:
Instruments with
significant
increase in credit
risk since initial
recognition but
not credit-
impaired (Stage 2)

With breaches

Of which:

refinanced

exposures

Of which:
less than
90 days
past due

Loans and advances subject to moratoria

197,135

195,611

52,126

53,927

1.524 (*)

1,394

1,408

Of which: Households

8,100

6,666

650

2,180

1,434

1,366

1,380

Of which: Secured by residential property

2,804

1,549

528

977

1,255

Of which: Non-financial corporations

189,034

188,945

51,476

51,747

Of which: SMEs

158,210

158,121

51,476

51,747

Of which: Secured by commercial property

51,936

51,875

40,532

40,649

—

(*) Of which 1.5 million euro correspond to stage 3 transactions.

Thousand euro

31/12/2021

Accumulated
impairment,
accumulated
negative
changes in fair
value due to
credit risk

With no
breaches

Of which:
refinanced
exposures

Of which:
Instruments with
significant
increase in credit
risk since initial
recognition but
not credit-
impaired (Stage 2)

With breaches

Of which:
refinanced
exposures

Of which:
less than
90 days
past due

Loans and advances subject to moratoria

(3,258)

(3,072)

(3,054)

(2,172)

(2,201)

(186)

(67)

Of which: Households

(210)

(48)

(29)

(5)

(34)

(163)

(44)

Of which: Secured by residential property

(129)

(14)

—

(1)

(14)

(115)

—

Of which: Non-financial corporations

(3,048)

(3,025)

(2,166)

(2,168)

(23)

Of which: SMEs

(2,964)

(2,941)

(2,166)

(2,168)

(23)

Of which: Secured by commercial property

(1,634)

(1,622)

(1,603)

(1,604)

(11)

Thousand euro

31/12/2022

Gross
carrying
amount

Of which:
subject to
legislative

moratoria

Of which:
expired

Remaining validity period of moratoria

Less than
3 months

3 to 6

months

6 to 9
months

9 to 12
months

More than
12 months

Loans and advances subject to moratorium (granted)

6,794,789

4,374,169

6,794,789

—

Of which: Households

6,457,307

4,050,901

6,457,307

—

Of which: Secured by residential property

6,073,476

3,947,439

6,073,476

—

Of which: Non-financial corporations

337,217

323,004

337,217

—

Of which: SMEs

307,376

293,172

307,376

—

Of which: Secured by commercial property

282,878

271,431

282,878

—

Thousand euro

31/12/2021

Gross
carrying
amount

Of which:
subject to
legislative

moratoria

Of which:
expired

Remaining validity period of moratoria

Less than
3 months

3 to 6
months

6 to 9
months

9 to 12
months

More than
12 months

Loans and advances subject to moratorium (granted)

8,544,562

5,641,866

8,347,428

171,892

25,243

—

Of which: Households

8,021,621

5,258,623

8,013,520

8,100

—

Of which: Secured by residential property

7,457,730

5,060,563

7,454,926

2,804

—

Of which: Non-financial corporations

522,591

382,892

333,557

163,791

25,243

—

Of which: SMEs

451,817

343,018

293,606

132,967

25,243

—

Of which: Secured by commercial property

329,570

317,178

277,634

26,693

25,243

—

A-466



Thousand euro

	31/12/2022

	Gross carrying amount	Of which: refinanced		Maximum amount of the guarantee that can be considered
	Gross carrying amount	Of which: refinanced		Public financial guarantees received

Newly originated loans and advances subject to public guarantee schemes	*7.824.731 ()**		783,440	5,978,744

Of which: Households	830,511		—	—

Of which: Secured by residential property	—		—	—

Of which: Non-financial corporations	6,991,468		740,600	5,320,481

Of which: SMEs	5,341,435		—	—

Of which: Secured by commercial property	26,901		—	—

(*) Of which 514 million euro correspond to stage 3 transactions.



Thousand euro

	31/12/2021

	Gross carrying amount	Of which: refinanced		Maximum amount of the guarantee that can be considered
	Gross carrying amount	Of which: refinanced		Public financial guarantees received

Newly originated loans and advances subject to public guarantee schemes	*9.362.892 ()**		909,670	7,189,136

Of which: Households	1,014,618		—	—

Of which: Secured by residential property	—		—	—

Of which: Non-financial corporations	8,345,090		859,706	6,371,037

Of which: SMEs	6,345,176		—	—

Of which: Secured by commercial property	34,650		—	—

(*) Of which 341 million euro correspond to stage 3 transactions.

In 2022, in accordance with the Code of Good Practice, Banco Sabadell has modified a total of 1,520 ICO Covid transactions that had an outstanding principal amount of 173 million euros on the date of modification. Of these modifications, 1,517 consisted of loan term extensions, for an amount of 173million euros, and 3 write-offs, for an amount of 217 thousand euros, with no conversions of profit participation loans having been carried out.

As at 31 December 2021, in accordance with the Code of Good Practice, Banco Sabadell had modified a total of 718 transactions that had an outstanding principal amount of 127 million euros on the date of modification. The total amount corresponded to loan term extensions, with no conversion of profit participation loans and/or write-downs carried out.

A-467

Schedule VI – Annual banking report

INFORMATION REQUIRED UNDER ARTICLE 89 OF DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 26 JUNE 2013

This information has been prepared pursuant to Article 89 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and the transposition thereof into Spanish national legislation in accordance with Article 87 and Transitional Provision 12 of Law 10/2014 of 26 June on the organisation, supervision and solvency of credit institutions, published in the Official State Gazette of 27 June 2014.

In accordance with the above regulations, the following information is presented on a consolidated basis and corresponds to the end of the 2022 financial year:


Thousand euro
	Turnover		No. of employees on a full time equivalent basis	Profit or loss before tax	Corporation tax

Spain		3,635,992	12,541	844,000	(223,405)
United Kingdom		1,166,902	5,157	196,267	(101,533)
Mexico		147,110	432	42,705	(9,856)
United States		184,299	240	144,311	(34,614)
Other		45,735	88	15,363	(3,848)


Total		5,180,038	18,458	1,242,646	(373,256)

As at 31 December 2022, the return on Group assets, calculated by dividing the consolidated gains/(losses) for the year by total assets on the consolidated balance sheet, amounts to 0.34%.

The name, geographical location and nature of the business activity of the companies operating in each jurisdiction are set out in Schedule I to these Group consolidated annual financial statements.

As can be seen in Schedule I, the main activity carried out by the Group in the different jurisdictions in which it operates is banking, and fundamentally commercial banking through a wide range of products and services for large and medium-sized enterprises, SMEs, retailers and self-employed workers, professional groups, other individuals and bancassurance.

For the purposes of this information, business turnover is regarded as the gross income recognised on the consolidated income statement at 2022 year-end. Data on full-time equivalent staff have been obtained from the workforce of each company/country as at the end of 2022.

The amount of public subsidies and aid received is not material.

A-468

Consolidated financial statements of

Banco Sabadell

as of and for the year ended

December 31, 2021

A-469

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2021 and 2020


Thousand euro
Assets	Note	2021		*2020 ()**
Cash, cash balances at central banks and other demand deposits ()**	7		49,213,196		35,184,902
Financial assets held for trading			1,971,629		2,678,836
Derivatives	10		1,378,998		2,364,595
Equity instruments	9		2,258		1,115
Debt securities	8		590,373		313,126
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			106,791		15,792
Non-trading financial assets mandatorily at fair value through profit or loss			79,559		114,198
Equity instruments	9		14,582		12,516
Debt securities	8		64,977		101,682
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			—		—
Financial assets designated at fair value through profit or loss			—		—
Debt securities			—		—
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			—		—
Financial assets at fair value through other comprehensive income			6,869,637		6,676,801
Equity instruments	9		184,546		169,983
Debt securities	8		6,685,091		6,506,818
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			1,530,351		1,091,719
Financial assets at amortised cost			178,869,317		174,488,258
Debt securities	8		15,190,212		18,091,189
Loans and advances	11		163,679,105		156,397,069
Central banks			170,881		134,505
Credit institutions			6,141,939		7,079,088
Customers			157,366,285		149,183,476
Memorandum item: loaned or pledged as security with sale or pledging rights			3,554,788		4,950,813
Derivatives – Hedge accounting	12		525,382		549,550
Fair value changes of the hedged items in portfolio hedge of interest rate risk			(3,963)		458,849
Investments in joint ventures and associates	14		638,782		779,859
Joint ventures			—		—
Associates			638,782		779,859
Assets under insurance or reinsurance contracts			—		—
Tangible assets	15		2,776,758		3,200,379
Property, plant and equipment			2,397,490		2,852,287
For own use			2,394,698		2,579,002
Leased out under operating leases			2,792		273,285
Investment properties			379,268		348,092
Of which: leased out under operating leases			379,268		348,092
Memorandum item: acquired through finance leases			1,017,016		1,007,727
Intangible assets	16		2,581,421		2,596,083
Goodwill			1,026,457		1,026,105
Other intangible assets			1,554,964		1,569,978
Tax assets			7,027,123		7,151,681
Current tax assets			319,596		506,943
Deferred tax assets	39		6,707,527		6,644,738
Other assets	17		619,715		908,356
Insurance contracts linked to pensions			116,453		133,757
Inventories			142,713		194,264
Rest of other assets			360,549		580,335
Non-current assets and disposal groups classified as held for sale	13		778,035		975,540


TOTAL ASSETS			251,946,591		235,763,292

(*) Shown for comparative purposes only.

(**) See details in the consolidated cash flow statement of the Group.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated balance sheet as at 31 December 2021.

A-470

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2021 and 2020


Thousand euro
Liabilities	Note		2021		*2020 ()**
Financial liabilities held for trading				1,379,898		2,653,849
Derivatives		10		1,323,236		2,437,919
Short positions				56,662		215,930
Deposits				—		—
Central banks				—		—
Credit institutions				—		—
Customers				—		—
Debt securities issued				—		—
Other financial liabilities				—		—
Financial liabilities designated at fair value through profit or loss				—		—
Deposits				—		—
Central banks				—		—
Credit institutions				—		—
Customers				—		—
Debt securities issued				—		—
Other financial liabilities				—		—
Memorandum item: subordinated liabilities				—		—
Financial liabilities at amortised cost				235,179,222		217,390,766
Deposits				209,306,598		193,234,442
Central banks		18		38,250,031		31,881,351
Credit institutions		18		8,817,114		10,083,381
Customers		19		162,239,453		151,269,710
Debt securities issued		20		21,050,955		20,413,398
Other financial liabilities		21		4,821,669		3,742,926
Memorandum item: subordinated liabilities				4,243,712		2,923,190
Derivatives – Hedge accounting		12		512,442		782,657
Fair value changes of the hedged items in portfolio hedge of interest rate risk				19,472		371,642
Liabilities under insurance or reinsurance contracts				—		—
Provisions		22		886,138		983,512
Pensions and other post employment defined benefit obligations				86,020		99,690
Other long term employee benefits				650		3,971
Pending legal issues and tax litigation				76,848		114,097
Commitments and guarantees given				190,591		195,879
Other provisions				532,029		569,875
Tax liabilities				204,924		206,206
Current tax liabilities				81,159		39,689
Deferred tax liabilities		39		123,765		166,517
Share capital repayable on demand				—		—
Other liabilities				768,214		883,022
Liabilities included in disposal groups classified as held for sale				—		—
TOTAL LIABILITIES				238,950,310		223,271,654

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated balance sheet as at 31 December 2021.

A-471

Consolidated balance sheets of Banco Sabadell Group

As at 31 December 2021 and 2020


Thousand euro
Equity	Note	2021		*2020 ()**
Shareholders’ equity	23		13,356,905		12,943,594
Capital			703,371		703,371
Paid up capital			703,371		703,371
Unpaid capital which has been called up			—		—
Memorandum item: capital not called up			—		—
Share premium			7,899,227		7,899,227
Equity instruments issued other than capital			—		—
Equity component of compound financial instruments			—		—
Other equity instruments issued			—		—
Other equity			19,108		20,273
Retained earnings			5,441,185		5,444,622
Revaluation reserves			—		—
Other reserves			(1,201,701)		(1,088,384)
Reserves or accumulated losses of investments in joint ventures and associates			235,453		264,484
Other			(1,437,154)		(1,352,868)
(-) Treasury shares			(34,523)		(37,517)
Profit or loss attributable to owners of the parent			530,238		2,002
(-) Interim dividends			—		—
Accumulated other comprehensive income	24		(385,604)		(523,590)
Items that will not be reclassified to profit or loss			(41,758)		(64,419)
Actuarial gains or (-) losses on defined benefit pension plans			917		(693)
Non-current assets and disposal groups classified as held for sale			—		—
Share of other recognised income and expense of investments in joint ventures and associates			—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income			(42,675)		(63,726)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income			—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]			—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]			—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk			—		—
Items that may be reclassified to profit or loss			(343,846)		(459,171)
Hedge of net investments in foreign operations [effective portion]			157,741		211,841
Foreign currency translation			(481,266)		(737,073)
Hedging derivatives. Cash flow hedges reserve [effective portion]			(30,163)		39,798
Fair value changes of debt instruments measured at fair value through other comprehensive income			(11,724)		(871)
Hedging instruments [not designated elements]			—		—
Non-current assets and disposal groups classified as held for sale			—		—
Share of other recognised income and expense of investments in joint ventures and associates			21,566		27,134
Non-controlling interests	25		24,980		71,634
Accumulated other comprehensive income			—		541
Other items			24,980		71,093
TOTAL EQUITY			12,996,281		12,491,638
TOTAL EQUITY AND TOTAL LIABILITIES			251,946,591		235,763,292

Memorandum item: off-balance sheet exposures

Loan commitments given	26		28,403,146		29,295,155

Financial guarantees provided	26		2,034,143		2,035,638
Other commitments provided	26		7,384,863		7,594,720

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated balance sheet as at 31 December 2021.

A-472

Consolidated income statements of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro
	Note		2021		*2020 ()**
Interest income		28		4,147,549		4,323,802
Financial assets at fair value through other comprehensive income				49,034		63,095
Financial assets at amortised cost				3,734,977		3,924,913
Other interest income				363,538		335,794
(Interest expenses)		28		(722,093)		(924,686)
(Expenses on share capital repayable on demand)				—		—
Net interest income				3,425,456		3,399,116
Dividend income				1,262		1,018
Profit or loss of entities accounted for using the equity method		14		100,280		35,926
Fee and commission income		29		1,661,610		1,538,377
(Fee and commission expenses)		29		(194,069)		(188,049)
Gains or (-) losses on financial assets and liabilities, net		30		157,045		1,226,417
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net				340,985		782,143
Financial assets at amortised cost				323,840		728,200
Other financial assets and liabilities				17,145		53,943
Gains or (-) losses on financial assets and liabilities held for trading, net				(183,555)		444,354
Reclassification of financial assets from fair value through other comprehensive income				—		—
Reclassification of financial assets from amortised cost				—		—
Other gains or (-) losses				(183,555)		444,354
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net				4,466		(9,544)
Reclassification of financial assets from fair value through other comprehensive income				—		—
Reclassification of financial assets from amortised cost				—		—
Other gains or (-) losses				4,466		(9,544)
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net				—		—
Gains or (-) losses from hedge accounting, net				(4,851)		9,464
Exchange differences [gain or (-) loss], net				187,174		(426,777)
Other operating income		31		154,732		225,220
(Other operating expenses)		32		(467,362)		(509,093)
Income from assets under insurance or reinsurance contracts				—		—
(Expenses on liabilities under insurance or reinsurance contracts)				—		—
Gross income				5,026,128		5,302,155

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated profit and loss account for 2021.

A-473

Consolidated income statements of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro
	Note	2021		*2020 ()**
(Administrative expenses)			(2,780,890)		(2,938,134)
(Staff expenses)	33		(1,776,797)		(1,884,576)
(Other administrative expenses)	33		(1,004,093)		(1,053,558)
(Depreciation and amortisation)	15, 16		(526,514)		(523,247)
(Provisions or (-) reversal of provisions)	22		(87,566)		(275,408)
Impairment or (-) reversal of impairment on financial assets not measured at fair value through	34		(959,507)		(1,745,014)
profit or loss and net modification losses or (-) gains)
(Financial assets at fair value through other comprehensive income)			697		288
(Financial assets at amortised cost)			(960,204)		(1,745,302)
Profit/(loss) on operating activities			671,651		(179,648)
(Impairment or (-) reversal of impairment of investments in joint ventures and associates)			(9,428)		(495)
(Impairment or (-) reversal of impairment on non-financial assets)	35		(105,967)		(40,401)
(Tangible assets)			(65,483)		7,692
(Intangible assets)			(1,570)		(2,025)
(Other)			(38,914)		(46,068)
Gains or (-) losses on derecognition of non-financial assets, net	36		71,121		(2,867)
Negative goodwill recognised in profit or loss			—		—
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	37		(7,388)		102,582
Profit or (-) loss before tax from continuing operations			619,989		(120,829)
(Tax expense or (-) income related to profit or loss from continuing operations)	39		(81,282)		123,839
Profit or (-) loss after tax from continuing operations			538,707		3,010
Profit or (-) loss after tax from discontinued operations			—		—
Profit or loss for the year			538,707		3,010
Attributable to minority interest [non-controlling interests]	25		8,469		1,008
Attributable to owners of the parent			530,238		2,002

Earnings (or loss) per share (euros)	3		0.08		(0.01)
Basic (in euro)			0.08		(0.01)
Diluted (in euro)			0.08		(0.01)

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated profit and loss account for 2021.

A-474

Consolidated statements of recognised income and expenses

of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro
	Note		2021		*2020 ()**
Profit or loss for the year				538,707		3,010
Other comprehensive income		24		137,445		(256,545)
Items that will not be reclassified to profit or loss				22,661		(19,742)
Actuarial gains or (-) losses on defined benefit pension plans				2,299		2,383
Non-current assets and disposal groups held for sale				—		—
Share of other recognised income and expense of investments in joint ventures and associates				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income				18,312		(17,986)
Gains or (-) losses from hedge accounting of equity instruments at fair value through other comprehensive income, net				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]				—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk				—		—
Income tax relating to items that will not be reclassified				2,050		(4,139)
Items that may be reclassified to profit or loss				114,784		(236,803)
Hedge of net investments in foreign operations [effective portion]				(54,100)		97,604
Valuation gains or (-) losses taken to equity				(54,100)		97,604
Transferred to profit or loss				—		—
Other reclassifications				—		—
Foreign currency translation				255,804		(291,902)
Translation gains or (-) losses taken to equity				255,804		(291,902)
Transferred to profit or loss				—		—
Other reclassifications				—		—
Cash flow hedges (effective portion)				(103,229)		(67,603)
Valuation gains or (-) losses taken to equity				(244,346)		69,626
Transferred to profit or loss				141,119		(137,951)
Transferred to initial carrying amount of hedged items				(2)		722
Other reclassifications				—		—
Hedging instruments [not designated elements]				—		—
Valuation gains or (-) losses taken to equity				—		—
Transferred to profit or loss				—		—
Other reclassifications				—		—
Debt instruments at fair value through other comprehensive income				(14,112)		1,392
Valuation gains or (-) losses taken to equity				1,300		170,382
Transferred to profit or loss				(15,412)		(168,990)
Other reclassifications				—		—
Non-current assets and disposal groups held for sale				—		—
Valuation gains or (-) losses taken to equity				—		—
Transferred to profit or loss				—		—
Other reclassifications				—		—
Share of other recognised income and expense of investments in joint ventures and associates				(5,567)		5,976
Income tax relating to items that may be reclassified to profit or (-) loss				35,988		17,730
Total comprehensive income for the year				676,152		(253,535)
Attributable to minority interest [non-controlling interests]				7,928		1,307
Attributable to owners of the parent				668,224		(254,842)

(*) Shown for comparative purposes only.

Explanatory notes 1 to 43 and the accompanying Schedules I to VII form an integral part of the consolidated statement of recognised income and expenses for 2021.

A-475

Consolidated statements of total changes in equity of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro

Sources of changes in equity	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests: Other items		Total
Closing balance 31/12/2020		703,371		7,899,227		—		20,273		5,444,622		—		(1,088,384)		(37,517)		2,002		—		(523,590)		541		71,093		12,491,638
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Opening balance 01/01/2021		703,371		7,899,227		—		20,273		5,444,622		—		(1,088,384)		(37,517)		2,002		—		(523,590)		541		71,093		12,491,638
Total comprehensive income for the period		—		—		—		—		—		—		—		—		530,238		—		137,986		(541)		8,469		676,152
Other changes in equity		—		—		—		(1,165)		(3,437)		—		(113,317)		2,994		(2,002)		—		—		—		(54,582)		(171,509)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Purchase of treasury shares		—		—		—		—		—		—		—		(64,378)		—		—		—		—		—		(64,378)
Sale or cancellation of treasury shares		—		—		—		—		—		—		936		67,372		—		—		—		—		—		68,308
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity		—		—		—		—		2,002		—		—		—		(2,002)		—		—		—		—		—
Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Share based payments		—		—		—		540		—		—		—		—		—		—		—		—		—		540
Other increase or (-) decrease in equity		—		—		—		(1,705)		(5,439)		—		(114,253)		—		—		—		—		—		(54,582)		(175,979)
Closing balance 31/12/2021		703,371		7,899,227		—		19,108		5,441,185		—		(1,201,701)		(34,523)		530,238		—		(385,604)		—		24,980		12,996,281

Explanatory notes 1 to 43 and the accompanying Schedules I to VII form an integral part of the consolidated statement of total changes in equity for 2021.

A-476

Consolidated statements of total changes in equity of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro

Sources of changes in equity	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests: Other items		Total
Closing balance 31/12/2019		703,371		7,899,227		—		39,742		4,858,681		—		(977,687)		(8,533)		767,822		(110,817)		(266,746)		242		69,104		12,974,406
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Opening balance 01/01/2020		703,371		7,899,227		—		39,742		4,858,681		—		(977,687)		(8,533)		767,822		(110,817)		(266,746)		242		69,104		12,974,406
Total comprehensive income for the period		—		—		—		—		—		—		—		—		2,002		—		(256,844)		299		1,008		(253,535)
Other changes in equity		—		—		—		(19,469)		585,941		—		(110,697)		(28,984)		(767,822)		110,817		—		—		981		(229,233)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		(112,539)		—		—		—		—		—		—		—		—		(112,539)
Purchase of treasury shares		—		—		—		—		—		—		—		(145,769)		—		—		—		—		—		(145,769)
Sale or cancellation of treasury shares		—		—		—		—		—		—		591		116,785		—		—		—		—		—		117,376
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity		—		—		—		—		657,005		—		—		—		(767,822)		110,817		—		—		—		—
Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Share based payments		—		—		—		1,004		—		—		—		—		—		—		—		—		—		1,004
Other increase or (-) decrease in equity		—		—		—		(20,473)		41,475		—		(111,288)		—		—		—		—		—		981		(89,305)
Closing balance 31/12/2020		703,371		7,899,227		—		20,273		5,444,622		—		(1,088,384)		(37,517)		2,002		—		(523,590)		541		71,093		12,491,638

Shown for comparative purposes only.

Explanatory notes 1 to 43 and the accompanying Schedules I to VII form an integral part of the consolidated statement of total changes in equity for 2021.

A-477

Consolidated cash flow statements of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro
	Note	2021		*2020 ()**
Cash flows from operating activities			12,338,823		20,421,390
Profit or loss for the year			538,707		3,010
Adjustments to obtain cash flows from operating activities			1,700,666		2,373,743
Depreciation and amortisation			526,514		523,247
Other adjustments			1,174,152		1,850,496
Net increase/decrease in operating assets			(3,826,355)		5,570,590
Financial assets held for trading			707,207		(237,970)
Non-trading financial assets mandatorily at fair value through profit or loss			34,638		56,859
Financial assets designated at fair value through profit or loss			—		—
Financial assets at fair value through other comprehensive income			(181,941)		1,105,368
Financial assets at amortised cost			(5,416,431)		4,301,447
Other operating assets			1,030,172		344,886
Net increase/decrease in operating liabilities			13,851,502		12,509,147
Financial liabilities held for trading			(1,273,950)		(60,517)
Financial liabilities designated at fair value through profit or loss			—		—
Financial liabilities at amortised cost			16,348,950		11,903,622
Other operating liabilities			(1,223,498)		666,042
Income tax receipts or payments			74,303		(35,100)
Cash flows from investing activities			419,591		237,644
Payments			(505,679)		(706,336)
Tangible assets	15		(225,626)		(394,647)
Intangible assets	16		(276,141)		(288,371)
Investments in joint ventures and associates	14		(3,912)		(23,318)
Subsidiaries and other business units			—		—
Non-current assets and liabilities classified as held for sale			—		—
Other payments related to investing activities			—		—
Collections			925,270		943,980
Tangible assets	15, 36		444,505		189,957
Intangible assets			—		—
Investments in joint ventures and associates	14		63,086		70,106
Subsidiaries and other business units			—		—
Non-current assets and liabilities classified as held for sale			417,679		683,917
Other collections related to investing activities			—		—

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated cash flow statement for 2021.

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Consolidated cash flow statements of Banco Sabadell Group

For the years ended 31 December 2021 and 2020


Thousand euro
	Note		2021		*2020 ()**
Cash flows from financing activities				1,095,286		(460,482)
Payments				(723,022)		(877,858)
Dividends				—		(112,539)
Subordinated liabilities		Schedule V		(443,497)		(424,600)
Amortisation of own equity instruments				—		—
Acquisition of own equity instruments				(64,378)		(145,769)
Other payments related to financing activities				(215,147)		(194,950)
Collections				1,818,308		417,376
Subordinated liabilities		Schedule V		1,750,000		300,000
Issuance of own equity instruments				—		—
Disposal of own equity instruments				68,308		117,376
Other collections related to financing activities				—		—
Effect of exchange rate fluctuations				174,594		(182,852)
Net increase (decrease) in cash and cash equivalents				14,028,294		20,015,700
Cash and cash equivalents at the beginning of the year		7		35,184,902		15,169,202
Cash and cash equivalents at the end of the year		7		49,213,196		35,184,902

Memorandum item
CASH FLOWS CORRESPONDING TO:
Interest received				4,144,382		4,426,825
Interest paid				1,209,006		(980,300)
Dividends received				1,262		1,018

COMPONENTS OF CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
Cash		7		704,105		749,608
Cash equivalents in central banks		7		47,741,021		33,842,492
Other demand deposits		7		768,070		592,802
Other financial assets				—		—
Less: bank overdrafts repayable on demand				—		—
TOTAL CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR				49,213,196		35,184,902

Of which: held by Group entities but which cannot be drawn by the Group				—		—

(*) Shown for comparative purposes only.

Notes 1 to 43 and accompanying schedules I to VII form an integral part of the consolidated cash flow statement for 2021.

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Consolidated report of Banco Sabadell Group for the year ended 31 December 2021

Note 1 – Activity, accounting policies and practices

1.1 Activity

1.2 Basis of presentation, changes in accounting regulations, and impacts arising from COVID-19

The Group’s consolidated annual financial statements for 2021 have been prepared in accordance with the International Financial Reporting Standards adopted by the European Union (EU-IFRS) applicable at the end of 2021, taking into account Bank of Spain Circular 4/2017 of 27 November as well as other provisions of the financial reporting regulations applicable to the Group and considering the formatting and mark-up requirements established in Commission Delegated Regulation EU 2019/815, in order to fairly present the Group’s equity and consolidated financial situation as at 31 December 2021 and the results of its operations, recognised income and expenses, changes in equity and cash flows (all consolidated) in 2021.

The information included in these consolidated annual financial statements is the responsibility of the directors of the Group’s parent company. The Group’s consolidated annual financial statements for 2021 have been signed off by the directors of Banco Sabadell at a meeting of the Board of Directors on 17 February 2022 and will be submitted to shareholders at the Annual General Meeting for approval. It is expected that the shareholders will approve the accounts without significant changes.

Standards and interpretations issued by the International Accounting Standards Board (IASB) entering into force in 2021

In 2021, the standards indicated hereafter, which have entered into force and been adopted by the European Union, have been applied by the Group for the first time:


Standards		Titles

Amendments to IFRS 4		Temporary exemption from applying IFRS 9

Amendments to IFRS 16		COVID-19-related rent concessions beyond 30 June 2021

2021 has also seen the entry into force of the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 in relation to the “Interest Rate Benchmark Reform (Phases 1 and 2)”, which were applied early by the Group in 2020.

Amendments to IFRS 4 “Extension of the temporary exemption from applying IFRS 9”

These amendments of the previous Standard on insurance contracts, IFRS 4, allow insurers to opt to defer the date of initial application of IFRS 9 “Financial instruments” to 1 January 2023.

Amendments to IFRS 16 “COVID-19-related rent concessions beyond 30 June 2021”

These amendments introduce an extension, until 30 June 2022, of the practical expedient to simplify how lessees should account for any rent concessions received as a result of COVID-19, such as rent waivers or reductions, allowing these concessions to be accounted for in the same way as they would if they were not lease modifications.

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Standards and interpretations issued by the IASB not yet in force

As at 31 December 2021, the most significant standards and interpretations that have been published by the IASB but which have not been applied when preparing these consolidated annual financial statements, either because their effective date is subsequent to the date thereof or because they have not yet been endorsed by the European Union, are as follows:


Standards and Interpretations	Title	Mandatory for years beginning:

Approved for application in the EU

Amendments to IAS 16, IAS 37 and IFRS 3 and annual improvements to IFRS 2018-20	Narrow-scope amendments	1/1/2022
IFRS 17	Insurance contracts	1/1/2023

Not approved for application in the EU

Amendments to IAS 1	Presentation of financial statements: classification of liabilities as current or non-current	1/1/2023

Amendments to IAS 1 and IFRS Practice Statement 2	Disclosure of accounting policies	1/1/2023

Amendments to IAS 8	Definition of accounting estimates	1/1/2023

Amendments to IAS 12	Deferred tax related to assets and liabilities arising from a single transaction	1/1/2023

Amendments to IFRS 17	Initial application of IFRS 17 and IFRS 9: Comparative Information	1/1/2023

The Group has carried out an assessment of the impacts resulting from these standards and decided not to exercise its option to adopt early, where possible. Unless otherwise indicated, Management estimates that their adoption would not have a material impact on the Group.

Approved for implementation in the EU

Narrow-scope amendments to IAS 16, IAS 37 and IFRS 3 and annual improvements to IFRS 2018-20

IFRS 17 “Insurance contracts”

In accordance with this standard, insurance contracts combine features of both financial instruments and service contracts. In addition, many insurance contracts generate cash flows with substantial variability over a long period. In order to provide useful information about these features, IFRS 17:

–

combines the current measurement of future cash flows with the revenue recognised throughout the period during which the services established in the contracts are provided.

–

presents results for services provided separately from the financial expenses and income relating to these contracts.

–

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Insurance undertakings associated with the Group are working on the implementation of the new regulatory framework for insurance contracts arising from IFRS 17.

Not approved for implementation in the EU

Amendments to IAS 1 “Presentation of financial statements: classification of liabilities as current or non-current”

These amendments are designed to make clear how institutions should classify debts and other liabilities as current and non-current, in particular liabilities with no fixed maturity and those that may be converted to equity. The early application of these amendments is permitted.

Amendments to IAS 1 and IFRS Practice Statement 2 “Disclosure of accounting policies”

These amendments aim to help institutions to improve accounting policy disclosures so that they provide more useful information in their annual financial statements.

The amendments to IAS 1 will be applied prospectively, with early application permitted.

Amendments to IAS 8 “Definition of accounting estimates”

Amendments to IAS 12 “Deferred tax related to assets and liabilities arising from a single transaction”

Amendment to IFRS 17 “Initial application of IFRS 17 and IFRS 9 – Comparative Information”

In the event this option is used, the application of this amendment will be simultaneous with the application of IFRS 17.

Impacts arising from COVID-19

The public health emergency triggered by COVID-19 in March 2020 continued into the start of 2021. During the first half of the year, the main markets in which the Group operates experienced a third wave of COVID-19 infections, causing them to tighten containment measures. Subsequent to this, although the epidemiological situation was generally brought under control for a good part of the second half of the year thanks to the progress of vaccination programmes, the surge of the new, more infectious Omicron variant in November and December once again threatened to overwhelm hospitals and resulted in the reintroduction of certain containment measures, whose impact and duration remains to be seen in 2022.

In the face of this situation, throughout 2021 some of the measures implemented in the previous year to cushion the impact of this crisis remained in place, while other measures were introduced in order to steer the economy towards recovery.

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Spain

Statutory and sector moratoria

Royal Decree-Law 3/2021, of 2 February, extended the deadline for applying for legislative and non-legislative moratoria to 30 March 2021, stipulating that they would apply for a total period of no longer than 9 months, including any length of time during which they had already been in effect. With this amendment, the moratoria were brought in line with the new date set in the revised Guidelines on Moratoria issued in December 2020 by the European Banking Authority (EBA).

Regarding sector moratoria, in 2020, Banco Sabadell signed up to the moratorium promoted by the Spanish Banking Association (Asociación Española de Banca, or AEB), while its subsidiary Sabadell Consumer Finance S.A.U. signed up in that same year to the moratorium promoted by the National Association of Financial Credit Institutions (Asociación Nacional de Establecimientos Financieros de Crédito, or ASNEF). Both of these sector moratoria were initially planned to remain in effect until September 2020, but they were subsequently renewed following the publication of the EBA Guidelines, extending the application deadline to

30 March 2021 and 31 March 2021, respectively, under the same terms as those provided in the aforesaid Guidelines.

ICO COVID-19 guarantee line

Following Royal Decree-Law 8/2020, of 17 March, which approved a government guarantee line for companies and self-employed persons of up to 100 billion euros (of which more than 92.5 billion euros had already been mobilised as at 31 December 2021), Royal Decree-Law 25/2020, of 3 July, approved a new ICO government guarantee line for companies and self-employed persons of up to 40 billion euros, whose final tranche was approved by the Council of Ministers’ Resolution of 28 May 2021. The full guaranteed amount of this new line amounted to almost 10.5 billion euros as at 31 December 2021.

Similarly, in March 2021, Royal Decree-Law 5/2021 was approved, mobilising 11 billion euros of direct aid for companies, support for the restructuring of balance sheets and recapitalisations.

This aid was aimed at viable businesses in the sectors hardest hit by the pandemic, in order to channel funds to the overall economy and reduce the risk of over-indebtedness, which could hamper economic recovery. These measures include more flexible criteria for government-guaranteed loans, thus enabling the ICO to be involved in any refinancing or restructuring arrangements agreed between banks and their customers.

Similarly, with the approval of this Royal Decree-Law 5/2021, the deadline for applying for all guarantees was extended to 31 December 2021. Lastly, on 24 November 2021, Royal Decree-Law 27/2021 was published, which further extended the deadline for applying for these guarantees by another 6 months, i.e. to 30 June 2022, in line with the extension of the European Union State Aid Temporary Framework.

Code of Good Practice

On 11 May 2021, the Council of Ministers adopted a Resolution approving the Code of Good Practice for renegotiations with customers of the guaranteed loans envisaged in Royal Decree-Law 5/2021, of 12 March, on extraordinary business solvency support measures in response to the COVID-19 pandemic.

This Code of Good Practice provides three main options available to debtors meeting a series of specific conditions in order to deal with the economic difficulties resulting from COVID-19: maturity extensions (which they could initially apply for until 15 October 2021), conversion of debt into participating loans (which they could also initially apply for until 15 October 2021), and debt reductions (which could initially be executed until 1 December 2022).

Lastly, on 1 December 2021, the Resolution dated 30 November 2021 of the Secretaría de Estado de Economía y Apoyo a la Empresa (State Secretariat for Economic Affairs and Support for Businesses) was published in the Official State Gazette (BOE). This Resolution once again extends the deadlines for applying for maturity extensions and conversions of debt into participating loans to 1 June 2022 and the deadline for applying for debt reductions to 1 June 2023, thus bringing the deadlines in line with the new thresholds established in the EU Temporary Framework following its amendment.

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United Kingdom

Payment holidays

As a result of the second wave of COVID-19, on 17 November 2020 the Financial Conduct Authority (FCA) once again updated its guidance concerning mortgages and consumer loans, which it had previously updated in June 2020, allowing customers who had already received a three-month payment holiday to apply for an additional payment holiday of up to three months and those who had not already requested a payment holiday to sign up for two consecutive payment holidays for a total maximum six-month duration. The deadline for payment holiday applications was extended to 31 March 2021 and the ban on lender repossessions of mortgaged goods, vehicles and properties was extended to 31 January 2021. On 27 January 2021, the FCA announced a further extension of the ban on lender repossessions of mortgaged properties to 31 March 2021.

Government guarantees channelled through the banking industry

In March 2021, the launch of the Recovery Loan Scheme was announced at the Budget 2021. This new scheme allows businesses of any size, including those that have already benefited from BBLs, CLBILs and CBILs, to apply for loans of between 25,000 and 10 million pounds sterling, with the government guaranteeing 80% of the amount, until the end of the year. Similarly, at the Autumn Budget 2021, presented in October, it was announced that the Recovery Loan Scheme would be extended to 30 June 2022, explaining that the following changes will come into effect from 1 January 2022:

–

The scheme will only be open to small and medium-sized enterprises.

–

The maximum amount of finance available will be 2 million pounds per business.

–

The guarantee coverage that the UK Government will provide to lenders will be reduced to 70%.

Acquisition of housing

The aforesaid Budget 2021 introduces the following measures to drive house purchases:

–

Stamp duty: the tax applied to the first 500,000 pounds of the purchase price of a property will remain at 0% until the end of June 2021 (the stamp duty holiday was previously due to end in March). Between June and October, the 0% stamp duty will only apply to the first 250,000 pounds of the purchase price of a property and from November onwards it will return to normal.

–

Mortgage guarantee scheme: this scheme will allow mortgage loans with a LTV of between 91% and 95% to be granted between April 2021 and December 2022. This scheme will apply to the purchase of primary residences of up to 600,000 pounds and will not be restricted to first-time buyers.

Schedule VI to these consolidated annual financial statements sets out quantitative data relating to the Group’s risk exposures arising from statutory and sector moratoria and to transactions approved as part of the public support schemes implemented in response to the crisis caused by COVID-19 and the Code of Good Practice.

Details of the impact, if any, of COVID-19 on the main risks to which the Group is exposed are provided in Note 4 to these consolidated annual financial statements.

Judgements and estimates

The main judgements and estimates relate to the following:

–

The determination of the business models under which financial assets are managed (see Notes 1.3.3, 8 and 11).

–

The accounting classification of financial assets according to their credit risk (see Notes 1.3.4, 8 and 11).

–

Impairment losses on certain financial assets (see Notes 1.3.4, 8 and 11).

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–

The assumptions used in actuarial calculations of liabilities and post-employment obligations (see Notes 1.3.17 and 22).

–

The measurement of consolidated goodwill (see Notes 1.3.12 and 16).

–

The useful life and impairment losses of tangible assets and other intangible assets (see Notes 1.3.10, 1.3.11, 1.3.12, 15 and 16).

–

The provisions and consideration of contingent liabilities (see Notes 1.3.16 and 22).

–

The fair value of certain unquoted financial assets (see Note 6).

–

The fair value of real estate assets held on the balance sheet (see Notes 1.3.9, 1.3.10, 1.3.13 and 6).

–

The recoverability of non-monetisable deferred tax assets and tax credits (see Note 39).

–

The duration of lease contracts and the discount rate used in the measurement of the lease liability (see Notes 1.3.11 and 15).

The COVID-19 pandemic has increased uncertainty when making estimates and underlined the need to use expert judgement when assessing how those estimates are impacted by the current macroeconomic situation, fundamentally in relation to the classification and calculation of impairment losses on both financial and non-financial assets.

Although estimates are made based on the information available to Management regarding current and foreseeable circumstances, final results could differ from these estimates.

1.3 Accounting principles and policies and measurement criteria

1.3.1 Consolidation principles

In the consolidation process, a distinction is drawn between subsidiaries, joint ventures, associates and structured entities.

Subsidiaries

For control to exist, the following criteria must be met:

–

When the Group takes control over a subsidiary, it applies the acquisition method provided for in the regulations governing business combinations (see Note 1.3.2) except in the case of acquisitions of an asset or a group of assets.

The financial statements of subsidiaries are consolidated with the Bank’s financial statements using the full consolidation method.

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Joint ventures

These are entities subject to joint control agreements whereby decisions on significant activities are made unanimously by the entities which share control.

Investments in joint ventures are accounted for by the equity method i.e. by the fraction of equity represented by the share held in their capital stock, after taking account of any dividends received from them and any other equity disposals.

The Group has not held investments in joint ventures in 2021 and 2020.

Associates

In the consolidated annual financial statements, associates are accounted for using the equity method.

The above notwithstanding, when the Group’s investment in an associate is held directly by, or is held indirectly through, a venture capital organisation or similar entity, it may elect to measure that investment at fair value through profit or loss in accordance with IFRS 9. This election is made separately for each associate on the date of its initial recognition. Similarly, when the Group has an interest in an associate that is an investment entity, it may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate to its subsidiaries. This election is made separately for each investment entity associate at the later of the date on which (a) the associate is initially recognised, (b) the associate becomes an investment entity, and (c) the associate first becomes the parent of a group of entities.

Structured entities

A structured entity is an entity that has been designed so that voting or other similar rights are not the dominant factor in deciding who controls the entity.

–

Analysis of the influence of the Group over the significant activities of the entity that could have an influence on the amount of its returns.

–

Implicit or explicit commitments of the Group to provide financial support to the entity.

–

Identification of the entity’s manager and analysis of the remuneration scheme.

–

Existence of removal rights (possibility of dismissing managers).

–

Significant exposure of the Group to the variable returns on the entity’s assets.

Schedule II provides details of the structured entities of the Group.

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1.3.2 Business combinations

A business combination is a transaction, or any other event, through which the Group obtains control over one or more businesses. Business combinations are accounted for using the acquisition method.

The Group then recognises goodwill in the consolidated annual financial statements if on the acquisition date there is a positive difference between:

–

the sum of the consideration paid plus the amount of all minority interests and the fair value of prior interests held in the acquired business; and

–

the fair value of recognised assets and liabilities.

If the difference is negative, it is recorded under the heading “Negative goodwill recognised in profit or loss” in the consolidated income statement.

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1.3.3 Measurement of financial instruments and recognition of changes arising in their subsequent measurement

In general, all financial instruments are initially recognised at fair value (see definition in Note 6) which, unless evidence to the contrary is available, coincides with the transaction price. For financial instruments not recognised at fair value through profit or loss, the fair value is adjusted either by adding or deducting the transaction costs directly attributable to their acquisition or issuance. In the case of financial instruments at fair value through profit or loss, the directly attributable transaction costs are recognised immediately in the consolidated income statement. As a general rule, conventional purchases and sales of financial assets are recognised at the settlement date.

Instruments which form part of a hedging relationship are treated in accordance with regulations applicable to hedge accounting.

Changes in measurements occurring subsequent to initial recognition for reasons other than those mentioned above are treated according to the classification of financial assets and financial liabilities for the purposes of their measurement which, in general, is based on the following aspects:

–

The business model for managing the financial assets, and

–

The contractual cash flow characteristics of the financial assets.

Business model

The business models used by the Group are indicated here below:

–

Business model whose objective is to sell financial assets.

–

Contractual cash flow characteristics of the financial assets

Financial assets should initially be classified into one of the following two categories:

–

Those whose contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

–

All other financial assets.

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The most significant judgements used in this evaluation are indicated here below:

–

•

Other clauses that could change the timing or amount of cash flows: clauses that could alter contractual cash flows as a result of changes in credit risk are considered to pass the SPPI test.

–

•

the underlying pool of financial instruments comprises instruments whose contractual cash flows are solely payments of principal and interest on the principal amount outstanding; and

•

the exposure to credit risk corresponding to the tranche being assessed is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments.

–

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–

Portfolios of financial instruments classified for the purpose of their measurement

Financial assets and financial liabilities are classified, for the purpose of their measurement, into the following portfolios, based on the aspects described above:

Financial assets at amortised cost

This category includes financial assets that meet the following two conditions:

–

They are managed with a business model whose objective is to hold financial assets in order to collect contractual cash flows, and

–

Their contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at fair value through other comprehensive income

This category includes financial assets that meet the following two conditions:

–

They are managed with a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and

–

The contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

These financial assets primarily correspond to debt securities.

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Income and expenses from financial assets at fair value through other comprehensive income are recognised in accordance with the following criteria:

–

Interest accrued or, where applicable, dividends accrued are recognised in the consolidated income statement.

–

Losses due to impairment of debt instruments, or gains due to their subsequent recovery, are recognised in the consolidated income statement.

–

Other changes in value are recognised through other comprehensive income.

When a debt instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, the fair value change recognised under the heading “Accumulated other comprehensive income” of the consolidated statement of equity is reclassified into the consolidated income statement. However, when an equity instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, this amount is not reclassified into the consolidated income statement, but rather to reserves.

Financial assets at fair value through profit or loss

This portfolio is in turn subdivided into:

–

Financial assets held for trading

–

Non-trading financial assets mandatorily at fair value through profit or loss

All other financial assets mandatorily at fair value through profit or loss are classified in this portfolio.

No reclassifications have been made in 2021 and 2020 between the portfolios in which financial assets are recognised for the purpose of their measurement.

Financial liabilities held for trading

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Fair value changes are directly recognised in the consolidated income statement, making a distinction, in the case of non-derivative instruments, between the portion attributable to returns accrued on the instrument, which are recognised as interest applying the effective interest rate method, and the remaining portion, which is recognised as gains or (-) losses on financial assets and liabilities under the corresponding heading.

Financial liabilities at amortised cost

Hybrid financial instruments

When the host contract of a hybrid financial instrument is a financial liability, the embedded derivatives of that contract are accounted for separately if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, if a different financial instrument with the same conditions as those of the embedded derivative would qualify as a derivative instrument, and if the entire hybrid contract is not designated at fair value through profit or loss.

The fair value of the Group’s financial instruments as at 31 December 2021 and 2020 is indicated in Note 6.

1.3.4 Impairment of financial assets

A financial asset or a credit exposure is considered to be impaired when there is objective evidence that one or more events have occurred whose direct or combined effect gives rise to:

–

In the case of investments in joint ventures and associates, a situation in which their carrying amount cannot be recovered.

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1.3.4.1 Debt instruments and off-balance sheet exposures

1.3.4.1.1 Accounting classification on the basis of credit risk attributable to insolvency

The following sections describe the classification principles and methodology used by the Group.

Definition of classification categories

Credit exposures and off-balance sheet exposures are both classified, on the basis of their credit risk, into the following stages:

–

Stage 2: standard exposures under special monitoring, i.e. transactions which, although they do not meet the criteria to be classified individually as stage 3 or write-offs, show significant increases in credit risk (SICR) since initial recognition. In this regard, the Group does not make use of the low credit risk exemption envisaged in IFRS 9 for its portfolio of loans and advances. According to this exemption, if an entity considers that a financial instrument has low credit risk at the reporting date, it can assume that there has not been any significant increase in credit risk since initial recognition. This category includes, among other transactions, those in which there are amounts more than 30 days past due, with the exception of non-recourse factoring, for which a threshold of more than 60 days is applied (32 million euros as at 31 December 2021), as well as refinanced and restructured transactions not classified as stage 3 until they are classified into a lower risk category once they meet the established requirements for modifying their classification.

–

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•

For reasons other than borrower arrears: transactions which do not meet the conditions for classification as write-offs or stage 3 as a result of borrower arrears, but for which there are reasonable doubts as to the likelihood of obtaining the estimated cash flows of the transaction, as well off-balance sheet exposures not classified as stage 3 as a result of borrower arrears whose payment by the Group is likely but whose recovery is doubtful. This category includes transactions that were classified as stage 3 as a result of borrower arrears, which will be reclassified as standard exposures under special monitoring (stage 2) once they have completed a probation period classified as stage 3 for reasons other than borrower arrears.

The accounting definition of stage 3 is in line with the definition used in the Group’s credit risk management activities.

–

Write-off:

The Group derecognises from the consolidated balance sheet transactions for which the possibility of full or partial recovery is considered to be remote following an individual assessment. This also includes transactions which, despite not being in any of the previous situations, are undergoing a manifest and irreversible deterioration of their solvency.

Purchased or originated credit-impaired transactions

Extent of alignment between the stage 3 accounting category and the prudential definition of default

Notwithstanding the foregoing, the prudential definition is generally more conservative than the accounting definition. The key differing aspects are set out hereafter:

–

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–

Transaction classification criteria

The Group applies various criteria to classify borrowers and transactions into different categories based on their credit risk. These include:

–

Automatic criteria;

–

Specific criteria for refinancing; and

–

Criteria based on indicators (triggers).

The automatic factors and specific classification criteria for refinancing make up what the Institution refers to as the classification and cure algorithm and are applied to the entire portfolio.

Furthermore, to enable an early identification of any significant increase in credit risk or vulnerabilities, or any transaction impairment, the Group establishes different triggers for significant and non-significant borrowers. In particular, non-significant borrowers who, once the automatic classification algorithm has been applied, do not meet any of the conditions for reclassification as stages 2 or 3 are assessed by means of a process the objective of which is to identify any significant increase in credit risk since the transaction was first approved and which could result in losses greater than those incurred on other similar transactions classified as stage 1. For significant borrowers, on the other hand, there is an automated system of triggers in place that generates a series of alerts, which serve to indicate, during a borrower’s assessment, that a decision needs to be made with regard to their classification.

As a result of the application of these criteria, the Group either classifies its borrowers as stage 2 or 3 or keeps them in stage 1.

Individual assessment

The Group has established a significance threshold in terms of exposure, which is used to classify certain borrowers as significant, meaning that their risks need to be assessed individually.

To assess significant borrowers’ transactions, a system of triggers is established. These triggers identify any significant increase in credit risk, as well as any signs of impairment.

A team of expert risk analysts carries out the individual assessment of borrowers, reviewing each transaction and assigning it the corresponding accounting classification.

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The system of triggers for significant borrowers is automated and takes into account the particular characteristics of segments that perform differently within the loan portfolio. In any event, the system of triggers does not automatically or individually classify borrowers. Instead, it serves to indicate, during a borrower’s assessment, that a decision needs to be made with regard to their classification. The aspects identified by the system of triggers are listed here below:

–

Stage 2 triggers:

•

Adverse changes in the financial situation, such as a significant increase in debt levels, or sharp drops in turnover.

•

Adverse changes in the economy or market indicators, such as a significant fall in share prices or a reduction in the price of debt issues.

•

Significant actual or expected downgrade of the internal credit rating assigned to the transaction or borrower, or a reduction in the behavioural score assigned during the internal credit risk monitoring process.

•

Significant increase in credit risk of other transactions of the same borrower, or in entities associated with the borrower’s risk group.

Stage 3 triggers:

•

Evidence of impairment of other transactions of the same borrower, or in entities associated with the borrower’s risk group.

•

Negative EBITDA, significant decrease in EBITDA, in turnover, or in general, in the borrower’s recurrent cash flows.

•

Increase in the borrower’s leverage ratios.

•

Negative equity or equity reduction as a result of the borrower suffering equity losses of 50% or more in the past year.

•

Existence of an internal or external credit rating showing that the borrower is in arrears.

•

Existence of a borrower’s past-due commitments of significant value with public bodies.

•

For transactions secured with collateral, significant decline in the value of the collateral received.

•

Existence of debt remissions or debt reductions approved for the same borrower or for entities associated with the latter’s risk group in the last 2 years.

–

Breach of contract, non-payments or delayed payments of principal or interest: in addition to amounts more than 90 days past due, which form part of the automatic classification algorithm, non-payments or delayed payments less than 90 days past due are also identified, as these can be a sign of impairment or of a significant increase in credit risk. Non-payments declared in other credit institutions in the financial system are also considered in the assessment.

–

The Group carries out an annual review of the reasonableness of its thresholds and of the credit risk captured in the individual assessments carried out using these thresholds.

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Collective assessment

For transactions of borrowers that are assessed collectively, the Group uses a statistical model that allows it to determine the Probability of Default (PD) term structure and, therefore, the residual lifetime PD of a contract (or the PD from a given moment in time up to the maturity of the transaction), based on different characteristics:

–

Systemic: macroeconomic characteristics shared by all exposures.

–

Idiosyncratic: aspects specific to each transaction or borrower.

With this specification, the Group is able to measure the residual lifetime PD of a transaction under the conditions that existed at the time the transaction was approved (or originated), or under the conditions existing at the time the provision is calculated. Therefore, the current residual lifetime PD may fluctuate in relation to the PD at the time the transaction was approved, due to changes in the economic environment or in the idiosyncratic characteristics of the transaction or of the borrower.

The significant increase in credit risk for borrowers and transactions subject to collective assessment is estimated by comparing the residual lifetime PD under the economic and idiosyncratic conditions at the time the provision is calculated against the residual lifetime PD under the conditions that existed at the time the transaction was approved. Some thresholds for the increase in the annualised residual lifetime PD, which is a criterion for classification as stage 2, have been calibrated using historical data in order to maximise risk discrimination (default rate) among borrowers and/or transactions classified as stage 1 and 2. These thresholds are not fixed, rather, they act as a non-linear function that depends on the level of annualised residual lifetime PD at origination, requiring higher relative increases if the PD is low. This type of function is deemed adequate for risk discrimination purposes.

This criterion is applied to the main portfolios in Spain (individuals with mortgages or consumer loans, and companies). More specifically, a contract is classified as stage 2 if the following is true in relation to the two PDs:

PD current > (PD upon approval) ^1-ß

where beta is a parameter between 0 and 1 calibrated using historical data.

For the less material portfolios in Spain, the multiplier between lifetime PD upon approval and current lifetime PD is used as a metric to identify any significant increase in credit risk and classify exposures as stage 2.

In any case, as a general criterion additional to those described above, applicable to all portfolios in Spain, all borrowers/transactions whose multiplier of current residual lifetime PD relative to PD upon approval is greater than 3 and whose current annualised residual lifetime PD is over 2% are reclassified as stage 2.

The average multiplier of current PD relative to PD upon approval that has resulted in a risk being reclassified from stage 1 to stage 2 has ranged between 2.3 and 3 in 2021 (1.95 and 2.95 in 2020), depending on the portfolio to which each risk was assigned.

In the case of TSB, the multiplier of lifetime PD upon approval relative to current lifetime PD is also used, complemented with an absolute increase in PD calculated specifically for each portfolio. Both of these thresholds must be reached in order for an exposure to be reclassified as stage 2. In 2021 and 2020, the threshold for the multiplier of current PD relative to PD upon approval applied to all portfolios has been set at 2, while absolute thresholds have ranged from 10 to 770 basis points in both years.

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Refinancing and restructuring transactions

–

Refinancing transaction: refinancing is approved or used for economic or legal reasons related to a borrower’s current or foreseeable financial difficulties in order to terminate one or more transactions approved by the Group, or to bring outstanding payments fully or partially up to date, with a view to making it easier for borrowers to pay their debt (principal and interest) when they are unable, or will predictably soon be unable, to honour their payment obligations in good time and in the manner agreed.

–

Restructured transaction: restructuring involves modifying the financial terms of a transaction for economic or legal reasons related to a borrower’s current or foreseeable financial difficulties in order to make it easier for them to pay their debt (principal and interest) when they are unable, or will predictably soon be unable, to honour their payment obligations in good time and in the manner agreed, even when that modification is already provided for in the contract. In any case, transactions whose terms are modified to extend the term to maturity, to modify the repayment schedule in order to the reduce repayment instalment amounts in the short term or to reduce their payment frequency, or to establish or extend the grace period for the repayment of principal, interest, or both, are all considered restructured transactions, unless it can be proven that the terms are being modified for reasons other than borrowers’ financial difficulties and that the modified terms are equivalent to the terms that would be applied by other institutions in the market for similar risks.

If a transaction is classified in a particular risk category, refinancing does not mean that its risk classification will automatically improve. The algorithm establishes the initial classification of refinanced transactions based on their characteristics, mainly, the existence of a borrower’s financial difficulties (for example, an unsuitable business plan), the existence of particular clauses such as long grace periods, or the existence of amounts that have been written off as they are considered to be non-recoverable. The algorithm then changes the initial classification depending on the established cure periods. Reclassification into a lower risk category will only be considered if evidence exists of a continuous and significant improvement in the recovery of the debt over time; therefore, the act of refinancing does not in itself produce any immediate improvements.

Refinancing, refinanced and restructured transactions remain identified as such during a probation period until all of the following requirements are met:

–

It is concluded, having reviewed the borrower’s assets and financial position, that the borrower is unlikely to experience financial difficulties.

–

A minimum of two years have passed since the date of the restructuring or refinancing or, if later, since the date of reclassification to the stage 3 category.

–

The borrower has no other transactions with amounts more than 30 days past due at the end of the probation period.

–

One year has passed since the date of the refinancing or restructuring.

–

The borrower has paid the accumulated instalments of principal and interest.

–

The borrower has no other transactions with amounts more than 90 days past due on the date on which the refinancing, refinanced or restructured transaction is reclassified as stage 2.

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With regard to refinanced/restructured loans classified as stage 2, different types of transactions are specifically assessed in order to reclassify them, where applicable, into one of the categories described previously that reflect a higher level of risk (i.e. into stage 3 as a result of borrower arrears, when payments are, in general, over 90 days past due, or for reasons other than borrower arrears, when there are reasonable doubts as to their recoverability).

Impact of COVID-19 on the classification of financial instruments based on their credit risk

Loans classified as stage 1 granted to borrowers who have received state-guaranteed finance as part of a government support scheme designed to address the impact of COVID-19 (ICO guarantee), or who have opted for a statutory or sector moratorium, have been kept in that category insofar as there have been no doubts as to the repayment of the obligations and provided no significant increase in credit risk has been identified.

Transactions classified as stages 2 or 3 whose borrowers have opted for a statutory or sector moratorium or who have received state-guaranteed finance as part of a government support scheme designed to address the impact of COVID-19 have not been reclassified to a lower credit risk category until the grace period and the probation period have both come to an end, at which time they are classified according to the Institution’s general classification rules.

Due to the macroeconomic situation caused by COVID-19, the criteria for classifying credit exposures according to their credit risk have been modified. As a consequence of the changes applied, there has been a significant transfer of exposures initially considered as stage 1 to stages 2 and 3 under this new criterion.

These criteria have been applied, especially, in Banco Sabadell and TSB, as these institutions account for the majority of the Group’s lending volumes.

With regard to the portfolio of Banco Sabadell, S.A., the new classification criteria applied for reclassifications to stage 2 are described hereafter:

–

Transactions to which a legislative moratorium has been applied in Spain have been classified as stage 2 where they had amounts more than 10 days past due or where their borrowers were unemployed and/or furloughed, or where they were assessed as being higher risk by internal customer monitoring tools.

–	Company contracts identified as being blocked from the point of view of credit risk management.

–	All transactions whose borrowers already showed signs of financial difficulties, even when they were granted during the pandemic to help deal with the situation generated by the crisis, are tagged as refinancing.

–

Incorporation of a sectoral adjustment: increase of PD for certain sectors, reclassifying transactions of borrowers that showed a significant increase in credit risk on applying this sectoral adjustment, or that were considered to be in the special monitoring category in the internal customer monitoring tool as a result of the application of this sectoral adjustment, due to an increase in their PD and because their liquidity needs were expected to continue.

In the stage 3 category, the new criteria applied mainly stem from the establishment of a 3-month cure period for transactions with amounts more than 90 days past due and from the enhanced monitoring of significant borrowers who are assessed individually.

In TSB, on the other hand, an enhanced methodology has been developed that ranks transactions/borrowers according to UTP criteria. Those with the worst rankings according to this methodology are classified as stage 2. Furthermore, in the case of transactions for which moratoria or payment holidays have been applied, those with amounts more than 60 days past due are classified as stage 3.

Given the types of measures adopted and described above, their effect will be transitory, lasting for the duration of the situation that has given rise to the classification into the stage 2 or stage 3 categories.

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Any amounts suspended due to statutory and sector moratoria are not considered receivable and can therefore not be deemed past due. Thus, any payments suspended while the moratoria are in effect are not considered for the purpose of the classification of transactions as stage 3. Furthermore, the transactions to which the statutory or sector moratoria have been applied are not identified as restructuring or refinancing unless they have been tagged as such or if signs that they would be difficult to recover had already emerged prior to the outbreak of the pandemic.

In terms of ICO-guaranteed loans, the status of transactions granted to the borrower prior to the start of the COVID crisis is taken into account in order to determine the classification of the guaranteed loan on the basis of its credit risk and whether it should be tagged as a refinanced or restructured transaction.

Modifications of financial assets

All transactions subject to the statutory moratorium in Spain and which entail waiving interest for the duration of the moratorium, which the Bank cannot subsequently claim from customers, are treated as modifications of financial assets. The losses recognised by the Group as a result of the aforesaid modifications have not been significant. Similarly, transactions that are subject to sector moratoria in Spain or to the government’s payment holiday scheme in the UK, whose principal repayments are suspended but which continue to accrue interest throughout the moratoria or payment holiday period, do not in themselves give rise to modification losses on financial assets at the time of their arrangement.

1.3.4.1.2 Credit loss allowances

The Group applies the following parameters to determine its credit loss allowances:

–

EAD (Exposure at Default): the Institution defines exposure at default as the value to which it expects to be exposed when a loan defaults.

–

PD (Probability of Default): estimation of the probability that a borrower will default within a given period of time.

The Group has tools in place to help in its credit risk management that predict the probability of default of each borrower and which cover practically all lending activity.

•

Credit ratings (for companies): in general, credit risks undertaken with companies are rated using a rating system based on the internal estimate of their probability of default (PD). The rating model estimates the risk rating in the medium term, based on qualitative information provided by risk analysts, financial statements and other relevant information. The rating system is based on factors that predict the probability of default over a one-year period. It has been designed for different segments. The rating model is reviewed annually based on the analysis of actual default patterns. A predicted default rate is assigned to each credit rating level, which also allows a uniform comparison to be made against other segments and against credit ratings issued by external credit rating agencies using a master ratings scale.

Credit ratings have a variety of uses in risk management. Most notably, they form part of the transaction approval process (system of discretions), risk monitoring and pricing policies.

•

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•

Credit scores: in general, credit risks undertaken with individuals are rated using credit scoring systems, which are in turn based on a quantitative model of historical statistical data, identifying the relevant predictive factors. In regions where credit scoring takes place, credit scores are divided into two types:

○

Behavioural credit scores: the system automatically classifies all customers using information regarding their activity based on their financial situation (balances, activity, non-payments), their personal characteristics and the features of each of the products that they have acquired. These credit scores are mainly used to authorise transactions, establish (authorised) overdraft limits, design advertising campaigns and adjust the initial stages of the debt recovery process.

If no credit scoring system exists, individual assessments supplemented with policies are used instead.

–

Multiple scenarios: in order to estimate expected losses, the Group applies different scenarios to identify the effect of the non-linearity of losses. To this end, the provisions required are estimated in the different scenarios for which a probability of occurrence has been defined. Specifically, the Group has considered three macroeconomic scenarios: one baseline scenario, the most likely of all (60%), and two alternative scenarios: alternative scenario 1, a more optimistic scenario that considers a swift, worldwide eradication of the pandemic and productivity gains (15%), and alternative scenario 2, a more adverse scenario that envisages further outbreaks of COVID-19 (25%). To carry out the forecasts of these scenarios, 5-year time horizons are used. The main variables considered are changes in GDP, the unemployment rate and house prices. In 2020, the Group considered three macroeconomic scenarios, with the same weights and macroeconomic variables as in 2021.

Baseline scenario

•

The pandemic remains under control in advanced economies, where concern about the spread of the virus, previously paramount, starts to decline. Unlike the global financial crisis, the COVID-19 crisis does not produce major structural losses of GDP.

•

The rate of global economic growth remains high for a time, but slows down as unemployment levels drop. The bottlenecks that had affected activity in 2021 begin to be resolved in 2022 and are greatly reduced in 2023. By then, the pandemic has also receded in emerging economies, demand has shifted towards service activities and supply has increased.

•

High levels of inflation are transitory, converging towards central bank targets, while agents’ inflation expectations continue to be firmly anchored. Nevertheless, inflation persistently remains slightly above pre-COVID levels, with a balance of risks that is clearly tilted to the upside.

•

In terms of economic policy, stimulus measures are withdrawn gradually, keeping pace with fiscal and monetary policies. In Europe, the tax framework review enables the pursuit of more social and inclusive criteria rather than the de facto application of austerity measures.

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•

The main central banks make progress with their exit strategies. The rate hike cycle is slower than on previous occasions, slightly higher rates of inflation are tolerated, and aspects such as the recovery of full employment and financial stability are prioritised.

•

With regard to the Spanish economy, its good performance largely rests on domestic demand. The labour market performs well, with falling unemployment rates, while the real estate sector benefits from benign financing conditions.

•

In relation to financial markets, long-term government bond yields plunge substantially below fundamentals due to central bank interventions. Sovereign debt risk premiums in the European periphery remain at contained levels.

•

The US dollar, in its currency pair with the euro, faces depreciation pressure as global economic recovery takes hold and against a backdrop of high deficits (both public and external) in the United States.

•

As regards Brexit, the scenario envisages a situation in which the United Kingdom and the European Union continue to implement pragmatic solutions to the agreements.

Alternative scenario 1: Swift, worldwide eradication of the pandemic and productivity gains

•

The pandemic is left behind relatively quickly thanks to the efficacy of vaccines and their distribution across the globe.

•

Economies have greater potential to grow despite adverse demographic dynamics. Global economic growth is robust and synchronised, thanks to productivity gains stemming from a more digitised and sustainable economy.

•

These productivity gains allow increased growth to become compatible with the absence of inflationary pressure. Inflation remains close to the levels targeted in the monetary policy of the respective central banks.

•

Stimulus measures introduced to overcome the crisis are withdrawn gradually, albeit at a faster pace than in the baseline scenario, in both the monetary and fiscal domains.

•

Global financing conditions remain lax, with no significant episodes of risk aversion.

•

The macroeconomic and financial environment allows risk premiums on both peripheral debt and corporate bonds to remain contained.

•

In Spain, the economy particularly benefits from the full resumption of activity, given the importance of the sectors most affected by COVID. The funds from Next Generation EU are seamlessly absorbed and used efficiently.

Alternative scenario 2: Further outbreaks of the pandemic in 2022

•

New outbreaks of the pandemic take place, linked to the emergence of more vaccine-resistant mutations of the virus. This requires restrictions to be reintroduced, affecting both the movement of people and certain close contact activities.

•

Economic recovery comes to a halt and some sectors, such as tourism and catering, are once again particularly hard hit. The difficulty in eradicating the pandemic fuels the uncertainty and cautionary attitude of economic players, which further weighs down consumption and investment. The environment of economic contraction spreads across the globe.

•

Weakened domestic demand brings inflation back down to low levels, requiring the accommodative response of economic policy to be maintained and intensified. The environment of zero or negative interest rates endures.

•

In financial markets, the backdrop of uncertainty and economic downturn that exists in 2022 generates a complicated market environment, with tightening financial conditions and dwindling risk asset prices.

•

Government bond yields fall below historic lows and risk premiums on peripheral government bonds increase. This increase is exacerbated by further deterioration of fiscal metrics but is mitigated by the actions taken by the ECB.

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•

In Spain, the economic importance of the sectors most vulnerable to outbreaks heightens the impact on activity. Solvency problems in companies cause structural damage to part of the economy’s productive fabric, despite the stimulus of Next Generation EU.

As at 31 December 2021, the main forecast variables considered for Spain and the United Kingdom are those shown below:


%

									31/12/2021

					Spain								United Kingdom

	2022		2023		2024		2025		2026		2022		2023		2024		2025		2026

GDP growth
Baseline scenario		6.3		3.3		2.7		2.2		2.0		5.3		1.5		1.4		1.4		1.4
Alternative scenario 1		7.8		4.5		3.6		2.7		2.4		6.7		2.8		1.6		1.6		1.6
Alternative scenario 2		3.4		1.9		1.8		1.5		1.4		1.7		2.4		1.2		1.2		1.2

Unemployment rate
Baseline scenario		14.1		12.9		12.0		11.6		11.4		5.4		4.4		4.0		4.0		4.0
Alternative scenario 1		12.5		10.6		9.5		8.7		8.0		4.3		3.5		3.5		3.5		3.5
Alternative scenario 2		16.9		16.5		15.5		14.6		14.0		6.7		6.1		5.0		4.5		4.5

*House price growth ()**
Baseline scenario		3.8		3.8		3.5		3.2		3.2		-1.0		1.6		2.5		2.5		2.5
Alternative scenario 1		5.7		4.8		4.0		3.8		3.6		3.5		4.3		3.3		2.5		2.5
Alternative scenario 2		-0.5		0.6		1.8		2.0		2.4		-7.3		-7.2		9.6		7.4		4.2

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

As at 31 December 2020, the main forecast variables considered for Spain and the United Kingdom were as follows:


%

									31/12/2020

					Spain								United Kingdom

	2021		2022		2023		2024		2025		2021		2022		2023		2024		2025

GDP growth
Baseline scenario		7.2		4.5		2.0		1.5		1.4		6.1		5.8		1.5		1.4		1.4
Alternative scenario 1		10.6		5.6		2.5		1.9		1.6		9.3		6.7		1.7		1.6		1.6
Alternative scenario 2		3.0		1.7		2.0		1.8		1.6		3.5		4.9		1.3		1.4		1.4

Unemployment rate
Baseline scenario		17.5		15.5		14.6		13.6		12.9		6.9		5.8		4.6		4.3		4.1
Alternative scenario 1		15.7		13.0		12.5		11.8		11.1		5.1		3.7		3.3		3.3		3.3
Alternative scenario 2		21.4		20.0		18.7		18.0		16.8		8.0		7.0		5.8		5.2		5.0

*House price growth ()**
Baseline scenario		0.0		4.5		3.5		3.5		3.0		-4.8		0.1		6.2		5.0		4.4
Alternative scenario 1		6.0		5.3		4.0		3.5		3.5		-2.6		2.2		4.6		5.0		4.4
Alternative scenario 2		-3.5		0.0		2.0		3.0		3.0		-5.3		-5.2		6.2		5.0		4.4

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

In the Bank, macroeconomic scenarios have been incorporated into the impairment calculation model.

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For its part, the subsidiary TSB applies a series of adjustments to the results of its credit risk models, called Post Model Adjustments (PMAs), in order to address situations in which the results of the models are not sufficiently sensitive to the current economic conditions. In 2021, the most significant PMA considered in TSB amounted to 40 million euros, and it was recognised in 2020 in order to capture any impairment losses resulting from changes in customer behaviour which might not have been considered when the credit risk models were developed, such as the granting of payment holidays or changes in consumer spending habits in the COVID-19 environment compared to before the pandemic.

The Group applies the criteria described below to calculate credit loss allowances.

–

12-month expected credit losses, when the risk of a default event materialising has not significantly increased since initial recognition (assets classified as stage 1).

–

Lifetime expected credit losses, if the risk of a default event materialising has increased significantly since initial recognition (assets classified as stage 2).

–

Expected credit losses, when a default event has materialised (assets classified as stage 3).

12-month expected credit losses are defined as:

LOGO

Where:

EA_D12M is the exposure at default at 12 months, PD_12M is the probability of a default occurring within 12 months and LGD_12M is the expected loss given default.

Lifetime expected credit losses are defined as:

LOGO

Where:

During this estimation process, a calculation is made of the allowance necessary to cover, on one hand, the credit risk attributable to the borrower in question and, on the other hand, country risk.

The agreed amortisation schedule for each transaction is used. Subsequently, these expected credit losses are updated by applying the effective interest rate of the instrument (if its contractual interest rate is fixed) or the contractual effective interest rate ruling on the date of the update (if the interest rate is variable). The value of effective guarantees received is also taken into account.

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The following sections describe the different methodologies applied by the Group to determine impairment loss allowances:

Individual allowance estimates

Three methods are established to calculate the recoverable amount of assets assessed individually:

–

Discounted cash flow method (going concern): debtors who are estimated to be able to generate future cash flows through their own business activity, thereby allowing them to fully or partially repay the debt owed through the economic and financial activities and structure of the company. This involves estimating the cash flows obtained by the borrower during the course of their business activity.

–

Collective allowance estimates

Exposures that are not assessed using individual allowance estimates are subject to collective allowance estimates.

When calculating collective impairment losses, the Group, in accordance with IFRS 9, mainly takes the following aspects into account:

–

In order to collectively assess impairment, internal models estimate a different PD and LGD for each contract. To this end, various types of historical information are used that allow the risk to be individually classified for each exposure (ratings, non-payments, vintage, exposure, collateral, characteristics of the borrower or contract). Available historical information representative of the Institution and past losses (defaults) is therefore taken into account. It is worth highlighting that the estimation obtained from the models is adjusted to account for the existing economic climate and the forecasts in the scenarios considered, the latter of which are representative of expected credit losses. The estimates of impairment loss allowance models are directly integrated in some activities related to risk management and the input data that they use (e.g. credit ratings and credit scores) are those used for approving risks, monitoring risks, for pricing purposes and in capital calculations. In addition, recurring back-testing exercises are carried out at least once a year, and the models are adjusted in the event any significant deviations are detected. The models are also reviewed regularly in order to incorporate the most recent information available and to ensure that

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they perform adequately and that they are suitably representative when applied to the current portfolio for the calculation of impairment loss allowances.

Segmentation of models

The models for significant increase in credit risk (SICR) carry out calculations at the contract level, in order to consider the characteristics specific to each transaction (origination date, maturity date).

Where LGD is concerned, contracts with similar risk characteristics are grouped together for collective assessment, using the following segmentation hierarchy:

–

By type of borrower: companies, developers and natural persons.

–

By type of guarantee: mortgage, unsecured, monetary/financial, and guarantors.

–

By type of product: credit cards, overdrafts, leases, credits and loans.

Risk drivers

The main risk drivers are presented hereafter, grouped together by type of model (PD, SICR and LGD).

In both cases, other recent risk events (refinancing, exit from default status, non-payments, lending restrictions) also explain the probability of default.

The explanatory factors mainly used by SICR models are the PD upon approval and the current residual lifetime PD (i.e. for the residual life of the transaction).

LGD models use additional risk drivers that enable a more in-depth segmentation to take place. More specifically, for mortgage guarantees, the LTV (Loan to Value) is used, or the order of priority in the event the mortgage guarantee is enforced. Similarly, the amount of the debt and the type of product are also factors taken into account.

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Summary of criteria for classification and allowances

LOGO

Guarantees

Effective guarantees are collateral and personal guarantees proven by the Group to be a valid means of mitigating credit risk.

Based on the foregoing, the following types of guarantees can be considered to be effective guarantees:

–

Real estate guarantees applied as first mortgage liens:

•

Completed buildings and completed component parts:

○

Housing units.

○

Offices, commercial premises and multi-purpose industrial buildings.

○

Other buildings, such as non-multi-purpose industrial buildings and hotels.

•

Urban land and regulated building land.

•

Other real estate.

–

Collateral in the form of pledged financial instruments:

•

Cash deposits.

•

Equity instruments in listed entities and debt securities issued by creditworthy issuers.

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–

Other collateral:

•

Personal property received as collateral.

•

Subsequent mortgages on properties.

–

Real estate guarantees for loan transactions are valued on the date the transactions are granted, while real estate assets are valued on the date on which they are recognised, whether as a result of a purchase, foreclosure or a payment in kind, and also whenever there is a significant reduction in value. In addition, minimum updating criteria are applied, which ensure that updates take place at least once a year in the case of impaired assets (assets classified as stages 2 or 3 and real estate assets foreclosed or received in lieu of debt), or at least once every three years for large debts classified as stage 1 with no signs of latent credit risk. Similarly, statistical methodologies may be used to update appraisals but only for properties that have a certain level of homogeneity among them, in other words, those with low exposure and low risk whose characteristics are likely to be shared by other properties and which are located in an active market with frequent transactions, although a full appraisal is carried out in accordance with the aforesaid ECO Order (an “ECO appraisal”) at least once every three years.

Assets located in other EU countries are appraised in accordance with that set forth in Royal Decree 716/2009 of 24 April, while those in the rest of the world are appraised by companies and/or experts with recognised expertise and experience in the country in question. Real estate assets located in a foreign country will be appraised using the method approved by the RICS (Royal Institution of Chartered Surveyors), through prudent and independent appraisals carried out by authorised experts in the country where the property is located or, where appropriate, by appraisal firms or services accredited in Spain, and in accordance with the appraisal rules applicable in that country insofar as these are compatible with generally accepted appraisal practices.

Credit losses on State-guaranteed loans granted as part of a government support scheme designed to address the impact of COVID-19, irrespective of the credit risk category or categories into which the transaction is classified throughout its life, are calculated based on their expected credit loss less the positive impact of cash flows expected to be recovered with the State guarantee.

Overall comparison between financial asset and real estate asset impairment allowances

The Group has established backtesting methodologies to compare estimated losses against actual losses.

The backtests carried out show that the credit loss allowances are adequate given the portfolio’s credit risk profile.

1.3.4.2 Investments in joint ventures and associates

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The Group considers the following indicators, among others, to determine whether there is evidence of impairment.

–

Significant financial difficulties.

–

Disappearance of an active market for the instrument in question due to financial difficulties.

–

Significant changes in profit or loss, compared to the data included in budgets, business plans or targets.

–

Significant changes in the market of the issuer’s equity instruments, its existing products, or its potential products.

–

Significant changes in the global economy or in the economy of the region in which the issuer operates.

–

Significant changes in the technological or legal environment in which the issuer operates.

1.3.5 Hedging transactions

The Group has elected to continue applying IAS 39 for its hedge accounting until the IFRS 9 macro hedge accounting project has been finalised, as permitted by IFRS 9.

–

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–

Changes that take place after the designation of the hedge, changes in the valuation of financial instruments designated as hedged items and changes in financial instruments designated as hedging instruments are recognised in the following way:

–

In cash flow hedges, differences in the value of the effective portion of hedging instruments are recognised under the heading “Accumulated other comprehensive income – Hedging derivatives. Cash flow hedges reserve [effective portion]” on the consolidated statement of equity. These differences are recognised in the consolidated income statement when the losses or gains on the hedged item are recognised through profit or loss, when the envisaged transactions are executed, or on the maturity date of the hedged item.

–

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1.3.6 Financial guarantees

Contracts by which the Group undertakes to make specific payments on behalf of a third party in the event of that third party failing to do so, irrespective of their legal form, are considered financial guarantees. These can be bonds, bank guarantees, insurance contracts or credit derivatives, among other items.

1.3.7 Transfers and derecognition of financial instruments from the balance sheet

Note 4 provides details of asset transfers in effect at the end of 2021 and 2020, indicating those that did not involve the derecognition of the asset from the consolidated balance sheet.

1.3.8 Offsetting of financial instruments

1.3.9 Non-current assets and assets and liabilities included in disposal groups classified as held for sale and discontinued operations

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Discontinued operations are components of the Institution that have been disposed of or classified as held for sale and which (i) represent a business line or geographical region that is significant and separate from the rest or is part of a single coordinated plan to dispose of that business or geographical region, or (ii) are subsidiaries acquired solely in order to be resold. Income and expenses of any kind generated by discontinued operations, if any, during the year, including those generated before they were classified as discontinued operations, are presented net of the tax effect as a single amount under the heading “Profit or (-) loss after tax from discontinued operations” in the consolidated income statement, regardless of whether the business has been derecognised from or remains on the asset side of the balance sheet as at year-end. This heading also includes the profit or loss obtained from their sale or disposal.

1.3.10 Tangible assets



		Useful life (years)

Land and buildings		38 to 75

Fixtures and fittings		5 to 20

Furniture and office equipment		3 to 10

Vehicles		3 to 6

Cash dispensers, computers and computer equipment		4

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In particular, certain items of property, plant and equipment are assigned to cash-generating units in the banking business. Impairment tests are conducted on these units to verify whether sufficient cash flows are generated to support the assets’ value. To this end, the Group (i) calculates the recurring net cash flow of each branch based on the cumulative contribution margin less the allocated recurring cost of risk, and (ii) this recurring net cash flow is regarded as a perpetual cash flow and a valuation is effected using the discounted cash flow method applying the cost of capital and growth rate to perpetuity determined by the Group (see Note 16).

The costs of preserving and maintaining tangible assets are recognised in the consolidated income statement for the year in which they are incurred.

1.3.11 Leases

Leases in which the Group acts as lessee

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–

Fixed payments, less any lease incentives payable.

–

Variable lease payments that depend on an index or rate.

–

Amounts expected to be paid for residual value guarantees given to the lessor.

–

The exercise price of a purchase option if the Group is reasonably certain to exercise that option.

–

Payments of penalties for terminating the lease, if the lease term shows that an option to terminate the lease will be exercised.

The payments settled by the lessee in each period reduce the lease liability and accrue an interest expense that is recognised in the consolidated income statement over the lease term.

The right-of-use asset, which is classified as a fixed asset based on the type of leased property, is initially measured at cost, which comprises the following amounts:

–

The amount of the initial measurement of the lease liability, as described above.

–

Any lease payments made at or before the lease commencement date, less any incentives received.

–

Any initial direct costs.

–

The right-of-use asset is depreciated on a straight-line basis at the shorter of the useful life of the asset or the lease term.

The criteria for impairing these assets are similar to those used for tangible assets (see Note 1.3.10).

Sale and leaseback

If the Group retains control over the asset, (i) the asset sold is not derecognised from the balance sheet and (ii) a financial liability is recognised for the amount of consideration received.

Leases in which the Group acts as lessor

Finance leases

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Operating leases

In operating leases, ownership of the leased asset and a substantial proportion of all of the risks and rewards incidental to ownership of the asset remain with the lessor.

1.3.12 Intangible assets

Goodwill

Each goodwill item is assigned to one or more cash-generating units (UGEs, for their acronym in Spanish) which are expected to benefit from the synergies arising from the business combinations. These UGEs are the smallest identifiable group of assets which, as a result of their continuous operation, generate cash flows for the Group, separately from other assets or groups of assets.

UGEs, or groups of UGEs, to which goodwill has been assigned are tested annually for impairment, or whenever there is evidence that impairment might have occurred. To this end, the Group calculates their value in use using mainly the distributed profit discount method, in which the following parameters are taken into account:

–

Estimates of macroeconomic variables and other financial parameters.

–

Discount rate: the present value of future dividends, from which a value in use is obtained, is calculated using the Institution’s cost of capital (Ke), from the standpoint of a market participant, as a discount rate. To determine the cost of capital, the CAPM (Capital Asset Pricing Model) is used in accordance with the formula: “Ke = Rf + b (Pm) + a”, where: Ke = Required return or cost of capital, Rf = Risk-free rate, b = Company’s systemic risk coefficient, Pm = Market premium and a = Non-systemic risk premium.

–

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If the carrying amount of a UGE (or group of UGEs to which goodwill has been assigned) is higher than its recoverable amount, the Group recognises an impairment loss that is allocated, firstly, by reducing the goodwill attributed to that UGE and, secondly, if any losses remain to be allocated, by reducing the carrying amount of the remaining allocated assets on a pro-rata basis. Impairment losses recognised for goodwill cannot subsequently be reversed.

Other intangible assets

These intangible assets have a finite useful life and are amortised based on their useful lives, applying similar criteria to those used for tangible assets. The useful life of brands and contractual rights arising from relationships with customers of the acquired businesses varies between 5 and 15 years, while for computer software the useful life ranges from 3 to 15 years. In particular, the sub-systems corresponding to infrastructure, communications, architecture and corporate functions of the banking platforms used by Group entities to carry out their activity generally have a useful life of between 10 and 15 years, while the useful life of sub-systems corresponding to channels and data & analytics ranges from 7 to 10 years. The base platform implemented in 2018 that TSB uses to carry out its activity has a useful life of 15 years.

Changes in the estimated useful life of intangible assets are treated in a similar way to changes in the estimated useful life of tangible assets.

1.3.13 Inventories

In general, inventories are measured at the lower of cost, including all costs of purchase, costs of conversion and other direct and indirect costs incurred in bringing the inventories to their present location and condition, and their net realisable value.

For inventories comprising land and buildings, the net realisable value is calculated based on the appraisal carried out by an independent expert, entered in the Bank of Spain Special Register of Appraisal Firms and performed in accordance with the criteria established in Order ECO/805/2003 on rules for the appraisal of real estate and particular rights for specific financial purposes, which is then adjusted in line with the internal methodology developed by the Group, taking into account its experience in selling assets that are similar in terms of prices, the period during which each asset remains on the consolidated balance sheet and other explanatory factors. Nevertheless, as with real estate guarantees, statistical methodologies may be used to update appraisals for properties with a fair value or no more than 300,000 euros and which have a certain level of homogeneity among them, in other words, those with low exposure and low risk whose characteristics are likely to be shared by other properties and which are located in an active market with frequent transactions, although a full appraisal is carried out in accordance with the aforesaid ECO Order (an “ECO appraisal”) at least once every three years.

The carrying amount of the inventories is derecognised from the consolidated balance sheet and recognised as an expense during the year in which the income from its sale is recognised.

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1.3.14 Own equity instruments

Own equity instruments are defined as equity instruments that meet the following conditions:

–

All transactions involving the issuer’s own equity instruments, including their issuance or depreciation, are recognised directly with a balancing entry in consolidated equity.

1.3.15 Remuneration in equity instruments

The amounts recognised in consolidated equity cannot subsequently be reversed, even when employees do not exercise their right to receive the equity instruments.

1.3.16 Provisions, contingent assets and contingent liabilities

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1.3.17 Provisions for pensions

The Group’s pension commitments to its employees are as follows:

Defined contribution plans

These contributions are recognised each year in the consolidated income statement (see Note 33).

Defined benefit plans

Defined benefit plans cover all existing commitments arising from the application of the Collective Bargaining Agreement for Banks (Convenio Colectivo de Banca).

These commitments are financed through the following vehicles: the pension plan, insurance contracts, the voluntary social welfare agency (E.P.S.V.) and internal funds.

Pension plan

Banco Sabadell’s employee pension plan covers benefits payable under the aforesaid collective bargaining agreement with employees belonging to regulated groups, with the following exceptions:

–

Additional commitments due to early retirement, as set out in the Collective Bargaining Agreement for Banks.

–

Disability or incapacity arising in certain circumstances.

–

Widowhood and orphanhood benefits arising from the death of a retired member of staff who began their employment after 8 March 1980.

Insurance contracts

Insurance contracts generally cover certain commitments arising from the Collective Bargaining Agreement for Banks, including:

–

Commitments that are expressly excluded from the Banco Sabadell employee pension plan (listed in the previous section).

–

Serving employees covered by a collective bargaining agreement of Banco Atlántico.

–

Pension commitments in respect of some serving employees not provided for under the collective bargaining agreement.

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–

Commitments towards employees on extended leave of absence not covered with benefits accrued in the Banco Sabadell employee pension plan.

–

Commitments towards early retirees. These may be partly financed with benefits accrued in the Banco Sabadell employee pension plan.

Voluntary social welfare agency (Entidad de Previsión Social Voluntaria, or E.P.S.V.)

The acquisition and subsequent merger of Banco Guipuzcoano resulted in the takeover of Gertakizun, E.P.S.V., which covers defined benefit commitments in respect of serving and former employees, who are insured by policies. It was set up by the aforesaid bank in 1991 as an agency with a separate legal personality. All of the pension commitments to serving and former employees are insured by entities outside the Group.

Internal funds

Internal funds are used to settle obligations with early retirees up to their legal retirement age and relate to employees previously working for Banco Sabadell.

Accounting record of defined benefit obligations

–

They are owned, not by the Group, but by a legally separate third party not qualifying as a related party.

–

They are available only to pay or fund employee benefits and are not available to creditors of the Group, even in the event of insolvency.

–

They are not non-transferable financial instruments issued by the Group.

Pension commitments are recognised in the following way:

–

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Actuarial assumptions

The most relevant financial/actuarial assumptions used in the valuation of pension commitments as at 31 December 2021 and 2020 are as follows:



	2021	2020


Tables	PER2020_Col_1er.orden	PER2020_Col_1er.orden
Discount rate, pension scheme	1.00% per annum	0.50% per annum
Discount rate, internal fund	1.00% per annum	0.50% per annum
Discount rate, related insurance	1.00% per annum	0.50% per annum
Discount rate, non-related insurance	1.00% per annum	0.50% per annum
Inflation	2.00% per annum	1.50% per annum
Rate of increase in salaries	3.00% per annum	2.50% per annum
Retirement due to disability	SS90-Absolute	SS90-Absolute
Staff turnover	None assumed	None assumed
Early retirement	Allowed for	Allowed for
Normal retirement age	65 or 67 years	65 or 67 years

In 2021 and 2020, the technical interest rate on all commitments has been determined by reference to the return on AA-rated corporate bonds (iBoxx € Corporates AA 10+), with an average duration of 13.70 and 12.60 years, respectively.

The early retirement age considered is the earliest retirement date after which pension entitlements cannot be revoked by the employer for 100% of the employees.

The return on long-term assets corresponding to plan assets and insurance policies linked to pensions has been determined by applying the same technical interest rate used in actuarial assumptions (1.00% and 0.50% in 2021 and 2020, respectively).

1.3.18 Foreign currency transactions and exchange differences

The Group’s functional and presentation currency is the euro. Consequently, all balances and transactions denominated in currencies other than the euro are treated as being denominated in a foreign currency.

–

Monetary assets and liabilities are translated at the closing rate, defined as the average spot exchange rate as at the reporting date.

–

Non-monetary items measured at historical cost are translated at the exchange rate ruling on the acquisition date.

–

Non-monetary items measured at fair value are translated at the exchange rate ruling on the date on which the fair value was determined.

–

Income and expenses are translated at the exchange rate ruling at the transaction date.

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The balances of the financial statements of consolidated entities with a functional currency other than the euro are translated into euros in the following manner:

–

Assets and liabilities are translated at the exchange rate ruling at each year-end closing.

–

Income and expenses are translated at the average exchange rate, weighted by the volume of transactions of the company whose income and expenses are being translated.

–

Equity is translated at historical exchange rates.

The exchange rates applied to translate balances denominated in foreign currencies into euros are those published by the European Central Bank on 31 December of each year.

1.3.19 Recognition of income and expenses

Interest income and expenses and other similar items

Commissions, fees and similar items

Generally, income and expenses in the form of commissions and similar fees are recognised in the consolidated income statement based on the following criteria:

–

Those linked to financial assets and financial liabilities measured at fair value through profit or loss are recognised at the time of disbursement.

–

Those related to transactions carried out or services rendered over a given period of time are recognised throughout that period.

–

Those related to a transaction or service that is carried out or rendered in a single act are recognised when the originating act takes place.

Non-financial income and expenses

Deferred payments and collections

Deferred payments and collections are accounted for at the carrying amount obtained by discounting expected cash flows at market rates.

Levies

A-521

Deposit guarantee schemes

The Bank is a member of the Deposit Guarantee Fund. In 2021, the Management Committee of the Deposit Guarantee Fund of Credit Institutions, in accordance with that established in Royal Decree Law 16/2011 and Royal Decree 2606/1996, set the contribution for all entities covered by the Fund’s deposit guarantee at 0.17% of the value of deposits guaranteed as at 31 December 2020. Each entity’s contribution is calculated based on the value of the deposits guaranteed and its risk profile, taking into account indicators such as capital adequacy, asset quality and liquidity, which have been defined in Bank of Spain Circular 5/2016 of 27 May. Furthermore, the contribution to the securities guarantee offered by the Fund has been set at 0.2% of 5% of the value of the securities guaranteed as at 31 December 2021 (see Note 32).

–

TSB Bank plc makes contributions to the Financial Services Compensation Scheme.

–

Banco Sabadell, S.A. Institución de Banca Múltiple makes contributions to the deposit guarantee scheme established by the Instituto para la Protección del Ahorro Bancario.

Single Resolution Fund

1.3.20 Corporation tax

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To conduct the aforesaid review, the following variables are taken into account:

–

Estimate of the reversal of timing differences on the basis of their nature; and

–

The period or limit set forth by prevailing legislation in each country for the reversal of the different tax assets.

1.3.21 TLTRO III programme

Against the backdrop of COVID-19, the European Central Bank announced measures designed to mitigate the impact arising from this situation, including the TLTRO III programme, which offers favourable conditions for banks to borrow funds. More specifically, the TLTRO III programme ensures an interest rate that will be no higher than the average deposit facility rate (-0.50%), provided that the growth targets of eligible net lending established by the European Central Bank are met in certain special reference periods. Moreover, the interest rate over the period from 24 June 2020 to 23 June 2022 will be 50 basis points below the aforesaid rate, potentially being as low as -1%.

The Group has considered that the use of a more favourable interest rate, i.e. the deposit facility rate (-0.50%), rather than the interest rate on the main refinancing operations (0%), subject to compliance with the lending performance thresholds established by the European Central Bank for the period from 1 March 2020 to 31 March 2021 (the ‘special reference period’) and for the period from 1 October 2020 to 31 December 2021 (the ‘additional special reference period’), does not place the conditions of these operations significantly below market interest rates; therefore, this refinancing has been recognised as a financial liability measured at amortised cost pursuant to IFRS 9.

The effective interest rate on this financial liability has been determined on the assumption that the European Central Bank’s net lending targets would be met. These have been monitored by the Bank on an ongoing basis throughout 2021. The two special reference periods expired on 31 March 2021 and 31 December 2021, respectively. Compliance with the growth targets set for both periods has been verified.

A-523

The further interest rate reduction of 50 basis points for the period from 24 June 2020 to 23 June 2021 (the ‘special interest rate period’) and for the period from 24 June 2021 to 23 June 2022 (the ‘additional special interest rate period’) is not subject to compliance with any specific net lending target, having estimated that this reduction could result in the cost of this refinancing having better conditions than those in the market. Accordingly, this reduction has been considered a discount associated with the COVID-19 pandemic, aimed at reducing the Group’s borrowing costs during the special interest rate periods, and it has been recognised under net interest margin in the consolidated income statement in a systematic way throughout the aforesaid periods (see Note 4.4.3.1).

1.3.22 Consolidated statement of recognised income and expenses

As such, this statement shows:

–	Consolidated profit or loss for the year

–	Changes in “Accumulated other comprehensive income” in consolidated equity, which includes:

•

Gross recognised income and expenses, distinguishing between those that will not be reclassified in the income statement and those which may be reclassified in the income statement.

•

Corporation tax due on recognised income and expenses, with the exception of adjustments arising from equity interests held in associates or joint ventures accounted for using the equity method, which are shown net.

•

1.3.23 Consolidated statement of total changes in equity

–

Total recognised income and expenses: includes, in aggregate form, the total of items recognised in the aforesaid consolidated statement of recognised income and expenses.

–

1.3.24 Consolidated cash flow statement

The consolidated cash flow statement includes certain items which are defined as follows:

–

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–

Operating activities: typical day-to-day activities of the Group and other activities that cannot be classified as investing or financing activities.

–

Investing activities: the acquisition, sale or other disposal of long-term assets and other investments not included in cash and cash equivalents or in operating activities.

–

Financing activities: activities that result in changes in the size and composition of consolidated equity and of liabilities that do not form part of operating activities.

No situations requiring the application of significant judgements to classify cash flows have arisen during the year.

There have been no significant transactions that have generated cash flows not reflected in the consolidated cash flow statement.

1.4 Comparability

The information presented in these consolidated annual financial statements corresponding to 2020 is provided solely and exclusively for purposes of comparison with the information for the year ended 31 December 2021 and therefore does not constitute the Group’s consolidated annual financial statements for 2020.

Note 2 – Banco Sabadell Group

Subsidiaries and associates as at 31 December 2021 and 2020 are listed in Schedule I, along with their registered offices, primary activities, the Bank’s percentage shareholding in each, key financial data and the consolidation method used (full consolidation or equity method) in each case.

Schedule II provides details of consolidated structured entities (securitisation funds).

The following section provides a description of the business combinations, acquisitions and sales or liquidations which are most representative of investments in the capital of other entities (subsidiaries and/or investments in associates) performed by the Group during 2021 and 2020. Moreover, Schedule I includes details of changes in the scope of consolidation in each financial year and the results obtained by the Group on the disposal of its subsidiaries and associates.

Changes in the scope of consolidation in 2021

Additions to the scope of consolidation:

There were no significant additions to the scope of consolidation in 2021.

Exclusions from the scope of consolidation:

–

On 29 April 2021, Banco Sabadell and the ALD Automotive Group entered into a long-term strategic partnership to offer vehicle leasing products, which will allow Banco Sabadell to improve its customer value proposition for mobility solutions, with a larger and more innovative range of vehicle leasing products. This transaction was closed on 30 November 2021 after obtaining the necessary authorisations.

The agreement includes the sale of 100% of the share capital of Bansabadell Renting, S.L.U. for 59 million euros, adjusted by the change in the company’s equity between the reference date used for ALD Automotive Group’s offer (i.e., 30 September 2020) and the closing date of the transaction. The transaction contributed 10 basis points to the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio. The Group obtained a profit of 41,907 thousand euros on this transaction, which has been recognised under the heading “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” of the consolidated income statement (see Note 37).

–

On 5 October 2021, Banco Sabadell transferred to Mora Banc Grup, S.A. its entire stake in BancSabadell d‘Andorra, S.A., which represents 50.97% of its share capital (and 51.61% including the proportional part of treasury stock) for 68 million euros. The transaction contributed 7 basis points to the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio. The Group obtained a profit of 11,725 thousand euros on this transaction, which has been recognised under the heading “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” of the consolidated income statement (see Note 37).

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With the exception of the transactions described above, there have been no significant changes in the scope of consolidation in 2021.

Changes in the scope of consolidation in 2020

Additions to the scope of consolidation:

There were no significant additions to the scope of consolidation in 2020.

Exclusions from the scope of consolidation:

–

On 21 January 2020, Banco Sabadell and Amundi Asset Management (Amundi) entered into a long-term strategic partnership to distribute Amundi products through the retail network of Banco Sabadell in Spain. The agreement included the sale of 100% of the share capital of Sabadell Asset Management, S.A., S.G.I.I.C, Sociedad Unipersonal (SabAM) for an amount of 430 million euros and an earn-out of up to 30 million euros, payable in 2024, depending on the assets under management pertaining to customers of Banco Sabadell on such date.

As at the end of 2019, SabAM’s assets under management amounted to approximately 21.8 billion euros, excluding third party funds, and it earned a net profit of 34 million euros (including, among other items, 65 million euros in net fee income and 17 million euros of operating and staff expenses). The sale of SabAM included its subsidiary Sabadell Asset Management Luxembourg, S.A. but did not include Sabadell Urquijo Gestión, S.A., S.G.I.I.C., Sociedad Unipersonal, which remains part of Banco Sabadell Group.

On 30 June 2020, having obtained all of the necessary authorisations, the Bank transferred 100% of the share capital of SabAM to Amundi.

This transaction will generate a profit of 349 million euros after tax for the Group from the closing date of the transaction. Of this amount, 293 million euros has been recognised under the heading “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” of the income statement for the year 2020 (see Note 37). The remaining amount is subject to certain guarantees and is recognised over the length of the distribution agreement, which expires in June 2030.

–

On 5 February 2019, the Bank began a competitive bidding process to sell 100% of the share capital of Solvia Desarrollos Inmobiliarios, S.L.U. (SDIn), together with a pool of plots and real estate developments managed by this company and owned by Banco Sabadell. SDIn is the result of the spin-off and transfer en bloc of part of the equity of Solvia Servicios Inmobiliarios, S.L.U., a company engaging in the provision of real estate development services.

On 3 August 2019, the Bank transferred 100% of the share capital of this investee company, together with the aforementioned plots and real estate developments, to an entity controlled by funds managed and/or advised by Oaktree Capital Management. The total amount of the transaction, referenced to the existing pool as at 1 January 2019, amounted to 882 million euros. As at 31 December 2019, the carrying amount of assets subject to this transaction amounted to 824 million euros, of which 766 million euros were recognised under the “Inventories” heading of the consolidated balance sheet, being subject to closing the transaction and obtaining the necessary authorisations.

The Bank, after obtaining the necessary authorisations, completed this transaction on 21 September 2020.

The closing of this transaction generated a capital gain of 8 million euros after tax, and it has strengthened the Bank’s capital position by adding 5 basis points to the fully-loaded CET1 ratio. Including previous transactions involving the initially established asset pool, this transaction generated an overall capital gain of 21 million euros after tax and has added 7 basis points to the fully-loaded CET1.

With the exception of the transactions described above, there have been no significant changes in the scope of consolidation in 2020.

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Other significant transactions in 2021

On 4 June 2021, having obtained the relevant authorisations and after meeting all the conditions that needed to be met prior to closing the transaction set out in the agreement reached by the parties on 28 March 2020, Banco Sabadell has sold its institutional depositary business to BNP Paribas Securities Services S.C.A., Sucursal en España (BP2S) for 115 million euros.

The agreement envisages additional collections after closing, subject to the achievement of certain objectives linked to the volume of the assets deposited with BP2S and revenues from the deposit fees on these assets.

The transaction will generate a net profit of 75 million euros, of which 59 million euros has been recognised in the 2021 consolidated income statement (mainly, an income of 84 million euros under the heading “Gains or (-) losses on derecognition of non-financial assets, net” and an expense of 25 million euros under the heading “Tax expense or (-) income related to profit or loss from continuing operations”). The remaining 16 million euros will be accrued in the consolidated income statement over a period of 10 years from the date the transaction is closed (see Note 36).

Other significant transactions in 2020

No other significant transaction has been carried out during 2020 that has not been described in these consolidated annual financial statements.

Other material disclosures

Asset Protection Scheme

As a result of the acquisition of Banco CAM on 1 June 2012, the Asset Protection Scheme (hereinafter, APS) envisaged in the protocol on financial assistance measures for the restructuring of Banco CAM came into force with retroactive effect from 31 July 2011. Under the scheme, which covers a specified portfolio of assets that had a gross value of 24,644 million euros as at 31 July 2011, the Deposit Guarantee Fund (hereinafter, DGF) bears 80% of the losses on the portfolio for a period of ten years, once impairment allowances in respect of those assets, which amounted to 3,882 million euros at the aforementioned date, have been fully applied.

In 2021, the guarantee granted by the DGF expired, as the ten-year period mentioned above has elapsed; therefore, the Group does not hold any assets protected by the APS as at 31 December 2021, with only the final settlement in favour of the Bank of the final amount to be paid by the DGF pending. As at 31 December 2020, the portfolio of assets protected by the APS amounted to 2,582 million euros (including 529 million euros of write-offs), against which allowances for 953 million euros had been recorded.

The Bank has carried out two arbitration proceedings, jointly with the DGF, to settle the interpretation of certain clauses of the APS protocol. Both arbitration proceedings have concluded. The arbitration rulings were received on 14 July 2021 and 4 January 2022, respectively. The estimated end date for the APS is 4 October 2022, once the aspects subject to the arbitration proceedings are definitively settled with the APS.

On 15 September 2021, according to that set forth in the Protocol, the final APS settlement (albeit provisional) was filed, as it included the estimated settlement as a result of both arbitration proceedings, calculated following conservative criteria, which must be adjusted in accordance with the impact of the aspects that were subject to such arbitration proceedings. Even considering this pending adjustment, in Banco Sabadell’s view, the maximum collection amount to be received from the APS agreed with the DGF will be exceeded; therefore, the Group keeps the recognition of an account receivable amounting to 70.4 million euros as at 31 December for this item.

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Note 3 – Shareholder remuneration and earnings per share

Set out below is the proposed distribution of the profits earned by Banco de Sabadell, S.A. in 2021, which the Board of Directors will submit to shareholders for approval at the Annual General Meeting (AGM), together with the proposed distribution of profits earned by Banco de Sabadell, S.A. in 2020, which was approved by shareholders at the AGM on 26 March 2021:


Thousand euro

	2021		2020

To dividends		168,809		—

To Canary Island investment reserve		—		216

To voluntary reserves		159,603		93,565

Profit for the year of Banco de Sabadell, S.A.		328,412		93,781

During 2020, the Bank’s Board of Directors, at its meeting held on 8 April 2020, following the recommendation of the European Central Bank to financial institutions not to pay or enter into irrevocable commitments to pay dividends for the financial years 2019 and 2020, resolved that no dividends would be paid out for 2020, as a prudent measure in light of the crisis caused by COVID-19.

On 21 July 2021, the European Central Bank issued a note in which it indicated that the recommendation period for not paying or entering into irrevocable commitments to pay dividends ended on 30 September 2021. Subsequently, on its meeting on 26 January 2022, the Board of Directors agreed to submit a proposal to the Annual General Meeting for the distribution of a dividend of 0.03 euros gross per share paid out of the earnings of 2021, to be paid in cash in the second quarter of 2022.

The distributions of profits of subsidiaries are subject to approval by shareholders at their respective Annual General Meetings.

Earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Group, adjusted by earnings on other equity instruments, by the weighted average number of ordinary shares outstanding in the year, excluding any treasury shares acquired by the Group. Diluted earnings per share are calculated by applying adjustments for the estimated effect of potential conversions of ordinary shares to the net profit attributable to the Group and the weighted average number of ordinary shares outstanding.

The Group’s earnings per share calculations are shown in the following table:



	2021		2020

Profit or loss attributable to owners of the parent (thousand euro)		530,238		2,002

Adjustment: Remuneration of other equity instruments (thousand euro)		(100,593)		(73,227)

Profit or (-) loss after tax from discontinued operations (thousand euro)		—		—

Adjusted net profit attributable to the owners of the parent company (thousand euros)		429,646		(71,225)

Weighted average number of ordinary shares outstanding (*)		5,586,444,414		5,582,484,318

Conversion undertaken of convertible debt and other equity instruments		—		—

Adjusted weighted average number of ordinary shares outstanding		5,586,444,414		5,582,484,318

Earnings (or loss) per share (euros)		0.08		(0.01)

Basic earnings (or loss) per share adjusted for the effect of mandatory convertible bonds (euros)		0.08		(0.01)

Diluted earnings (or loss) per share (euros)		0.08		(0.01)

(*)

Number of shares outstanding, excluding the average number of own shares held in treasury stock during the year.

As at 31 December 2021 and 2020, there were no other share-based financial instruments or commitments with employees with a significant impact on the calculation of diluted earnings per share for the periods presented. For this reason, basic earnings per share coincide with diluted earnings per share.

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Note 4 – Risk management

4.1 Introduction

Throughout 2021, Banco Sabadell Group has continued to strengthen its risk management and control framework by incorporating improvements in accordance with supervisory expectations and market trends.

Bearing in mind that Banco Sabadell Group takes risks during the course of its activities, good management of these risks is a key part of the business. To this end, the Group has established a set of principles that are set out in policies and rolled out through procedures, strategies and processes that aim to increase the likelihood of achieving the strategic objectives of the Group’s various activities, facilitating management in an uncertain environment. This set of principles is called the Global Risk Framework.

In its management of risks, the Group considers the macroeconomic environment. The most significant aspects of 2021 are set out below:

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COVID-19 remained in the limelight during 2021, although vaccination rollouts took some focus away from it as a conditioning factor of economic activity and of the financial markets.

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In general, global economic performance has been positive, especially that of developed countries.

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In Spain, the economy has performed well and the employment rate has recovered to pre-pandemic levels.

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The poorer health conditions of many emerging countries and their reduced capacity to extend the stimulus measures have negatively impacted their economies.

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In Latin America, Mexico has stood out positively due to its low fiscal, financial and socio-political vulnerabilities and its strong link to the United States.

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In Europe, the implementation of the Next Generation EU programme is noteworthy. Spain expects to receive around 70 billion euros in transfers in the coming years.

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As regards economic policy in Spain, a labour reform aimed at limiting temporary employment was adopted, as well as a pension reform that introduces incentives to push back the retirement age.

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Inflation surprised upwards and is at high levels in many countries.

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Rising inflation has been driven by factors such as the quick recovery of demand, supply problems and the price of commodities.

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High inflation has prompted a shift in central banks’ monetary policies, especially in emerging markets.

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The European Central Bank (ECB) confirmed that it will end the PEPP (an asset purchase programme implemented during the pandemic) in March 2022. The ECB also presented its new monetary policy strategy.

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The Federal Reserve (Fed) began tapering its asset purchases in November and expects several official interest rate hikes in 2022.

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The Bank of England raised the benchmark interest rate in December by 15 basis points, to 0.25%, concerned over the tightening of the job market.

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Global financial markets remained underpinned by the measures implemented by various authorities after the onset of the crisis, as well as by vaccination rollouts and the economic recovery.

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Long-term government bond yields in the major developed countries rebounded sharply, influenced by inflation and central bank policy moves.

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Peripheral sovereign debt risk premiums ended 2021 at somewhat higher levels than the previous year, although they remained contained.

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The dollar showed its strength and appreciated significantly against the euro due to the Fed’s less accommodating tone and the lack of a synchronised global economic recovery.

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Emerging currencies tended to depreciate; the case of the Turkish lira is noteworthy as it lost more than 40% of its value against the dollar.

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Financial authorities have focused on monitoring risks to financial stability, in an environment in which certain vulnerabilities in the global non-bank financial sector and concerns over the momentum of the real estate market in some European countries have materialised.

Brexit

The Group continued to monitor developments and consequences of Brexit. Since the Brexit deals came into effect on 1 January 2021, one of the focal points has been the difficulties that certain sectors have experienced when attempting to continue trade relations between the UK and the EU and on how companies have been adapting to the new trade arrangements. It is difficult to distinguish between the impacts caused by Brexit, the impacts caused by the restrictions put in place due to the pandemic and the impacts arising from the complications observed in global supply chains since the economic reopening. Another focus point has been the implementation of the Northern Ireland Protocol, which is part of the Brexit agreements, and that is still being negotiated between the United Kingdom and the European Union as a result of the challenges arising from its entry into force.

As regards financial services post-Brexit, the UK has indicated that it will work on the assumption that no general equivalence deal will be reached. The UK has therefore brought forward the publication, for consultation purposes, of proposals regarding the regulation of financial services, using the new regulatory freedoms offered by Brexit. Meanwhile, the EU indicated that it plans to extend the equivalence decision that allows EU banks to continue to use central clearing houses in the UK, but it has not signalled its intention of wanting to go further in terms of other equivalence decisions. In addition, the EU announced that it intends to strengthen central clearing houses’ infrastructure so that in the medium-/long-term this activity is performed in the EU, rather than in the UK. On the other hand, news of financial service activity moving from the UK to the EU and the US continues to trickle through.

In relation to the specific activity of Banco Sabadell Group in the United Kingdom, there have been no significant changes in the Group’s exposure to Brexit relative to its exposure as at 31 December 2020.

4.2 Key milestones during the year

4.2.1 The Group’s risk profile during the year

The following milestones have been achieved in relation to the Group’s risk profile during 2021:

Non-performing assets:

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The NPL ratio has increased slightly from 3.6% to 3.7% over the year, mainly due to higher inflows as a result of model changes and the repurchase of non-performing portfolios.

II.

Lending performance

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Performing loans continue to increase year-on-year in all regions, with annual growth figures of 2.3% in Spain, 19.1% in TSB and 5.6% in Mexico.

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In Spain, the year-on-year growth has been mainly underpinned by business loans granted to companies, SMEs and the self-employed and the increase in mortgages to individuals. In addition, we see momentum in the project finance portfolio, in which sustainable projects are gaining traction.

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In TSB, there has been steady growth in all loan categories, especially mortgages. The growth of mortgages benefited from a more active mortgage market and TSB’s operational resilience to absorb this increase in demand. There was an upturn in consumer lending and unsecured lending volumes after lockdown restrictions were eased.

III.

Concentration

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From a sectoral point of view, the loan portfolio is diversified and has limited exposure to the sectors most sensitive to COVID-19 and shows a downward trend.

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Similarly, in terms of individual concentration, the downward trend in risk metrics relating to concentration of large exposures continues, both due to lower exposure (numerator) and to an increase in capital (denominator). The credit rating of top borrowers has been impacted, although not significantly, due to a deterioration in the balance sheets as a result of the health crisis.

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Geographically, the portfolio is positioned in the most dynamic regions, in Spain and worldwide. International lending continues to account for around a third of the loan book.

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IV.

Strong capital position:

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The CET1 ratio improved to 12.22% in fully-loaded terms as at 2021 year-end (compared to 12.02% as at 2020 year-end). Generalised fulfilment of regulatory capital requirements.

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The Total Capital ratio was 17.70% as at 2021 year-end (compared to 15.91% as at 2020 year-end), while the Leverage ratio was 5.81%, vs. 5.05% a year earlier (in fully-loaded terms).

Sound liquidity position:

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The LCR stood at 221% (compared to 198% as at 2020 year-end) and the loan-to-deposit ratio was 96%.

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The MREL requirement is still being met.

4.2.2 Strengthened credit risk management and control environment

2021 was marked by the monitoring and control of the measures adopted to mitigate the effects of COVID-19.

Special focus has been placed on the monitoring and control of the measures adopted (mainly payment holidays and ICOs). RAS metrics have also been tightened and exposure to the sectors most affected by the crisis has been assessed to mitigate their impact.

Performance of the main solutions offered in Spain

As at 31 December 2021, the gross carrying amount of the Bank’s loans to which moratoriums have been granted is 3,077 million euros, of which an amount of 3,002 million euros has already matured and 75 millions euros remains in effect. As regards the breakdown by sector, 88% corresponds to households (includes self-employed workers).

As for ICOs, as at 31 December 2021, the amount of the loans granted is approximately 8.6 billion euros. During the year, extensions to payment holidays have been facilitated by taking advantage of the windows offered in March and October, and, as at 31 December 2021, approximately 40% of the total are in force.

Performance of the main solutions offered in the United Kingdom

In the United Kingdom, the main solutions during 2020 and 2021 were government-backed loans to companies, the so-called BBLs (Bounce Back Loans). These guaranteed loans benefited from extensions by the UK government during the year, facilitating repayment conditions for customers. The exposure to these loans as at 2021 year-end was 546 million pounds, representing more than 75% of the corporate customer portfolio.

As regards individuals, the amount of loans granted a payment holiday is a total of 4,442 million pounds, all of which matured during 2021.

4.3 General principles of risk management

Global Risk Framework

The Global Risk Framework aims to establish the common basic principles relating to the risk management and control activity of Banco Sabadell Group, including, inter alia, all those actions associated with the identification, decision, measurement, assessment, monitoring and control of the different risks to which the Group is exposed. With the Global Risk Framework, the Group aims to:

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Follow a structured and consistent approach to risk throughout the Group.

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Foster an open and transparent culture with regard to risk management and control, encouraging the involvement of the entire organisation.

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Facilitate the decision-making process.

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Align the accepted risk to the risk strategy and the risk appetite.

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Understand the risk environment in which it operates.

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Ensure, following the guidelines of the Board of Directors, that critical risks are identified, understood, managed and controlled efficiently.

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The Group’s Global Risk Framework consists of the following elements:

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The Group’s Global Risk Framework Policy.

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Risk Appetite Framework (RAF) of the Group and subsidiaries.

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Risk Appetite Statement (RAS) of the Group and subsidiaries.

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Specific policies for the various material risks to which the Group and subsidiaries are exposed.

4.3.1 Global Risk Framework Policy

As an integral part of the Global Risk Framework, the Global Risk Framework Policy establishes the common basic principles for Banco Sabadell Group’s risk management and control activities, including, among other things, all actions associated with the identification, decision, measurement, assessment, monitoring and control of the different risks to which the Group is exposed. These activities comprise the duties carried out by the various areas and business units of the Group as a whole.

Global Risk Framework Principles

For risk management and control to be effective, the Group’s Global Risk Framework must comply with the following principles:

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Risk governance and involvement of the Board of Directors through the model of three lines of defence, among others;

Among other duties, the Board of Directors of Banco de Sabadell, S.A. is responsible for identifying the Group’s main risks, implementing and monitoring appropriate internal control and reporting systems, which include challenging and monitoring the Group’s strategic planning, and supervising the management of material risks and their alignment with the risk profile defined by the Group.

Similarly, the equivalent bodies of the Group’s various subsidiaries have the same level of involvement in risk management and control activities at the local level.

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Alignment with the Group’s business strategy, particularly through the implementation of the risk appetite throughout the organisation;

Through the set of policies, procedures, manuals and other documents that comprise it, the Group’s Global Risk Framework is aligned with the Group’s business strategy, adding value as it is designed to contribute to the achievement of objectives and improve medium-term performance. It is therefore integrated in key processes such as strategic and financial planning, budgeting, capital and liquidity planning and, in general, business management.

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Integration of the risk culture, focusing on aligning remuneration with the risk profile;

Corporate culture and corporate values are a key element, as they strengthen the ethical and responsible behaviour of all members of the organisation.

The Group’s risk culture is based on compliance with the regulatory requirements applicable to it in all areas in which it carries out its activities, ensuring compliance with supervisory expectations and best practices in risk management, monitoring and control.

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The Group establishes as one of its priorities the maintenance of a solid risk culture in the aforesaid terms, on the understanding that this lays the groundwork for appropriate risk-taking, makes it easier to identify and manage emerging risks, and encourages employees to carry out their activities and engage in the business in a legal and ethical manner.

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A holistic view of risk that translates into the definition of a taxonomy of first- and second-tier risks based on their nature; and

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Alignment with the interests of stakeholders.

Similarly, risks are managed and controlled with a view to safeguarding the interests of the Group and its shareholders at all times.

4.3.2 Risk Appetite Framework (RAF)

The risk appetite is a key element in determining the risk strategy, as it defines the scope of activity. The Group has a Risk Appetite Framework (RAF) that sets out the governance framework governing its risk appetite.

The RAF covers all the Group’s business lines and units, in accordance with the proportionality principle, and it is designed to enable suitably informed decisions to be made, taking into account the material risks to which it is exposed, including both financial and non-financial risks.

The RAF is aligned with the Group’s strategy and with the processes of strategic planning and budgeting, its internal capital and liquidity adequacy assessments, the Recovery Plan and the remuneration framework, among other things, and it takes into account the material risks to which the Group is exposed, as well as their impact on stakeholders such as shareholders, customers, investors, employees and the general public.

4.3.3 Risk Appetite Statement (RAS)

The Risk Appetite Statement (RAS) is the written declaration of the types of risks the Group is willing to accept, or wishes to avoid, in order to achieve its business objectives. Depending on the nature of each risk, the RAS includes both qualitative aspects and quantitative metrics, which are expressed in terms of capital, asset quality, liquidity, profitability or any other relevant measure. The RAS is therefore a key element in setting the risk strategy, as it determines the scope of activity.

Qualitative aspects of the RAS

The Group’s RAS incorporates the definition of a set of qualitative aspects, which essentially help to define the Group’s position regarding certain risks, especially when those risks are difficult to quantify.

Quantitative aspects of the RAS

The set of quantitative metrics defined in the RAS are intended to provide objective elements with which to compare the Group’s situation against the goals or challenges proposed at the risk management level. These quantitative metrics follow a hierarchical structure, as established in the RAF, with three levels: Board (or first-tier), Executive (or second-tier) and Operational (or third-tier) metrics.

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Each of these levels has its own approval, monitoring and action arrangements that should be followed in the event a threshold is ruptured.

In order to gradually detect possible situations in which the risk position might deteriorate and thus be able to better monitor and control them, the RAS defines a system of thresholds associated with the quantitative metrics. These thresholds reflect the desirable levels of risk for each metric, as well as the levels that should be avoided. A rupture of these thresholds can trigger the activation of remediation plans designed to remedy the situation.

The different thresholds are set at levels that reflect the severity of the situation, which allows preventive actions to be taken before extreme levels are reached. Some or all of the thresholds of a given metric will be set depending on the nature of that metric and its hierarchical level within the structure of RAS metrics.

4.3.4 Specific policies for the different material risks

4.3.5 Overall organisation of the risk function

Governance structure

The Board of Directors of Banco de Sabadell, S.A. is the body responsible for establishing the general guidelines for the organisational distribution of the risk management and control functions, as well as determining the main strategies in this regard, ensuring consistency with the Group’s short- and long-term strategic objectives, as well as with the business plan, capital and liquidity planning, risk-taking capacity and remuneration schemes and policies.

The Board of Directors of Banco de Sabadell, S.A. is also responsible for approving the Group’s Global Risk Framework.

In addition, within the Board of Directors of Banco de Sabadell, S.A., there are four committees involved in the Group’s Global Risk Framework and, therefore, in risk management and control (the Delegated Credit Committee, the Board Risk Committee, the Remuneration Committee and the Audit and Control Committee). There are also other committees and divisions with a significant level of involvement in the risk function.

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The participation and involvement of the Group’s governing bodies and Senior Management in decisions regarding risks, and also in their supervision and control.

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The alignment of objectives at all levels, monitoring their achievement and implementing corrective measures where necessary.

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The existence of an adequate management and control environment for all risks.

Organisation

The Group establishes an organisational model for assigning and coordinating risk control responsibilities based on the model of three lines of defence. This model is described, for each of the risks, in the various policies that make up the Group’s regulations, which assign specific responsibilities to each of the three lines of defence.

For each line of defence, the risk policies describe and assign responsibilities, as appropriate, to the following functions (or any other additional ones to be considered):

–

•

Maintaining effective internal controls and performing risk assessment and control procedures on a daily basis;

•

Identifying, quantifying, controlling and mitigating risks, following internal policies and procedures and ensuring that activities are consistent with the Bank’s goals and objectives;

•

Implementing adequate management and oversight processes to ensure compliance with regulations, focusing mainly on control errors, inadequate processes and unforeseen events.

–

•

Proposing the Global Risk Framework, for risk management and control.

•

Guiding and ensuring the implementation of risk policies, defining responsibilities and objectives for their effective implementation.

•

Overseeing the implementation of risk management processes and controls.

•

Participating in decision-making processes, providing an overview in terms of risk.

•

Ensuring and monitoring compliance with the established risk appetite.

•

Verifying compliance with the regulations applicable to the Group in the course of its business activities.

•

Analysing and comparing existing and potential incidents by reviewing available information.

•

Ensuring that the models work as expected and that the results obtained from them are appropriate to their various uses, both internal and regulatory.

•

Promoting and pursuing the highest possible levels of compliance with existing legislation and professional ethics within the Group.

•

Endeavouring to uphold processes for the operational continuity of ordinary business activities and the security of the information on which such activities are based.

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Third line of defence: helps the Group to achieve its objectives by providing a systematic, disciplined approach to assess the adequacy and effectiveness of the organisation’s governance processes and its risk management and internal control activities.

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4.4 Management and monitoring of the main material risks

In relation to the first-tier risks identified in the Banco Sabadell Group risk taxonomy, the most salient aspects of their management and the actions taken in this regard in 2021 are set out below:

4.4.1 Strategic risk

The Group develops a Strategic Plan which sets out the Bank’s strategy over a certain period of time. In 2021, Banco Sabadell defined a new Strategic Plan which sets out the main lines for action and transformation for each business in the coming years to seize the opportunity to consolidate its position as a major domestic bank.

As part of the Strategic Plan, the Group develops 5-year financial projections, which are the result of the implementation of the strategic lines defined in the Plan. These projections are prepared on the basis of the most likely economic scenario for the key regions (baseline scenario) and they are also included in the ICAAP as a baseline scenario. The economic scenario is described in terms of the key risk factors impacting the Group’s income statement and balance sheet. In addition, the Plan is regularly monitored in order to analyse the Group’s most recent performance and changes in the environment, as well as the risks taken.

The projection exercises of the Strategic Plan and its monitoring are integrated into management procedures, as they set out the key aspects of the Group’s strategy in the medium and long term. The Plan is prepared at the business unit level, on the basis of which the Group manages its activities, and annual results are also assessed in terms of compliance with the target risk appetite.

It is also worth highlighting the launch of a new efficiency programme (in addition to that implemented in 1Q21) in Spain (to be implemented in 1Q22), which includes initiatives designed to increase the digitalisation of customer services as well as projects for organisational restructuring and streamlining. Meanwhile, TSB, after the restructuring programmes implemented, reached the breakeven point in the first quarter of 2021.

Strategic risk includes the management and control of four risks:

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Reputational risk: this is the current or future risk of incurring losses as a result of failures in the areas of processes and operations, strategy or corporate governance, which generate a negative perception among customers, counterparties, shareholders, investors or regulators that can negatively affect the Group’s ability to maintain its business relationships or establish new ones, and to continue to access funding sources.

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Environmental and climate risk: this is the risk of incurring losses arising from the impact, both present and future, on the climate risk factors of customers and of the Bank’s own activity. These factors may materialise mainly in physical aspects (the physical effects of weather changes, such as more frequent extreme weather events and gradual changes in the weather) and transition factors (arising from adjustment processes towards a lower emissions economy). Climate risk acts, where appropriate, as a driver for other risks such as credit risk.

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4.4.1.1 Solvency risk

Banco Sabadell is also compliant with MREL, which coincides with supervisory expectations and is in line with its funding plans.

Details on the closing data as at 31 December 2021 for solvency risk and capital management are available in Note 5 to the consolidated annual financial statements.

4.4.1.2 Business risk

The economic environment has been impacted by disruptions in the supply chains of some sectors, the different spread of COVID-19 among countries and rising inflation. In any case, the Eurozone’s economy performed positively in 2021, enabling an increase of the Group’s core banking revenue, which has remained solid throughout the year. Fee and commission income also performed well.

The actions taken throughout the year have laid the foundations for greater future profitability built on the growth of core revenue, mainly by driving digitisation and divesting non-strategic businesses. Additionally, as part of its strategy, a series of efficiency initiatives have been launched in Spain, which will help reduce recurrent costs and which include further digitisation of customer services and process re-engineering.

4.4.1.3 Reputational risk

Regarding reputational risk, in 2021 Banco Sabadell has continued to be by the side of its customers during the situation brought about by COVID-19 and its transition towards a more digital business model.

In 2021, the Group has strengthened the deep transformation process envisaged in the new Strategic Plan, which has been welcomed by various stakeholders and which has been supported by the publication of good quarterly results. As regards the organisation, significant changes have been carried out both in the Institution’s business model and in its internal structure.

During the first quarter of 2021, the voluntary redundancy programme started in 2020 was completed. In the second half of the year, a labour force adjustment plan was launched, which has the agreement of all the members of the negotiating table, and it will mostly be fulfilled with voluntary redundancies.

The Group’s actions and its interactions with customers and the general public through social networks and the media have allowed Banco Sabadell to stand out from other banks in the sector in terms of reputational impact.

4.4.1.4 Environmental and climate risk

The big milestone in the international commitment to fight climate change is materialised in the 2015 Paris Agreement, which promotes the reduction of carbon emissions to limit global warming “well below” 2ºC in 2100 and seeks not to exceed 1.5ºC in relation to pre-industrial average temperatures (1850-1900). The EU included the Agreement in its legislation, detailing and tightening it through a “regulatory tsunami” whose main initiatives are established in the Action Plan on Sustainable Finance of March 2018, as well as in its subsequent restatement in the Renewed Sustainable Finance Strategy (RSFS) of July 2021.

Banco Sabadell’s commitment to sustainability has been incorporated into all areas of its strategy and business model, internal governance, risk management and assessment arrangements, steering its activity and processes in order to make a firm contribution to sustainability and the fight against climate change. The aim is to support the Group’s customers in the transition towards a sustainable future, either by providing them with the appropriate and necessary funding for this or by offering them those savings and investment products which help to achieve GHG emissions neutral operations.

As part of this corporate goal, Banco Sabadell has continued to implement throughout 2021 the Sustainable Finance Plan, which includes a series of initiatives adding to its track record of projects that pursue a more sustainable economy.

Furthermore, all these initiatives enable the adoption and implementation of the various sustainability regulations to which Banco Sabadell is subject, as well as to comply with supervisory expectations on climate and environmental risk management and disclosure set out by the European Central Bank (ECB).

In line with our commitment to achieve a sustainable future, Banco Sabadell has joined the Net-Zero Banking Alliance (NZBA), an international banking alliance under the sponsorship of the United Nations,

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whose main goal is to achieve the alignment of their loan and investment portfolios with net zero emission scenarios in 2050 or earlier. Committing to this entails achieving one of the most ambitious climate goals established in the Paris Agreement.

Finally, Banco Sabadell has also agreed to follow the recommendations for disclosure of financial information related to climate risks established by the Task Force on Climate-related Financial Disclosures (TCFD).

Banco Sabadell Sustainable Finance Plan

Since 2020, Banco Sabadell has been developing a cross-cutting Sustainable Finance Plan that will enable reaching the Institution’s sustainability commitments, as well as adopting all the regulations, regulatory initiatives and supervisory expectations in the European Union’s banking sector.

As part of the initiatives developed, worthy of note is the approval by the Board of Directors of the Sustainability Policy in 2020 (which defines the vision, governance and responsibilities of the three lines of defence in relation to sustainability) and of the Climate Risk Policy of July 2021 (which defines the critical management parameters to progressively and proportionally integrate these risks into the risk management and control and business units). During this year, Banco Sabadell has also defined and developed climate and environmental risk indicators which will gradually be converted to metrics that can be included in the RAS in order to manage and monitor these risks.

Climate risk management

Climate risks can be associated with two types of factors: “physical environmental factors” and “environmental transition factors”. Physical environmental factors, also called physical risks, are related to adverse weather events (such as floods or heat waves) or long-term changes in the weather (such as rising sea levels). On the other hand, environmental transition factors or transition risks arise from the transition processes towards a low-emission economy (such as regulatory changes, the emergence of disruptive technologies, market trends, etc.). For more information, please check the section on Environmental and Climate Risk of the Non-Financial Disclosures Report.

According to the EBA’s Sustainable Finance Plan to be developed during the period 2020-2025 and which envisages including ESG factors and risks in the EU’s regulatory framework (Pillars I, II and III of the Basel prudential framework for credit institutions), Banco Sabadell is adapting and aligning its internal corporate governance, strategy, structure and risk management and control processes, as well as its disclosures to comply with these planned regulations. All this will be based on an assessment of the materiality of ESG risks (initially focusing more on climate risks) which enables us to analyse the transmission channels through which they end up moving and impacting as an additional risk factor to traditional banking risks (credit, market, liquidity, operational) and measure their impact (e.g., in terms of the solvency of customers or counterparties or the Institution itself).

Today, as the EBA and the ECB themselves acknowledge, the academic world is working intensively and rapidly to develop and define the more suitable methodologies that allow tackling technical challenges and the lack of robust data that the field of sustainability-related risks is facing.

The assessment of the materiality of climate risks on Banco Sabadell’s credit exposure has enabled on a preliminary basis to initiate the analysis process of the qualitative calculation of the impacts of climate risk on traditional banking risks. During 2021, the quantitative analysis process of the exposure of its credit portfolios to the sectors that emit more carbon emissions was initiated and the process of measuring its sustainable exposure (green, social or sustainability-linked operations) is underway.

It is worth noting that the Group has not incurred losses related to climate risk. On the other hand, we should also mention that on a preliminary basis on a first qualitative assessment of the materiality of the climate change factor on those risks in which this could be relevant, the risks focus on credit portfolios, the more relevant risks being transition risks (in the first instance) from a triple point of view: regulation, technological change and market factors. While no impact is expected in the short term, an ongoing monitoring and assessment of medium- and long-term impacts must be carried out, depending on the sector.

As regards banking operations, Banco Sabadell is developing and implementing a network of teams specialised in environmental risks in both risk management and control and the business units themselves that collect information related to the sustainability of the customer and of its operations through specific ESG questionnaires. The main goal is to support customers transition towards a more sustainable economy.

It is also worthy of note the rollout of an internal eligibility guide, aligned with the EU’s taxonomy and the ICMA’s Social Bond Principles, that will be updated with the Social Taxonomy and that enables the

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validation of the sustainability of the credit transactions financed by Banco Sabadell, as well as the adoption of sector-specific regulations in which the commitment to sustainability of the Institution is set when granting finance to certain greenhouse gas-intensive sectors and sectors with the greatest potential impact on the climate and the environment.

In the same vein, the Sustainable Finance Plan expanded its portfolio of sustainable products with the aim of making it easier for customers to transition towards an environmentally friendly economy. It has also launched new financing solutions including products such as ‘eco-leases’ and the ‘eco-reformas’ loan for energy-efficient and sustainable home renovations.

Additionally, it is worth mentioning that Banco Sabadell has issued 500 million euros worth of green bonds in the capital market in the third bond issue of this kind (the first issue was placed in 2020).

4.4.2. Credit risk

Credit risk refers to the risk of incurring losses as a result of borrowers’ failure to fulfil their payment obligations or through losses in value due simply to the deterioration of borrower quality.

4.4.2.1 Credit risk management framework

Acceptance and monitoring

Credit risk exposures are rigorously managed and monitored through regular assessments of borrowers’ solvency and their ability to honour their payment obligations undertaken with the Group, adjusting the exposure limits for each counterparty to levels that are deemed to be acceptable. It is also normal practice to mitigate credit risk exposures by requiring borrowers to provide collateral or other guarantees to the Bank.

The Board of Directors grants powers and discretions to the Delegated Credit Committee to allow the latter to delegate responsibilities to different decision-making levels. The implementation of authority thresholds in credit approval management systems ensures that the conferral of powers established at each level is linked to the expected loss calculated for each transaction.

To optimise the business opportunities provided by each customer and guarantee an appropriate level of security, responsibility for accepting and monitoring risks is shared between the account manager and the risk analyst who, by maintaining effective communication, are able to obtain a comprehensive (360°) and forward-looking view of each customer’s individual circumstances and needs.

The implementation of advanced risk management methodologies also benefits the process in ensuring that proactive measures can be taken once a risk has been identified. Of vital importance in this process are tools such as credit rating systems for companies and credit scoring systems for individuals, as well as early warning indicators for monitoring risk. These are integrated into a single tool that provides a comprehensive and forward-looking vision of customers.

Risk monitoring is carried out for all exposures in order to identify potentially problematic situations and prevent credit impairment. In general, this monitoring is based on early warnings systems at both the transaction/borrower level and at the portfolio level, and both systems use the firm’s internal information and external information in order to obtain results. Risk monitoring is carried out prior to any default and on a forward-looking basis, i.e. with an outlook based on the foreseeable future development of circumstances, in order to determine both actions to strengthen the business (increase lending) and prevent risk (risk mitigation, improvement of guarantees, etc.).

The early warnings system allows an integrated measurement to be made of the level of the risk taken and allows it to be transferred to recovery management specialists, who determine the different types of procedures that should be implemented. Therefore, different groups or categories are established based on risks that exceed a set limit and according to predicted default rates, so that they can be treated individually. These warnings are additionally managed by the account manager and the risk analyst.

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Management of non-performing exposures

Generally, during stages of weakness in the economic cycle, debt refinancing and restructuring are the main risk management techniques used. The Bank’s objective, when faced with debtors and borrowers that have, or are expected to have, financial difficulties to honour their payment obligations under the agreed contractual terms, is to facilitate the repayment of the debt by reducing the probability of default as much as possible. A number of common policies to achieve this are in place in the Institution, as well as procedures for the approval, monitoring and control of potential debt forbearance (refinancing and restructuring) processes, the most significant of which are the following:

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Forbearance conditions based on a realistic repayment schedule that is in line with the borrower’s current and expected payment capacity, preventing future difficulties.

–

If new guarantees are provided, these must be regarded as a secondary and exceptional means for recovering the debt, so as to avoid adversely affecting existing means. All ordinary interest accrued must always be paid up to the refinancing date.

–

A maximum length is applied to grace periods.

The Group continually monitors compliance with the agreed terms and with the above policies.

Internal risk models

Banco Sabadell Group also has a system in place which is made up of three lines of defence to ensure the quality and oversight of internal models, as well as a governance process which has been specifically designed to manage and monitor these models and to ensure compliance with regulations and the supervisor’s instructions.

The governance framework of internal credit risk and impairment models (risk management, regulatory capital and provisions) is based on the following pillars:

–

Effective management of changes to internal models.

–

Ongoing monitoring of internal models.

–

Regular reporting, both internal and external.

–

Management tools for internal models.

Banco Sabadell Group also has an advanced Non-Performing Asset (NPA) risk management model in place to manage the impaired assets portfolio. The purpose of managing NPA risk is to find the best solution for the customer upon detecting the first signs of impairment, reducing the entry into default of customers with financial difficulties, ensuring intensive management and avoiding downtime between the different phases.

For further quantitative information, see Schedule VI “Other risk information: Refinancing and restructuring operations” to these consolidated annual financial statements.

Real estate credit risk management

As part of its general policy on risks and, in particular, its policy on the construction and real estate development sector, the Group has a number of specific policies in place for mitigating risks.

The main measure taken in relation to this portfolio is the continuous monitoring of risks and the reappraisal of borrowers’ financial viability in light of the new economic circumstances. If the results of the reappraisal are satisfactory, the existing arrangements continue on the basis agreed, with new commitments being required where appropriate given the new circumstances.

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The Bank has established three strategic lines of approach:

–

New lending: real estate development business

To this end, the Bank has:

•

The Real Estate Business Division (a unit within the Business Banking Division), with a team of real estate specialists who exclusively manage the Bank’s developer customers. This unit has a monitoring approach that enables the Group to have detailed information about the projects being analysed by the unit (including surface area, number of units, sales volume, construction budget and the extent of pre-marketing activities).

•

Two Real Estate Investment Analysis and Monitoring Divisions, one for the East and one for the West (both report to the Real Estate Division), which are responsible for analysing all of the real estate projects that the Bank is thinking of financing, strictly from the point of view of real estate business, analysing the location and suitability of the product, as well as the potential supply and demand, and comparing these in each case against the figures of the business plan submitted by the customer (particularly costs, sales and timelines). This analysis model is coupled with a model for monitoring approved real estate development projects. The progress of each real estate development project is monitored using standardised reports in order to track drawdowns and compliance with the business plan (sales, costs and timelines).

This management model has allowed warning levels to be defined so that they can be monitored by the Analysis and Monitoring Divisions.

–

Management of non-performing real estate exposures

Non-performing exposures are managed in line with the defined policy. In general, they are managed taking into account:

•

The customer.

•

The guarantees.

•

The status of the loan (from the time when a warning is triggered, warning of a potential deterioration of the current status, up until the properties are surrendered in payment of debt [payment in kind]/purchased in an amicable settlement, or until an auction is held following a mortgage enforcement process and whenever there is a ruling in favour of foreclosure).

Cases in which the stabilisation of the loan or its settlement by the customer is not a feasible option are managed using support models depending on the type of loan or financed item.

In the case of completed real estate developments or completed non-residential properties, these can be put on sale at prices that drive market traction.

–

Management of foreclosed assets

Once the loan has been converted into a real estate asset, a management strategy is defined depending on the type of asset and its location, in order to identify the potential of each asset according to its potential demand.

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The main disposal mechanism is the sale of the asset, for which the Bank, through Solvia, has developed different channels on the basis of the type of property and customer.

For further quantitative information, see Schedule VI “Other risk information: Exposure to construction and real estate development sector” to these consolidated annual financial statements.

4.4.2.2. Risk management models

Credit ratings

Credit risks incurred with corporates, real estate developers, specialised lending projects, financial institutions and countries are rated using a rating system based on predictive factors and an internal estimate of their probability of default (see section “Impairment of financial assets” in Note 1).

The rating model is reviewed annually based on the analysis of performance patterns of actual defaulted loans. A predicted default rate is assigned to each internal credit rating level, which also allows a uniform comparison to be made against other segments and ratings issued by external credit rating agencies using a master ratings scale.

The percentage distribution by credit rating of Banco Sabadell’s portfolio of companies as at 31 December 2021 and 2020 is detailed below:



2021 Breakdown of Sabadell corporates portfolio by rating

9	8			7			6			5			4			3			2			1			0			TOTAL

0.16%		5.18	%		15.28	%		23.73	%		32.66	%		13.63	%		6.73	%		1.85	%		0.68	%		0.10	%		100	%

In this scale of 0 to 9, probability of default goes from high to low.



2020 Breakdown of Sabadell corporates portfolio by rating

9	8			7			6			5			4			3			2			1			0			TOTAL

0.39%		6.00	%		19.46	%		24.55	%		29.33	%		11.42	%		6.35	%		1.83	%		0.52	%		0.15	%		100	%

In this scale of 0 to 9, probability of default goes from high to low.

Credit scores

In general, credit risks undertaken with individuals are rated using credit scoring systems, which are in turn based on a quantitative model of historical statistical data, identifying the relevant predictive factors (see section “Impairment of financial assets” in Note 1).

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The percentage distribution by credit score of Banco Sabadell’s portfolio of individuals as at 31 December 2021 and 2020 is detailed below.



Distribution, by credit score, of Banco Sabadell’s portfolio of individuals 2021

9	8			7			6			5			4			3			2			1			0			TOTAL

0.48%		5.74	%		22.28	%		36.30	%		20.92	%		9.48	%		2.80	%		0.93	%		0.31	%		0.76	%		100	%

In this scale of 0 to 9, probability of default goes from high to low.



Distribution, by credit score, of Banco Sabadell’s portfolio of individuals 2020

9	8			7			6			5			4			3			2			1			0			TOTAL

0.36%		4.65	%		20.57	%		35.02	%		20.80	%		12.54	%		3.89	%		1.13	%		0.31	%		0.73	%		100	%

In this scale of 0 to 9, probability of default goes from high to low.

Warning tools

In general, the Group has a system of warning tools in place, which include both individual warnings and advanced early warning models for both the Companies segment and the Individuals segment. These warning tools are based on performance factors obtained from available sources of information (credit ratings or credit scores, customer files, balance sheets, CIRBE (Bank of Spain Central Credit Register), information relating to the industry or past banking activity, etc.). They measure the risk presented by the customer on a short-term basis (predicted propensity to default), obtaining a high level of predictability to detect potential defaulters. The resulting rating or score, which is obtained automatically, is used as a basic input in monitoring the risk of companies and individuals (see section “Impairment of financial assets” in Note 1).

This warnings system enables:

–

Efficiency to be improved, as monitoring exercises focus on customers with the lowest credit rating or credit score (different cut-off points for each group).

–

The Institution to anticipate actions required to manage any negative change in the situation of the customer (change in rating, new severe warnings, etc.).

–

Customers whose situation remains unchanged and who have been assessed by the Basic Management Team to be regularly monitored.

4.4.2.3. Credit risk exposure

In relation to credit risk, COVID-19 and the serious health situation arising from it have had an impact on economic activity and on the Group’s existing borrowers in terms of solvency, liquidity and turnover. In view of this, the Group has continued to offer options to meet the liquidity needs of its customers, including COVID-19 ICO-guaranteed loans for its business customers and payment holidays for its individual customers.

Additionally, this situation has caused impairment allowances to be significantly higher in 2021 and especially in 2020.

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The tables below show the breakdown, by headings of the consolidated balance sheet, of the Group’s maximum gross credit risk exposure as at 31 December 2021 and 2020, without deducting collateral or credit enhancements obtained in order to ensure the fulfilment of payment obligations, broken down by portfolios and in accordance with the nature of the financial instruments:


Thousand euro

Maximum credit risk exposure	Note		2021		2020

Financial assets held for trading				592,631		314,241
Equity instruments		9		2,258		1,115
Debt securities		8		590,373		313,126

Non-trading financial assets mandatorily at fair value through profit or loss				79,559		114,198
Equity instruments		9		14,582		12,516
Debt securities		8		64,977		101,682

Financial assets at fair value through other comprehensive income				6,999,326		6,825,501
Equity instruments		9		314,235		318,563
Debt securities		8		6,685,091		6,506,938

Financial assets at amortised cost				182,173,414		177,571,171
Debt securities		8		15,190,212		18,091,366
Loans and advances		11		166,983,202		159,479,805

Derivatives		10, 12		1,904,380		2,914,145

Total credit risk due to financial assets				191,749,310		187,739,256

Loan commitments provided		26		28,403,146		29,295,155
Financial guarantees provided		26		2,034,143		2,035,638
Other commitments provided		26		7,384,863		7,594,720
Total off-balance sheet exposures				37,822,152		38,925,513

Total maximum credit risk exposure				229,571,462		226,664,769

Schedule VI to these consolidated annual financial statements shows quantitative data relating to credit risk exposures by region.

4.4.2.4. Credit risk mitigation

Credit risk exposures are rigorously managed and monitored through regular assessments of borrowers’ solvency and their ability to honour their payment obligations undertaken with the Group, adjusting the exposure limits for each counterparty to levels that are deemed to be acceptable. It is also normal practice to mitigate credit risk exposures by requiring borrowers to provide collateral or other guarantees to the Bank.

Generally, these take the form of collateral, mainly mortgages on properties used as housing, whether finished or under construction. The Group also accepts, although to a lesser degree, other types of collateral, such as mortgages on retail properties, industrial warehouses, etc. and financial assets. Another credit risk mitigation technique commonly used by the Institution is the acceptance of sureties, in this case subject to the surety presenting a certificate of good standing.

Personal guarantees or sureties are established in favour of the Institution and, except in certain exceptional cases, these are also executed before a notary public through a public document, to vest the agreement with the highest possible legal certainty and to allow legal claims to be filed through executive proceedings in the event of default. They constitute a credit right with respect to the guarantor that is irrevocable and payable on first demand.

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The Group has not received any significant guarantees which it is authorised to sell or pledge, irrespective of any non-payment by the owner of the referred guarantees, except for those intrinsic in treasury activities, which are mostly repos with maturities of no more than six months, therefore their fair value does not differ substantially from their carrying amount (see Note 6). The fair value of the assets sold in connection with repos is included under the heading “Financial liabilities held for trading” as part of the short positions of securities.

Assets assigned under the same transactions amounted to 694,554 thousand euros (491,891 thousand euros as at 31 December 2020) and are included by type under the repos heading in Notes 18 and 19.

There have been no significant changes to Banco de Sabadell’s policies in relation to guarantees during this year. Neither have there been any significant changes in the quality of the Group’s guarantees with respect to the preceding year.

The values of the guarantees received to ensure collection, broken down into collateral and other guarantees, as at 31 December 2021 and 2020 are as follows:


Thousand euro
	2021		2020

Value of collateral		97,877,766		91,329,442
Of which: securing Stage 2 loans		6,740,264		6,552,027
Of which: securing Stage 3 loans		2,291,061		2,054,278

Value of other guarantees		17,315,699		16,514,989
Of which: securing Stage 2 loans		2,886,141		2,045,347
Of which: securing Stage 3 loans		604,726		416,685
Total value of guarantees received		115,193,465		107,844,431

The main risk concentration in relation to all of these types of collateral and credit enhancements corresponds to the use of mortgage guarantees as a credit risk mitigation technique in exposures of loans intended for the financing or construction of housing or other types of real estate. On a like-for-like basis, as at 31 December 2021, exposures secured with mortgages represent 58.6% of total gross performing loans to customers (56.9% as at 31 December 2020).

In addition, the Bank has carried out two synthetic securitisation transactions in 2021 and 2020.

In September 2021, the Bank carried out a synthetic securitisation of a portfolio of loans granted to SMEs and mid-corporates for 1.5 billion euros, having received an initial guarantee from Chorus Capital Management in the amount of 75 million euros (70 million euros as at 31 December 2021), covering losses of between 0.9% and 5.9% on the securitised portfolio. This transaction did not involve a substantial transfer of the risks and rewards from the assets concerned and, consequently, did not entail the derecognition of those assets from the consolidated balance sheet.

In June 2020, the Bank carried out a synthetic securitisation of a portfolio of loans granted to SMEs and mid-corporates for 1.6 billion euros, having received an initial guarantee from the European Investment Fund in the amount of 96 million euros (63 million euros as at 31 December 2021), covering losses of between 1.5% and 7.5% on the securitised portfolio. This transaction did not involve a substantial transfer of the risks and rewards from the assets concerned and, consequently, did not entail the derecognition of those assets from the consolidated balance sheet.

Both transactions are given preferential treatment for capital consumption purposes, in accordance with Article 270 of Regulation (EU) 2017/2401 (see Note 5).

In the case of market transactions, counterparty credit risk is managed as explained in section 4.4.2.7 of these consolidated annual financial statements.

4.4.2.5. Credit quality of financial assets

As stated earlier, in general terms, the Group uses internal models to rate most borrowers (or transactions) through which credit risk is incurred. These models have been designed considering the best practices proposed by the New Basel Capital Accord (NBCA). However, not all portfolios in which credit risk is incurred have internal models, partly due to the fact that these models can only be reasonably designed if a minimum level of experience with cases of non-payment is available.

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The exposure percentage calculated by the Institution using internal models, for solvency purposes, is 82%. This percentage has been calculated following the specifications of the ECB guide to internal models (Article 26 a) published in October 2019.

The breakdown of total exposures, rated based on the various internal rating levels, as at 31 December 2021 and 2020 is as follows:


Million euro
	Loans assigned rating/score

	2021
Breakdown of exposure by
rating	Stage 1		Stage 2		Stage 3		Of which: purchased credit-impaired	Total

AAA/AA		18,848		140		11	—		19,000
A		12,337		38		—	—		12,375
BBB		86,246		220		4	1		86,470
BB		23,747		520		2	2		24,269
B		21,667		3,827		19	74		25,512
Other		3,979		7,496		5,662	83		17,137
No rating/score assigned		4,515		86		—	—		4,601
Total gross amount		171,339		12,327		5,698	160		189,364


Impairment allowances		(378)		(494)		(2,432)	*(1)*		(3,304)

Total net amount		170,962		11,833		3,266	*159*		186,060

Million euro
	Loans assigned rating/score

	2020
Breakdown of exposure by
rating	Stage 1		Stage 2		Stage 3		Of which: purchased credit- impaired	Total

AAA/AA		15,044		280		—	—		15,324
A		5,310		28		—	—		5,338
BBB		66,998		157		—	1		67,155
BB		28,988		1,115		—	1		30,103
B		45,181		3,932		—	89		49,113
Other		2,821		5,707		5,294	83		13,822
No rating/score assigned		3,206		62		26	—		3,294
Total gross amount		167,548		11,281		5,320	174		184,149


Impairment allowances		(448)		(465)		(2,170)	*(3)*		(3,083)

Total net amount		167,100		10,816		3,150	*171*		181,066

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The breakdown of total off-balance sheet exposures, rated based on the various internal rating levels, as at

31 December 2021 and 2020 is as follows:


Million euro
	Loans assigned rating/score

	2021
Breakdown of exposure by
rating	Stage 1		Stage 2		Stage 3		Of which: purchased credit- *impaired*	Total

AAA/AA		1,598		38		—	—		1,636
A		2,546		4		—	—		2,550
BBB		10,642		106		4	—		10,752
BB		9,095		158		3	—		9,255
B		10,323		684		2	24		11,009
Other		406		587		550	1		1,543
No rating/score assigned		725		352		—	—		1,077
Total gross amount		35,335		1,928		559	25		37,822


Impairment allowances		(52)		(18)		(121)	—		(191)

Total net amount		35,283		1,910		438	25		37,631

Million euro
	Loans assigned rating/score

	2020
Breakdown of exposure by
rating	Stage 1		Stage 2		Stage 3		Of which: purchased *credit-impaired*	Total

AAA/AA		944		36		—	—		981
A		823		—		—	—		823
BBB		7,288		18		—	—		7,306
BB		9,188		83		—	—		9,270
B		17,309		688		—	12		17,997
Other		235		553		587	1		1,375
No rating/score assigned		352		821		—	—		1,174
Total gross amount		36,139		2,200		587	14		38,926


Impairment allowances		(57)		(15)		(102)	—		(174)

Total net amount		36,082		2,185		485	14		38,752

Further details on the credit rating and credit scoring models are included in Section 4.4.2.2 of these consolidated annual financial statements.

For borrowers included within business in Spain whose coverage has been assessed using internal models as at 31 December 2021 and 2020, the following table shows the breakdown by segment of the average EAD-weighted PD and LGD parameters, differentiating between on-balance sheet and off-balance sheet exposures, and the stage in which the transactions are classified according to their credit risk.


%
	31/12/2021
	Average ECL parameters for on-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.00%		20.10%		17.90%		21.20%		100.00%		42.40%		6.70%		21.20%

Other financial corporations		1.00%		22.10%		18.80%		20.60%		100.00%		60.20%		2.30%		22.20%

Non-financial corporations		1.70%		29.40%		13.20%		24.30%		100.00%		47.10%		6.90%		29.40%

Households		0.50%		13.20%		28.10%		14.30%		100.00%		39.40%		6.70%		14.50%

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%
							31/12/2021
	Average ECL parameters for off-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.30%		32.00%		9.90 %		29.30%		100.00%		27.80%		2.20%		31.90%

Other financial corporations		1.50%		31.80%		13.20 %		32.00%		100.00%		19.50%		1.60%		31.80%

Non-financial corporations		1.50%		30.40%		8.60 %		29.90%		100.00%		28.20%		2.40%		30.30%

Households		0.80%		36.70%		24.40 %		21.50%		100.00%		31.00%		1.20%		36.50%

%
							31/12/2020
	Average ECL parameters for on-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.50%		18.20%		21.80%		18.90%		100.00%		39.80%		7.00%		19.10%

Other financial corporations		2.00%		22.60%		35.80%		30.20%		100.00%		18.60%		3.20%		22.60%

Non-financial corporations		2.10%		26.60%		22.60%		23.70%		100.00%		47.60%		7.70%		27.20%

Households		1.10%		11.60%		21.00%		14.10%		100.00%		34.30%		6.60%		12.80%

%
							31/12/2020
	Average ECL parameters for off-balance sheet exposures
	Stage 1				Stage 2				Stage 3				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Loans and advances		1.80%		31.30%		21.20 %		23.30%		100.00%		34.20%		2.80%		31.10%

Other financial corporations		1.80%		30.10%		21.90 %		31.40%		0.00%		0.00%		1.80%		30.10%

Non-financial corporations		2.20%		29.60%		23.30 %		26.60%		100.00%		34.20%		3.50%		29.50%

Households		1.00%		35.50%		13.40 %		10.90%		100.00%		22.00%		1.30%		35.00%

The development of new LGD models started in 2020 and continued in 2021 in order to renew previous models that were in use since the implementation of IFRS 9 and to improve some aspects that had been previously identified, during either the ongoing monitoring carried out by Banco Sabadell or the independent reviews conducted by the internal control units (Models Validation and Internal Audit). In addition, a new database was built in order to incorporate valuable new information for modelling and to improve the quality of historic data. The new models involve a technological advance, improve the differentiation of risks and most significantly affect the unsecured LGD of the non-financial corporate segment, which is where the reduction in LGD is mainly recorded. As at 2021 year-end, LGDs were adjusted to include the results of the new models. The adjustment processes follow the internal governance established for their validation, review and approval by the corresponding divisions.

Details of the PD and LGD parameters for exposures in the business of the subsidiary TSB as at 31 December 2021 and 2020 are shown below.


%
							31/12/2021
	Average ECL parameters for on-balance sheet exposures
	*Stage 1*				*Stage 2*				*Stage 3*				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Secured loans		0.23%		2.80%		4.61%		4.48%		100.00%		1.89%		1.24%		2.28%

Credit cards		1.00%		84.90%		9.25%		83.70%		100.00%		67.76%		3.80%		84.44%

Current accounts		0.82%		69.65%		7.71%		70.40%		100.00%		68.56%		3.52%		69.68%

Loans		2.21%		81.35%		8.28%		82.70%		100.00%		80.75%		4.58%		81.52%

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%
							31/12/2020
	Average ECL parameters for off-balance sheet exposures
	*Stage 1*				*Stage 2*				*Stage 3*				Total portfolio
	PD		LGD		PD		LGD		PD		LGD		PD		LGD

Secured loans		0.20%		4.10%		3.80%		2.70%		100.00%		1.90%		1.10%		2.40%

Credit cards		1.70%		84.70%		14.10%		83.10%		100.00%		69.40%		4.90%		84.20%

Current accounts		1.10%		70.00%		11.00%		70.60%		100.00%		71.00%		4.10%		70.10%

Loans		4.60%		81.10%		12.70%		82.10%		100.00%		78.80%		8.00%		81.40%

In the case of the UK, the parameters in general show a slight improvement compared to 2020, in line with the economic recovery in 2021 compared to 2020, where negative impacts on PD and LGD materialised as a result of the economic situation.

During 2021, Stage 3 assets have increased by 395 million euros, thus raising the Group’s NPL ratio as shown in the table below:


%

	2021		2020

NPL ratio (*)		3.65		3.60

NPL (stage 3) coverage ratio, with total provisions (*)		56.34		56.45

(*) The NPL ratio excluding TSB stands at 4.44% and the NPL coverage ratio at 58.45% (in 2020, 4.28% and 56.37%, respectively).

The NPL ratio, broken down by lending segment as at 31 December 2021 and 2020, is set out below:


%

	*Proforma 2021 ()**	2021	*Proforma 2020 ()**		2020

Real estate development and construction	9.86	9.79		8.14		8.10

Non-real estate construction	11.97	11.95		13.28		13.26

Corporates	2.35	2.35		2.20		2.20

SMEs and self-employed	6.43	6.40		6.75		6.72

Individuals with 1st mortgage guarantee	3.60	2.50		3.27		2.36

BS Group NPL ratio	4.44	3.65		4.28		3.60

(*) Corresponds to the NPL ratio excluding TSB.

A more detailed quantitative breakdown of allowances and assets classified as Stage 3 can be found in Note 11, and a more detailed breakdown of forborne (refinanced and restructured) transactions is included in Schedule VI.

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4.4.2.6. Concentration risk

Concentration risk refers to the level of exposure to a series of economic groups which could, given their materiality, give rise to significant credit losses in the event of an adverse economic situation.

Exposures can be concentrated within a single customer or economic group, or within a given sector or region.

Concentration risk can be caused by two risk subtypes:

–

Individual concentration risk: this refers to the possibility of incurring significant credit losses as a result of maintaining large exposures with specific customers, either with a single customer or with an economic group.

–

Sector concentration risk: imperfect diversification of systematic components of risk within the portfolio, which can be sector-based factors, geographical factors, etc.

Banco Sabadell has a series of specific tools and policies in place to ensure its concentration risk is managed efficiently:

–

Quantitative metrics from the Risk Appetite Statement and their subsequent monitoring, including both first-tier (Board) metrics and second-tier (Executive) metrics.

–

Individual limits for risks and customers considered to be significant, which are set by the Delegated Credit Committee.

–

A structure of conferred powers which requires transactions with significant customers to be approved by the Credit Operations Committee, or even by the Delegated Credit Committee.

In order to control its concentration risk, Banco Sabadell Group has deployed the following critical control parameters:

Consistency with the Global Risk Framework

Establishment of limits and metrics for concentration risk control

Given the nature of the Group’s activity and its business model, concentration risk is primarily linked to credit risk, and various metrics along with their associated limits are in place.

The metrics used to measure such levels, as well as appetite limits and tolerance thresholds for the identified risks, are described in the RAS metrics.

Risk control monitoring and regular reporting

Action plans and mitigation techniques

When dealing with exceptions to internally established limits, the criteria based on which such exceptions can be approved must be included.

The Group will take any measures required to match the concentration risk to the levels approved in the RAS by the Board of Directors.

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Exposure to customers or significant risks

As at 31 December 2021 and 2020, there were no borrowers with an approved lending transaction that individually exceeded 10% of the Group’s own funds.

Country risk: geographical exposure to credit risk

Different indicators and tools are used to manage country risk: credit ratings, credit default swaps, macroeconomic indicators, etc.

Schedule VI includes quantitative data relating to the breakdown of the concentration of risks by activity and on a global scale.

Exposure to sovereign risk and exposure to the construction and real estate development sector

Schedule VI includes quantitative data relating to sovereign risk exposures and exposures to the construction and real estate development sector.

4.4.2.7. Counterparty credit risk

The amount exposed to a potential default by the counterparty does not correspond to the notional value of the contract, instead, it is uncertain and depends on market price fluctuations until the maturity or settlement of the financial contracts.

Exposure to counterparty credit risk is mainly concentrated in customers, financial institutions and central counterparty clearing houses.

The following two tables show the breakdown of exposures by credit rating and by the regions in which the Group operates:



							2021

AAA	AA+	AA	AA-	A+	A	A-	BBB+	BBB	BBB-	BB+	BB	BB-	B+	Other	TOTAL


0.0%	0.0%	18.2%	30.1%	15.8%	0.9%	8.2%	8.9%	5.7%	1.9%	2.2%	2.4%	1.3%	0.6%	3.8%	100.0%

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							2020

AAA	AA+	AA	AA-	A+	A	A-	BBB+	BBB	BBB-	BB+	BB	BB-	B+	Other	TOTAL


0.0%	0.3%	10.1%	28.8%	21.9%	13.1%	5.0%	3.4%	5.1%	3.2%	1.5%	1.9%	2.1%	0.4%	3.2%	100.0%


%

	2021	2020

Euro Zone	71.6%	65.6%
Rest of Europe	18.3%	25.7%
United States and Canada	6.6%	6.3%
Rest of the world	3.5%	2.5%

Total	100.0%	100.0%

As can be seen in the table, the risk is concentrated in counterparties with a high credit quality, with 73% of the risk relating to counterparties rated A, whereas in 2020 this concentration was 79%.

In 2016, under the European Market Infrastructure Regulation (EMIR) (Regulation 648/2012), the obligation to settle and clear certain over-the-counter derivatives through central counterparty clearing houses (CCPs) began to apply to the Group. For this reason, the derivatives arranged by the Group and subject to the foregoing are channelled via these agents. At the same time, the Group has improved the standardisation of OTC derivatives with a view to fostering the use of CCPs. The exposure to risk with CCPs largely depends on the value of the deposited guarantees.

The breakdown of transactions involving derivatives in financial markets, according to whether the counterparty is another financial institution, clearing house or organised market, is shown below:


Million euro

	2021	2020

Transactions with organised markets	2,000	4,992
OTC transactions	149,280	157,596
Settled through clearing houses	96,403	92,775

Total	151,280	162,588

There are currently no transactions that meet the accounting criteria for offsetting transactions involving financial assets and financial liabilities on the balance sheet. The netting of derivative and repo transactions is only material when calculating the amount pending collateralisation, and it is not material in terms of their presentation on the balance sheet.

The following table shows the aggregate amount reflected on the balance sheet for the financial instruments subject to a master netting and collateral agreement for 2021 and 2020:


Thousand euro

	2021
	Financial assets subject to collateral agreements
	Amount recognised on balance sheet	Amount offset (for collateral calculations only)	Guarantee received
	Amount recognised on balance sheet		Cash	Securities	Net value


Financial assets	(a)	(b)	(c)	(d)	(a)-(b)-(c)-(d)

Derivatives	1,603,160	1,338,552	278,944	—	(14,336)

Repos	4,935,785	—	22,350	4,927,409	(13,974)

Total	6,538,945	1,338,552	301,294	4,927,409	(28,310)

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Thousand euro

	2021
	Financial liabilities subject to collateral agreements
	Amount recognised on balance sheet	Amount offset (for collateral calculations only)	Guarantee given
	Amount recognised on balance sheet		Cash	Securities	Net value


Financial liabilities	(a)	(b)	(c)	(d)	(a)-(b)-(c)-(d)

Derivatives	1,744,351	1,338,552	596,202	159,273	(349,676)

Repos	5,454,650	–	37,643	5,680,214	(263,207)

Total	7,199,001	1,338,552	633,845	5,839,487	(612,883)


Thousand euro

	2020
	Financial assets subject to collateral agreements
	Amount recognised on balance sheet	Amount offset (for collateral calculations only)	Guarantee received
	Amount recognised on balance sheet		Cash	Securities	Net value


Financial assets	(a)	(b)	(c)	(d)	(a)-(b)-(c)-(d)

Derivatives	2,258,947	2,024,304	298,048	–	(63,405)

Repos	5,485,382	–	13,901	5,844,055	(372,574)

Total	7,744,329	2,024,304	311,949	5,844,055	(435,979)


Thousand euro

	2020
	Financial liabilities subject to collateral agreements
	Amount recognised on balance sheet	Amount offset (for collateral calculations only)	Guarantee given
	Amount recognised on balance sheet		Cash	Securities	Net value


Financial liabilities	(a)	(b)	(c)	(d)	(a)-(b)-(c)-(d)

Derivatives	3,140,883	2,024,304	1,283,589	12,244	(179,254)

Repos	6,785,687	–	33,087	6,782,288	(29,688)

Total	9,926,570	2,024,304	1,316,676	6,794,532	(208,942)

The values of derivative financial instruments which are settled through a clearing house as at 31 December 2021 and 2020 are indicated hereafter:


Thousand euro

	2021		2020


Derivative financial assets settled through a clearing house		1,148,242		1,363,111
Derivative financial liabilities settled through a clearing house		949,365		1,727,778

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Each day at close of business, all of the exposures are recalculated in accordance with the transaction inflows and outflows, changes in market variables and risk mitigation mechanisms established by the Group. Exposures are thus subjected to daily monitoring and controlled in accordance with the limits approved by the Board of Directors. This information is included in risk reports for disclosure to the departments and units responsible for their management and monitoring.

With regard to counterparty credit risk, the Group has different mitigation techniques. The main techniques are:

–

Netting agreements for derivatives (ISDA and CMOF).

–

Variation margin collateral agreements for derivatives (CSA and Schedule 3 - CMOF), repos (GMRA, EMA) and securities lending (GMSLA).

–

Initial margin collateral agreements for derivatives (CTA and SA).

By default, the Group has netting agreements with all of the counterparties that wish to trade in derivatives.

In order to operate in derivatives or repos with financial institutions, the Group has established the requirement of having variation margin collateral agreements. Furthermore, for derivative transactions with these institutions, the Group is required to exchange variation margin collateral with financial counterparties pursuant to Delegated Regulation (EU) 2251/2016. The Group’s standard variation margin collateral agreement, which complies with the aforementioned regulation, is bilateral (i.e. both parties are obliged to deposit collateral) and includes a daily exchange of guarantees in the form of cash and in euros.

Initial margin collateral agreements include the provision of guarantees which mitigate the potential future exposure with a counterparty in respect of the transactions subject to such agreements.

The Group has initial margin collateral agreements in place for derivative transactions with financial institutions pursuant to Delegated Regulation (EU) 2251/2016.

4.4.2.8 Assets pledged in financing operations

As at 31 December 2021 and 2020, there were certain financial assets pledged in financing operations, i.e. offered as collateral or guarantees for certain liabilities. These assets correspond mainly to loans linked to the issuance of mortgage covered bonds, public sector covered bonds and long-term asset-backed securities (see Note 20, Schedule III for transactions linked to the Spanish Mortgage Market and Schedule IV for details of issues). The remaining pledged assets are debt securities which are submitted in transactions involving assets sold under repurchase agreements, pledged collateral (loans or debt instruments) to access certain financing operations with central banks and all types of collateral provided to secure derivatives transactions.

Information on home equity loans granted in Spain, included in “Loans and advances – Customers” and linked to the issuance of mortgage covered bonds pursuant to the Spanish Mortgage Market Law, is included in Schedule III on “Information required to be kept by issuers of mortgage market securities and the special accounting mortgage register”, a special accounting record of the issuing entity Banco Sabadell, as required by Bank of Spain Circular 5/2011, applying Royal Decree 716/2009 of 24 April (implementing certain aspects of Law 2/1981 of 25 March on the regulation of the mortgage market).

The Group has used part of its portfolio of loans and similar credit in fixed-income securities by transferring assets to various securitisation funds created for this purpose. Under current regulations, securitisations in which there is no substantial risk transfer cannot be derecognised from the balance sheet.

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Thousand euro

	2021		2020

Fully derecognised from the balance sheet:		808,862		752,548
Securitised mortgage assets		118,986		113,369
Other securitised assets		397,367		632,599
Other transferred financial assets		292,509		6,580

Fully retained on the balance sheet:		6,950,706		8,176,528
Securitised mortgage assets		6,721,857		7,730,400
Other securitised assets		228,849		446,128
Total		7,759,568		8,929,076

The assets and liabilities associated with securitisation funds of assets originated after 1 January 2004, and for which inherent risks and rewards of ownership have not been transferred to third parties, have been retained in the consolidated balance sheet. As at 31 December 2021 and 2020, there was no significant financial aid from the Group for unconsolidated securitisations.

Schedule II to these consolidated annual financial statements includes certain information regarding the securitisation funds originated by the Group.

4.4.3. Financial risks

Financial risk is defined as the possibility of obtaining inadequate returns or having insufficient levels of liquidity that prevent an institution from meeting future requirements and expectations.

4.4.3.1 Liquidity risk

Liquidity risk refers to the possibility of losses being incurred as a result of the Institution being unable, albeit temporarily, to honour payment commitments due to a lack of liquid assets, or unable to access the markets to refinance debts at a reasonable cost. This risk may be associated with factors of a systemic nature or specific to the Institution itself.

In this regard, the Group aims to maintain a liquid asset base and a funding structure that, in line with its strategic objectives and based on its Risk Appetite Statement, allows it to honour its payment commitments normally and at a reasonable cost, both under business-as-usual conditions and in a stress situation caused by systemic and/or idiosyncratic factors.

The fundamental pillars of Banco Sabadell’s governance structure for liquidity management and control are the direct involvement of the governing body, committees and management bodies, following the model of three lines of defence, and a strict separation of duties, as well as a clear-cut structure of responsibilities.

Liquidity management

The Group follows a structure based on Liquidity Management Units (“UGLs”, for their acronym in Spanish) to manage its liquidity. Each UGL is responsible for managing its own liquidity and for setting its own metrics to control liquidity risk, working together with the Group’s corporate functions. At present, these UGLs are Banco Sabadell (includes Banco de Sabadell, S.A., which incorporates activity in foreign branches, as well as the business in Mexico of Banco de Sabadell, S.A., I.B.M. (IBM) and Sabcapital S.A. de C.V., SOFOM, E.R. (SOFOM) and the individual management of their own risk) and TSB.

In order to achieve these objectives, the Group’s current liquidity risk management strategy is based on the following principles and pillars, in line with the UGLs’ retail business model and the defined strategic objectives:

–

Risk governance and the involvement of the Board of Directors and Senior Management in the management and control of liquidity risk. The Board of Directors has the highest level of responsibility for the oversight of liquidity risk.

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–

Integration of the risk culture, based on prudent liquidity risk management and clear and consistent definitions of their terminologies, as well as its alignment with the Group’s business strategy through the established risk appetite.

–

Clear separation of responsibilities and duties between the organisation’s various units and bodies, with a clear identification of the three lines of defence, providing independence in the assessment of positions and in risk assessment and control.

–

Decentralised liquidity management system for the more significant units but with a centralised risk oversight and management system.

–

Sound identification, measurement, management, control and reporting processes for the different liquidity sub-risks to which the Group is exposed.

–

Existence of a funds transfer pricing system to transfer the cost of funding.

–

Balanced funding structure largely based on customer deposits.

–

Ample base of unencumbered liquid assets that can be accessed immediately to generate liquidity and which comprise the Group’s first line of liquidity.

–

Diversification of sources of funding, with controlled use of short-term wholesale funding without having to depend on individual fund suppliers.

–

Self-funding by the main banking subsidiaries outside of Spain.

–

Monitoring of the balance sheet volume being used as collateral in funding transactions.

–

Maintenance of a second line of liquidity that includes the capacity to issue covered bonds.

–

Holistic view of risk, through first- and second-tier risk taxonomies, and complying with regulatory requirements, recommendations and guidelines.

–

Alignment with stakeholders’ interests through regular public disclosure of liquidity risk information.

–

Availability of a Liquidity Contingency Plan.

As regards 2021, the effects of the COVID-19 crisis have been reduced, resulting in greater stability in lending volumes. Nevertheless, the mitigating actions taken by central banks in response to COVID-19 are still in place. Worthy of note is the asset purchase programmes designed to ensure market liquidity, the support put in place for bank lending, allowing banks to accept a larger number of loans as collateral and the reduction of the deduction from the market value of collateral pledged for loans, among others.

Tools/Metrics for monitoring and controlling liquidity risk management

Banco Sabadell Group has a system of metrics and thresholds which are provided in the RAS and which define the appetite for liquidity risk that has been previously approved by the Board of Directors. The system enables liquidity risk to be assessed and monitored, ensuring the achievement of strategic objectives, adherence to the risk profile, as well as compliance with regulations and supervisory guidelines. Within the Group-level monitoring of liquidity metrics, there are metrics that have been established at the Group level and which are calculated on a consolidated basis, metrics established at the Group level and rolled out to each Group UGL, as well as metrics established at the UGL level to reflect specific local characteristics.

It should be mentioned that the Group has designed and implemented a system of early warning indicators (EWIs) at the UGL level, which includes market and liquidity indicators adapted to the funding structure and business model of each UGL. The deployment of these indicators at the UGL level complements the RAS metrics and allows tensions in the local liquidity position and funding structure to be detected early, thereby facilitating the implementation of corrective measures and actions and reducing the risk of contagion between the different management units.

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The risk of each UGL is also monitored daily through the Structural Treasury Report, which measures the daily changes in the funding needs of the balance sheet, the daily changes in the outstanding balance of transactions in capital markets, as well as the daily changes in the first line of liquidity maintained by each UGL.

The metrics reporting and control framework involves, among other aspects:

–

Monitoring the RAS metrics and their thresholds on a consolidated basis, as well as those established for each UGL, in line with the established monitoring frequency.

–

Reporting the relevant set of metrics to the governing body, committees and management bodies, depending on the tiers into which those metrics have been classified.

–

In the event a threshold breach is detected, activating the communication protocols and necessary plans for its resolution.

Within the Group’s overall budgeting process, Banco Sabadell plans its liquidity and funding requirements over different time horizons, which it aligns with the Group’s strategic objectives and risk appetite. Each UGL has a 1-year and 5-year funding plan in which they set out their potential funding needs as well as their management strategy, and they regularly analyse compliance with that plan, any deviations from the projected budget and the adequacy of the plan in terms of the market environment.

In addition, Banco Sabadell regularly reviews the identification of potential liquidity risks and assesses their materiality. It also conducts regularly liquidity stress tests, which envisage a series of stress scenarios in the short and longer term, and it analyses its impact on the liquidity position and the main metrics in order to ensure that the exposures are consistent at all times with the established liquidity risk tolerance threshold.

The Institution also has an internal funds transfer pricing system to transfer the funding costs to business units.

Lastly, Banco Sabadell has a Liquidity Contingency Plan (LCP) in place, which sets forth the strategy for ensuring that the Institution has sufficient management capabilities and measures in place to minimise the negative impacts of a crisis situation on its liquidity position and to allow it to return to a business-as-usual situation. The LCP also aims to facilitate operational continuity in the management of liquidity, particularly in the event a crisis is caused by a subpar performance of one or more financial market infrastructures. The LCP can be invoked in response to different crisis situations affecting either the markets or the Institution itself. The key components of the LCP include, among others: the definition of the strategy for its implementation, measures available to generate liquidity in business-as-usual situations or in a crisis situation linked to the activation of the LCP and a communication plan (both internal and external) for the LCP.

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Residual maturity periods

The table below shows the breakdown by contractual maturity, excluding, in some cases, value adjustments and impairment losses, of certain pools of items on the consolidated balance sheet as at 31 December 2021 and 2020, under business-as-usual market conditions:



Thousand euro

							2021

Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

Money Market		820,709		50,506,624		601,264		639,359		617,358		—		—		—		—		53,185,314

Loans and advances		651,830		5,149,891		3,852,171		17,337,155		17,144,784		13,383,708		11,641,365		9,542,810		77,726,412		156,430,126

Debt securities		—		247,958		169,504		675,099		1,910,984		1,764,053		1,541,855		972,214		13,261,447		20,543,114

Other assets		—		—		—		—		—		—		—		—		—		—

Total assets		1,472,539		55,904,473		4,622,939		18,651,613		19,673,126		15,147,761		13,183,220		10,515,024		90,987,859		230,158,554

Money Market		—		5,556,755		48,136		608,723		27,651,130		5,089,523		6,619,156		65,728		159,630		45,798,781

Of which: Repos		—		4,415,675		—		482,405		560,425		—		—		—		—		*5,458,505*

Customer deposits		143,660,961		4,814,054		2,078,848		4,755,779		2,055,104		1,313,814		104,546		877,871		130,057		159,791,034

Issues of marketable securities (*)		—		110,331		1,312,490		3,282,225		2,943,224		5,185,577		2,779,331		2,496,107		4,147,520		22,256,805

Of which: Secured senior debt		—		11,375		347,591		1,539,210		1,454,224		2,803,577		957,631		429,107		2,882,494		*10,425,209*

Of which: Unsecured senior debt		—		44,146		604,415		582,215		989,000		2,382,000		1,521,700		567,000		500,000		*7,190,476*

Of which: Subordinated liabilities		—		—		—		1,150,000		500,000		—		300,000		1,500,000		765,025		*4,215,025*

Other liabilities		—		33,965		127,482		224,510		227,802		195,440		161,018		141,184		744,053		1,855,454

Total liabilities		143,660,961		10,515,105		3,566,956		8,871,237		32,877,260		11,784,354		9,664,051		3,580,890		5,181,260		229,702,074

Of which:

Secured liabilities		—		4,427,050		347,591		1,426,576		2,014,649		1,911,017		7,503,066		429,107		2,287,455		*20,346,511*

Unsecured liabilities		143,660,961		6,088,055		3,219,365		7,444,661		30,862,611		9,873,337		2,160,985		3,151,783		2,893,805		*209,355,563*

Trading and Hedging Derivatives

Receivable		—		3,673,541		3,724,587		8,481,451		11,361,142		14,097,461		3,675,670		5,579,757		29,751,995		80,345,604

Payable		—		3,431,728		3,822,997		8,321,320		9,868,689		13,981,588		3,653,398		5,151,087		32,153,776		80,384,583

Net		—		241,813		(98,410)		160,131		1,492,453		115,873		22,272		428,670		(2,401,781)		(38,979)



Contingent risks

Financial guarantees		1,022		43,498		72,482		326,089		134,790		79,928		45,349		34,759		1,296,226		2,034,143

(*) For details of maturities of issues aimed at institutional investors, see the section entitled “ Funding strategy and liquidity trends in 2021” in this note.

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Thousand euro

							2020

Time to maturity	On demand		Up to 1 month		1 to 3 months		3 to 12 months		1 to 2 years		2 to 3 years		3 to 4 years		4 to 5 years		More than 5 years		Total

Money Market		656,091		35,610,081		2,167,396		648,771		311,993		—		—		—		—		39,394,332

Loans and advances		611,640		2,791,832		5,053,402		15,332,898		13,986,456		16,244,015		12,454,253		9,270,716		71,050,798		146,796,010

Debt securities		—		131,986		279,697		606,337		808,598		2,095,323		1,832,083		1,583,921		15,188,692		22,526,637

Other assets		—		11		128		160		459		576		6,100		—		—		7,434

Total assets		1,267,731		38,533,910		7,500,624		16,588,166		15,107,505		18,339,914		14,292,437		10,854,637		86,239,490		208,724,413

Money Market		230.94238		6,172,131		2,922,359		2,096,940		1,222,132		27,067,223		73,483		62,980		142,840		39,760,319

Of which: Repos		—		4,722,060		1,374,497		510,558		195,900		—		—		—		—		*6,803,015*

Customer deposits		126,725,560		5,362,495		2,510,793		9,460,571		2,512,954		684,537		614,051		342,246		50,139		148,263,346

Issues of marketable securities (*)		—		24,867		822,536		2,411,476		4,129,336		2,988,603		5,154,980		2,761,172		3,771,297		22,064,267

Of which: Secured senior debt		—		13,368		436,261		1,629,262		1,797,121		1,499,603		2,772,314		939,472		2,756,272		*11,843,673*

Of which: Unsecured senior debt		—		8,149		22,508		346,775		1,182,215		989,000		2,382,667		1,521,700		500,000		*6,953,014*

Of which: Subordinated liabilities		—		—		—		428,239		1,150,000		500,000		—		300,000		515,025		*2,893,264*

Other liabilities		—		36,707		128,683		305,799		288,769		232,672		199,362		163,350		941,911		2,297,253

Total liabilities		126,725,791		11,596,199		6,384,371		14,274,787		8,153,191		30,973,036		6,041,877		3,329,748		4,906,185		212,385,185

Of which:

Secured liabilities		—		4,735,428		2,811,837		3,602,508		2,382,330		1,499,603		1,938,081		939,472		2,756,272		*20,665,531*

Unsecured liabilities		126,725,791		6,860,771		3,572,534		10,672,279		5,770,861		29,473,433		4,103,796		2,390,276		2,149,913		*191,719,654*

Trading and Hedging Derivatives

Receivable		—		23,059,291		21,820,479		14,480,698		10,964,620		12,171,348		16,417,300		5,825,214		34,534,819		139,273,769

Payable		—		16,281,187		19,588,410		18,236,030		15,186,698		11,639,502		16,059,618		6,194,162		36,316,279		139,501,886

Net		—		6,778,104		2,232,070		(3,755,332)		(4,222,078)		531,846		357,683		(368,949)		(1,781,459)		(228,117)


Contingent risks

Financial guarantees		14,076		43,202		71,718		323,101		134,456		80,794		45,525		34,534		1,288,231		2,035,637

In this analysis, very short-term maturities traditionally represent funding requirements, as they include continuous maturities of short-term liabilities, which in typical banking activities see higher turnover rates than assets, but as they are continuously renewed they actually end up satisfying these requirements and even resulting in an increase in outstanding balances.

Furthermore, the Group’s funding capacity in capital markets is systematically checked to ensure it can meet its short-, medium- and long-term needs.

With regard to the information included in this table, it is worth highlighting that the table shows the residual term to maturity of the asset and liability positions on the balance sheet, broken down into different time brackets.

The information provided is static and does not reflect foreseeable funding requirements.

It should also be noted that cash flow breakdowns in the parent company have not been deducted.

In order to present the contractual maturities of financial liabilities with certain particular characteristics, the parent company has taken the following approach:

–

For any transaction that includes flows corresponding to repayments (regular or irregular), each capital flow is shown in the time bracket in which the payment/collection is expected to take place (in accordance with the contractual repayment schedule).

–

Demand liabilities are included in the “on demand” tranche, without taking into account their type (stable vs. unstable).

–

There are also contingent commitments which could lead to changes in liquidity requirements. These are fundamentally credit facilities with amounts undrawn by the borrowers as at the balance sheet date. The Board of Directors also establishes limits in this regard for control purposes.

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–

Balances from financial guarantee contracts have been included in the parent company’s table, assigning the maximum amount of the guarantee to the first year in which the guarantee can be enforced.

–

Financing in capital markets via instruments which include clauses that could lead to accelerated repayment (puttables or instruments with clauses linked to a credit rating downgrade) is reduced in line with the Group’s financial liabilities. It is for this reason that the estimated impact on the parent company would not be significant.

–

As at 31 December 2021 and 2020, the Group had no instruments in addition to those regulated by master agreements associated with the arrangement of derivatives and repos/reverse repos.

–

The Group does not have any instruments which allow the Institution to decide whether to settle its financial liabilities using cash (or another financial asset) or through the submission of its own shares as at 31 December 2021 and 2020.

Funding strategy and evolution of liquidity in 2021

The Group’s primary source of funding is customer deposits (mainly demand deposits and term deposits acquired through the branch network), supplemented with funding raised through interbank and capital markets in which the Institution has various short-term and long-term funding programmes in order to achieve an adequate level of diversification by type of product, term and investor. The Institution continues to maintain a diversified portfolio of liquid assets that are largely eligible as collateral in exchange for access to funding operations with the European Central Bank (ECB).

On-balance sheet customer funds

As at 31 December 2021 and 2020, on-balance sheet customer funds broken down by maturity were as follows:


Million euro / %

	Note	2021		3 months			6 months			12 months			>12 months			No mat.

*Total on-balance sheet customer funds ()**			162,020		3.5	%		1.4	%		1.5	%		2.7	%		90.9	%

Deposits with agreed maturity			13,623		36.7	%		13.8	%		17.1	%		32.4	%		—	%

Sight accounts	19		147,268		—	%		—	%		—	%		—	%		100.0	%

Retail issues			1,129		62.9	%		33.9	%		3.2	%		—	%		—	%

(*) Includes customer deposits (excl. repos) and other liabilities placed via the branch network: non-convertible bonds issued by Banco Sabadell, commercial paper and others.


Million euro / %

	Note	2020		3 months		6 months		12 months		>12 months		No mat.

*Total on-balance sheet customer funds ()**			150,778		4.1 %		2.4 %		3.8 %		3.2 %		86.5 %

Deposits with agreed maturity			19,359		31.7 %		17.2 %		29.7 %		21.4 %		— %

Sight accounts	19		130,294		— %		— %		— %		— %		100.0 %

Retail issues			1,125		5.5 %		28.4 %		4.9 %		61.2 %		— %

(*) Includes customer deposits (excl. repos) and other liabilities placed via the branch network: non-convertible bonds issued by Banco Sabadell, commercial paper and others.

The downward trend of interest rates in financial markets has resulted in a change in the composition of on-balance sheet customer funds, as term deposits flowed through to demand deposits.

Off-balance sheet customer funds managed by the Group and those sold but not under management are shown in Note 27 to these consolidated annual financial statements.

The Group’s deposits are sold through the following business units/companies of the Group (Banking Business Spain, TSB and Mexico). Details of the volumes of these business units are included in the “Businesses” section of the consolidated Directors’ Report.

In 2021, the positive trend in terms of the generation of a customer funding gap observed in recent years has continued, which has allowed the Group to continue reducing its Loan-to-Deposit (LtD) ratio (from 97.6% as at 2020 year-end to 96.3% as at 2021 year-end).

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Capital markets

In 2021, the level of funding in capital markets remained steady because of the need to meet regulatory requirements such as MREL (Minimum Requirement for own funds and Eligible Liabilities), focusing on products that have a tighter cost-to-term ratio given the Institution’s credit rating. The outstanding nominal amount of funding in capital markets, by type of product, as at 31 December 2021 and 2020, is shown below:


Million euro

	2021		2020

Outstanding nominal balance		21,086		20,788

Covered Bonds		9,754		10,862

Of which: TSB		2,083		1,390

Commercial paper and ECP		—		—

Senior debt		4,335		4,621

Senior non-preferred debt		2,042		1,451

Subordinated debt and preference shares		4,215		2,888

Of which: TSB		—		428

Securitisation bonds		738		953

Of which: TSB		—		—

Other		2		13

Maturities of issues in capital markets, by type of product (excluding securitisations and commercial paper), and considering their legal maturity, as at 31 December 2021 and 2020, are analysed below:


Million euro

	2022		2023		2024		2025		2026		2027		>2027		Balance outstanding

Covered bonds (*)		1,717		1,388		2,743		836		390		1100		1580	9,754

Senior Debt (**)		25		1,475		735		1,600		—		500		—	4,335

Senior non-preferred debt (**)		—		—		975		500		67		—		500	2,042

Subordinated debt and preference shares (**)		—		—		—		—		500		—		3,715	4,215

Other medium/long term financial instruments (**)		—		—		2		—		—		—		—	2

Total		1,742		2,863		4,455		2,936		957		1,600		5,795	20,348

(*) Secured issues.

(**) Unsecured issues.


Million euro

	2021		2022		2023		2024		2025		2026		>2026		Balance outstanding

Covered bonds (*)		1,808		1,696		1,388		2,684		836		390		2,060	10,862

Senior Debt (**)		294		25		1,473		729		1,600		—		500	4,621

Senior non-preferred debt (**)		—		—		—		951		500		—		—	1,451

Subordinated debt and preference shares (**)		—		—		—		—		—		923		1,965	2,888

Other medium/long term financial instruments (**)		10		—		—		3		—		—		—	13

Total		2,112		1,721		2,861		4,367		2,936		1,313		4,525	19,835

(*) Secured issues.

(**) Unsecured issues.

The Group is an active participant in capital markets and has a number of funding programmes in operation, with a view to diversifying its different funding sources.

In terms of short-term funding, as at year-end the Bank had one corporate commercial paper programme in operation, which governs issues of commercial paper and is aimed at institutional and retail investors. The Banco Sabadell 2021 Commercial Paper Programme was registered with the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (IBERCLEAR) and had an issuance limit of 7 billion euros, which can be extended to 9 billion euros. As at 31 December 2021, the outstanding balance of the programme was 426 million euros (net of commercial paper subscribed by Group companies), compared with 374 million euros as at 31 December 2020.

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Regarding medium- and long-term funding, the Institution has the following programmes in operation:

–

Programme for the issuance of non-equity securities (“Fixed Income Programme”) registered with the CNMV on 2 November 2021, with an issuance limit of 10 billion euros: this programme regulates the issuance of ordinary, non-convertible, non-preferred, subordinated or structured bonds and debentures, in addition to mortgage covered bonds, public sector covered bonds and mortgage bonds issued under Spanish law through the CNMV and aimed at institutional and retail investors, both domestic and foreign. The limit available for new issues under the Banco Sabadell programme for the issuance of non-equity securities for 2021, as at 31 December 2021, was 9,933 million euros (as at 31 December 2020, the limit available under the Fixed Income Programme for 2020 was of 8.5 billion euros).

Banco Sabadell’s public issuance volume under the Fixed-Income Programme in 2021 amounted to a total of 67 million euros:

Million euro

ISIN Code

Type of investor

Issue Date

Amount

Term

Issue of Ordinary Non-Preferred Bonds 1/2021

ES0213860333

Institutional

29/11/2021

–

Euro Medium Term Notes (EMTN) programme, registered with the Irish Stock Exchange on 31 May 2021, and renewed on 3 August and 3 November 2021. This programme allows senior debt (preferred and non-preferred) and subordinated bonds to be issued in various currencies, with a maximum limit of 15 billion euros.

Banco Sabadell’s issuance volume under the EMTN Programme in 2021 amounted to a total of 1 billion euros. On 15 January, it issued Tier 2 subordinated debt for 500 million euros, with a 10.25-year maturity and an early cancellation option in favour of Banco Sabadell after the fifth year. Furthermore, on 16 June 2021, it carried out an inaugural green bond issuance of senior non- preferred debt in the amount of 500 million euros with a 7-year maturity and an early cancellation option in favour of Banco Sabadell in the sixth year. Throughout the year, Banco Sabadell has issued the following:

Million euro

ISIN Code

Type of investor

Issue Date

Amount

Term

Subordinated Bonds 1/2021

XS2286011528

Institutional

15/1/2021

500

10.25

Senior Non Preferred 1/2021 issue

XS2353366268

Institutional

16/6/2021

500

On 15 March 2021, the Bank carried out an issue of subordinated securities contingently convertible into newly issued ordinary shares of Banco Sabadell (Additional Tier 1), for a nominal amount of 500 million euros, at an annual interest rate of 5.75%, subject to reset every five years as from 15 September 2026.

Furthermore, on 19 November 2021, the Bank carried out an issue of undated securities contingently convertible into newly issued ordinary shares of Banco Sabadell (Additional Tier 1), for a nominal amount of 750 million euros, at an annual interest rate of 5%, subject to reset every five years as from 19 November 2027.

The aforesaid subordinated securities and undated securities are perpetual, although they may be converted into newly issued Banco Sabadell ordinary shares, if either Banco Sabadell or its consolidable group has a Common Equity Tier 1 (CET1) ratio lower than 5.125%, calculated in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, of 26 June, on prudential requirements for credit institutions and investment firms.

Meanwhile, on 22 June 2021, TSB carried out a new covered bonds issuance. TSB placed with the institutional market a 500 million pound 7-year transaction with a floating coupon set at SONIA + 37 bp.

In relation to asset securitisation:

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–

Since 1993, the Group has been very active in this market and has taken part in various securitisation programmes, sometimes acting together with other institutions, granting mortgage loans, loans to small and medium-sized enterprises and consumer loans.

–

There are currently 17 outstanding asset securitisation transactions fully recognised on the balance sheet. Although part of the bonds issued were retained by the Institution as liquid assets eligible as collateral in exchange for access to the European Central Bank’s funding operations, the rest of the bonds were placed in capital markets. As at the end of 2021, the nominal value of asset-backed securities placed in the market was 738.4 million euros.

–

During 2021, Banco de Sabadell carried out an early call of the fund TDA 14 mixto, FTA in January, on the date of the clean-up call. It also carried out an early call of the fund IM Sabadell PYME 10, FT in February, whose bonds were fully retained by Banco de Sabadell.

Coinciding with the repayment of TLTRO II, on 24 June 2020 Banco Sabadell requested a withdrawal of 27 billion euros from TLTRO III (see Note 1.3.21). In addition, on 24 March 2021, Banco Sabadell requested a withdrawal of 5 billion euros from TLTRO III. Considering this, as at 31 December 2021, the total balance drawn down by Banco Sabadell stood at 32 billion euros, corresponding to TLTRO III. The Group has recognised 313,056 thousand euros in interest income on TLTRO III during 2021 (143,250 thousand euros during 2020).

On the other hand, the Bank of England has also launched a package of measures to drive lending in the COVID-19 environment.

These include the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), whose aim is to incentivise lending to SMEs in the United Kingdom. Through this programme, British banks can carry out 4-year drawdowns, extendable in a first phase to 6 years, in the case of having one or more lenders accredited by the BBLS (Bounce Back Loan Scheme) to be able to align with the term of loans granted through the BBLS and, in a second phase for a further 4 years, up to a total of 10, providing collateral eligible as consideration. To determine the volume that can be extended, in this first phase, the total volume of BBLS loans outstanding as at 30 June 2021 will be considered, with those loans already extended in the previous phase being eligible for extension in the second phase for an additional 4 years, and considering the total volume of BBLS loans of the Institution outstanding at that time. TSB, as member of the Sterling Monetary Framework (SMF), made use of the TFSME throughout 2021, refinancing through this programme the amount outstanding from the TFS, as well as carrying out additional drawdowns during the second half of the year, resulting in a total amount taken from the Bank of England of 6,545 million euros as at 31 December 2021.

Liquid assets

In addition to these sources of funding, the Group maintains a liquidity buffer in the form of liquid assets to meet potential liquidity needs.


Million euro
	2021		2020

Cash(*) + Net Interbank Position		43,189		29,560
Funds available in Bank of Spain facility		1,527		7,728
ECB eligible assets not pledged in facility		4,429		3,387
Other non-ECB eligible marketable assets (**)		4,738		3,710

Memorandum item:
Balance drawn from Bank of Spain facility(*)		32,000		27,978
Balance drawn from Bank of England Term Funding Scheme (**)		6,545		3,409
Total Liquid Assets Available		53,883		44,385

(*) Excess reserves at Central Banks.

(***) Corresponds to 32 billion euros of TLTRO III in 2021, while in 2020 it included 27 billion euros of TLTRO III and the drawdown of 1.2 billion dollars, with a 3-week maturity, from the ECB .

(****) Includes 5,500 million pounds for Small and Medium-sized Enterprises.

With respect to 2020, the Group’s first line of liquidity increased during the year by 9,498 million euros. Of particular note are the increase in the issuance of own-name securities and other non-marketable securities pledged in the Bank of Spain and the Bank of England facilities, as well as the positive funding gap generated by a greater increase of funds than lending. The balance of central bank reserves and the net interbank position increased by 13,629 million euros in 2021, mainly due to the additional withdrawal of 5

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billion euros from TLTRO III and sales made in the fixed income portfolio. There is also a volume of ECB-eligible liquid assets, whose balance has decreased by 5,159 million euros during 2021, also primarily due to the additional TLTRO III drawdown, while available non-ECB-eligible assets have increased by 1,028 million euros during 2021, mainly due to the increase in TSB.

It should be noted that the Group follows a decentralised liquidity management model. This model tends to limit the transfer of liquidity between the various subsidiaries involved in liquidity management, thereby limiting intra-group exposures beyond any restrictions imposed by local regulators on each subsidiary. Thus, the subsidiaries involved in liquidity management determine their liquidity position by considering only those assets in their possession that meet the eligibility, availability and liquidity criteria set forth both internally and in regulations in order to comply with regulatory minima.

In addition to the first line of liquidity, each UGL monitors its liquidity buffer with internal and conservative criteria, called counterbalancing capacity. In the case of the BSab UGL (includes Banco de Sabadell, S.A., which incorporates activity in foreign branches, as well as the business in Mexico of Banco de Sabadell, S.A.), this liquidity buffer comprises the first and second lines of liquidity. As at 31 December 2021, the second line of liquidity amounted to 11,536 million euros, including the issuing capacity of mortgage covered bonds considering the average haircut applied by the ECB to own-use covered bonds to obtain funding, as well as assets available for up to 7 days of the business in Mexico not included in the first line of liquidity.

For the TSB UGL, this metric is calculated as the sum of the first line of liquidity and those loans pre-pledged with the Bank of England to obtain funding. As at 31 December 2021, the amount of loans pre-pledged with the Bank of England stood at 5,786 million euros (6,499 million euros as at 31 December 2020).

There are no significant amounts of cash or cash equivalents that are unavailable for use by the Group.

Compliance with regulatory ratios

As part of its liquidity management, Banco Sabadell Group monitors the short-term liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) and reports the necessary information to the regulator on a monthly and quarterly basis, respectively. The measurement of liquidity based on these metrics forms part of liquidity risk control arrangements in UGLs.

In terms of the LCR, since 1 January 2018, the regulatory required minimum LCR has been 100%, a level which is amply surpassed by all of the Group’s UGLs. At the Group level, throughout the year, the LCR has consistently been well above 100%. As at 31 December 2021, the LCR stood at 221% in the Group, 254% in Banco Sabadell Spain and 194% in the TSB UGL (as at 31 December 2020, 198% in the Group, 221% in Banco Sabadell Spain and 201% in the TSB UGL).

In terms of the NSFR, the regulatory minimum requirement, effective from June 2021, is 100%, a level that is amply surpassed by all UGLs of the Institution given its funding structure, in which customer deposits are predominant and where the majority of market funding is in the medium-/long-term. As at 31 December 2021, the NSFR stood at 141% for the Group, 137% for Banco Sabadell Spain and 149% for the TSB UGL.

4.4.3.2. Market risk

Market risk is defined as the risk of losses in the market value of financial instrument positions due to variations in risk factors affecting their quoted price or market performance, their volatility, or the correlation between them.

Positions that generate market risk are usually held in connection with trading activity, which consists of hedging transactions arranged by the Bank to provide services to its customers as well as discretionary proprietary positions.

Market risk can also arise from the mere maintenance of overall (also known as structural) balance sheet positions that in net terms are left open. This risk is described in the sections on structural risks.

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The items of the consolidated balance sheet as at 31 December 2021 and 2020 are shown below, making a distinction between positions included in trading activity and other positions. In the case of items not included in trading activity, their main risk factor is indicated:


Thousand euro
	31/12/2021
	On-balance sheet balance		Trading activity		Other		Main risk factor for balance sheet under “Other”

Assets subject to market risk		251,946,591		1,791,687		250,154,904

Cash, cash balances at central banks and other demand deposits		49,213,196		—		49,213,196		Interest rate

Financial assets held for trading		1,971,629		1,754,670		216,959		Interest rate; credit spread

Non-trading financial assets mandatorily at fair value through profit or loss		79,559		11,942		67,617		Interest rate; credit spread

Financial assets at fair value through other comprehensive income		6,869,637		25,075		6,844,562		Interest rate; credit spread

Financial assets at amortised cost		178,869,317		—		178,869,317		Interest rate

Derivatives – Hedge accounting		525,382		—		525,382		Interest rate

Investments in joint ventures and associates		638,782		—		638,782		Equities

Other assets		13,779,089		—		13,779,089		—

Liabilities subject to market risk		238,950,310		1,180,734		237,769,576

Financial liabilities held for trading		1,379,898		1,180,734		199,164		Interest rate
Derivatives – Hedge accounting		512,442		—		512,442		Interest rate
Financial liabilities at amortised cost		235,179,222		—		235,179,222		Interest rate
Other liabilities		1,878,748		—		1,878,748		—

Equity		12,996,281				12,996,281


Thousand euro
	31/12/2020
	On-balance sheet balance		Trading activity		Other		Main risk factor for balance sheet under “Other”

Assets subject to market risk		235,763,292		2,495,230		233,268,061

Cash, cash balances at central banks and other demand deposits		35,184,902		—		35,184,902		Interest rate

Financial assets held for trading		2,678,836		2,412,144		266,692		Interest rate; credit spread

Non-trading financial assets mandatorily at fair value through profit or loss		114,198		10,566		103,631		Interest rate; credit spread

Financial assets at fair value through other comprehensive income		6,676,801		72,520		6,604,281		Interest rate; credit spread

Financial assets at amortised cost		174,488,258		—		174,488,258		Interest rate
Derivatives – Hedge accounting		549,550		—		549,550		Interest rate
Investments in joint ventures and associates		779,859		—		779,859		Equities
Other assets		15,290,888		—		15,290,888		—

Liabilities subject to market risk		223,271,654		2,308,943		220,962,711

Financial liabilities held for trading		2,653,849		2,308,943		344,905		Interest rate
Derivatives – Hedge accounting		782,657		—		782,657		Interest rate
Financial liabilities at amortised cost		217,390,766		—		217,390,766		Interest rate
Other liabilities		2,444,382		—		2,444,382		—

Equity		12,491,638		—		12,491,638

The market risk acceptance, management and oversight system is based on managing positions expressly assigned to different trading desks and establishing limits for each one, in such a way that the trading desks have the obligation to always manage their positions within the limits established by the Board of Directors and the Technical Risk Committee. Market risk limits are aligned with the Group’s risk appetite framework and objectives.

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Trading activity

The main market risk factors considered by the Group in its trading activity are:

–

Equity price risk: risk arising from fluctuations in the value of capital instruments (shares and quoted indices). This risk is reflected in the market prices of the securities and their derivatives.

Changes in commodities prices have not had an impact in the year, as the Group has residual (both direct and underlying) exposures.

Market risk in trading activities is measured using the VaR and stressed VaR methodologies. This allows risks to be standardised across different types of financial market transactions.

VaR provides an estimate of the maximum potential loss associated with a position due to adverse, but normal, movements of one or more of the identified parameters generating market risk. This estimate is expressed in monetary terms and refers to a specific date, a particular level of confidence and a specific time horizon. A 99% confidence interval is used. Due to the low complexity of the instruments and the high level of liquidity of the positions, a time horizon of 1 day is used.

The reliability of the VaR methodology used can be checked using backtesting techniques, which serve to verify that the VaR estimates fall within the confidence level considered. Backtesting consists of comparing daily VaR against daily results. If losses exceed the VaR level, an exception occurs. In 2021, no exceptions occurred in the backtesting exercise, whereas in 2020 three exceptions occurred due to the impact of COVID-19 on sovereign bond spreads in the European periphery.

Stressed VaR is calculated in the same way as VaR but with a historical insight into variations of the risk factors in stressed market conditions. This stress situation is determined on the basis of currently outstanding transactions, and it can vary if the portfolios’ risk profile changes. The methodology used for this risk metric is historical simulation.

The monitoring of market risk is supplemented with additional measurements such as risk sensitivities, which refer to a change in the value of a position or portfolio in response to a change in a specific risk factor, and also with the calculation of management results, which are used to monitor stop-loss limits.

Furthermore, specific simulation exercises are carried out applying extreme market scenarios (stress testing), which analyse the impacts of different historical and theoretical scenarios on the portfolios.

Market risk is monitored on a daily basis and reports are made to supervisory bodies on the existing risk levels and on the compliance with the limits set forth by the Technical Risk Committee for each trading desk (limits based on nominal, VaR and sensitivity, as applicable). This makes it possible to keep track of changes in exposure levels and measure the contribution of market risk factors.

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The market risk incurred on trading activity in terms of 1-day VaR with a 99% confidence interval for 2021 and 2020 was as follows:


Million euro
	2021			2020
	Average	Maximum	Minimum	Average	Maximum	Minimum

Interest rate risk	0.88	1.86	0.55	1.42	2.71	0.60

Currency risk-trading	1.61	3.13	0.03	0.46	3.22	0.01

Equities	0.16	1.89	0.04	0.19	0.23	0.08

Credit spread	0.25	0.62	0.07	1.10	2.14	0.20
Aggregate VaR	2.89	5.39	1.15	3.17	5.05	1.26

During 2021, the overall VaR figures of the trading activity have remained at medium-low levels, the exchange rate being the main risk factor, as result of the impact that the pandemic had on the markets during the first quarter of 2020 and also due to a higher exposure of portfolios to this risk factor. There were also rises in interest rate curves and credit spreads and increases in equity indices, which did not significantly affect the portfolios given the limited exposure to these risk factors during this period.

Structural interest rate risk

–

The Group identifies five interest rate sub-risks: Repricing risk: it is the risk arising from mismatches at the time the repricing of interest rate-sensitive instruments occurs, including those changes in the time structure of interest rates that occur consistently along the yield curve (parallel changes).

–

Automatic optionality risk comprises the risk arising from automatic options (e.g., floors and lending caps), both embedded and explicit, in which the UGB or its customer can alter the level and timing of their cash flows and in which the holder will almost certainly exercise the option when it is in their financial interest to do so.

–

Behavioural optionality risk arises from the flexibility embedded within the terms of certain financial contracts, which allow variations in interest rates to cause a change in customer behaviour.

The Group’s management of this risk pursues two fundamental objectives:

–

To stabilise and protect the net interest margin, preventing interest rate movements from causing excessive variations in the budgeted margin.

–

To minimise the volatility of the economic value of equity, this perspective being complementary to that of the margin.

Interest rate risk is managed through a Group-wide approach on the basis of the RAS, approved by the Board of Directors. A decentralised model is followed based on Balance Sheet Management Units (UGBs, for their acronym in Spanish). In coordination with the Group’s corporate functions, each UGB has the autonomy and capacity to carry out risk management and control duties.

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The Group’s current interest rate risk management strategy is based on the following principles in particular, in line with the business model and the defined strategic objectives:

–

Each UGB has appropriate tools and robust processes and systems in order to properly identify, measure, manage, control and report on IRRBB. The Group uses these to obtain information about all of the identified sources of IRRBB, assess their effect on the net interest margin and the economic value of equity and measure the vulnerability of the Group/UGB in the event of potential losses arising from IRRBB under different scenarios in the interest rate curves.

–

At the corporate level, a series of limits are established for overseeing and monitoring IRRBB exposure levels, which are aligned with internal risk tolerance policies. However, each UGB has the autonomy and structure required to properly manage and control IRRBB and CSRBB. Specifically, each UGB has sufficient autonomy to choose the management target that it will pursue, although all UGBs should follow the principles and critical parameters set by the Group, adapting them to the specific characteristics of the region in which they operate.

–

The existence of a transfer pricing system.

–

The set of systems, processes, metrics, limits, reporting arrangements and governance arrangements included within the IRRBB strategy must comply with regulatory requirements at all times.

As defined in the IRRBB management and control policy, the first line of defence is undertaken by the various Balance Sheet Management Units (UGBs), which report to the various local Asset and Liability Committees. Their main role is to manage interest rate risk, ensuring it is assessed on a recurrent basis through management and regulatory metrics, taking into account the modelling of the various balance sheet totals and the level of risk taken.

The metrics developed to control and monitor the Group’s structural interest rate risk are aligned with the market’s best practices and are implemented consistently across all UGBs and by each of the local asset and liability committees. The diversification effect between currencies and UGBs is taken into account when presenting overall figures.

The metrics that the Group calculates on a monthly basis are as follows:

–

Net interest margin sensitivity: dynamic metric that measures the impact of interest rate fluctuations at different time horizons. It is obtained by comparing the net interest margin over a time horizon in the baseline scenario, which would be the one obtained from implied market interest rates, against the one obtained in a scenario of instant disruption, always considering the result obtained in the least favourable scenario. This metric supplements the economic value of equity sensitivity.

–

Economic value of equity sensitivity: static metric that measures the impact of interest rate fluctuations. It is obtained by comparing the economic value of the balance sheet in the baseline scenario against the one obtained in a scenario of instant disruption, always considering the result obtained in the least favourable scenario. This is done by calculating the present value of interest rate-sensitive items as an update in the risk-free yield curve, on the reference date, of future payments of principal and interest without taking into account profit margins, in line with the Group’s IRRBB management strategy. This metric supplements the net interest margin sensitivity.

In the quantitative interest rate risk estimations made by each UGB, a series of interest rate scenarios are designed which allow the different sources of risk mentioned above to be identified. These scenarios include, for each significant currency, parallel movements and non-parallel movements in the interest rate curve. Based on these, sensitivity is calculated as the difference resulting from:

–

Baseline scenario: market interest rate movements based on implied interest rates.

–

Stressed scenario: a shift in interest rates in relation to the baseline scenario, with the extent of this shift varying depending on the scenario to be calculated. A minimum post-disruption interest rate is applied, starting at -100 bp for current maturities and increasing by 5 bp intervals, eventually reaching 0% after 20 years or more.

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In addition, measurements are carried out that include assumptions on the balance sheet’s performance based on forecasting scenarios of the Group’s Financial Plan, referring to scenarios of interest rates, volumes and margins.

Furthermore, in accordance with the Group’s corporate principles, all UGBs regularly carry out stress tests, which allow them to forecast high-impact situations with a low probability of occurrence that could place UGBs in a position of extreme exposure in relation to interest rate risk, and they also consider mitigating actions for such situations.

The following table gives details of the Group’s interest rate gap as at 31 December 2021 and 2020:


Thousand euro

			2021

Time to maturity	Up to 1 month	1 to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Total


Money Market	51,444,557	642,925	536,886	560,946	—	—	—	—	53,185,314

Loans and advances	21,535,549	17,995,202	44,644,079	21,591,930	13,065,877	10,720,014	8,498,091	18,379,384	156,430,126

Debt securities	857,839	486,726	237,455	1,824,255	1,546,186	1,494,251	972,214	13,124,187	20,543,113

Other assets	—	—	—	—	—	—	—	—	—
Total assets	73,837,945	19,124,853	45,418,420	23,977,131	14,612,063	12,214,265	9,470,305	31,503,571	230,158,553

Money Market	44,399,516	68,987	726,837	562,504	11,387	10,632	9,396	9,521	45,798,780

Customer deposits	120,591,033	3,273,525	9,927,201	6,240,826	5,196,402	4,045,350	4,747,226	5,769,470	159,791,033

Issues of marketable securities	3,268,999	2,336,211	2,137,459	2,539,000	3,510,000	2,658,110	2,457,000	3,350,025	22,256,804

Of which: Subordinated liabilities	—	—	1,150,000	500,000	—	300,000	1,500,000	765,025	4,215,025

Other liabilities	67,713	182,548	343,475	180,694	157,013	129,087	114,763	680,161	1,855,454
Total liabilities	168,327,261	5,861,271	13,134,972	9,523,024	8,874,802	6,843,179	7,328,385	9,809,177	229,702,071

Hedging Derivatives	21,026,307	(3,048,310)	(1,768,615)	(9,450,677)	(1,689,870)	655,000	1,488,242	(7,212,077)	—

Interest rate gap	(73,463,008)	10,215,271	30,514,834	5,003,429	4,047,390	6,026,086	3,630,161	14,482,316	456,479

Thousand euro

			2020

Time to maturity	Up to 1 month	1 to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Total


Money Market	36,288,646	2,262,392	647,395	195,900	—	—	—	—	39,394,333

Loans and advances	21,548,366	19,361,922	41,528,676	17,350,167	14,266,266	9,924,226	7,287,614	15,528,774	146,796,010

Debt securities	703,271	846,318	517,188	412,999	1,914,820	1,599,902	1,467,462	15,064,677	22,526,637

Other assets	8	247	3,310	2,969	891	9	—	—	7,434
Total assets	58,540,290	22,470,879	42,696,570	17,962,035	16,181,976	11,524,137	8,755,075	30,593,450	208,724,413

Money Market	34,558,562	4,227,133	753,612	197,063	2,094	7,071	11,606	3,178	39,760,319

Customer deposits	107,918,360	3,617,491	13,193,029	5,607,265	3,719,182	3,600,881	3,378,151	7,228,987	148,263,346

Issues of marketable securities	1,226,472	3,548,787	2,090,214	3,026,659	2,539,000	3,510,000	2,658,110	3,465,025	22,064,268

Of which: Subordinated liabilities	—	—	428,239	1,150,000	500,000	—	300,000	515,025	2,893,265

Other liabilities	85,539	202,717	468,804	221,647	183,456	159,018	129,675	846,396	2,297,254
Total liabilities	143,788,934	11,596,129	16,505,659	9,052,635	6,443,732	7,276,969	6,177,543	11,543,587	212,385,187

Hedging Derivatives	8,066,166	(1,588,206)	(400,383)	(3,255,101)	(185,892)	1,684,739	(38,988)	(4,282,334)	—

Interest rate gap	(85,248,644)	10,874,750	26,190,910	8,909,401	9,738,244	4,247,168	2,577,533	19,049,864	(3,660,774)

The following table shows the interest rate risk levels in terms of the sensitivity of the Group’s main currencies, as at 2021 year-end, to the most frequently used interest rate scenarios in the sector:



	Instant and parallel interest rate increase

	100 pb	200 pb

Interest rate sensitivity	Impact on net interest margin	Impact on economic value of equity

EUR	2.5%	(1.2)%

GBP	2.2%	0.7%

USD	0.4%	(0.1)%

MXN	0.2%	(0.1)%

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In addition to the impact on the net interest margin within the time horizon of one year shown in the previous table, the Group calculates the impact on the margin over a time horizon of two and three years, the result of which is considerably more positive for all of the currencies. In particular, the net interest margin’s sensitivity for the second year is calculated considering the Group’s main currencies, with a high “pass through”, i.e. most of the percentage increase of benchmark interest rates is transferred to customers’ term deposits and interest-bearing demand deposits. The results obtained are shown in the following table:



	Instant and parallel increase of 100 bps
Impact on net interest margin 2nd year	High “Pass Through”	Medium “Pass Through”

Total	8.1%	11.6%

Of which EUR	3.5%	5.3%

Of which GBP	3.8%	5.3%

The metrics are calculated taking into account the assumptions regarding the performance of items with no contractual maturity and those whose expected maturity is different from the maturity established in the contracts, in order to obtain a view that is more realistic and, therefore, more effective for management purposes. The most significant of these include:

–

Prepayment of the loan portfolio and early termination of term deposits (implicit options): in order to reflect customers’ reactions to interest rate movements, prepayment/termination assumptions are defined, broken down by type of product. To this end, the Institution uses historical data to ensure it is in line with the market’s best practices. The prepayment mainly affects fixed rate mortgages where their contractual interest rates are low compared to market interest rates.

–

Modelling of non-performing loans: a model has been defined that allows the expected payment flows associated with non-performing loans (net of provisions, i.e. those expected to be recovered) to be included in pools of interest rate-sensitive balance sheet items. To this end, both existing balances and expected recovery periods have been incorporated.

The process to approve and update IRRBB models is part of the corporate governance arrangements for models, whereby these models are reviewed and validated by a Division that is always separate from the division that created them. This process is included in the corresponding model risk policy and establishes both the duties of the different areas involved in the models and the internal validation framework to be followed.

As for the measurement systems and tools used, all sensitive transactions are identified and recorded taking into account their interest rate characteristics, the sources of information being the official ones of the Institution. These transactions are aggregated according to predefined criteria, so that calculations can be made faster without undermining the quality or reliability of the data. The entire data process is subject to the requirements of information governance and data quality, to ensure compliance with the best practices in this area. Additionally, a regular process is carried out to reconcile the information uploaded onto the measurement tool against accounting information. The calculation tool includes sensitive transactions and its parameters are also configured to reflect the result of the behavioural models described above, the volumes and prices of the new business, defined according to the Business Plan, and the interest rate curves on which the aforesaid scenarios are built.

Based on the balance sheet position and the market situation and outlooks, risk mitigation techniques are proposed and agreed upon to adjust this position to match the one desired by the Group. Interest rate instruments additional to the natural hedges of balance sheet items are used as mitigation techniques, such as fixed-income bond portfolios or hedging derivatives that enable metrics to be placed at levels appropriate to the Institution’s risk appetite. In addition, proposals can be put forward to redefine the interest rate characteristics of commercial products or the creation of new products.

–

Cash flow macro-hedges of interest rate risk, the purpose of which is to reduce the volatility of the net interest margin due to changes in interest rates over a one-year time horizon.

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–

Fair value macro-hedges of interest rate risk, the purpose of which is to maintain the economic value of the hedged items, consisting of fixed-rate assets and liabilities.

For each type of macro-hedge, there is a framework document that includes the hedging strategy, defining it in terms of management and accounting and establishing its governance.

During 2021, the Bank’s loan book has shifted towards a higher proportion of fixed rate transactions (mainly mortgages and business loans), while on the liabilities side demand deposits have increased. In addition, the main changes in the balance sheet in 2021 have been: the reduction of the fixed income portfolio on the assets side; and the 5 billion euro increase in access to TLTRO III, to a total of 32 billion euros. This leaves a higher balance of interest rate-sensitive assets.

In terms of interest rates, these have remained low throughout 2021. In this regard, the European Central Bank’s marginal deposit rate has remained unchanged at -0.50%, while the BoE official rate has risen by 15 bp to 0.25%. Interbank rates on the currencies relevant to the Group have risen compared to 2021 year-end. The future scenario for the short to medium term is for EUR rates to remain at negative levels and for USD and GBP rates to rise, all of this conditional upon potential hikes due to the inflationary pressures that are becoming more relevant in the last period of the year.

On the other hand, the Group pays close attention to possible changes in customer behaviour deriving from a potential interest rate hike or changes in other economic variables (unemployment rates, GDP, etc.), in order to keep the behavioural assumptions used to measure and manage IRRBB in line with expectations. This concerns customer behaviour related to non-maturing items (changes in the stability of demand deposits) and items with an expected maturity that may be different to the contractually established maturity (due to early repayment of loans, early termination of term deposits or recovery time and balance of non-performing exposures).

The Group’s balance sheet management has enabled it to keep its IRRBB metrics within the risk appetite and below the levels considered significant under current legislation, taking into consideration the structural changes outlined previously as well as the episodes of market volatility and interest rate variations.

4.4.3.3. Structural foreign exchange risk

Foreign exchange risk is monitored regularly and reports are sent to supervisory bodies on existing risk levels and on compliance with the limits set forth by the Board of Directors. The main monitoring metric is currency exposure, which measures the maximum potential loss that the open structural position could cause over a 1-month time horizon, with a 99% confidence level and in stressed market conditions.

Compliance with, and the effectiveness of, the Group’s objectives and policies are monitored and reported on a monthly basis to the Board Risk Committee.

The most significant permanent investments are denominated in US dollars, pounds sterling and Mexican pesos.

As regards permanent investments in US dollars, the overall position in this currency has gone from 1,108 million US dollars as at 31 December 2020 to 1,170 million US dollars as at 31 December 2021. In relation to this position, as at 31 December 2021, a buffer of 24% of total investment is maintained.

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In terms of permanent investments in Mexican pesos, the capital buffer has gone from 9,003 million Mexican pesos as at 31 December 2020 (of a total exposure of 14,651 million Mexican pesos) to 10,003 million Mexican pesos as at 31 December 2021 (of a total exposure of 14,572 million Mexican pesos), representing 69% of total investment.

As regards permanent investments in pounds sterling, the capital buffer has remained stable at 213 million pounds sterling during 2021 (total exposure has gone from 1,760 million pounds sterling as at 31 December 2020 to 1,890 million pounds sterling as at 31 December 2021), representing 11% of the total investment made (excluding intangibles).

Currency hedges are continuously monitored in light of market movements.

The exchange value in euros of assets and liabilities in foreign currencies maintained by the Group as at 31 December 2021 and 2020, classified in accordance with their nature, is as follows:


Thousand euro

		2021

	USD	GBP	Other currencies	Total

Assets denominated in foreign currency:	10,063,410	57,229,033	3,577,568	70,870,011
Cash, cash balances at central banks and other demand deposits	464,724	5,825,313	863,459	7,153,496
Debt securities	1,158,570	3,862,850	478,752	5,500,172
Loans and advances	8,255,149	46,259,554	1,987,782	56,502,485
Central banks and Credit institutions	49,286	258,741	39,984	348,011
Customers	8,205,863	46,000,813	1,947,798	56,154,474
Other assets	184,967	1,281,316	247,575	1,713,858

Liabilities denominated in foreign currency:	7,606,360	53,111,696	2,476,766	63,194,822
Deposits	7,405,911	49,911,932	2,410,628	59,728,471
Central banks and Credit institutions	1,559,034	6,757,419	292,431	8,608,884
Customers	5,846,877	43,154,513	2,118,197	51,119,587
Other liabilities	200,449	3,199,764	66,138	3,466,351

Thousand euro

		2020

	USD	GBP	Other currencies	Total

Assets denominated in foreign currency:	9,509,570	48,726,489	3,074,872	61,310,931
Cash, cash balances at central banks and other demand deposits	313,503	5,652,619	546,958	6,513,080
Debt securities	1,062,537	2,939,234	220,186	4,221,957
Loans and advances	7,849,982	38,765,206	2,087,589	48,702,777
Central banks and Credit institutions	110,579	209,854	136,045	456,478
Customers	7,739,403	38,555,352	1,951,544	48,246,299
Other assets	283,548	1,369,430	220,139	1,873,117

Liabilities denominated in foreign currency:	7,316,619	45,321,362	2,302,968	54,940,949
Deposits	6,986,825	42,119,071	2,225,313	51,331,209
Central banks and Credit institutions	2,362,537	3,458,680	361,626	6,182,843
Customers	4,624,288	38,660,391	1,863,687	45,148,366
Other liabilities	329,794	3,202,291	77,655	3,609,740

The net position of foreign currency assets and liabilities includes the structural position of the Institution, valued at the closing exchange rate of 31 December 2021, which amounted to 3,026 million euros, including 1,996 million euros corresponding to permanent equity holdings in pounds sterling, 785 million euros corresponding to permanent equity holdings in US dollars and 197 million euros to permanent equity holdings in Mexican pesos. Net assets and liabilities valued at historical exchange rates are hedged with forwards and options denominated in foreign currencies in line with the Group’s Risk Management Policy.

As at 31 December 2021, the sensitivity of the equity exposure to a 1.3% exchange rate depreciation against the euro of the main currencies to which the Bank is exposed would amount to 39 million euros, of which 66% correspond to the pound sterling, 26% to the US dollar and 7% to the Mexican peso. This potential depreciation is in line with the historical quarterly volatility of recent years.

During 2021, the US dollar appreciated by 8.3%, the pound sterling appreciated by 7.0% and the Mexican peso appreciated by 5.5% against the euro. The Bank’s strategy, consisting of protecting the capital ratio against exchange rate movements during this period, has remained unchanged from the previous year.

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4.4.4. Operational risk

Operational risk is defined as the risk of incurring losses due to inadequacies or failures of processes, staff or internal systems or due to external events. This definition includes but is not limited to legal risk, model risk and information and communication technology (ICT) risk and excludes strategic risk and reputational risk.

Senior Management and the Board of Directors are directly involved and effectively take part in managing this risk by approving the management framework and its implementation as proposed by the Board Risk Committee. The latter is formed of Senior Management members from various functional areas within the Institution. The management of this risk also requires regular audits to be carried out of the application of the management framework and the reliability of the information provided, as well as internal validation tests of the operational risk model. Operational risk is managed with two lines of approach:

The first line of approach is based on the analysis of processes, the identification of risks associated with those processes that may result in losses, and a qualitative assessment of the risks and the associated controls. The foregoing are carried out jointly between process managers and the central operational risk unit. This provides an assessment of the future exposure to risk in terms of expected and unexpected losses and also allows trends to be foreseen and the corresponding mitigating actions to be adequately planned.

This is complemented by the identification, monitoring and active management of the risk through the use of key risk indicators. These allow warnings to be established, which alert the Bank to any increase in this exposure, and also enable the Bank to identify the causes of that increase and measure the effectiveness of the implemented controls and improvements.

At the same time, the Bank checks that specific business continuity plans have been defined and implemented for processes identified as being highly critical in the event of any service disruption. In terms of the identified risks, a qualitative estimate is made of the reputational impact that they could cause if they were to materialise.

The second line of approach is based on experience. It consists of recording all losses incurred by the Institution in a database, which provides information about the operational risks encountered by each business line as well as their causes, so as to be able to take action to minimise these risks and detect potential weaknesses in processes that require action plans to be drawn up aimed at mitigating the risks associated therewith. Recoveries are also recorded, which make it possible to reduce the extent of the loss either as a result of direct management or by having an insurance policy that covers all or part of the resulting impacts.

Additionally, this information allows the consistency between estimated losses and actual losses to be determined, in terms of both frequency and severity, iteratively improving the estimates of exposure levels.

Within operational risk, the following risks are also managed and controlled:

–

Conduct risk: defined as the possibility, now or in the future, of incurring losses as a result of the inadequate provision of financial services, including cases of wilful misconduct or negligence. It is comprehensively managed using the elements defined in the methodological framework for operational risk and through the governance arrangements and lines of defence defined therein.

–

Technology risk: technology risk (or ICT (information and communication technology) risk) is defined as the current or future risk of incurring losses due to inadequacies or failures of technical infrastructures’ hardware and software, which could compromise the availability, integrity, accessibility and security of these infrastructures and data, or make it impossible for IT platforms to be changed at a reasonable cost and within a reasonable time frame to respond to changes in the needs of either the environment or the business.

It also includes security risks resulting from inadequacies or failures of internal processes or external events, including cyberattacks or inadequate physical security in data centres.

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–

Model risk: the possibility of incurring losses due to decisions made using inadequate models.

–

Tax risk: the probability of failing to achieve the objectives set out in Banco Sabadell’s tax strategy from a dual perspective due to either internal or external factors:

•

On the other hand, the probability of paying taxes not actually due under tax obligations, thus negatively affecting shareholders and other stakeholders.

–

Compliance risk: the risk of incurring legal or administrative sanctions, significant financial losses or a loss or damage to the Institution’s reputation as a result of an infringement of laws, regulations, internal procedures or codes of conduct applicable to the Group’s activity.

Detailed information on the risks that the Group deems most material is provided below:

4.4.4.1 Technology risk

Since 2020, the relevance, complexity and use of technology and data have increased even further in banking processes, especially in remote channels (online banking) arising from the impact of COVID-19; therefore, the reliance on information systems and their availability are undeniable, as the Bank is more exposed to cyberattacks just like the other operators in the sector. Furthermore, the Institution is undergoing a transformation process, based on digitisation and process automation, that increases the reliance on systems and the exposure to risks associated with this change. Therefore, technology risk remains as one of the focus areas in Banco Sabadell Group’s risk management.

It should be mentioned that this risk is not only applicable to the Group’s own systems, but it is also applicable to suppliers, given the widespread use of third parties for support in technological and business processes, and this therefore represents a significant risk when it comes to managing outsourcing.

In order to holistically and adequately manage all risks related to technology and data, the Institution classifies and categorises these risks into 8 categories, in line with the Guidelines on ICT and security risk management (EBA/GL/2019/04):

–

IT security (cybersecurity): risk of unauthorised access to IT systems and the information (data and metadata) they contain (including cyberattacks).

–

IT availability (technological resilience): risk that customer and employee services are affected by system failures.

–

IT change: risk arising from errors in the change and development processes of information systems.

–

Data integrity: risk that data stored and processed by IT systems are incomplete, inaccurate or inconsistent.

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–

IT outsourcing: risk that the outsourcing to a third party or to another Group entity (intra-group outsourcing) of IT systems, their management or IT-related services has a negative impact on the Institution’s performance (including impact on customers, reputational, regulatory and financial impacts).

–

IT governance: risk arising from inadequate or insufficient management and use of technology, as well as a poor alignment of these technologies and their intended uses with the business strategy.

–

Technological transformation: risk associated with inappropriate adoption or inefficient use of technology within the organisation for the development of new value propositions.

–

IT skills: risk arising from the insufficiency of adequate IT profiles (internal and/or external collaborators) to ensure effective and efficient coverage of technological activities, processes and services.

4.4.4.2 Tax risk

Banco Sabadell Group’s tax risk policies aim to set out principles and guidelines in order to ensure that any tax risks that may affect the Group’s tax strategy and fiscal objectives are systematically identified, assessed and managed so as to comply with the new requirements of the Spanish Capital Companies Act and of Banco Sabadell Group stakeholders.

In terms of tax risk, Banco Sabadell Group aims to fulfil its tax obligations at all times, adhering to the existing legal framework in matters relating to taxation.

Banco Sabadell Group’s tax strategy reflects its commitment to fostering responsible taxation, promoting preventive measures and developing key transparency schemes in order to gain the confidence and trust of its various stakeholders.

The tax strategy is governed by the principles of efficiency, prudence, transparency and mitigation of tax risk, and it is generally aligned with the business strategy of Banco Sabadell Group.

–

Setting the Institution’s tax strategy.

–

Approving investments and operations of all types which are considered to be strategic or to have a particular tax risk due to their high monetary value or particular characteristics, except when such approval corresponds to the Annual General Meeting.

–

Approving the creation and acquisition of shareholdings in special purpose entities or entities domiciled in countries or territories classified as tax havens.

–

Approving any transaction which, due to its complexity, might undermine the transparency of the Institution and its Group.

As such, the duties of the Board of Directors of Banco Sabadell include the obligation to approve the Corporate Tax Policy and ensure compliance therewith by implementing an appropriate control and oversight system, which is enshrined in the general risk management and control framework of the Group.

4.4.4.3 Compliance risk

As regards compliance risk, one of the essential aspects of the Group’s policy, and the foundation of its organisational culture, is strict compliance with all legal provisions, meaning that the achievement of business objectives must be compatible, at all times, with adherence to the law and the established legal system.

This Division assesses and manages compliance risk in order to minimise the possibility of failing to comply with such legislation, and to ensure that any instances of non-compliance are identified, reported and diligently resolved. It does this by:

–

Monitoring and overseeing the adaptation to new regulations through proactive management to ensure regular and systematic monitoring of legal updates.

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–

Establishing, in accordance with the above, an up-to-date oversight and control programme, with the appropriate tools and methodologies for control.

–

Supervising the risk management activities carried out by the first line of defence to ensure that they are aligned with the established policies and procedures.

–

Submitting to the administrative and management bodies the regular or ad-hoc reports on compliance that are legally required at any given time.

–

Reporting to the administrative and management bodies on any information relevant to compliance arising from all areas and activities of each Group entity.

–

Assisting the Board of Directors and Senior Management in compliance matters.

–

Acting as a spokesperson before the relevant regulatory bodies, overseeing the responses to requirements and inspections by official or supervisory bodies, as well as compliance with their recommendations, in relation to anti-money laundering and counter-terrorist financing (SEPBLAC, Bank of Spain, etc.), and in relation to securities markets (CNMV), insurance distribution (DGS) and data protection (AEPD).

–

Assigning functional responsibilities for compliance where necessary.

–

Intervening in the process for establishing remuneration policies and practices.

–

With regard to Anti-Money Laundering, Counter-Terrorist Financing (AML/CTF) and International Sanctions, implementing, managing and updating policies and procedures; carrying out the classification of the AML/CTF risk of customers, both at the time of onboarding and throughout the business relationship; applying due diligence measures in accordance with the risk level assigned to customers, paying particular attention to those classified as high risk to whom enhanced measures will be applied for onboarding purposes so that they can be accepted beforehand and updated as required; managing tracking alerts and detecting matches against lists of designated persons and transactions of countries subject to international sanctions; performing special analyses of suspicious activities and reporting them as necessary; preparing training plans; approving new products, services, channels and business areas and preparing a periodic risk assessment of internal control procedures in the area of AML/CTF and international sanctions, providing support to the Internal Control Body (ICB) responsible for compliance in these matters.

–

Collaborating in the development of training programmes in order to advise and make employees aware of the importance of complying with the established internal procedures.

–

Disseminating, reviewing or proposing corrective measures and/or responses to incidents detected in matters of conduct or to queries submitted to the Corporate Ethics Committee (CEC), whose mission is to promote the Group’s ethical conduct to ensure compliance with the action principles set forth in Banco Sabadell Group’s Code of Conduct, Banco Sabadell Group’s Internal Code of Conduct relating to the securities market, Banco Sabadell Group’s General Policy on Conflicts of Interest and Banco Sabadell Group’s Corporate Crime Prevention Policy.

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Note 5 – Minimum own funds and capital management

Minimum own funds requirements

The Group calculates minimum capital requirements based on Directive 2013/36/EU (known as CRD-V since its most recent update) and Regulation (EU) 575/2013 (CRR), amended by Regulation (EU) 2019/876 (hereinafter, CRR-II).

Regulation CRR-II and Directive CRD-V entered into force on 27 June 2019 and have been implemented in successive stages since that date, although most of the provisions are applicable as from 28 June 2021.

The Spanish government has transposed Directive CRD-V into national law through Royal Decree Law 7/2021, of 27 April, Royal Decree Law 970/2021, of 8 November, and Circular 5/2021, of 22 December.

The health crisis caused by COVID-19 has resulted in competent institutions in Europe temporarily lowering liquidity, capital and operational requirements applicable to banks, to ensure that they can continue carrying out their role of providing funding to the real economy.

In particular, the European Commission, the European Central Bank and the EBA have provided clarity regarding the application of the flexibility already embedded in Regulation (EU) 575/2013 by issuing interpretations and guidance on the application of the prudential framework in the context of COVID-19.

This guidance includes the European Central Bank (ECB) announcement, released on 18 June 2021, that euro area credit institutions that it directly supervises may continue to exclude certain central bank exposures from the leverage ratio, given the exceptional macroeconomic circumstances due to the coronavirus (COVID-19) pandemic. As a result, the leverage ratio relief originally authorised in September 2020, which was due to end on 27 June 2021, will be extended until 31 March 2022.

In this regard, on 23 November 2020, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements applicable to the Bank for 2021 as a result of the Supervisory Review and Evaluation Process (SREP). On a consolidated basis, Banco Sabadell was required to keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.52% and a phase-in Total Capital ratio of at least 13%. These ratios include the minimum required by Pillar 1 (8% of which 4.50% corresponds to CET1), the Pillar 2R requirement (2.25% of which 1.27% must be covered with CET1), the capital conservation buffer (2.50%), and the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%). Following this decision, the capital requirements remained unchanged with respect to 2020.

On 2 February 2022, Banco Sabadell received a letter setting out the decision of the European Central Bank concerning the minimum prudential requirements applicable in 2022 as a result of the Supervisory Review and Evaluation Process (SREP), in which it was informed that the Total Capital requirement would be reduced by 10 basis points relative to that of 2021. At a consolidated level, Banco Sabadell is required to keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.46% and a phase-in Total Capital ratio of at least 12.9%. These ratios include the minimum required by Pillar 1 (8% of which 4.5% corresponds to CET1), the Pillar 2R requirement (2.15% of which 1.21% must be covered with CET1), the capital conservation buffer (2.50%) and the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%).

Additionally (and this is also included in SREP requirements), the requirement resulting from the calculation of the specific counter-cyclical capital buffer, as at 31 December 2021, stands at 0% as a consequence of the measures taken to deal with the COVID-19 crisis, which have led different countries to lower their capital

requirements, including this buffer’s requirement. More specifically, on 11 March 2020, the Bank of England’s Financial Policy Committee (FPC) announced that the counter-cyclical buffer rate (which had been 1% and had been due to reach 2% by December 2020) was being reduced to 0% with immediate effect. The FPC has maintained this 0% rate until 13 December 2021, whereupon the counter-cyclical buffer rate was increased to 1%. This increase will be implemented within 12 months of its announcement, that is, by December 2022.

As at 31 December 2021, the Group’s CET1 capital ratio stood at 12.50% (12.57% as at 31 December 2020); therefore, the capital requirements indicated in the preceding points are being comfortably met.

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The following table sets out the minimum prudential requirements applicable to Banco Sabadell following the Supervisory Review and Evaluation Process (SREP) for the years 2020-2022:



	2022		2021		2020

Pillar 1 CET1		4.50%		4.50%		4.50%
Pillar 2 Requirement		1.21%		1.27%		2.25%
Capital conservation buffer		2.50%		2.50%		2.50%
Systemic buffer		0.25%		0.25%		0.25%
Contracyclical buffer		0.00%		0.00%		0.00%
Common Equity Tier 1 ratio (CET 1)		8.46%		8.52%		9.50%
Dates of communication of the SREP outcome		2/2/2022		23/11/2020		4/12/2019

On a standalone basis, the requisite Common Equity Tier 1 (CET1) ratio resulting from the 2022 SREP is 8.21% and the required Total Capital ratio is 12.65%. This requirement includes the minimum required by Pillar 1 (8% of which 4.50% corresponds to CET1), the Pillar 2R requirement (2.15% of which 1.21% must be covered with CET1), the capital conservation buffer (2.50%) and the requirement arising from the calculation of the counter-cyclical capital buffer which, as at December 2020, was 0%. As indicated for the requirements on a consolidated basis, the Pillar 2R requirement has been reduced by 10 basis points in the period, decreasing from 2.25% to 2.15%.

As at 31 December 2021, Banco Sabadell’s CET1 capital ratio stood at 13.70%, and its phase-in Total Capital ratio stood at 19.08%; consequently, with regard to standalone capital requirements, it also comfortably exceeds the SREP requirements.

Requirements related to the restructuring and resolution of credit institutions

Through the publication of the Royal Decree 1012/2015, of 6 November 2015, implementing Law 11/2015, of 18 June 2015, on the recovery and resolution of credit institutions and investment firms, the BRRD was transposed into Spanish law.

The BRRD arises from the need to establish a framework that provides authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the Institution’s critical financial and economic functions, to avoid a significant adverse effect on financial stability, and to adequately protect public funds by minimising reliance on extraordinary public financial support. Likewise, covered depositors enjoy special treatment.

The framework proposed by the BRRD is based on the principle that traditional insolvency proceedings are not, in many cases, the best option to achieve the aforementioned objectives. Therefore, the BRRD introduces the resolution procedure, whereby competent resolution authorities obtain administrative powers to manage a failing institution.

The preamble of Law 11/2015 defines a resolution process as a unique administrative process to address the failure of credit institutions and investment firms, when an insolvency proceeding is not appropriate for reasons of public interest and financial stability. In order to achieve the aforementioned objectives, the BRRD envisages a series of instruments available to the competent resolution authority, including a bail-in tool. The BRRD introduces for this purpose a minimum requirement for own funds and eligible liabilities (MREL) that institutions must comply with at all times in order to ensure their loss-absorbing capacity is sufficient to guarantee the effective implementation of the resolution tools and that, in the current regulatory environment, would be expressed as the amount of own funds and eligible liabilities expressed as a percentage of the total liabilities and own funds of the Institution.

Similarly, in 2015 the FSB defined the TLAC (Total Loss-Absorbing Capacity) requirement, which has been designed to ensure that institutions have sufficient capacity to absorb losses and execute a bail-in in the event of resolution. It should be noted that this requirement only applies to global systemically important banks (G-SIBs); therefore, it does not apply to Banco Sabadell Group.

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In May 2020, the SRB published the MREL Policy under the Banking Package, which integrates the regulatory changes of the aforesaid resolution framework reform. The new SRB decisions will be based on balance sheet data as at December 2021 (except for capital buffers, which will be taken into account as at June 2020) and will set two binding MREL targets: the final MREL target, which will be binding on 1 January 2024, and an interim target to be met by 1 January 2022. The latter corresponds to an intermediate level that allows for a linear build-up by institutions of their MREL capacity. Therefore, its calibration depends on the Institution’s MREL capacity at the time of calibration and its final target. In addition, in the intermediate level calibration, the SRB may make an adjustment due to the impact of the COVID-19 crisis on banks’ balance sheets as long as this has been material.

Banco Sabadell has received a communication from the Bank of Spain regarding the decision made by the Single Resolution Board (SRB) concerning the minimum requirement for own funds and eligible liabilities (MREL) and the subordination requirement applicable on a consolidated basis.

Sabadell needs to meet the following requirements from 1 January 2024:

–

The minimum requirement for own funds and eligible liabilities (MREL) is 21.75% of the total risk exposure amount (TREA) and 6.22% of the leverage ratio exposure (LRE).

–

The subordination requirement is 14.45% of TREA and 6.22% of LRE.

The decision sets out the following interim requirements that must be met from 1 January 2022:

–

The MREL requirement is 21.05% of TREA and 6.22% of LRE.

–

The subordination requirement is 14.45% of TREA and 6.06% of LRE.

The own funds used by the Bank to meet the combined buffer requirement (CBR), comprising the capital conservation buffer, the systemic risk buffer and the counter-cyclical buffer, will not be eligible to meet its MREL and subordination requirements expressed in terms of the TREA.

Banco Sabadell is already compliant with the requirements that need to be met from 1 January 2024 onwards, which are consistent with the Bank’s expectations and in line with its funding plans. In 2021, the Bank issued 2.25 billion euros of MREL-eligible issues, 500 million euros of senior non-preferred debt, 500 million euros of Tier 2 and 1,250 million euros corresponding to two AT1 issuances.



	MREL Requirement		Subordination Requirement

	% TREA	% LRE	% TREA	% LRE

Requirement 1 January 2022	21.05%	6.22%	14.45%	6.06%
Requirement 1 January 2024	21.75%	6.22%	14.45%	6.22%
MREL 31 December 2021 (*)	23.41%	10.02%	17.76%	7.85%

(*) The % TREA does not include capital used to meet the CBR (2.75% TREA).

Capital management

The management of capital resources is the result of the ongoing capital planning process. This process considers the evolution of the economic, regulatory and sectoral environment. It takes into account the expected capital consumption of different activities, under the various envisaged scenarios, and the market conditions that could determine the effectiveness of the different actions being considered for implementation. The process is enshrined within the Group’s strategic objectives and aims to achieve an attractive return for shareholders, whilst also ensuring that its level of own funds is appropriate in terms of the inherent risks of banking activity.

As regards capital management, as a general policy, the Group aims to adjust its overall available capital to the incurred risks.

A-579

The Group carries out frequent backtesting exercises on its IRB models, at least once a year. These backtesting exercises are independently reviewed by the Internal Validation unit and reported for monitoring purposes to the established internal governing bodies, such as the Technical Risk Committee and the Board Risk Committee (delegated Board committee). Additionally, the backtesting results that affect the risk parameters and the main conclusions drawn from these results, taking into account the criteria established by the EBA in its Disclosure Guidelines, are included in the annual Pillar III Disclosures report.

The Group has a model in place that comprehensively measures its risks using an internal measurement of allocated capital, and this model is based on the risk measurements provided by the new methodologies.

As part of the Group’s Global Risk Framework (detailed in Note 4), the Group has defined a risk taxonomy that encompasses the relevant risks to which it is exposed. First-tier risks are credit risk, strategic risk, financial risk and operational risk. From each of these first-tier risks stem second-tier risks (or even lower-tier risks depending on the nature of the risk). All risks are assessed internally in the self-assessment exercise, thereby determining whether they represent a high, medium or low risk. Once assessed, for those relevant risks representing a significant risk, the Group has a complex system for measuring capital using internal models, through which it measures capital in stress situations. In this way, internal methods ensure that capital needs are consistent with the risk inventory.

Each year, the Group carries out an internal capital adequacy assessment process. This process, as mentioned in the previous paragraph, starts from a broad spectrum of previously identified risks and a qualitative internal assessment of policies, procedures and systems for accepting, measuring and controlling each type of risk, as well as the corresponding mitigation techniques.

The next stage involves a comprehensive quantitative assessment of the necessary capital based on internal parameters and using the Group’s own models (such as borrower credit rating and scoring systems) and other internal estimates appropriate to each type of risk. The assessments of each type of risk are then integrated and a figure is calculated to be used as an indicator in terms of allocated capital. In addition, the Group’s business and financial plans and stress testing exercises are taken into account to determine whether certain business developments or extreme scenarios could endanger its solvency when compared to its available own funds.

Assessing risks in terms of the capital that needs to be allocated enables the risk to be linked to the profitability obtained at both the transaction and customer level, all the way up to the business unit level. The Group has implemented a risk adjusted return on capital (RaRoC) system which provides this assessment, enabling uniform comparisons to be made and included in the transaction pricing process.

The level and quality of capital are first-tier metrics of the Group’s Risk Appetite Statement and their management and control are governed by the Group’s Risk Appetite Framework (RAF).

A-580

Eligible capital and capital ratios

As at 31 December 2021, the Group’s eligible capital amounted to 14,501 million euros (12,729 million euros as at 31 December 2020), representing a surplus of 8,049 million euros (6,421 million euros as at 31 December 2020), as shown below:


Thousand euro

	2021		2020		Year-on-year change (%)

Capital		703,371		703,371		—

Reserves		12,519,248		12,277,739		1.97

Convertible bonds		—		—		—

Minority interests		—		9,270		(100.00)

Deductions		(3,143,086)		(3,079,274)		2.07
CET1 capital		10,079,533		9,911,106		1.70

CET1 (%)		12.50		12.57		(0.56)

Preference shares, convertible bonds and deductions		2,400,000		1,153,539		108.00
Additional Tier 1 capital		2,400,000		1,153,539		108.00

AT1 (%)		2.98		1.46		103.69
Tier 1 capital		12,479,533		11,064,645		12.79

Tier 1 (%)		15.47		14.03		10.26
Tier 2 capital		2,021,270		1,664,708		21.42

Tier 2 (%)		2.51		2.11		18.96
Capital base		14,500,802		12,729,353		13.92

Minimum capital requirement		6,451,647		6,308,656		2.27
Capital surplus		8,049,155		6,420,697		25.36

Total capital ratio (%)		17.98		16.14		11.40

Risk weighted assets (RWAs)		80,645,593		78,858,201		2.27

Common Equity Tier 1 (CET1) capital accounts for 69.51% of eligible capital. Deductions are mainly comprised of intangible assets, goodwill and deferred tax assets. They also include valuation adjustments.

It is also necessary to add the impact of applying Regulation 2020/873 from June onwards in the context of COVID-19. This regulation extends the transitional arrangements designed to mitigate the impact of IFRS 9 for two years, allowing institutions to fully add back to their Common Equity Tier 1 capital any increase in new expected credit loss provisions that they recognise in 2020 and 2021 for their financial assets that are not credit-impaired.

Tier 1 comprises, in addition to CET1 funds, items that largely make up Additional Tier 1 capital (16.55% of own funds), which are capital items comprised of securities and convertible instruments.

Tier 2 capital provides 13.94% of the total capital ratio and is made up largely of subordinated debt.

In 2021, the calculation of own funds took into consideration: the issuance of 500 million euros of Subordinated Debentures I/2021 in January, the issuance of Preferred Securities I/2021 in March for 500 million euros, and the redemption of the TSB issuance of subordinated debentures in May for 443 million euros by exercising an early redemption option. Lastly, the issuance of AT1 2/2021 for 750 million euros took place in November.

In terms of risk-weighted assets, a synthetic securitisation was carried out in the period (see Note 4.4.2.4). It is also worth noting the entry into force of the rest of the CRR2 regulation of 28 June 2021, where the main changes concern the new framework for calculating exposure under the standardised approach for derivative exposures (SA-CCR) and the changes to the weighting applicable to exposures consisting of units in collective investment undertakings.

In fully-loaded terms, as at 31 December 2021, the Common Equity Tier 1 (CET1) ratio stood at 12.22% and the total capital ratio stood at 17.70%, both well above the regulatory minima.

A-581

The following table shows movements in the various regulatory capital components during 2021 and 2020:


Thousand euro
CET1 balance as at 31 December 2019			10,104,845

Profit or (-) loss attributable to the Group, net of dividends			(542,464)

Reserves			455,773

Minority interests			(8,892)

Valuation adjustments			(222,082)

Deductions and transition effects			123,927
CET1 balance as at 31 December 2020			9,911,107

Profit or (-) loss attributable to the Group, net of dividends			359,427

Reserves			(117,919)

Minority interests			(9,270)

Valuation adjustments			216,115

Deductions and transition effects			(279,927)
CET1 balance as at 31 December 2021			10,079,533

Thousand euro
Additional Tier 1 balance as at 31 December 2019			1,153,033

Eligible instruments			—

Minority interests			(142)

Deductions and transition effects			648
Additional Tier 1 balance as at 31 December 2020			1,153,539

Eligible instruments			1,250,000

Minority interests			(3,539)

Deductions and transition effects			—
Additional Tier 1 balance as at 31 December 2021			2,400,000

Thousand euro
Tier 2 balance as at 31 December 2019			1,492,357

Eligible instruments			171,370

Credit risk adjustments			232,096

Minority interests			275

Deductions and transition effects			(231,390)
Tier 2 balance as at 31 December 2020			1,664,708

Eligible instruments			89,030

Credit risk adjustments			26,773

Minority interests			(4,719)

Deductions and transition effects			245,478
Tier 2 balance as at 31 December 2021			2,021,270

A-582

The table below shows the reconciliation of equity and regulatory capital as at 31 December 2021 and 2020:


Thousand euro
	2021		2020

Shareholders’ equity		13,356,905		12,943,594

Accumulated other comprehensive income		(385,604)		(523,590)

Minority interests		24,980		71,634

Total equity		12,996,281		12,491,638

Goodwill and intangibles		(3,111,702)		(3,004,978)

Other adjustments		194,953		424,447

Regulatory accounting adjustments		(2,916,749)		(2,580,531)

Common Equity Tier 1 capital		10,079,532		9,911,107

Additional Tier 1 capital		2,400,000		1,153,539

Tier 2 capital		2,021,270		1,664,708
Total regulatory capital		14,500,802		12,729,354

As at 31 December 2021 and 2020, there is no significant difference between the accounting scope of consolidation and the regulatory scope of consolidation.

Risk-weighted assets (RWAs) for the period stand at 80,646 million euros as at 31 December 2021, which represents a variation of 2.27% relative to the previous period, mainly explained by the variation of credit risk RWAs.

The following table shows the reasons for the variation in RWAs due to credit risk occurring during 2021 and 2020:


Thousand euro
	RWA		Capital *requirements ()**

Balance as at 31 December 2019		69,871,601		5,589,728

Change in business volume		(1,450,026)		(116,002)
Asset quality		(1,018,504)		(81,480)

Changes in models		1,392,282		111,383

Methodology, parameters and policies		(2,800)		(224)

Acquisitions and disposals		(844,399)		(67,552)

Exchange rate		(1,251,907)		(100,153)

Other		—		—
Balance as at 31 December 2020		66,696,247		5,335,700

Change in business volume		869,920		69,594

Asset quality		(764,498)		(61,160)

Changes in models		55,000		4,400

Methodology, parameters and policies		(510,161)		(40,813)

Acquisitions and disposals		(11,021)		(882)

Exchange rate		1,129,734		90,379

Other (**)		2,077,912		166,233
Balance as at 31 December 2021		69,543,133		5,563,451

(*) Calculated as 8% of RWAs.

A-583

The breakdown of risk-weighted assets by type of risk, as at 31 December 2021 and 2020, is shown below:


%
	2021		2020

Credit risk (*)		89.15 %		88.89 %

Operational risk		10.28 %		10.43 %

Market risk		0.57 %		0.68 %
Total		100 %		100 %

(*) Includes counterparty credit risk and other risk exposure amounts.

The table below shows risk-weighted assets for the most significant risk in terms of volume (credit risk), broken down by region, as at 31 December 2021 and 2020:


%
	2021		2020

Spain		65.13 %		68.03 %
United Kingdom		18.47 %		14.75 %
Rest of European Union		9.98 %		5.04 %
Americas		5.30 %		10.94 %

Rest of the world		1.12 %		1.24 %
Total		100 %		100 %

Includes counterparty credit risk.

The leverage ratio as at 31 December 2021 and 2020 is shown below:


Thousand euro
	2021		2020

Tier 1 capital		12,479,533		11,064,646

Exposure		211,616,215		210,713,611
Leverage ratio		5.90 %		5.25 %

In 2018, following the entry into force of IFRS 9, the Group opted to apply the transitional arrangements established in Regulation (EU) 2017/2395.

In 2021 the leverage ratio increased by 65 bps relative to the ratio as at 31 December 2020, mainly due to the increased Tier 1 capital following the AT1 issuances carried out in the period and, additionally, due to the increase of Common Equity Tier 1 (CET1) capital.

A-584

The following table shows the impact that the application of the transitional arrangements in force in 2021 has had on the various capital ratios (in phase-in terms) compared to the impact if the IFRS 9 rules had been applied in full (in fully-loaded terms):


Thousand euro
	2021
Available capital

Common Equity Tier 1 (CET1) capital		10,079,533

Common Equity Tier 1 (CET1) capital if the IFRS 9 or analogous ECL transitional arrangements had not been applied		9,859,600

Tier 1 (T1) capital		12,479,533

Tier 1 (T1) capital if the IFRS 9 or analogous ECL transitional arrangements had not been applied		12,259,600

Total capital		14,500,802

Total capital if the IFRS 9 or analogous ECL transitional arrangements had not been applied		14,280,869

Risk weighted assets

Total risk weighted assets		80,645,593

Total risk weighted assets if the IFRS 9 or analogous ECL transitional arrangements had not been applied		80,689,118
Capital ratios

Common Equity Tier 1 (CET1) capital (expressed as percentage of risk exposure amount)		12.50 %

Common Equity Tier 1 (CET1) capital (expressed as percentage of risk exposure amount) if the IFRS 9 or analogous ECL transitional arrangements had not been applied		12.22 %

Tier 1 (T1) capital (expressed as percentage of risk exposure amount)		15.47 %

Tier 1 (T1) capital (expressed as percentage of risk exposure amount) if the IFRS 9 or analogous ECL transitional arrangements had not been applied		15.19 %

Total capital (expressed as percentage of risk exposure amount)		17.98 %

Total capital (expressed as percentage of risk exposure amount) if the IFRS 9 or analogous ECL transitional arrangements had not been applied		17.70 %
Leverage ratio

Total exposure measure corresponding to leverage ratio		211,616,215

Leverage ratio		5.90 %

Leverage ratio if the IFRS 9 or analogous ECL transitional arrangements had not been applied		5.80 %

The main impact arising from the application of these transitional arrangements has been the inclusion of 220 million euros in CET1, which partly mitigates the decrease in equity resulting from the entry into force of IFRS 9, due to the increase in accounting provisions. The impact generated a reduction in risk-weighted assets of 44 million euros.

For more information on capital ratios and the leverage ratio, their composition, details of parameters and their management, see the Pillar III Disclosures report, which is published annually and is available on the Group’s website (www.grupobancosabadell.com), in the section “Information for shareholders and investors / Financial information”.

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Note 6 – Fair value of assets and liabilities

Financial assets and financial liabilities

When there is no market price for a particular financial asset or financial liability, the fair value is estimated from the values established for similar instruments in recent transactions or, alternatively, by using mathematical valuation models that have been suitably tested by the international financial community. When using these models, the particular characteristics of the financial asset or financial liability to be valued are taken into account, particularly the different types of risks that may be associated therewith. The above notwithstanding, the limitations inherent in the valuation models that have been developed and possible inaccuracies in the assumptions and parameters required by these models may result in the estimated fair value of a financial asset or financial liability not exactly matching the price at which the asset or liability could be delivered or settled on the valuation date.

The fair value of financial derivatives quoted on an active market is the daily quoted price.

In the case of instruments for which quoted prices cannot be determined, prices are estimated using internal models developed by the Bank, most of which take data based on observable market parameters as significant inputs. In the remaining cases, the models make use of other inputs which rely on internal assumptions based on generally accepted practices within the financial community.

For financial instruments, the fair values disclosed in the financial statements are classified according to the following fair value levels:

–

Level 1: Fair values are obtained from the (unadjusted) prices quoted on active markets for that instrument.

–

Level 3: Fair values are obtained through valuation techniques in which some significant inputs are not based on observable market data.

A-586



Level 2 financial instruments	Valuation techniques	Main assumptions	Main inputs used

Debt securities	Net present value method	Calculation of the present value of financial instruments as the present value of future cash flows (discounted at market interest rates), taking into account: - An estimate of pre-payment rates - Issuers’ credit risk	- Issuers’ credit spreads - Observable market interest rates

Equity instruments	Sector multiples (P/BV)	Based on the NACE code that best represents the company’s primary activity, the price-to-book value (P/BV) ratio obtained from peers is applied	- NACE codes - Share price listings in organised markets

Simple derivatives (a)	Net present value method	Implicit curves calculated based on quoted market prices.	- Observable yield curve - FX swaps curve and spot curve

	For equity derivatives, currencies and commodities: - Black-Scholes model (analytic/semi-analytic formulae)	Black-Scholes model: a lognormal distribution is assumed for the underlying asset with volatility depending on the term	- Forward structure of the underlying asset, given by market data (dividends, swap points, etc.). - Volatility surfaces of options - For forex derivatives: Probability of default for the calculation of CVA and DVA (b)
Rest of derivatives (a)	For equity derivatives, currencies and commodities: - Monte Carlo simulations - SABR	Black-Scholes model: a lognormal distribution is assumed for the underlying asset with volatility depending on the term - SABR: stochastic volatility model.
	For interest rate derivatives: - Standard Model - Shifted Libor Market Model	These models assume that: - The standard and shifted models allow negative interest rates - Forward rates in the term structure of the interest rate curve are fully correlated	- Term structure of interest. - Volatility surfaces of Libor rate options (caps) and swap rate options (swaptions) - Probability of default to calculate CVA and DVA (b)
	For credit derivatives: - Intensity models	These models assume a default probability structure resulting from term-based default intensity rates	- Price listings of Credit Default Swaps (CDS) - Historic volatility of credit spreads

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Level 3 financial instruments	Valuation techniques	Main assumptions	Main non-observable inputs

Debt securities	Net present value method	Calculation of the present value of financial instruments as the present value of future cash flows (discounted at market interest rates), taking into account in each case: - An estimate of pre-payment rates - Issuers’ credit risk - Other estimates for variables that affect future cash flows: claims, losses, amortisations	- Estimated credit spreads of the issuer or a similar issuer - Rates of claims, losses and/or amortisations

Equity instruments	Discounted cash flow method	Calculation of the present value of future cash flows discounted at market interest rates adjusted for risk (CAPM method), taking into account: - An estimate of the company’s projected cash flows - Risk in the company’s sector - Macroeconomic inputs	Entity’s business plans - Risk premiums of the company’s sector - Adjustment for systemic risk (Beta Parameter)

Derivatives (a)	For credit derivatives: - Intensity models	These models assume a default probability structure resulting from term-based default intensity rates	For credit derivatives: - Estimated credit spreads of the issuer or a similar issuer - Historic volatility of credit spreads

(a) Given the small net position of Banco Sabadell, the funding value adjustment (FVA) is estimated to have a non-material impact on the valuation of derivatives.

(b) To calculate CVA and DVA, levels of severity fixed at 60% have been used, which corresponds to the market standard for senior debt. Average future, positive and negative exposures have been estimated using market models, Libor for interest rates and the Black-Scholes model for currencies, using market inputs. The probability of default of customers with no quoted debt instruments or CDS have been obtained using the IRB model and for Banco Sabadell those obtained from the CDS stock prices have been assigned.

Determination of the fair value of financial instruments

A comparison between the value at which the Group’s financial assets and liabilities are recognised on the accompanying consolidated balance sheets and their corresponding fair values is shown below:


Thousand euro
			2021				2020
	Note		Carrying amount		Fair value		Carrying amount		Fair value

Assets:

Cash, cash balances at central banks and other demand deposits		7		49,213,196		49,213,196		35,184,902		35,184,902

Financial assets held for trading		8,9,10		1,971,629		1,971,629		2,678,836		2,678,836

Non-trading financial assets mandatorily at fair value through profit or loss		8		79,559		79,559		114,198		114,198

Financial assets designated at fair value through profit or loss				—		—		—		—

Financial assets at fair value through other comprehensive income		9		6,869,637		6,869,637		6,676,801		6,676,801

Financial assets at amortised cost		8		178,869,317		184,223,595		174,488,258		181,743,524

Derivatives – Hedge accounting		12		525,382		525,382		549,550		549,550

Fair value changes of the hedged items in portfolio hedge of interest rate risk				(3,963)		(3,963)		458,849		458,849
Total assets				237,524,757		242,879,035		220,151,394		227,406,660

A-588


Thousand euro
			2021				2020

	Note		Carrying amount		Fair value		Carrying amount		Fair value

Liabilities:

Financial liabilities held for trading		10		1,379,898		1,379,898		2,653,849		2,653,849

Financial liabilities designated at fair value through profit or loss				—		—		—		—

		18, 19,

Financial liabilities at amortised cost		20, 21		235,179,222		234,493,250		217,390,766		218,442,668

Derivatives – Hedge accounting		12		512,442		512,442		782,657		782,657

Fair value changes of the hedged items in portfolio hedge of interest rate risk				19,472		19,472		371,642		371,642
Total liabilities				237,091,034		236,405,062		221,198,914		222,250,816

In relation to financial instruments whose carrying amount differs from their fair value, the latter has been calculated as follows:

–

The fair value of the heading “Cash, cash balances at central banks and other demand deposits” has been likened to its carrying amount, as these are mainly short-term balances.

–

The fair value of the headings “Financial assets at amortised cost” and “Financial liabilities at amortised cost” has been estimated using the discounted cash flow method, applying market interest rates at the end of each year, with the exception of debt securities, for which it has been estimated using year-end market prices. The majority of the valuations of “Financial assets at amortised cost” are considered as Level 3. On the other hand, the majority of the valuations of “Financial liabilities at amortised cost” are considered as Level 2.

–

Under the heading “Fair value changes of the hedged items in portfolio hedge of interest rate risk” of the accompanying consolidated balance sheets, adjustments (positive or negative) are recorded at the fair value of the financial assets or financial liabilities included in the amortised cost portfolio, which correspond exclusively to hedged interest rate risk. The fair value is calculated using internal models and observable market data variables.


Thousand euro
					2021
	Note		Level 1		Level 2		Level 3		Total

Assets:

Financial assets held for trading				592,631		1,378,998		—		1,971,629

Derivatives		10		—		1,378,998		—		1,378,998

Equity instruments		9		2,258		—		—		2,258

Debt securities		8		590,373		—		—		590,373

Loans and advances – Customers				—		—		—		—

Non-trading financial assets mandatorily at fair value through profit or loss				18,361		1,541		59,657		79,559

Equity instruments				14,544		38		—		14,582

Debt securities		8		3,817		1,503		59,657		64,977

Loans and advances				—		—		—		—

Financial assets designated at fair value through profit or loss				—		—		—		—

Debt securities				—		—		—		—

Loans and advances – Credit institutions				—		—		—		—

Financial assets at fair value through other comprehensive income				6,594,926		133,287		141,424		6,869,637

Equity instruments		9		2,402		106,378		75,766		184,546

Debt securities		8		6,592,524		26,909		65,658		6,685,091

Loans and advances				—		—		—		—

Derivatives – Hedge accounting		12		—		525,382		—		525,382
Total assets				7,205,918		2,039,208		201,081		9,446,207

A-589


Thousand euro
					2021
	Note		Level 1		Level 2		Level 3		Total

Liabilities:

Financial liabilities held for trading				56,662		1,323,236		—		1,379,898

Derivatives		10		—		1,323,236		—		1,323,236

Short positions				56,662		—		—		56,662

Deposits with credit institutions				—		—		—		—

Financial liabilities designated at fair value through profit or loss				—		—		—		—

Derivatives – Hedge accounting		12		—		512,442		—		512,442
Total liabilities				56,662		1,835,678		—		1,892,340


Thousand euro
					2020
	Note		Level 1		Level 2		Level 3		Total

Assets:

Financial assets held for trading				275,021		2,398,827		4,988		2,678,836

Derivatives		10		—		2,364,595		—		2,364,595

Equity instruments		9		290		825		—		1,115

Debt securities		8		274,731		33,407		4,988		313,126

Loans and advances – Customers				—		—		—		—

Non-trading financial assets mandatorily at fair value through profit or loss				22,048		36,025		56,125		114,198

Equity instruments		9		12,481		35		—		12,516

Debt securities				9,567		35,990		56,125		101,682

Loans and advances				—		—		—		—

Financial assets designated at fair value

through profit or loss				—		—		—		—

Debt securities				—		—		—		—

Loans and advances – Credit institutions				—		—		—		—

Financial assets at fair value through other comprehensive income				6,407,496		169,812		99,493		6,676,801

Equity instruments		9		5,914		80,715		83,354		169,983

Debt securities		8		6,401,582		89,097		16,139		6,506,818

Loans and advances				—		—		—		—

Derivatives – Hedge accounting		12		—		549,550		—		549,550
Total assets				6,704,565		3,154,214		160,606		10,019,385


Thousand euro
					2020
	Note		Level 1		Level 2		Level 3		Total

Liabilities:

Financial liabilities held for trading				215,930		2,437,919		—		2,653,849

Derivatives		10		—		2,437,919		—		2,437,919

Short positions				215,930		—		—		215,930

Deposits with credit institutions				—		—		—		—

Financial liabilities designated at fair value through profit or loss				—		—		—		—

Derivatives – Hedge accounting		12		—		782,657		—		782,657
Total liabilities				215,930		3,220,576		—		3,436,506

Derivatives with no credit support annexes (CSAs) include the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA) in their fair value, respectively. The fair value of these derivatives represents 4.74% of the total, and their adjustment for credit and debit risks represents 5.73% of their fair value as at 31 December 2021 (4.97% and 3.79%, respectively, as at 31 December 2020).

A-590


Thousand euro
	Assets		Liabilities
Balance as at 31 December 2019		216,667		—

Valuation adjustments recognised in profit and loss (*)		(8,512)		—

Valuation adjustments not recognised in profit and loss		622		—

Purchases, sales and write-offs		(47,788)		—

Net additions/removals in Level 3		3,610		—

Exchange differences and other		(3,993)		—
Balance as at 31 December 2020		160,606		—

Valuation adjustments recognised in profit and loss (*)		4,231		—

Valuation adjustments not recognised in profit and loss		5,015		—

Purchases, sales and write-offs		(30,874)		—

Net additions/removals in Level 3		58,927		—

Exchange differences and other		3,176		—
Balance as at 31 December 2021		201,081		—

(*) Relates to securities retained on the balance sheet.

Net Level 3 inflows primarily correspond to debt instruments previously classified as Level 1 whose fair value is now calculated using valuation techniques in which the main significant inputs are based on unobservable data.

Details of financial instruments that were transferred to different valuation levels in 2021 and 2020 are as follows:


Thousand euro
	2021

	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:

Financial assets held for trading			—		—		—		—		—		—

Non-trading financial assets mandatorily at fair value through profit or loss			—		—		—		—		—		—

Financial assets designated at fair value through profit or loss			—		—		—		—		—		—

Financial assets at fair value through other comprehensive income			—		58,890		—		37		—		—

Derivatives			—		—		—		—		—		—

Liabilities:

Financial liabilities held for trading			—		—		—		—		—		—

Financial liabilities designated at fair value through profit or loss			—		—		—		—		—		—

Derivatives – Hedge accounting			—		—		—		—		—		—
Total			—		58,890		—		37		—		—

A-591


Thousand euro
						2020

	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			6,197		4,988		—		—		—		—
Non-trading financial assets mandatorily at fair value through profit or loss			26,240		—		—		—		—		—

Financial assets designated at fair value through profit or loss			—		—		—		—		—		—

Financial assets at fair value through other comprehensive income			—		834		—		—		420		1,792
Derivatives			—		—		—		—		—		—

Liabilities:

Financial liabilities held for trading			—		—		—		—		—		—

Financial liabilities designated at fair value through profit or loss			—		—		—		—		—		—

Derivatives – Hedge accounting			—		—		—		—		—		—
Total			32,437		5,822		—		—		420		1,792

Transfers from Level 1 to Level 3 in 2021 are due to the fact that the markets in which these instruments (mainly asset-backed securities) are traded are no longer considered as active markets; therefore, their value is now calculated using valuation techniques in which one of the main significant inputs (early redemption rate) is based on unobservable market data.

As at 31 December 2021 and 2020, the effect of replacing the main assumptions used in the valuation of Level 3 financial instruments with other reasonably possible assumptions, taking the highest value (most favourable assumption) or lowest value (least favourable assumption) of the range that is considered likely, is not significant.

At year-end in both years, there were no derivatives using equity instruments as underlying assets or material interests in discretionary gains in any companies.

Loans and financial liabilities at fair value through profit or loss

As at 31 December 2021 and 2020, there were no loans or financial liabilities recognised at fair value through profit or loss.

Financial instruments at cost

As at the end of 2021 and 2020, there were no equity instruments valued at their cost of acquisition that could be considered significant.

Non-financial assets

Real estate assets

As at 31 December 2021 and 2020, the net carrying values of real estate assets do not differ significantly from the fair values of these assets (see Notes 13, 15 and 17).

The selection criteria for valuation suppliers and the update of appraisals are defined in the section on “Guarantees”, in Note 1.3.4. to these consolidated annual financial statements.

Valuation techniques are generally used by all appraisal companies based on the type of each real estate asset.

A-592

The main valuation methods used fall into the following measurement levels:

Level 2

–

Rental update method: applicable when the valued property generates or may generate rental income and there is a representative market of comparable data.

–

Statistical model: this model adjusts the value of the assets based on the date of acquisition and their location, updating the value in accordance with price trends in the area concerned as from the date of purchase. To this end, it includes statistical information on price trends in all provinces, as provided by external appraisal companies, as well as demographic data from the Spanish Office for National Statistics (INE) to calculate sensitivity at a municipality level. The value obtained is in turn adjusted based on the construction status (finished product, development in progress, plots or land under management) and use (residential, industrial, etc.) of the asset.

Level 3

–

Cost method: applicable to determine the value of buildings being planned, under construction or undergoing renovations.

–

Residual method: in the present macroeconomic climate, the dynamic calculation procedure is being used preferentially in new land valuations to the detriment of the static procedure, which is reserved for specific cases in which the envisaged time frames for project completion are in line with the relevant regulations.

Depending on the type of asset, the methods used in the valuation of the Group’s portfolio are the following:

–

Completed works: valued in comparable terms, based on updates to income or the statistical model (Level 2).

–

Works in progress: valued using the cost method as a sum of the land value and the value of the work carried out (Level 3).

–

Land: valued using the residual method (Level 3).

Determination of the fair value of real estate assets

The following tables show the main real estate assets broken down using the valuation method used in their fair value estimate as at 31 December 2021 and 2020:


Thousand euro
	2021
	Level 1		Level 2		Level 3		Total

Housing		—		809,601		—	809,601

Offices, retail establishments and other real estate		—		1,014,204		—	1,014,204

Land and building plots		—		—		30,440	30,440

Work in progress		—		—		3,966	3,966
Total assets		—		1,823,805		34,406	1,858,211

Thousand euro
	2020
	Level 1		Level 2		Level 3		Total

Housing		—		904,750		—	904,750

Offices, retail establishments and other real estate		—		1,101,166		—	1,101,166

Land and building plots		—		—		32,316	32,316

Work in progress		—		—		7,026	7,026
Total assets		—		2,005,916		39,342	2,045,258

A-593

Significant unobservable variables used in valuations classed as Level 3 have been developed, not by the Group, but by the independent third party companies that performed the appraisals. Given the widespread use of the appraisals, the valuation techniques of which are clearly set out in the regulation governing the valuation of properties, the unobservable variables used reflect the assumptions frequently used by all appraisal companies. In terms of proportional weight, unobservable variables represent almost all of the value of these appraisals.

Movements in the balances of real estate assets classified as Level 3 in 2021 and 2020 are shown below:


Thousand euro
	For house purchase		Offices, retail establishments and other real estate		Land, building plots and work in progress
Balance as at 31 December 2019		—		—		791,034

Purchases		—		—		20,044

Sales		—		—		(756,772)

Impairments recognised on income statement (*)		—		—		(14,737)

Net additions/removals in Level 3		—		—		(227)
Balance as at 31 December 2020		—		—		39,342

Purchases		—		—		11,360

Sales		—		—		(8,704)

Impairments recognised on income statement (*)		—		—		(6,502)

Net additions/removals in Level 3		—		—		(1,090)
Balance as at 31 December 2021		—		—		34,406

(*) Relates to assets kept on the balance sheet as at 31 December 2021 and 2020.

During 2021 and 2020, certain real estate assets have been transferred between the different valuation levels, due to the transformation of assets that were in the process of construction into finished products.

The following table shows a comparison between the value at which the Group’s real estate assets were recognised under the headings “Non-current assets and disposal groups classified as held for sale”, “Investment properties” and “Inventories” and their appraisal value, as at the end of 2021 and 2020:


Thousand euro
			2021								2020

	Note		Carrying amount (*)		Impairment		Net carrying amount		Valuation amount		Carrying amount (*)		Impairment		Net carrying amount		Valuation amount

Investment properties		15		450,644		(71,376)		379,268		468,641		390,757		(42,665)		348,092		379,225

Inventories		17		248,345		(105,632)		142,713		213,470		313,094		(118,830)		194,264		291,990

Non-current assets held for sale				788,711		(208,322)		580,389		913,787		946,814		(282,756)		664,058		1,091,219
Total				1,487,700		(385,330)		1,102,370		1,595,898		1,650,665		(444,251)		1,206,414		1,762,434

(*) Cost less accumulated depreciation.

A-594


Thousand euro

Appraisal firm	Non-current assets held for sale		Investment properties		Inventories

Afes Técnicas de Tasación, S.A.		—		949		—

Alia Tasaciones, S.A.		64,804		26,728		22,805

CBRE Valuation Advisory SA		74,503		1,541		7,647

Cushman & Wakefield		—		15,968		—

Eurovaloraciones, S.A.		7,801		13,182		1,506

Gestión de Valoraciones y Tasaciones, S.A.		16,029		22,623		9,403

Gloval Valuation, S.A.U.		232,420		77,813		29,581

Ibertasa, S.A.		397		—		—

Instituto de Valoraciones, S.A.		429		—		—

Krata, S.A.		167		1,803		—

Sociedad de Tasación, S.A.		55,902		83,350		12,462

Tabimed Gestión de Proyectos, S.L.		312		—		—

Tecnitasa Técnicos en Tasación, S.A		16,622		7,501		8,426

Tinsa Tasaciones Inmobiliarias, S.A.		61,806		62,015		34,826

Valoraciones Mediterráneo, S.A.		43,852		65,090		14,719

Other		5,345		705		1,338
Total		580,389		379,268		142,713

The fair value of property, plant and equipment for own use does not differ significantly from its net carrying amount.

Note 7 – Cash, cash balances at central banks and other demand deposits

The composition of this asset heading on the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021		2020

By nature:

Cash		704,105		749,608

Cash balances at central banks		47,741,021		33,842,492

Other demand deposits		768,070		592,802
Total		49,213,196		35,184,902

By currency:

In euro		42,059,700		28,671,822

In foreign currency		7,153,496		6,513,080
Total		49,213,196		35,184,902

Cash balances at central banks include balances held to comply with the central bank’s mandatory minimum reserve requirement. Throughout 2021 and 2020, Banco Sabadell has complied with minimum requirements set out in applicable regulations regarding this ratio.

The increase during 2021 of the “Cash, Cash balances at central banks and other demand deposits” heading is mainly due to the Bank’s participation in the TLTRO III liquidity auctions (see Notes 1.3.21 and 4.4.3.1).

A-595

Note 8 – Debt securities

Debt securities reported in the consolidated balance sheets as at 31 December 2021 and 2020 are broken down below:


Thousand euro
	2021	2020

By heading:
Financial assets held for trading	590,373	313,126
Non-trading financial assets mandatorily at fair value through profit or loss	64,977	101,682
Financial assets designated at fair value through profit or loss	—	—
Financial assets at fair value through other comprehensive income	6,685,091	6,506,818
Financial assets at amortised cost	15,190,212	18,091,189
Total	22,530,653	25,012,815

By nature:
Central banks	—	—
General governments	21,361,299	22,132,663
Credit institutions	689,449	1,435,817
Other sectors	393,424	1,106,251
Stage 3 assets	73	73
Impairment allowances	—	(297)
Other valuation adjustments (interest, fees and commissions, other)	86,408	338,308
Total	22,530,653	25,012,815

By currency:
In euro	17,030,481	20,790,858
In foreign currency	5,500,172	4,221,957
Total	22,530,653	25,012,815

In May 2021, the Group decided to sell debt instruments which had a carrying amount of 3,735 million euros and which were recognised on the consolidated balance sheet under the heading “Financial assets at amortised cost”, by arranging forward sale contracts that were settled in the third quarter of 2021. These sales were carried out as part of a series of actions undertaken to improve the Group’s future profitability while preserving its solvency, including the restructuring announced in Spain in the third quarter of 2021 (see Note 33). The Group considered that these sales, while not speculative in nature, do not fit into any of the categories that the regulations consider consistent with the business model under which these assets are managed (hold to collect contractual cash flows). For this reason, the Bank decided to refrain from classifying debt securities it acquires under the heading “Financial assets at amortised cost” on the consolidated balance sheet, until the conditions allowing debt instruments to be classified under this heading again are met.

In March 2020, the Group sold Italian sovereign debt instruments which had a carrying amount of 2,835 million euros and which were recognised under the heading “Financial assets at amortised cost” of the consolidated balance sheet. These sales were executed with the aim of managing the increased credit risk associated with Italian debt instruments issued as a result of the impact of COVID-19 on the Italian economy. Consequently, following the sales, the carrying amount of Italian sovereign debt instruments recorded at amortised cost was reduced to 2,792 million euros as at 31 December 2020. The Group considered that these sales were consistent with the business model under which these assets were managed (held to collect contractual cash flows).

In the last quarter of 2020, the Group sold Spanish and Portuguese sovereign debt instruments which had a carrying amount of 4,032 million euros and which were recognised under the heading “Financial assets at amortised cost” of the consolidated balance sheet. These sales were carried out in order to preserve the Group’s solvency as part of a series of actions taken to improve future profitability and the quality of its balance sheet (such as the disposal of certain portfolios of impaired financial assets or the agreement on retirement, early retirement and voluntary redundancy mentioned in Note 33), in response to the economic crisis triggered by COVID-19. The Group considered that these sales were consistent with the business model under which these assets were managed (held to collect contractual cash flows) as they were sales made due to exceptional circumstances beyond the control of the Group, that did not modify the criteria under which debt instruments classified in the amortised cost portfolio which had not been disposed of were managed.

A-596

The results obtained from these disposals were recognised under the heading “Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net – Financial assets at amortised cost” of the consolidated income statement (see Note 30).

Additionally, during 2020, based on the latest strategic plan presented by the Spanish company for the management of assets proceeding from the restructuring of the banking system (SAREB, for its acronym in Spanish), the carrying amount of subordinated debt held by the Group in this company was written down by 27 million euros, which was charged to the heading “Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net – Other gains or (-) losses” of the consolidated income statement, reducing the carrying amount to zero (see Note 30).

Details of debt instruments included under the “Financial assets at fair value through other comprehensive income” heading, as at 31 December 2021 and 2020, are shown below:


Thousand euro
	2021	2020

Amortised cost	6,699,715	6,513,033
Fair value (*)	6,685,091	6,506,818
Accumulated losses recognised in equity	(88,999)	(87,420)
Accumulated capital gains recognised in equity	75,525	82,997
Value adjustments made for credit risk	(1,150)	(1,792)

(*) Includes net impairment in the profit and loss account for the years 2021 and 2020 in the amount of 697 and 288 thousand euro, of which (677) and (1,475) thousand euro were provisioned in the year, and reversal of impairment in the amount of 1,374 and 1,763 thousand euro in 2021 and 2020, respectively (see note 34).

Details of exposures held in public debt instruments included under the “Financial assets at fair value through other comprehensive income” heading, as at 31 December 2021 and 2020, are as follows:


Thousand euro
	2021	2020

Amortised cost	6,466,128	5,718,479
Fair value	6,446,213	5,702,819
Accumulated losses recognised in equity	(88,156)	(84,255)
Accumulated capital gains recognised in equity	68,347	68,704
Value adjustments made for credit risk	(106)	(109)

Details of the “Financial assets at amortised cost” portfolio as at 31 December 2021 and 2020 are shown below:


Thousand euro
	2021	2020

Central banks	—	—
General governments	14,457,615	16,750,347
Credit institutions	647,363	815,989
Other sectors	85,234	525,039
Impairment allowances	—	(186)
Total	15,190,212	18,091,189

A-597

Note 9 – Equity instruments

Equity instruments reported in the consolidated balance sheets as at 31 December 2021 and 2020 are broken down as follows:


Thousand euro
	2021	2020

By heading:
Financial assets held for trading	2,258	1,115
Non-trading financial assets mandatorily at fair value through profit or loss	14,582	12,516
Financial assets at fair value through other comprehensive income	184,546	169,983
Total	201,386	183,614

By nature:
Resident sector	165,405	146,872
Credit institutions	6,659	5,081
Other	158,746	141,791
Non-resident sector	18,548	16,569
Credit institutions	—	—
Other	18,548	16,569
Participations in investment vehicles	17,433	20,173
Total	201,386	183,614

By currency:
In euro	199,778	181,786
In foreign currency	1,608	1,828
Total	201,386	183,614

As at 31 December 2021 and 2020, there were no investments in listed equity instruments for which their quoted market price has not been considered as a reference of their fair value.

Details of equity instruments included under the “Financial assets at fair value through other comprehensive income” heading are as follows:


Thousand euro
	2021	2020

Cost of acquisition	257,714	264,897
Fair value	184,546	169,983
Accumulated capital losses recognised in equity at reporting date	(149,044)	(154,041)
Accumulated capital gains recognised in equity at reporting date	75,876	59,127

Transfers of gains or losses within equity during the period	(868)	4,846
Recognised dividends from investments held at the end of the year	1,239	994
Recognised dividends from investments derecognised during the year	—	5

A-598

Note 10 – Derivatives held for trading

The breakdown by type of risk of derivatives held for trading as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021			2020
		Assets	Liabilities		Assets	Liabilities

Securities risk		29,019	29,019		148,471	149,448
Interest rate risk		981,743	919,688		1,467,154	1,534,857
Currency risk		218,470	224,868		501,476	506,315
Other types of risk		149,766	149,661		247,494	247,299
Total		1,378,998	1,323,236		2,364,595	2,437,919

By currency:
In euro		1,061,444	1,027,833		1,919,173	1,895,436
In foreign currency		317,554	295,403		445,422	542,483
Total		1,378,998	1,323,236		2,364,595	2,437,919

The fair values of derivatives held for trading, broken down by type of derivative instrument as at 31 December 2021 and 2020, are shown below:


Thousand euro
	2021	2020

Assets

Swaps, CCIRS, Call Money Swap	1,104,366	1,685,131
Currency options	37,819	80,147
Interest rate options	27,143	29,015
Index and securities options	29,019	148,436
Currency forwards	180,651	421,329
Fixed income forwards	—	537
Equity forward	—	—
Interest rate forwards	—	—
Total derivatives on asset side held for trading	1,378,998	2,364,595

Liabilities

Swaps, CCIRS, Call Money Swap	1,050,442	1,755,200
Currency options	42,520	78,468
Interest rate options	11,644	20,915
Index and securities options	36,282	155,489
Currency forwards	182,348	427,847
Fixed income forwards	—	—
Equity forward	—	—
Interest rate forwards	—	—
Total derivatives on liability side held for trading	1,323,236	2,437,919

As at 31 December 2021, the Group holds embedded derivatives that have been separated from their host contracts and recognised under the heading “Financial liabilities held for trading – Derivatives” of the consolidated balance sheet in the amount of 7,683 thousand euros. The host contracts of those embedded derivatives correspond to customer deposits and debt securities in issue and have been allocated to the portfolio of financial liabilities at amortised cost.

A-599

Note 11 – Loans and advances

Central banks and Credit institutions

The breakdown of the headings “Loans and advances – Central banks” and “Loans and advances – Credit institutions”, of the consolidated balance sheets as at 31 December 2021 and 2020, is as follows:


Thousand euro
	2021	2020

By heading:
Financial assets held for trading	—	—
Non-trading financial assets mandatorily at fair value through profit or loss	—	—
Financial assets designated at fair value through profit or loss	—	—
Financial assets at fair value through other comprehensive income	—	—
Financial assets at amortised cost	6,312,820	7,213,593
Total	6,312,820	7,213,593

By nature:
Deposits with agreed maturity	1,165,623	1,629,195
Repos	4,938,372	5,424,127
Hybrid financial assets	—	—
Other	206,013	159,126
Stage 3 assets	1	5
Impairment allowances	(2,063)	(1,424)
Other valuation adjustments (interest, fees and commissions, other)	4,874	2,564
Total	6,312,820	7,213,593

By currency:
In euro	5,964,809	6,757,115
In foreign currency	348,011	456,478
Total	6,312,820	7,213,593

A-600

Customers

The breakdown of the heading “Loans and advances – Customers” (General governments and Other sectors) of the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021	2020

By heading:
Financial assets held for trading	—	—
Non-trading financial assets mandatorily at fair value through profit or loss	—	—
Financial assets designated at fair value through profit or loss	—	—
Financial assets at fair value through other comprehensive income	—	—
Financial assets at amortised cost	157,366,285	149,183,476
Total	157,366,285	149,183,476

By nature:
Overdrafts, etc.	2,875,764	4,833,182
Commercial loans	6,049,554	4,991,095
Finance leases	2,106,263	2,230,500
Secured loans	94,313,424	87,270,583
Repos	—	63,494
Other term loans	49,567,028	47,552,905
Stage 3 assets	5,698,077	5,319,869
Impairment allowances	(3,302,033)	(3,081,312)
Other valuation adjustments (interest, fees and commissions, other)	58,208	3,160
Total	157,366,285	149,183,476

By sector:
General governments	9,401,011	10,087,458
Other sectors	145,511,022	136,854,301
Stage 3 assets	5,698,077	5,319,869
Impairment allowances	(3,302,033)	(3,081,312)
Other valuation adjustments (interest, fees and commissions, other)	58,208	3,160
Total	157,366,285	149,183,476

By currency:
In euro	101,211,811	100,937,177
In foreign currency	56,154,474	48,246,299
Total	157,366,285	149,183,476

By geography:
Spain	98,017,676	96,288,761
United Kingdom	47,126,912	39,786,928
Rest of European Union	4,534,782	5,339,314
Americas	9,284,318	8,747,660
Rest of the world	1,704,629	2,102,125
Impairment allowances	(3,302,032)	(3,081,312)
Total	157,366,285	149,183,476

A-601

Finance leases

Certain information concerning finance leases carried out by the Group in which it acts as lessor is set out below:


Thousand euro
	2021	2020

Finance leases
Total gross investment	2,318,186	2,407,292
Impairment allowances	(97,017)	(64,347)
Interest income	49,667	61,899

As at 31 December 2021 and 2020, the reconciliation of undiscounted payments received on leases against the net investment in the leases is as follows:

Thousand euro

2021

2020

Undiscounted lease receipts

2,141,325

2,243,258

Unguaranteed residual value

176,861

164,034

Gross investment in the lease

2,318,186

2,407,292

Unearned financial income

(152,922)

(175,576)

Net investment in the lease

2,165,264

2,231,716

The table below shows a breakdown, by term, of the minimum undiscounted future amounts receivable by the Group during the period of mandatory compliance (assuming that no extensions or existing purchase options will be exercised) as set out in the finance lease contracts:


Thousand euro
	2021	2020

Up to 1 year	583,536	569,446
1-2 years	439,266	495,782
2-3 years	340,963	326,196
3-4 years	233,268	239,803
4-5 years	154,164	170,120
More than 5 years	390,128	441,911
Total	2,141,325	2,243,258

Past-due financial assets

The balance of “Loans and advances – Customers” past-due and pending collection not classified as stage 3 as at 31 December 2021 amounted to 128,382 thousand euros (77,350 thousand euros as at 31 December 2020). Of this total, over 90% of the balance as at 31 December 2021 (80% of the balance as at 31 December 2020) was no more than one month past due.

A-602

Financial assets classified on the basis of their credit risk

The breakdown of the gross carrying amounts, excluding valuation adjustments, of financial assets classified on the basis of their credit risk as at 31 December 2021 and 2020 is as follows:


Thousand euro
Stage 1	31/12/2021	31/12/2020

Debt securities	22,444,172	24,670,232
Loans and advances	148,895,098	142,878,089
Customers	142,607,101	135,666,359
Central banks and Credit institutions	6,287,997	7,211,729
Total stage 1	171,339,270	167,548,321

By sector:
General governments	30,758,253	32,193,319
Central banks and Credit institutions	6,977,447	8,647,547
Other private sectors	133,603,570	126,707,455
Total stage 1	171,339,270	167,548,321

Stage 2

Debt securities	—	4,500
Loans and advances	12,326,943	11,276,120
Customers	12,304,932	11,275,402
Central banks and Credit institutions	22,011	718
Total stage 2	12,326,943	11,280,620

By sector:
General governments	4,057	26,803
Central banks and Credit institutions	22,010	718
Other private sectors	12,300,876	11,253,099
Total stage 2	12,326,943	11,280,620

Stage 3

Debt securities	73	73
Loans and advances	5,698,078	5,319,874
Customers	5,698,077	5,319,869
Central banks and Credit institutions	1	5
Total stage 3	5,698,151	5,319,947

By sector:
General governments	9,632	10,231
Central banks and Credit institutions	1	5
Other private sectors	5,688,518	5,309,711
Total stage 3	5,698,151	5,319,947

Total stages	189,364,364	184,148,889

A-603

Movements of gross values, excluding valuation adjustments, of assets subject to impairment by the Group during the years ended 31 December 2021 and 2020 were as follows:


Thousand euro

	Stage 1	Stage 2	Stage 3	*Of which:* *purchased credit-* *impaired*	Total
Balance as at 31 December 2019	178,381,423	7,931,152	5,922,969	265,533	192,235,544

Transfers between impairment stages	(6,106,818)	4,558,050	1,548,769	—	—
Stage 1	5,612,870	(5,541,131)	(71,739)	—	—
Stage 2	(11,253,952)	11,578,522	(324,570)	—	—
Stage 3	(465,736)	(1,479,341)	1,945,077	—	—
Increases	50,140,360	841,787	458,809	7,023	51,440,955
Decreases	(52,346,170)	(1,820,692)	(2,005,296)	(88,401)	(56,172,159)
Transfers to write-offs	—	—	(568,816)	—	(568,816)
Adjustments for exchange differences	(2,520,473)	(229,675)	(36,488)	(9,950)	(2,786,637)
Balance as at 31 December 2020	167,548,321	11,280,620	5,319,947	174,204	184,148,888

Transfers between impairment stages	(3,796,767)	2,205,398	1,591,369	—	—
Stage 1	5,440,672	(5,345,852)	(94,820)	—	—
Stage 2	(8,899,067)	9,238,131	(339,064)	—	—
Stage 3	(338,372)	(1,686,881)	2,025,253	—	—
Increases	54,828,535	917,933	508,382	4,800	56,254,850
Decreases	(49,465,456)	(2,370,468)	(1,283,738)	(29,655)	(53,119,662)
Transfers to write-offs	(683)	(1,449)	(474,686)	—	(476,818)
Adjustments for exchange differences	2,225,320	294,909	36,877	10,417	2,557,106
Balance as at 31 December 2021	171,339,270	12,326,943	5,698,151	159,766	189,364,364

The breakdown of assets classified as stage 3 by type of guarantee as at 31 December 2021 and 2020 is as follows:


Thousand euro
	31/12/2021	31/12/2020

Secured with a mortgage (*)	2,708,483	2,363,867
Of which: Stage 3 financial assets with guarantees covering all of the risk	1,617,399	1,897,377
Other collateral (**)	288,025	274,821
Of which: Stage 3 financial assets with guarantees covering all of the risk	190,379	178,650
Other	2,701,643	2,681,259
Total	5,698,151	5,319,947

(*) Assets secured with a mortgage with an outstanding exposure below 100% of their valuation amount.

(**) Includes the rest of assets secured with collateral.

The breakdown by geographical area of the balance of assets classed as stage 3 as at 31 December 2021 and 2020 is as follows:


Thousand euro
	31/12/2021	31/12/2020

Spain	4,846,743	4,531,715
United Kingdom	679,817	564,290
Rest of European Union	45,538	44,099
Americas	96,950	89,587
Rest of the world	29,103	90,256
Total	5,698,151	5,319,947

A-604

The movements in impaired financial assets derecognised due to the remote likelihood of their recovery during 2021 and 2020 are as follows:


Thousand euro
Balance as at 31 December 2019			5,043,769

Additions			676,779
Use of accumulated impairment balance			531,055
Directly recognised on income statement			68,935
Contractually payable interests			62,944
Other items			13,845

Disposals			(507,193)
Collections of principal in cash from counterparties			(44,508)
Collections of interest in cash from counterparties			(1,274)
Debt forgiveness			(19,328)
Referrals			(129,542)
Forbearance			—
Sales			(256,102)
Foreclosure of tangible assets			(7,118)
Other items			(49,321)

Exchange differences			(22,223)
Balance as at 31 December 2020			5,191,132

Additions			903,346
Use of accumulated impairment balance			451,678
Directly recognised on income statement			35,855
Contractually payable interests			151,956
Other items			263,857

Disposals			(195,527)
Collections of principal in cash from counterparties			(63,553)
Collections of interest in cash from counterparties			(1,817)
Debt forgiveness			(17,847)
Referrals			—
Forbearance			—
Sales			(108,972)
Foreclosure of tangible assets			(2,510)
Other items			(828)

Exchange differences			30,891
Balance as at 31 December 2021			5,929,842

A-605

Allowances

The values of financial asset impairment allowances under the different headings on the asset side of the consolidated balance sheet, listed according to their credit risk, as at 31 December 2021 and 2020 are as follows:


Thousand euro
*Stage 1*	2021	2020

Debt securities	—	296
Loans and advances	377,703	447,796
Central banks and Credit institutions	2,041	1,032
Customers	375,662	446,763
Total stage 1	377,703	448,092

*Stage 2*

Debt securities	—	—
Loans and advances	494,047	465,067
Central banks and Credit institutions	22	—
Customers	494,025	465,067
Total stage 2	494,047	465,067

*Stage 3*

Debt securities	—	—
Loans and advances	2,432,345	2,169,874
Central banks and Credit institutions	—	392
Customers	2,432,345	2,169,482
Total stage 3	2,432,345	2,169,874

Total stages	3,304,096	3,083,032

A-606

Movements in impairment allowances allocated by the Group to cover credit risk during 2021 and 2020 are as follows:


Thousand euro

	Individually measured			Collectively measured				Total
	Individually measured			Collectively measured
		Stage 2	Stage 3		Stage 1	Stage 2	Stage 3

Balance as at 31 December 2019		16,149	491,526		399,862	252,593	1,773,862		2,933,992

*Movements reflected in impairment gains/(losses) ()**		2,418	219,856		70,290	309,375	979,230		1,581,169
Increases due to origination		—	—		266,479	—	—		266,479
Changes due to credit risk variance		2,350	234,695		(79,918)	225,626	985,257		1,368,010
Changes in calculation approach		—	—		—	—	—		—
Other movements		68	(14,839)		(116,271)	83,749	(6,027)		(53,320)

Movements not reflected in impairment gains/(losses)		(7,014)	(112,934)		(12,357)	(103,510)	(1,170,095)		(1,405,910)
Transfers between impairment stages		(6,066)	94,538		(6,301)	(81,020)	(1,151)		—
Stage 1		741	(1,785)		189,108	(163,198)	(24,866)		—
Stage 2		(486)	(608)		(177,906)	208,896	(29,896)		—
Stage 3		(6,321)	96,931		(17,503)	(126,718)	53,611		—
Utilisation of allocated provisions		(948)	(198,503)		(6,020)	(22,222)	(1,105,905)		(1,333,598)
Other movements (**)		—	(8,969)		(36)	(268)	(63,039)		(72,312)

Adjustments for exchange differences		(14)	(8,164)		(9,704)	(4,931)	(3,406)		(26,219)
Balance as at 31 December 2020		11,540	590,283		448,092	453,527	1,579,591		3,083,032

Scope additions / exclusions		.

*Movements reflected in impairment gains/(losses) ()**		(7,060)	114,141		(86,142)	223,992	608,267		853,198

Increases due to origination		—	—		259,110	1,400	76		260,586
Changes due to credit risk variance		(14,852)	159,904		(270,812)	177,536	571,293		623,069
Changes in calculation approach		—	—		—	—	—		—
Other movements		7,792	(45,763)		(74,440)	45,056	36,898		(30,457)

Movements not reflected in impairment gains/(losses)		(1,885)	(139,793)		(10,598)	(197,849)	(310,485)		(660,610)

Transfers between impairment stages		(1,516)	28,135		4,263	(176,866)	145,984		—
Stage 1		—	2,388		167,249	(143,558)	(26,079)		—
Stage 2		8,907	11,211		(150,882)	165,464	(34,699)		—
Stage 3		(10,423)	14,536		(12,104)	(198,772)	206,763		—
Utilisation of allocated provisions		(368)	(167,929)		(14,795)	(20,944)	(427,654)		(631,689)
Other movements (**)		—	—		(66)	(39)	(28,816)		(28,921)

Adjustments for exchange differences		—	(16,169)		26,352	11,768	6,525		28,476
Balance as at 31 December 2021		2,595	548,461		377,703	491,438	1,883,898		3,304,096

(*) This figure, corresponding to the amortisation charged to results on impaired financial assets derecognised from the asset side of the balance sheet and the recovery of write-offs, has been recognised with a balancing entry under the heading ‘Impairment and gains or losses on changes in cash flows of financial assets not measured at fair value through profit or loss and net gains or (-) losses on changes’ (see Note 34)

(**) Corresponds to credit loss allowances transferred to non-current assets held for sale (see Note 13).

The breakdown by geographical area of the balance of impairment allowances as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021	2020

Spain	2,746,076	2,565,302
United Kingdom	252,181	301,257
Rest of European Union	120,486	44,408
Americas	170,454	100,665
Rest of the world	14,899	71,400
Total	3,304,096	3,083,032

A-607

Sensitivity analysis of the key variables of macroeconomic scenarios

An analysis of the sensitivity of the Group’s expected loss and its impact by stage on impairment allowances in the event of a change, ceteris paribus, from the actual macroeconomic environment, relative to the most probable baseline macroeconomic scenario included in the Group’s business plan, is set out below. The results of this analysis are shown below:




Macroeconomic variables	Change in the *variable ()**		Impact on Stage 1			Impact on Stage 2			Impact on Stage 3			Total impact

Deviation of GDP growth		- 100 pb		4.8	%		3.3	%		4.8	%		4.6	%
Deviation of GDP growth		+ 100 pb		-4.5	%		-4.8	%		-4.5	%		-4.5	%

Deviation in unemployment rate		+ 350 pb		6.3	%		14.6	%		6.7	%		7.8	%
Deviation in unemployment rate		- 350 pb		-5.8	%		-9.8	%		-6.2	%		-6.6	%

Changes in housing prices		- 300 pb		7.0	%		7.8	%		4.9	%		5.6	%
Changes in housing prices		+ 300 pb		-6.1	%		-8.1	%		-4.5	%		-5.2	%

(*) Changes in macroeconomic variables reflect impacts, in absolute values, on the baseline macroeconomic scenario described in Note 1.3.4.

Note 12 – Derivatives - hedge accounting

Hedging management

The main hedges arranged by the Group are described below:

Interest rate risk hedge

–

Macro-hedges: hedges intended to mitigate the risk of balance sheet components.

–

Micro-hedges: hedges intended to mitigate the risk of a particular asset or liability.

When a transaction is designated as a hedging operation, it is classified as such from the outset of the transaction or the inception of the instruments included in the hedge, and a document is prepared which covers the hedging strategy, defining it in management and accounting terms and setting out its governance. The aforesaid document clearly identifies the item or items hedged and the hedging instrument, the risk that it seeks to hedge and the criteria or methodologies followed by the Group to evaluate its effectiveness.

The Group operates with the following types of hedges intended to mitigate structural interest rate risk:

–

The main types of balance sheet items hedged are:

●

Fixed-rate loans included in the lending portfolio.

●

Debt securities included in the portfolio of “Financial assets at fair value through other comprehensive income” and the portfolio of “Financial assets at amortised cost”.

●

Fixed-rate liabilities, including fixed-term deposits and the Institution’s funding operations in the capital markets.

Banco Sabadell generally uses macro-hedging for balance sheet items, both assets and liabilities, while TSB uses macro-hedging for fixed-rate loans or deposits and micro-hedging for debt securities or the Bank’s funding operations in the capital markets, for which they arrange derivative contracts, typically for a nominal amount identical to the hedged item and with the same financial features.

A-608

If the hedge relates to assets, the Group enters into a fixed-for-floating swap, whereas if the macro-hedge relates to liabilities, it enters into a floating-to-fixed interest rate swap. These derivatives can be traded in cash or as forwards. The hedged risk is the interest rate risk arising from a potential change in the risk-free interest rate that gives rise to changes in the value of the hedged balance sheet items. As such, the hedge will not cover any risk inherent in the hedged items other than the risk of a change in the risk-free interest rate

–

The main types of balance sheet items hedged are:

●

Floating rate mortgage loans indexed to the mortgage Euribor.

●

Floating rate liabilities indexed to the 3-month Euribor.

Banco Sabadell generally uses macro-hedging for balance sheet items, both assets and liabilities, while TSB also uses micro-hedging for floating-rate issues of its own-name securities, for which they arrange derivative contracts, typically for a nominal amount identical to the hedged item and with the same financial features.

Hedges of net investments in foreign operations

The positions of subsidiaries and foreign branches implicitly entail exposure to foreign exchange risk, which is managed by creating hedges through the use of forward contracts.

The maturities of these instruments are periodically renewed on the basis of prudential and forward-looking criteria.

A-609

2021 hedging disclosures

The nominal values and the fair values of the hedging instruments as at 31 December 2021 and 2020, broken down by risk category and type of hedge, are as follows:

Thousand euro

2021

2020

Nominal

Assets

Liabilities

Nominal

Assets

Liabilities

Micro-hedges:

Fair value hedges

7,583,852

168,282

92,692

5,231,704

46,337

45,992

Exchange rate risk

—

1,002

—

Of non-monetary items (B)

—

1,002

—

Interest rate risk

4,293,666

105,455

25,189

3,439,560

38,759

42,817

For funding operations (A)

32,359

309

879

444,105

4,824

623

For lending operations (C)

4,261,307

105,146

24,310

2,995,455

33,935

42,194

Risk associated with shares

3,290,186

62,827

67,503

1,791,142

7,496

3,175

For funding operations (A)

3,290,186

62,827

67,503

1,791,142

7,496

3,175

Cash flow hedges

3,553,777

20,071

44,935

4,255,363

139,086

25,972

Interest rate risk

2,756,394

13,923

9,041

2,896,963

19,835

Of future transactions (D)

238,016

2,686

625

156,746

—

2,441

For funding operations (A)

376,708

11,136

6,756

227,146

15,055

For securitisation operations (E)

2,141,670

101

1,660

2,513,071

2,339

Risk associated with shares

23,383

—

187

3,400

—

For funding operations (F)

23,383

—

187

3,400

—

Other risks

774,000

6,148

35,707

1,355,000

138,992

6,126

For inflation-linked bonds (G)

774,000

6,148

35,707

1,355,000

138,992

6,126

Hedge of net investment in foreign

operations

932,919

18,733

1,005,975

3,562

8,569

Exchange rate risk (H)

932,919

18,733

1,005,975

3,562

8,569

Macro-hedges:

Fair value hedges

35,581,142

336,958

356,082

32,091,269

360,565

697,089

Interest rate risk

35,581,142

336,958

356,082

32,091,269

360,565

697,089

For funding operations (I)

13,460,963

116,215

106,676

12,316,156

358,012

371

For lending operations (J)

22,120,179

220,743

249,406

19,775,113

2,553

696,718

Cash flow hedges

—

250,000

—

5,035

Interest rate risk

—

250,000

—

5,035

For funding operations (K)

—

250,000

—

5,035

Total

47,651,690

525,382

512,442

42,834,311

549,550

782,657

By currency:

In euro

20,381,698

231,943

353,202

20,643,531

393,373

523,545

In foreign currency

27,269,992

293,439

159,240

22,190,780

156,177

259,112

Total

47,651,690

525,382

512,442

42,834,311

549,550

782,657

The types of hedges according to their composition that are identified in the table are as follows:

Micro-hedges against the foreign exchange risk of equity transactions recognised under the heading “Non-trading financial assets mandatorily at fair value through profit or loss”. As at 31 December 2021, the micro-hedges against the foreign exchange risk of transactions involving equity securities are not in effect.

A-610

Micro-hedges against interest rate risk on futures transactions involving fixed-income securities. The Institution designates as a hedging item derivative contracts that will be settled at their gross value by transferring the underlying asset (according to the contract price) which, in accordance with the IAS 39 Implementation Guidance, can be considered as a cash flow hedge in respect of the consideration that will be settled in a future transaction arising from the settlement of the derivative itself in gross terms. If no derivative had been arranged, the Group would be exposed to changes in price.

Micro-hedging carried out by the Group’s securitisation funds.

Micro-hedges of transactions involving term deposits arranged by customers and which are currently being sold.

Micro-hedges of interest rates on inflation-linked bonds, recognised under the heading “Financial assets at amortised cost”. The Bank has arranged financial swaps to hedge future changes in cash flows that will be settled by inflation-linked bonds (ILBs). As at 31 December 2020, inflation-linked bonds recognised under the heading “Financial assets at fair value through other comprehensive income” were also hedged. The latter hedges expired during 2021.

Hedges against foreign exchange risk on permanent investments currently cover 213 million pounds sterling and 10,003 million Mexican pesos corresponding to interests held in Group entities (213 million pounds sterling and 9,003 million Mexican pesos as at 31 December 2020) and 280 million US dollars corresponding to interests held in foreign branches (150 million US dollars as at 31 December 2020). All of these hedges are carried out through currency forwards

Macro-hedges of debt securities classified under the headings “Financial assets at fair value through other comprehensive income” and “Financial assets at amortised cost”, and of fixed-rate mortgage loans granted to customers (recognised under the heading “Financial assets at amortised cost”).

Cash flow macro-hedges which were intended to reduce the volatility of the buy-sell spread as a result of interest rate fluctuations over a one-year time horizon. Thus, this macro-hedge covered future cash flows based on the net exposure of a portfolio consisting of floating rate liabilities recognised under the heading “Financial liabilities at amortised cost”. This macro-hedge expired during 2021. The average rate of interest rate swaps used for this hedge was -0.54% as at 31 December 2020.

The maturity profiles of the hedging instruments used by the Group as at 31 December 2021 and 2020 are shown below:


Thousand euro
	2021
	Nominal
		Up to 1 month	1 to 3 months	3 to 12 months	1 and 5 years	More than 5 years	Total

Exchange rate risk		304,396	610,373	18,150	—	—	932,919
Interest rate risk		242,999	238,016	6,871,995	19,164,433	16,113,758	42,631,201
Risk associated with shares		2,501	376,528	463,911	2,192,832	277,797	3,313,569
Other risks		—	—	—	449,000	325,000	774,000
Total		549,896	1,224,917	7,354,056	21,806,265	16,716,555	47,651,689

A-611


Thousand euro
	2020
	Nominal
		Up to 1 month	1 to 3 months	3 to 12 months	1 and 5 years	More than 5 years	Total

Exchange rate risk		506,233	482,538	18,206	—	—	1,006,977
Interest rate risk		4,141	1,563,818	3,229,878	17,130,246	16,749,709	38,677,792
Risk associated with shares		8,475	19,726	219,837	1,492,680	53,824	1,794,542
Other risks		—	11,000	—	449,000	895,000	1,355,000
Total		518,849	2,077,082	3,467,921	19,071,926	17,698,533	42,834,311

In 2021 and 2020 there were no reclassifications from equity to the consolidated income statement due to cash flow hedges and hedges of net investments in foreign operations for transactions that were ultimately not executed.

The following table shows the accounting information of items covered by the fair value micro-hedges arranged by the Group:


Thousand euro
	2021								2020

	Carrying amount of hedged item			Accumulated fair value adjustments in the hedged item			Accumulated amount of adjustments in hedged items for which hedge accounting no longer applies		Carrying amount of hedged item
		Assets	Liabilities		Assets	Liabilities				Assets	Liabilities

Micro-hedges:
Fair value hedges

Exchange rate risk		—	—		—	—		—		—	—
Interest rate risk		5,384,640	356,924		(65,713)	(9,377)		3,206		4,275,182	1,003,491
Risk associated with shares		—	1,708,590		—	14,149		(7)		—	1,903,259
Total		5,384,640	2,065,514		(65,713)	4,772		3,199		4,275,182	2,906,750

In terms of fair value macro-hedges, the carrying amount of the hedged items recognised in assets and liabilities for 2021 amounted to 29,343,668 thousand euros and 60,195,513 thousand euros, respectively (28,907,233 thousand euros and 60,851,577 thousand euros in 2020, respectively). Similarly, fair value adjustments of the hedged items amounted to -3,963 thousand euros and 19,472 thousand euros as at 31 December 2021, respectively (458,849 thousand euros and 371,642 thousand euros as at 31 December 2020).

In relation to fair value hedges, the losses and gains recognised in 2021 and 2020 arising from both hedging instruments and hedged items are detailed hereafter:


Thousand euro
	2021			2020
		Hedging instruments	Hedged items		Hedging instruments	Hedged items

Micro-hedges		33,932	(38,524)		45,768	(45,691)
Fixed-rate assets		89,231	(94,757)		(31,239)	31,665
Capital markets and fixed-rate liabilities		(18,498)	19,386		(3,785)	4,044
Assets denominated in foreign currency		(36,801)	36,847		80,792	(81,400)

Macro-hedges		297,263	(293,854)		(233,051)	242,738
Capital markets and fixed-rate liabilities		(318,769)	340,540		162,619	(158,746)
Fixed-rate assets		616,032	(634,394)		(395,670)	401,484
Total		331,195	(332,378)		(187,283)	197,047

A-612

Hedge ineffectiveness in the results for 2021 related to cash flow hedges amounted to losses of 3,668 thousand euros (losses of 300 thousand euros in 2020).

As at 31 December 2021, the Group holds embedded derivatives that have been separated from their host contracts and recognised under the headings “Derivatives – Hedge accounting” on the asset side and on and liabilities side of the consolidated balance sheet in the amount of 43,707 thousand euros and 22,683 thousand euros, respectively. The host contracts of those embedded derivatives correspond to customer deposits and debt securities in issue and have been allocated to the portfolio of financial liabilities at amortised cost.

Note 13 – Non-current assets and disposal groups classified as held for sale

The composition of these headings in the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021	2020

Assets	998,210	1,269,690
Loans and advances	67	243,890
Customers	67	243,890
Equity instruments	159,853	—
Real estate exposure	838,290	1,004,859
Tangible assets for own use	44,945	53,074
Foreclosed assets	793,345	951,785
Leased out under operating leases	—	9,141
Rest of other assets	—	11,800

Impairment allowances	(220,175)	(294,150)

Non-current assets and disposal groups classified as held for sale	778,035	975,540

Tangible assets for own use relate mainly to commercial premises.

Regarding real estate assets obtained through foreclosures, 93.7% of the balance corresponds to residential properties, 5.7% to industrial properties and 0.6% to agricultural assets.

The average term during which assets remained within the category of “Non-current assets and assets and liabilities included in disposal groups classified as held for sale – Foreclosed assets” was 43 months in 2021 (35 months in 2020). The policies concerning the sale or disposal by other means of these assets is set out in Note 4.4.2.1.

The percentage of foreclosed assets sold with financing granted to the buyer in 2021 was 4.1% (in 2020 it was 4.9%). On the date of sale, these properties had a gross asset value of 9.6 million euros in 2021 (7.2 million euros in 2020).

The reduced balance of loans and advances recognised as non-current assets held for sale in 2021 occurred as a result of the closing of transfer transactions of two credit portfolios, which were agreed on 21 December 2020 and 30 December 2020, once the established conditions had been met.

In 2021, the Group recognised its 20% stake in the capital of the associate company Promontoria Challenger I, S.A., an entity controlled by Cerberus, into which the Group transferred a large portion of its real estate exposure in 2019, as a non-current asset held for sale. With regard to this investment, the Group has an account receivable with Cerberus Capital Management L.P. amounting to 633 million euros in respect of a deferred collection on the sale, in 2019, of 80% of the business managed by Promontoria Challenger I, S.A., recognised under “Financial assets at amortised cost – Loans and advances – Customers” on the consolidated balance sheet as at 31 December 2021.

A-613

Movements in “Non-current assets and disposal groups classified as held for sale” during 2021 and 2020 were as follows:


Thousand euro
	Note	Non-current assets held for sale
Cost:
Balances as at 31 December 2019		976,084

Additions		685,665
Disposals		(462,095)
Transfer of credit losses (*)		(41,918)
Other transfers/reclassifications		111,954
Balances as at 31 December 2020		1,269,690

Additions		104,087
Disposals		(495,649)
Transfer of credit losses (*)	11	(28,921)
Other transfers/reclassifications		149,003
Balances as at 31 December 2021		998,210

Impairment allowances:
Balances as at 31 December 2019		211,881

Impairment through profit or loss	37	410,285
Reversal of impairment through profit or loss	37	(182,110)
Utilisations		(108,935)
Other transfers/reclassifications		(36,971)
Balances as at 31 December 2020		294,150

Impairment through profit or loss	37	71,148
Reversal of impairment through profit or loss	37	(53,236)
Utilisations		(88,494)
Other transfers/reclassifications		(3,393)
Balances as at 31 December 2021		220,175

Net balances as at 31 December 2020		975,540

Net balances as at 31 December 2021		778,035

(*) Allowance arising from provisions allocated to cover credit risk.

Details of the net carrying amount of transfers shown in the table above are as follows:


Thousand euro
	Note	2021	2020

Loans and advances		—	243,890
Tangible assets	15	(17,099)	100,173
Inventories	17	17,605	(85,854)
Equity interests	14	159,853	—
Other		(7,963)	(109,284)
Total		152,396	148,925

A-614

Note 14 – Investments in joint ventures and associates

Movements in this heading of the consolidated balance sheets as at 31 December 2021 and 2020 are as follows:


Thousand euro
Balance as at 31 December 2019			733,930

Scope additions / exclusions			12

Profit/(loss) for the year			35,926

Acquisition or capital increase () (*)			85,379

Sale or dissolution			(22,340)

Dividends			(47,347)

Transfer			(4,375)
Impairment, allowances, translation differences and other			(1,326)
Balance as at 31 December 2020			779,859

Scope additions / exclusions			—

Profit/(loss) for the year			100,280

Acquisition or capital increase (*)			3,912

Sale or dissolution			(2,279)

Dividends			(60,824)

Transfer			(160,429)
Impairment, allowances, translation differences and other			(21,737)
Balance as at 31 December 2021			638,782

(**) See the consolidated cash flow statement of the Group.

(**) As at 31 December 2020, 62,061 thousand euros are non-monetary contributions and 23,318 thousand euros are cash.

The section of the cash flow statement “Cash flows from investing activities – Collections – Investments in joint ventures and associates” shows 63,086 thousand euros which correspond to the sum of 2,279 thousand euros on sales or dissolutions, 60,824 thousand euros of dividends charged and (17) thousand euros resulting from the derecognitions and settlements included in the breakdown shown in Schedule I. Furthermore, the section “Cash flows from investing activities – Payments – Investments in joint ventures and associates” of this statement shows 3,912 thousand euros, which correspond to the acquisitions and capital increases carried out during 2021.

The main investee companies included for the first time in the balance sheet and those no longer in the balance sheet in 2021 y 2020 are indicated in Schedule I.

As at 31 December 2021 and 2020, goodwill linked to investments in joint ventures and associates corresponding to the investee Solvia Servicios Inmobiliarios, S.L.U. amounted to 25,637 thousand euros. This goodwill arose as a result of the recognition at fair value of the interest held in this entity following the sale of 80% of its share capital to a non-Group third party.

As at 31 December 2021 and 2020, no support agreements or other type of significant contractual commitment had been provided by the Bank or its subsidiaries to associates.

The reconciliation between the Group’s investment in investees and the balance recorded under the heading “Investments in joint ventures and associates” is as follows:


Thousand euro
	2021		2020

Group investment in investees (Schedule I)		493,156		502,019

Contributions due to retained earnings		326,138		296,707

Companies classified as non-current assets held for sale		(159,853)		—

Valuation adjustments		(20,659)		(18,867)
Total		638,782		779,859

A-615

Set out below are the most relevant financial data for the associate, Bansabadell Vida, S.A., as at 31 December 2021 and 2020, through which the Bank extends its customer offering via the distribution of insurance products through its branch network:


Thousand euro
	*BanSabadell Vida ()**
	2021		2020

Total assets		10,418,907		10,866,241

Of which: financial investments		9,455,504		9,625,116

Total liabilities		9,745,468		10,166,025

Of which: technical provisions		8,929,810		9,035,756

Result of the technical account of insurer		115,465		112,308

Of which: premiums allocated to the year		1,239,765		1,210,419

Of which: claims ratio for the year		(1,227,205)		(1,302,047)

Of which: technical financial yield		156,927		131,405

(*) Figures taken from BanSabadell Vida accounts without taking into consideration consolidation adjustments nor the Group’s percentage holding.

As at 31 December 2021 and 2020, the carrying amount of the investment in Bansabadell Vida, S.A. amounted to 289,861 thousand euros and 306,509 thousand euros, respectively. Furthermore, as at these dates, the aggregate carrying amount of investments in associates not considered individually significant was of 348,921 thousand euros and 267,757 thousand euros, respectively. In addition, as at 31 December 2020, the carrying amount of the investment in Promontoria Challenger I, S.A. amounted to 205,593 thousand euros. This investment has been classified as a non-current asset held for sale in 2021 (see Note 13).

A-616

Note 15 – Tangible assets

The composition of this heading in the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021								2020

	Cost		Depreciation		Impairment		Net value		Cost		Depreciation		Impairment		Net value



Property, plant and equipment		4,173,480		(1,706,114)		(69,876)		2,397,490		4,636,930		(1,767,492)		(17,151)		2,852,287

For own use:		4,168,101		(1,703,527)		(69,876)		2,394,698		4,278,181		(1,682,036)		(17,143)		2,579,002

Computer equipment and related facilities		710,316		(471,866)		—		238,450		643,025		(423,776)		—		219,249

Furniture, vehicles and other facilities		1,005,308		(598,167)		—		407,141		1,154,022		(660,514)		—		493,508

Buildings		2,309,743		(619,881)		(66,328)		1,623,534		2,384,730		(582,115)		(17,143)		1,785,472

Work in progress		63,495		(6,013)		(3,548)		53,934		9,522		(2)		—		9,520

Other		79,239		(7,600)		—		71,639		86,882		(15,629)		—		71,253

Leased out under operating leases		5,379		(2,587)		—		2,792		358,749		(85,456)		(8)		273,285

Investment properties		504,952		(54,308)		(71,376)		379,268		429,367		(38,610)		(42,665)		348,092

Buildings		504,558		(54,308)		(71,067)		379,183		429,367		(38,610)		(42,665)		348,092

Rural property, plots and sites		394		—		(309)		85		—		—		—		—
Total		4,678,432		(1,760,422)		(141,252)		2,776,758		5,066,297		(1,806,102)		(59,816)		3,200,379

A-617

Movements in the balance under this heading during 2021 and 2020 were as follows:


Thousand euro
		Own use - Buildings, work in progress and other		Own use - Computer equipment, furniture and related facilities		Investment properties		Leased out under operating leases		Total

Cost:	Note
Balances as at 31 December 2019			2,400,985		1,799,124		614,308		393,339		5,207,756

Additions			86,215		165,307		33,587		109,538		394,647

Disposals			(31,128)		(163,222)		(41,381)		(143,599)		(379,330)

Transfers			51,892		1,552		(177,146)		—		(123,702)

Exchange rate			(26,830)		(5,714)		—		(529)		(33,073)
Balances as at 31 December 2020			2,481,133		1,797,048		429,367		358,749		5,066,298

Additions			222,489 (*)		113,553		7,331		—		343,373

Disposals			(237,770)		(202,541)		(22,589)		(353,979)		(816,879)

Transfer of credit losses			—		—		—		—		—

Transfers			(46,197)		(296)		90,843		—		44,350

Exchange rate			32,819		7,861		—		610		41,290
Balances as at 31 December 2021			2,452,478		1,715,625		504,952		5,380		4,678,432

Accumulated depreciation:
Balances as at 31 December 2019			474,219		1,069,421		43,381		78,113		1,665,134

Additions			159,843		133,312		11,766		40,412		345,333

Disposals			(23,234)		(114,272)		(4,860)		(38,668)		(181,033)

Transfers			(3,091)		(49)		(11,678)		—		(14,818)

Exchange rate			(9,991)		(4,121)		—		5,599		(8,514)
Balances as at 31 December 2020			597,746		1,084,290		38,610		85,456		1,806,102

Additions			142,693		142,888		10,572		5		296,158

Disposals			(115,494)		(160,490)		(2,167)		(83,184)		(361,335)

Transfers			(5,754)		(1,105)		7,293		—		434

Exchange rate			14,303		4,451		—		310		19,064
Balances as at 31 December 2021			633,494		1,070,034		54,308		2,587		1,760,423

Impairment losses:
Balances as at 31 December 2019			13,907		4,078		56,298		5,940		80,223

Impairment through profit or loss	35		3,433		—		16,963		—		20,396

Reversal of impairment through profit or loss	35		(8,383)		—		(19,704)		—		(28,087)

Utilisations			4,191		(4,078)		1,815		(5,933)		(4,005)

Transfers			3,995		—		(12,706)		—		(8,711)
Balances as at 31 December 2020			17,144		—		42,665		8		59,816

Impairment through profit or loss	35		58,580		—		36,180		—		94,760

Reversal of impairment through profit or loss	35		(211)		—		(29,066)		—		(29,277)

Utilisations			(10,472)		—		(385)		(8)		(10,865)

Transfers			4,836		—		21,981		—		26,817
Balances as at 31 December 2021			69,877		—		71,375		—		141,251


Net balances as at 31 December 2020			1,866,244		712,758		348,092		273,285		3,200,379


Net balances as at 31 December 2021			1,749,108		645,591		379,268		2,793		2,776,758

(*) Includes 117,747 thousand euros of revaluations and new right-of-use assets corresponding to leased properties in which the Group acts as lessee.

The net carrying amount of “ Transfers” shown in the table above (17,099 thousand euros and -100,173 thousand euros in 2021 and 2020, respectively) correspond to reclassification of assets from or to the heading “ Non-current assets and disposal groups classified as held for sale” (see Note 13).

Specific information relating to tangible assets as at 31 December 2021 and 2020 is shown hereafter:


Thousand euro
	2021		2020

Gross value of tangible assets for own use in use and fully depreciated		481,244		454,649

Net carrying amount of tangible assets of foreign operations		401,094		363,344

A-618

Lease contracts in which the Group acts as lessee

As at 31 December 2021, the cost of property, plant and equipment for own use includes right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee, in the amount of 1,341,931 thousand euros, which have accumulated depreciation of 324,916 thousand euros and are impaired in the amount of 36,666 thousand euros as at the aforesaid date (1,231,842 thousand euros as at 31 December 2020, which had accumulated depreciation of 224,115 thousand euros as at that date).

The cost recognised in the consolidated income statement for 2021 for the depreciation of right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee amounted to 103,155 thousand euros (112,855 thousand euros in 2020). The total amount of impairments on these assets as at 31 December 2021 was recognised with a balancing entry in the consolidated income statement for 2021.

Information is set out below concerning the lease contracts in which the Group acts as lessee:


Thousand euro
	2021		2020

Interest expense on lease liabilities		(17,481)		(16,258)

Expense related to short-term low-value leases (*)		(11,537)		(17,888)

Total lease payments in cash (**)		110,934		117,535

(*) Recognised in the “ Administrative expenses” heading, in the item on “ Of property, plant and equipment” (see note 33).

(**) Payments of the principal and interest components of the lease liability are recognised as cash flows from financing activities in the group’s consolidated cash flow statement.

The future cash outflows to which the Group may potentially be exposed as lessee and which are not included under lease liabilities are not significant.

Minimum future payments over the non-cancellable period for lease contracts in effect as at 31 December 2021 are indicated below:


Thousand euro
	2021		2020

Undiscounted future lease payments

Up to 1 month		875		7,624

1 to 3 months		25,417		21,136

3 to 12 months		75,769		79,792

1 to 5 years		352,190		427,161

More than 5 years		569,317		501,878

Sale and leaseback transactions



Operating lease contracts	No. properties sold		No. contracts with purchase option		No. contracts without purchase option		Mandatory term

2009		63		26		37		10 to 20 years

2010		379		378		1		10 to 25 years

2011 (acquisition B.Guipuzcoano)		46		34		12		8 to 20 years

2012 (acquisition Banco CAM)		12		12		—		10 to 25 years

2012		4		4		—		15 years

A-619

Specific information in connection with this set of lease contracts as at 31 December 2021 is given below:


Thousand euro

Undiscounted future lease payments

Up to 1 month			120

1 to 3 months			10,630

3 to 12 months			32,702

1 to 5 years			169,022

More than 5 years			389,324

In 2021, gains from sale and leaseback transactions amounted to 25,281 thousand euros and were recognised under the heading “ Gains or (-) losses on derecognition of non-financial assets, net” of the consolidated income statement. In 2020, no significant results were recorded for sale and leaseback transactions.

Contracts in which the Group acts as lessor

The lease contracts entered into by the Group in which it acts as lessor are mainly operating leases.

As regards the investment properties item, the rental income from these investment properties and the direct costs associated with the investment properties that produced rental income during 2021 amounted to 25,785 thousand euros and 14,358 thousand euros, respectively. Direct costs associated with investment properties that did not produce rental income were not significant in the context of the consolidated annual financial statements.

A-620

Note 16 – Intangible assets

The composition of this heading in the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021		2020

Goodwill:		1,026,457		1,026,105

Banco Urquijo		473,837		473,837

Grupo Banco Guipuzcoano		285,345		285,345

From acquisition of Banco BMN Penedés assets		245,364		245,364

Other		21,911		21,559

Other intangible assets:		1,554,964		1,569,978

With a finite useful life:		1,554,964		1,569,978

Private Banking Business, Miami		8,444		11,332

Contractual relations with TSB customers and brand		84,589		118,873

Computer software		1,460,744		1,438,427

Other		1,187		1,346
Total		2,581,421		2,596,083

Goodwill

As set forth in the regulatory framework of reference, Banco Sabadell carried out an analysis in 2021 to evaluate the existence of any potential impairment of its goodwill.

The main transactions that generated goodwill were the acquisition of Banco Urquijo in 2006, of Banco Guipuzcoano in 2010 and of certain assets of BMN-Penedès in 2013.

Banco Sabadell Group has been monitoring the Group’s total goodwill across the ensemble of Cash-Generating Units (UGEs, for their acronym in Spanish) that make up the Banking Business Spain operating segment.

The projections used to determine the recoverable amount are those set out in the Financial Projections approved by the Board of Directors. Those projections are based on sound and well-founded assumptions, which represent management’s best estimates of overall upcoming economic conditions. To determine the key variables (basically net interest income, fees and commissions, expenses, cost of risk and solvency levels) that underpin the Financial Projections, management has used microeconomic variables, such as the existing balance sheet structure, market positioning and strategic decisions adopted, and macroeconomic variables, such as the expected evolution of GDP and the forecast evolution of interest rates and unemployment. The macroeconomic variables used for the baseline macroeconomic scenario, described in Note 1, were estimated by the Group’s Research Department.

The approach used to determine the values of assumptions is based on the projections and on past experience. These values are compared against external information sources, if available.

In 2021, to calculate the terminal value, 2026 has been taken as the reference year, using a growth rate in perpetuity of 2.0% (1.6% in 2020), which does not exceed the long-term average growth rate of the market in which the operating segment is active. The discount rate used was 9.3% (9% in 2020), determined using the Capital Asset Pricing Model (CAPM); it therefore comprises a risk-free rate plus a risk premium which reflects the inherent risk of the operating segment being valued.

The recoverable amount obtained is higher than the carrying amount; therefore, there has been no impairment. The individual recoverable amount for each UGE at the end of 2021 and 2020, before allocating goodwill to the UGEs as a group, was above its carrying amount; therefore, the Group did not recognise any impairment at UGE level during the aforesaid years.

Additionally, the Group has carried out a sensitivity test, making reasonable adjustments to the main assumptions used to calculate the recoverable amount.

A-621

This test consisted of adjusting, individually, the following assumptions:

–

Discount rate +/- 0.5%.

–

Growth rate in perpetuity +/- 0.5%.

–

Minimum capital requirement +/-0.5%.

–

NIM/ATAs in perpetuity +/- 5bps.

–

Cost of risk in perpetuity +/- 10bps.

The sensitivity test does not alter the conclusions drawn from the impairment test. In all scenarios defined in that analysis, the recoverable amount obtained is greater than the carrying amount.

In accordance with the specifications of the restated text of the Corporation Tax Law, the goodwill generated is not tax-deductible.

Other intangible assets

Miami Private Banking Business

Contractual relations with TSB customers and brand

The intangible assets associated with the acquisition of TSB include the value of the contractual rights arising from customer relationships taken over from TSB for core deposits, initially estimated at 353,620 thousand euros. This asset is amortised over a period of 8 years. The valuation of these intangible assets was carried out by calculating the value in use based on the income approach (discounted cash flows) with the multi-period excess earnings method. To determine whether there is any evidence of impairment, the balance of deposits currently in TSB linked to existing customers at the time of its acquisition by the Bank has been compared against the estimated balance that such customers would have at the end of 2021, forecast at the time of the initial valuation. Based on this comparison, it can be concluded that there is no evidence of any impairment. The carrying amount of contractual relationships with TSB customers amounted to 56,135 thousand euros as at 31 December 2021 (87,443 thousand euros as at 31 December 2020).

The value of the exclusive right of use of the TSB brand was also estimated at an initial amount of 73,328 thousand euros. The value attributable to this asset was determined through the replacement cost method, consisting of establishing the cost of rebuilding or acquiring an exact replica of the asset in question. This asset is amortised over a period of 12 years. For the brand, the assessment of the recoverable amount of the TSB UGE included an implicit analysis of its valuation and concluded that there is no impairment. The carrying amount of the TSB brand amounted to 28,454 thousand euros as at 31 December 2021 (31,430 thousand euros as at 31 December 2020).

Computer software

Computer software costs include mainly the capitalised costs of developing the Group’s computer software and the cost of purchasing software licences.

R&D expenditure in 2021 and 2020 was not significant.

A-622

Movements

Movements in goodwill in 2021 and 2020 were as follows:


Thousand euro
	Goodwill		Impairment		Total

Balance as at 31 December 2019		1,031,824		—		1,031,824

Additions		500		—		500

Disposals		(6,219)		—		(6,219)
Balance as at 31 December 2020		1,026,105		—		1,026,105

Additions		352		—		352
Balance as at 31 December 2021		1,026,457		—		1,026,457

Movements in other intangible assets in 2021 and 2020 were as follows:


Thousand euro

	Cost						Amortisation						Impairment						Total

	Internally developed		Other		Total		Internally developed		Other		Total		Internally developed		Other		Total


Balance as at 31 December 2019		2,013,009		968,417		2,981,426		(768,284)		(679,983)		(1,448,267)		—		—		—		1,533,159


Additions		271,363		17,008		288,371		(155,289)		(63,168)		(218,457)		—		(2,025)		(2.025) (*)		67,889

Disposals		(15,726)		(11,280)		(27,006)		2,237		6,553		8,790		—		—		—		(18,216)

Other		(1,652)		—		(1,652)		(39)		—		(39)		—		—		—		(1,691)

Exchange differences		(16,473)		(9,659)		(26,132)		5,482		9,487		14,969		—		—		—		(11,163)


Balance as at 31 December 2020		2,250,521		964,486		3,215,007		(915,893)		(727,111)		(1,643,004)		—		(2,025)		(2,025)		1,569,978


Additions		236,049		40,092		276,141		(166,853)		(63,502)		(230,355)		(1,570)		—		(1.570) (*)		44,216

Disposals		(63,144)		(172,010)		(235,154)		13,823		155,133		168,956		1,570		2,025		3,595		(62,603)

Other		(22,713)		12		(22,701)		5,937		(3)		5,934		—		—		—		(16,767)

Exchange differences		12,898		29,967		42,865		(2,554)		(20,171)		(22,725)		—		—		—		20,140


Balance as at 31 December 2021		2,413,611		862,547		3,276,158		(1,065,540)		(655,654)		(1,721,194)		—		—		—		1,554,964

(*) See Note 35.

The gross value of other intangible assets that were in use and had been fully amortised as at 31 December 2021 and 2020 amounted to 1,141,823 thousand euros and 945,626 thousand euros, respectively.

Note 17 – Other assets

The composition of this heading in the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	Note		2021		2020

Insurance contracts linked to pensions		22		116,453		133,757

Inventories				142,713		194,264

Rest of other assets				360,549		580,335
Total				619,715		908,356

The “Rest of other assets” item includes mainly prepaid expenses, the accrual of customer fees and commissions and transactions in progress pending settlement.

A-623

Movements in inventories in 2021 and 2020 were as follows:


Thousand euro
	Note		Land		Buildings under construction		Finished buildings		Total

Balance as at 31 December 2019				516,561		175,386		176,629		868,577

Additions				68,398		15,161		46,049		129,609

Disposals				(488,691)		(137,522)		(217,496)		(843,709)

Impairment through profit or loss		35		(50,156)		26,206		(65,714)		(89,663)

Reversal of impairment through profit or loss		35		3,788		300		39,508		43,596

Other transfers		13		(40,077)		(77,746)		203,676		85,854
Balance as at 31 December 2020				9,824		1,786		182,653		194,264

Additions				7,920		255		58,727		66,902

Disposals				(6,006)		(300)		(55,628)		(61,934)

Impairment through profit or loss		35		(4,997)		(381)		(51,763)		(57,141)

Reversal of impairment through profit or loss		35		1,608		156		16,463		18,227

Other transfers		13		60		—		(17,665)		(17,605)
Balance as at 31 December 2021				8,409		1,516		132,787		142,713

As at 31 December 2021 and 2020, there are no inventories associated with debt secured with mortgages.

Note 18 – Deposits of central banks and credit institutions

The breakdown of the balance of deposits of central banks and credit institutions in the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021		2020

By heading:

Financial liabilities at amortised cost		47,067,145		41,964,732
Total		47,067,145		41,964,732

By nature:

Demand deposits		534,995		375,755

Deposits with agreed maturity		41,468,444		34,535,298

Repurchase agreements		5,398,905		6,789,993

Hybrid financial liabilities		—		73,200

Other accounts		114,975		185,472

Valuation adjustments		(450,174)		5,014
Total		47,067,145		41,964,732

By currency:

In euro		38,458,261		35,781,889

In foreign currency		8,608,884		6,182,843
Total		47,067,145		41,964,732

A-624

Note 19 – Customer deposits

The balance of customer deposits on the consolidated balance sheets as at 31 December 2021 and 2020 breaks down as follows:


Thousand euro
	2021	2020

By heading:
Financial liabilities at amortised cost	162,239,453	151,269,710
Total	162,239,453	151,269,710

By nature:
Demand deposits	147,268,436	130,294,703
Deposits with agreed maturity	13,131,887	18,906,351
Fixed term	11,205,749	16,674,741
Non-marketable covered bonds and bonds issued	1,111,603	1,397,479
Other	814,535	834,131
Hybrid financial liabilities (see Notes 10 and 12)	1,680,942	1,898,153
Repurchase agreements	60,312	13,022
Valuation adjustments	97,876	157,481
Total	162,239,453	151,269,710

By sector:
General governments	7,905,699	6,456,561
Other sectors	154,235,878	144,655,668
Other valuation adjustments (interest, fees and commissions, other)	97,876	157,481
Total	162,239,453	151,269,710

By currency:
In euro	111,119,866	106,121,344
In foreign currency	51,119,587	45,148,366
Total	162,239,453	151,269,710

Note 20 – Debt securities in issue

The breakdown of the balance of debt securities issued by the Group by type of issuance and recognised on the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021	2020

Straight bonds/debentures	7,079,915	6,822,802
Straight bonds	7,022,715	6,717,715
Structured bonds	57,200	105,087
Commercial paper	426,094	374,317
Covered bonds	6,540,400	8,041,000
Covered Bonds (TSB)	2,082,640	1,390,387
Asset-backed bonds	671,317	874,049
Subordinated marketable debt securities	4,200,000	2,873,239
Subordinated liabilities	1,800,000	1,723,239
Preference shares	2,400,000	1,150,000
Valuation and other adjustments	50,589	37,604
Total	21,050,955	20,413,398

Schedule V shows details of the outstanding issues as at 2021 and 2020 year-end.

The remuneration for preference shares that are contingently convertible into ordinary shares amounted to 100,593 thousand euros in 2021 (73,250 thousand euros in 2020) and is recognised under the heading “Other reserves” of consolidated equity.

A-625

Note 21 – Other financial liabilities

The breakdown of the balance of other financial liabilities in the consolidated balance sheets as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021	2020

By heading:
Financial liabilities designated at fair value through profit or loss	—	—
Financial liabilities at amortised cost	4,821,669	3,742,926
Total	4,821,669	3,742,926

By nature:
Debentures payable	356,465	157,545
Guarantee deposits received	11,261	73,364
Clearing houses	672,355	607,792
Collection accounts	2,214,033	1,383,699
Lease liabilities	1,037,265	1,045,162
Other financial liabilities	530,290	475,364
Total	4,821,669	3,742,926

By currency:
In euro	4,294,286	3,442,277
In foreign currency	527,383	300,649
Total	4,821,669	3,742,926

The following table shows information relating to the average time taken to pay suppliers (days payable outstanding), as required by Additional Provision Three of Law 15/2010, taking into account the amendments introduced by Law 31/2014 of 3 December, amending the Capital Companies Act in order to improve corporate governance:


Number of days and thousand euro
	2021	2020

Days
Average time taken to pay suppliers (*)	27.30	30.13
Ratio of paid operations	27.30	30.14
Ratio of operations payable	17.06	17.99

Amount
Total payments made	957,417	995,338
Total payments outstanding	127	119

(*) Refers to the average period of payment to suppliers by consolidated undertakings based in Spain.

A-626

Note 22 – Provisions and contingent liabilities

Movements during 2021 and 2020 under the “Provisions” heading are shown below:


Thousand euro

	Pensions and other post employment defined benefit obligations	Other long term employee benefits	Pending legal issues and tax litigation	Commitments and guarantees given	Other provisions	Total

Balance as at 31 December 2019	99,346	6,938	66,889	110,746	146,515	430,434

Scope additions / exclusions	—	—	—	—	(745)	(745)

Interest and similar charges - pension commitments	1,004	107	—	—	—	1,111

*Allowances charged to income statement - staff expenses ()**	2,488	196	—	—	345,150	347,834

Allowances not charged to income statement	—	—	—	—	—	—

Allowances charged to income statement - provisions	1,224	(38)	70,003	87,180	117,039	275,408
Allocation of provisions	14	—	70,879	239,662	117,369	427,924
Reversal of provisions	—	—	(876)	(152,482)	(330)	(153,688)
Actuarial losses / (gains)	1,210	(38)	—	—	—	1,172

Exchange differences	(556)	(162)	—	(375)	(4,193)	(5,286)

Utilisations:	(8,575)	(3,205)	(22,795)	—	(63,146)	(97,721)
Contributions by the sponsor	(39)	1	—	—	—	(38)
Pension payments	(8,536)	(3,206)	—	—	—	(11,742)
Other	—	—	(22,795)	—	(63,146)	(85,941)

Other movements	4,759	135	—	(1,672)	29,255	32,477
Balance as at 31 December 2020	99,690	3,971	114,097	195,879	569,875	983,512

Scope additions / exclusions	—	—	—	—	(788)	(788)

Interest and similar charges - pension commitments	1,010	4	—	—	—	1,014

*Allowances charged to income statement - staff expenses ()**	2,859	6	—	—	280,390	283,255

Allowances not charged to income statement	—	—	—	—	—	—

Allowances charged to income statement - provisions	1,305	17	39,608	(9,046)	55,682	87,566
Allocation of provisions	39	—	41,093	197,837	57,363	296,332
Reversal of provisions	—	—	(1,485)	(206,882)	(1,681)	(210,048)
Actuarial losses / (gains)	1,266	17	—	—	—	1,283

Exchange differences	344	—	—	1,629	9,349	11,322

Utilisations:	(8,043)	(1,417)	(76,857)	—	(123,363)	(209,680)
Net contributions by the sponsor	281	—	—	—	—	281
Pension payments	(8,324)	(1,417)	—	—	—	(9,741)
Other	—	—	(76,857)	—	(123,363)	(200,220)

Other movements	(11,145)	(1,931)	—	2,129	(259,116)	(270,063)
Balance as at 31 December 2021	86,020	650	76,848	190,591	532,029	886,138

(*) See Note 33.

The headings “Pensions and other post-employment defined benefit obligations” and “Other long term employee benefits” include the amount of provisions for the coverage of post-employment remuneration and commitments undertaken with early retirees and similar commitments.

The heading “Commitments and guarantees given” includes the amount of provisions for the coverage of commitments given and contingent exposures arising from financial guarantees or other types of contracts.

A-627

During the usual course of business, the Group is exposed to fiscal, legal and regulatory contingencies, among others. All significant contingencies are analysed on a regular basis, with the collaboration of third party experts when necessary and, where appropriate, provisions are recognised under the headings “Pending legal issues and tax litigation” and “Other provisions”. As at 31 December 2021 and 2020, these headings mainly include:

–

Provisions allocated to provide compensation to certain TSB customers in arrears who received financial support that could have been detrimental to them during the 2013-2020 period. The estimated potential cost of compensation payable, which includes compensatory interest and associated operational costs, amounted to 65 million euros as at 31 December 2021 (61 million euros as at 31 December 2020).

–

Provisions for legal contingencies amounting to 28 million euros as at 31 December 2021 (77 million euros as at 31 December 2020).

–

Provisions to cover the anticipated restructuring costs at TSB amounting to 28 million euros as at 31 December 2021 (75 million euros as at 31 December 2020).

–

Provisions to cover the anticipated costs relating to restructuring plans in Spain amounting to 274 million euros as at 31 December 2021 (305 million euros as at 31 December 2020) – see Note 33.

–

Provisions for the possible reimbursement of amounts paid as a result of the application of mortgage floor clauses, whether as a result of the hypothetical voiding by the courts of law of floor clauses or whether due to the implementation of Royal Decree-Law 1/2017 of 20 January on measures to protect consumers regarding floor clauses, for the amount of euros 114 million euros as at 31 December 2021 (85 million euros as at 31 December 2020). In the highly adverse scenario of potential additional claims being filed, both through the procedures established by the Institution, in accordance with that set forth in the aforesaid Royal Decree, and through court proceedings applying the percentages set forth in the current agreement, the maximum contingency would amount to 141 million euros.

With regard to these provisions, the Bank considers its floor clauses to be transparent and clear to customers, and in general, these have not been definitively voided with a final ruling. On 12 November 2018, Section 28 of the Civil Division of the Provincial Court of Madrid issued a ruling in which it partially supported the appeal brought forth by Banco de Sabadell, S.A. against the ruling issued by the Commercial Court no. 11 of Madrid on the invalidity of the restrictive interest rate clauses, considering that some of the clauses established by Banco de Sabadell, S.A. are transparent and valid in their entirety. With regard to the rest of the clauses, the Bank still considers that it has legal arguments which should be reviewed in the legal appeal which the Institution presented to the Supreme Court, with regard to the ruling made by the Provincial Court of Madrid.

–

In addition, the Supreme Court ruling dated 4 March 2020, relating to revolving credit card contracts and/or contracts with deferred payment of a third-party institution, modifies the court’s own previous doctrine and clarifies that the specific benchmark interest rate for this category of credit transactions published in the Statistical Bulletin of the Bank of Spain is the one that should be used as a benchmark to determine the legal interest rate for the purposes of the Law on the Suppression of Usury. In the case in question, the average rate published was somewhat higher than 20%. The court does not set specific criteria to determine what a manifestly disproportionate interest rate means; therefore, each contract must be analysed on a case-by-case basis. Banco Sabadell considers that the Supreme Court ruling is unlikely to have a significant effect on its financial statements. As at 31 December 2021, provisions set aside to cover this contingency were not significant.

The final disbursement amount and the payment schedule are uncertain due to the difficulties inherent in estimating the factors used to determine the amount of the provisions set aside.

A-628

Pensions and similar obligations

The origins of liabilities recognised in respect of post-employment benefits and other similar long-term obligations on the Group’s balance sheet are shown below:


Thousand euro
	2021	2020	2019	2018	2017

Obligations arising from pension and similar commitments	739,456	819,789	803,905	768,695	793,871
Fair value of defined benefit plan assets	(652,786)	(716,128)	(697,621)	(667,835)	(692,537)
Net liability recognised on balance sheet	86,670	103,661	106,284	100,860	101,334

The return on the Banco Sabadell pension plan was 4.25% and that of the E.P.S.V. was 2.67% in 2021 (0.24% and 0.63%, respectively, in 2020).

Movements during 2021 and 2020 in obligations due to pensions and similar commitments and the fair value of the plan assets are as follows:


Thousand euro
	Obligations arising from pension and similar commitments	Fair value of defined benefit plan assets	Net liability recognised on balance sheet

Balance as at 31 December 2019	803,905	697,621	106,284

Interest costs	6,204	—	6,204
Interest income	—	5,092	(5,092)
Normal cost in year	2,643	—	2,643
Past service cost	—	—	—
Benefits paid	(48,220)	(36,478)	(11,742)
Settlements, curtailments and terminations	(8,695)	(9,905)	1,210
Net contributions by the Institution	—	(62)	62
Actuarial gains or losses from changes in demographic assumptions	23,964	—	23,964
Actuarial gains or losses from changes in financial assumptions	22,499	—	22,499
Actuarial gains or losses from changes in actuarial assumptions	(5,229)	—	(5,229)
Yield on defined benefit plan assets excluding interest income	—	39,788	(39,788)
Other movements	22,718	20,072	2,646
Balance as at 31 December 2020	819,789	716,128	103,661

Interest costs	4,503	—	4,503
Interest income	—	3,489	(3,489)
Normal cost in year	1,951	—	1,951
Past service cost	914	—	914
Benefits paid	(47,979)	(38,238)	(9,741)
Settlements, curtailments and terminations	(13,352)	(14,618)	1,266
Net contributions by the Institution	—	(181)	181
Actuarial gains or losses from changes in demographic assumptions	—	—	—
Actuarial gains or losses from changes in financial assumptions	(43,340)	—	(43,340)
Actuarial gains or losses from changes in actuarial assumptions	1,369	—	1,369
Yield on defined benefit plan assets excluding interest income	—	(30,845)	30,845
Other movements	15,601	17,051	(1,450)
Balance as at 31 December 2021	739,456	652,786	86,670

A-629

The breakdown of Group pension commitments and similar obligations as at 31 December 2021 and 2020, based on the financing vehicle, coverage and the interest rate applied in their calculation, is given below:

Thousand euro

2021

Financing vehicle

Coverage

Amount

Interest rate

Pension plans

358,922

Insurance policies with related parties

Matched

33,404

1.00 %

Insurance policies with unrelated parties

Matched

325,518

1.00 %

Insurance policies

372,859

Insurance policies with related parties

Matched

78,285

1.00 %

Insurance policies with unrelated parties

Matched

294,574

1.00 %

Internal funds

Without cover

7,675

1.00 %

Total obligations

739,456

Thousand euro

2020

Financing vehicle

Coverage

Amount

Interest rate

Pension plans

413,423

Insurance policies with related parties

Matched

39,817

0.50 %

Insurance policies with unrelated parties

Matched

373,606

0.50 %

Insurance policies

396,162

Insurance policies with related parties

Matched

88,078

0.50 %

Insurance policies with unrelated parties

Matched

308,084

0.50 %

Internal funds

Without cover

10,203

0.50 %

Total obligations

819,788

The value of the commitments covered by matched insurance policies as at 31 December 2021 amounted to 731,781 thousand euros (809,585 thousand euros as at 31 December 2020), therefore in 98.96% of its commitments (98.76% as at 31 December 2020) there is no mortality risk (mortality tables) or profitability risk (interest rate) for the Group. Therefore, the evolution of interest rates in 2021 has not had an impact on the Institution’s financial situation.

The sensitivity analysis for each key actuarial assumption, as at 31 December 2021 and 2020, shows how the obligation and the cost of the services during the current year would have been affected by changes deemed reasonably likely to occur as at that date.


%
	2021	2020
Sensitivity analysis	Percentage change

Interest rate

Interest rate -50 basis points:
Assumption	0.50 %	0.00 %
Change in obligation	5.87 %	6.25 %
Change of service cost in current year	11.59 %	10.44 %

Interest rate +50 basis points:
Assumption	1.50 %	1.00 %
Change in obligation	(5.36)%	(5.66)%
Change of service cost in current year	(10.33)%	(9.09)%

Rate of salary increase

Rate of salary increase -50 basis points:
Assumption	2.50 %	2.00 %
Change in obligation	(0.06)%	(0.17)%
Change of service cost in current year	(3.27)%	(2.69)%

Rate of salary increase +50 basis points:
Assumption	3.50 %	3.00 %
Change in obligation	0.06 %	0.19 %
Change of service cost in current year	3.92 %	2.99 %

A-630

The estimate of probable present values, as at 31 December 2021, of benefits payable for the next ten years, is set out below:


Thousand euro
	Years
	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031	Total

Future benefit payments	8,847	8,189	7,935	7,837	7,674	8,618	8,335	8,041	7,737	7,425	80,638

The fair value of assets linked to pensions recognised on the consolidated balance sheet amounted to 116,453 thousand euros as at 31 December 2021 (133,757 thousand euros as at 31 December 2020) – see Note 17.

The main categories of the plan assets as a percentage of total plan assets, as at 31 December 2021 and 2020, are listed below:


%
	2021	2020

Mutual funds	2.08 %	1.63 %
Deposits and guarantees	0.14 %	0.18 %
Other (non-linked insurance policies)	97.78 %	98.19 %
Total	100 %	100 %

The following financial instruments issued by the Bank as at 31 December 2021 and 2020 are included in the fair value of the plan assets:


Thousand euro
	2021	2020

Equity instruments	—	36
Deposits and guarantees	—	902
Total	—	938

Contingent liabilities

As at the date of preparation of these consolidated annual financial statements, the investigation by the British authorities into the incidents that occurred following the migration to TSB’s new IT platform in April 2018 has not yet been completed. The decision to recognise a provision for this item requires the use of judgement in order to determine whether there is a current payment obligation and, if so, to reliably estimate the same. Based on the information available regarding the progress made in the aforesaid investigation, the Group’s Management considers that the circumstances do not require a provision for potential sanctions to be recognised, as there is currently no payment obligation and, if such obligation were to exist, there is no way to reliably estimate the amount that would need to be disbursed.

Note 23 – Shareholders’ equity

The breakdown of the balance of shareholders’ equity on the consolidated balance sheets as at 31 December 2021 and 2020 is the following:


Thousand euro
	2021	2020

Capital	703,371	703,371
Share premium	7,899,227	7,899,227
Equity instruments issued other than capital	—	—
Other equity	19,108	20,273
Retained earnings	5,441,185	5,444,622
Revaluation reserves	—	—
Other reserves	(1,201,701)	(1,088,384)
(-) Treasury shares	(34,523)	(37,517)
Profit or loss attributable to owners of the parent	530,238	2,002
(-) Interim dividends	—	—
Total	13,356,905	12,943,594

A-631

Capital

The Bank’s share capital as at 31 December 2021 and 2020 stood at 703,370,587.63 euros, represented by 5,626,964,701 registered shares with a par value of 0.125 euros each. All shares are fully paid up and are numbered in sequential order from 1 through 5,626,964,701, inclusive.

The Bank’s shares are listed on the Madrid, Barcelona, Bilbao and Valencia stock exchanges and on Spain’s electronic market (Mercado Continuo) managed by Sociedad de Bolsas, S.A.

None of the other subsidiary companies included in the scope of consolidation are listed on the stock exchange.

There were no changes in the Bank’s share capital in 2021 and 2020.

Significant investments in the Bank’s capital

As required by Articles 23 and 32 of Royal Decree 1362/2007 of 19 October, implementing the Securities Market Law 24/1988 of 28 July, on transparency requirements relating to information on issuers whose securities have been admitted to trading on an official secondary market or on any other European Union regulated market, the following table gives details of significant investments in the share capital of Banco Sabadell as at 31 December 2021:



Direct owner of the shareholding	% of voting rights assigned to shares	% of voting rights through financial instruments	% of total voting rights	Indirect owner of the shareholding

Various subsidiaries of BlackRock Inc.	3.02%	0.41%	3.43%	Blackrock Inc.

Fintech Europe S.A.R.L.	3.45%	— %	3.45%	David Martínez Guzmán

Sanders Capital LLC	3.47%	— %	3.47%	Lewis A. Sanders and clients of Sanders Capital LLC who delegate their voting rights to others

The sources for the information provided are communications sent by shareholders to the National Securities Market Commission (CNMV) or directly to the Institution.

Share premium

The balance of the share premium as at 31 December 2021 amounted to 7,899,227 thousand euros, remaining unchanged from the amounts in 2021 and 2020.

Retained earnings and Other reserves

The balance of these headings of the consolidated balance sheets as at 31 December 2021 and 2020 breaks down as follows:

Thousand euro

2021

2020

Restricted reserves:

206,665

195,966

Statutory reserve

140,674

Reserves for treasury shares pledged as security

52,315

41,832

Canary Island investment reserve

10,561

10,345

Reserve for share capital redenomination in euro

113

Capital redemption reserve

3,002

Unrestricted reserves

3,797,366

3,895,788

Reserves of entities valued using the equity method

235,453

264,484

Total

4,239,484

4,356,238

Information on the reserves for each of the consolidated companies is indicated in Schedule I.

A-632

Other equity

This heading includes share-based remuneration pending settlement which, as at 31 December 2021 and 2020, amounted to 19,108 thousand euros and 20,273 thousand euros, respectively.

Business involving own equity instruments

The movements of the parent company’s shares acquired by the Bank are as follows:

Nominal value

Average price

No. of shares

(in thousand euro)

(in euro)

% Shareholding

Balance as at 31 December 2019

6,006,864

750.86

1.42

0.11

Purchases

342,926,719

42,865.84

0.42

6.09

Sales

300,372,716

37,546.59

0.39

5.34

Balance as at 31 December 2020

48,560,867

6,070.11

0.77

0.86

Purchases

115,224,411

14,403.05

0.56

2.05

Sales

123,106,070

15,388.26

0.55

2.19

Balance as at 31 December 2021

40,679,208

5,084.90

0.85

0.72

As at 31 December 2021, TSB holds 233,658 Banco Sabadell shares (66,016 as at 31 December 2020), with a cost of 104 thousand euros (60 thousand euros as at 31 December 2020), which are recorded as treasury shares on the consolidated balance sheet.

As at 31 December 2021, the number of shares of the Bank pledged as collateral for transactions was 88,399,047 with a nominal value of 11,450 thousand euros (118,169,913 shares with a nominal value of 14,771 thousand euros as at 31 December 2020).

The number of Banco de Sabadell, S.A. equity instruments owned by third parties, yet managed by the different companies of the Group, amounts to 17,183,167 and 12,669,119 securities as at 31 December 2021 and 2020, respectively. Their nominal value amounts to 2,148 thousand euros and 1,584 thousand euros, respectively. In both years, 100% of the securities corresponded to Banco Sabadell shares.

A-633

Note 24 – Accumulated other comprehensive income

The composition of this heading of consolidated equity as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021	2020

Items that will not be reclassified to profit or loss	(41,758)	(64,419)
Actuarial gains or (-) losses on defined benefit pension plans	917	(693)

Non-current assets and disposal groups classified as held for sale	—	—
Share of other recognised income and expense of investments in joint ventures and associates	—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income	(42,675)	(63,726)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income	—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income (hedged item)	—	—
Fair value changes of equity instruments measured at fair value through other comprehensive income (hedging instrument)	—	—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk	—	—
Items that may be reclassified to profit or loss	(343,846)	(459,171)
Hedge of net investments in foreign operations (effective portion) (*)	157,741	211,841
Foreign currency translation	(481,266)	(737,073)
Hedging derivatives. Cash flow hedges (effective portion) (**)	(30,163)	39,798
Amount deriving from outstanding operations	(67,193)	(4,662)
Amount deriving from discontinued operations	37,030	44,460
Fair value changes of debt instruments measured at fair value through other comprehensive income	(11,724)	(871)
Hedging instruments (not designated elements])	—	—

Non-current assets and disposal groups classified as held for sale	—	—
Share of other recognised income and expense of investments in joint ventures and associates	21,566	27,134
Total	(385,604)	(523,590)

(*) The value of the hedge of net investments in foreign operations is fully obtained from outstanding transactions (see note 12).

(**) Cash flow hedges mainly mitigate interest rate risk and other risks (see note 12).

A-634

The breakdown of the items in the statement of recognised income and expense as at 31 December 2021 and 2020, indicating their gross and net of tax effect amounts, is as follows:


Thousand euro
	2021						2020
	Gross amount		Tax effect		Net		Gross amount		Tax effect		Net

Items that will not be reclassified to profit or loss		20,611		2,050		22,661		(15,603)		(4,139)		(19,742)

Actuarial gains or (-) losses on defined benefit pension plans		2,299		(689)		1,610		2,383		(715)		1,668

Non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—

Share of other recognised income and expense of investments in joint ventures and associates		—		—		—		—		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income		18,312		2,739		21,051		(17,986)		(3,424)		(21,410)

Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—		—		—		—		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income (hedged item)		—		—		—		—		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income (hedging instrument)		—		—		—		—		—		—

Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—		—		—		—		—

Items that may be reclassified to profit or loss		78,796		35,988		114,784		(254,533)		17,730		(236,803)

Hedge of net investments in foreign operations [effective portion]		(54,100)		—		(54,100)		97,604		—		97,604

Foreign currency translation		255,804		—		255,804		(291,902)		—		(291,902)

Hedging derivatives. Cash flow hedges reserve [effective portion]		(103,229)		33,269		(69,960)		(67,603)		17,557		(50,046)

Fair value changes of debt instruments measured at fair value through other comprehensive income		(14,112)		2,719		(11,393)		1,392		173		1,565

Hedging instruments (not designated elements])		—		—		—		—		—		—

Non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—

Share of other recognised income and expense of investments in joint ventures and associates		(5,567)		—		(5,567)		5,976		—		5,976
Total		99,407		38,038		137,445		(270,136)		13,591		(256,545)

A-635

Note 25 – Minority interests (non-controlling interests)

The companies comprising this consolidated equity heading as at 31 December 2021 and 2020 are the following:

Thousand euro

2021

2020

%
Minority
interests

Amount

Of which:
Profit/ (loss)
attributed

%
Minority
interests

Amount

Of which:
Profit/ (loss)
attributed

BancSabadell d’Andorra, S.A.

—

4,700

49.03 %

49,815

4,967

Aurica Coinvestment, S.L.

38.24 %

24,190

4,129

38.24 %

20,707

(2,290)

Other

—

790

(360)

—

1,112

(1,669)

Total

24,980

8,469

71,634

1,008

The movements in the balance of this heading in 2021 and 2020 were as follows:


Thousand euro
Balances as at 31 December 2019			69,346

Valuation adjustments			299
Other			1,989
Percentage shareholding and other			981
Profit or loss for the year			1,008
Balances as at 31 December 2020			71,634

Valuation adjustments			(541)
Other			(46,113)
Scope additions / exclusions (*)			(52,502)
Percentage shareholding and other			(2,080)
Profit or loss for the year			8,469
Balances as at 31 December 2021			24,980

(*) Corresponds, fundamentally, to disposal of stake held in BancSabadell d’Andorra (see Note 2).

The dividends distributed to minority shareholders of Group entities in 2021 amounted to 2,118 thousand euros (1,472 thousand euros to BancSabadell d’Andorra, S.A. And 646 thousand euros to Aurica Coinvestment, S.L.) and 650 thousand euros in 2020 (Aurica Coinvestment, S.L.).

In 2021, the companies Aurica Coinvestment S.L., Business Services for Operational Support, S.A.U. and their investees are included within Banking Business Spain (see Note 38).

A-636

Note 26 – Off-balance sheet exposures

The breakdown of this heading for the years ended 31 December 2021 and 2020 is the following:


Thousand euro
Commitments and guarantees given	Note		2021		2020

Loan commitments provided				28,403,146		29,295,155
Of which, amount classified as Stage 2				1,310,996		1,584,252
Of which, amount classified as Stage 3				84,768		128,512
Can be drawn by third parties				28,403,146		29,295,155
By credit institutions				295		78
By general governments				1,062,490		1,472,415
By other resident sectors				15,553,771		16,470,386
By non-residents				11,786,590		11,352,276

Provisions recognised on liabilities side of the balance sheet		22		68,136		88,562
*Financial guarantees provided ()**				2,034,143		2,035,638
Of which, amount classified as Stage 2				143,686		136,415
Of which, amount classified as Stage 3				116,373		108,143

Provisions recognised on liabilities side of the balance sheet (**)		22		42,417		38,605
Other commitments provided				7,384,863		7,594,720
Of which, amount classified as Stage 2				473,436		479,396
Of which, amount classified as Stage 3				358,184		349,677
Other guarantees given				7,234,081		7,237,127
Assets earmarked for third-party obligations				—		—
Irrevocable letter of credit				967,766		760,160
Additional settlement guarantee				25,000		20,000
Other guarantees and sureties given				6,241,315		6,456,967
Other contingent risks				—		—
Other commitments provided				150,782		357,593
Financial asset forward purchase commitments				—		204,692
Conventional financial asset purchase contracts				50,116		171
Capital subscribed but not paid up				19		1,939
Underwriting and subscription commitments				—		—
Other loan commitments given				100,647		150,791

Provisions recognised on liabilities side of the balance sheet		22		80,038		68,712
Total				37,822,152		38,925,513

(*) Includes 68,837 thousand euros and 73,548 thousand euros as at 31 December 2021 and 2020, respectively, relating to financial guarantees given in relation to construction and real estate development.

(**) Includes 6,512 thousand euros and 3,909 thousand euros as at 31 December 2021 and 2020, respectively, in relation to construction and real estate development.

Total commitments drawable by third parties as at 31 December 2021 include home equity loan commitments amounting to 5,778,794 thousand euros (5,160,536 thousand euros as at 31 December 2020). As regards other commitments, in the majority of cases there are other types of guarantees which are in line with the Group’s risk management policy.

Financial guarantees and other commitments provided classed as Stage 3

The movement of the balance of the financial guarantees and other commitments provided classed as stage 3 during 2021 and 2020 was the following:


Thousand euro
Balances as at 31 December 2019			198,452

Additions			338,411
Disposals			(79,922)
Balances as at 31 December 2020			456,941

Additions			94,214
Disposals			(76,598)
Balances as at 31 December 2021			474,557

A-637

The breakdown by region of the balance of the financial guarantees and other commitments provided classed as stage 3 as at 31 December 2021 and 2020 is as follows:


Thousand euro
	2021		2020

Spain		469,444		455,929
United Kingdom		4		5
Rest of European Union		439		437
Americas		2,808		4
Rest of the world		1,862		566
Total		474,557		456,941

Credit risk allowances corresponding to financial guarantees and other commitments provided as at 31 December 2021 and 2020, broken down by the method used to determine such allowances, are as follows:


Thousand euro
	2021		2020

Specific individually measured allowances:		86,050		82,961
Stage 2		424		934
Stage 3		85,626		82,027

Specific collectively measured allowances:		36,405		24,355
Stage 1		6,317		7,651
Stage 2		5,229		5,539
Stage 3		24,141		10,667
Allowances for country risk		718		498
Total		122,455		107,316

The movement of this coverage during the years 2021 and 2020, together with the coverage of other loan commitments given, is shown in Note 22.

Note 27 – Off-balance sheet customer funds

Off-balance sheet customer funds managed by the Group, those sold but not under management and the financial instruments deposited by third parties as at 31 December 2021 and 2020 are shown below:


Thousand euro
	2021		2020

Managed by the group:		5,160,075		5,036,415
Investment firms and funds		1,364,922		1,738,444
Asset management		3,795,153		3,297,971

Sold by the group:		36,517,746		33,028,002
Mutual Funds		23,228,405		19,627,494
Pension funds		3,524,786		3,349,136
Insurance		9,764,555		10,051,372

Financial instruments deposited by third parties		47,881,913		69,347,471
Total		89,559,734		107,411,888

The reduction in the balance of “Financial instruments deposited by third parties” in 2021 is due to the sale of the institutional depository business (see Note 2).

Note 28 – Interest income and expenses

The majority of interest income is generated by the Group’s financial assets measured either at amortised cost or at fair value through other comprehensive income.

A-638

The average annual interest rate during 2021 and 2020 of the indicated balance sheet headings is shown below:


%

	2021				2020

	Banco Sabadell Group		*Ex TSB ()**		Banco Sabadell Group		*Ex TSB ()**

Assets
Cash, cash balances at central banks and other demand deposits		(0.26)		(0.28)		(0.01)		(0.06)
Debt securities		0.62		0.72		0.92		0.96
Loans and advances
Customers		2.31		2.21		2.52		2.42

Liabilities
Deposits
Central banks and Credit institutions		0.74		0.82		0.40		0.52
Customers		(0.05)		(0.04)		(0.15)		(0.12)
Debt securities issued		(1.17)		(1.18)		(1.30)		(1.26)

Positive (negative) figures correspond to income (expenses) for the Group.

(*) Group figures, not including TSB.

The breakdown of quarterly net interest income for the years 2021 and 2020, as well as returns and average costs of the different components which comprise the total investment and funds, is as follows:


Thousand euro
											2021
	1st quarter						2nd quarter						3rd quarter						4th quarter
	Average balance		Rate %		Profit/(loss)		Average balance		Rate %		Profit/(loss)		Average balance		Rate %		Profit/(loss)		Average balance		Rate %		Profit/(loss)		TOTAL
Return on the investment		236,160,370		1.54		899,136		245,532,351		1.45		889,206		248,758,987		1.44		901,290		250,605,494		1.41		892,879		3,582,511
Cash and cash equivalents (*)		41,910,017		(0.21)		(21,253)		48,148,899		(0.32)		(38,016)		49,896,356		(0.26)		(32,404)		54,664,905		(0.24)		(32,787)		(124,460)
Loans and advances		148,164,054		2.37		865,945		151,579,415		2.31		874,637		153,649,238		2.28		881,295		155,218,363		2.28		891,305		3,513,182
Fixed-income portfolio (**)		25,197,742		0.67		41,722		26,343,512		0.63		41,483		26,079,617		0.65		42,697		22,365,247		0.50		28,322		154,224
Equity portfolio		1,006,811						1,120,353						1,046,087						1,002,849						—
Tangible and intangible assets		5,428,850						5,278,329						5,026,872						4,986,359						—
Rest of other assets		14,452,896		0.36		12,722		13,061,843		0.34		11,102		13,060,817		0.29		9,702		12,367,771		0.19		6,039		39,565

Cost of resources		236,160,370		(0.11)		(66,193)		245,532,351		(0.06)		(36,847)		248,758,987		(0.04)		(24,014)		250,605,494		(0.05)		(30,001)		(157,055)
Central banks and Credit institutions		34,678,942		0.70		59,981		38,111,490		0.78		74,281		38,419,927		0.77		74,610		41,133,647		0.69		71,751		280,623
Customer deposits (***)		157,697,667		(0.08)		(29,691)		163,315,847		(0.06)		(22,500)		165,534,132		(0.04)		(14,718)		164,343,879		(0.05)		(20,687)		(87,596)
Capital markets		22,365,550		(1.31)		(72,059)		22,480,193		(1.15)		(64,265)		23,455,466		(1.10)		(65,191)		22,793,830		(1.12)		(64,361)		(265,876)
Other liabilities		8,844,806		(1.12)		(24,424)		9,017,734		(1.08)		(24,363)		8,591,010		(0.86)		(18,715)		9,358,896		(0.71)		(16,704)		(84,206)
Own funds		12,573,405						12,607,087						12,758,452						12,975,242						—
Net interest income						832,943						852,359						877,276						862,878		3,425,456

Average total assets						236,160,370						245,532,351						248,758,987						250,605,494		245,313,451

Ratio (margin/ATA)						1.43						1.39						1.40						1.36		1.40

(*) Includes cash, central banks, credit institutions and reverse repos.

(**) Includes 917 thousand euros corresponding to interest on financial assets held for trading.

(***) Includes repos.

Financial income and expense arising from the application of negative interest rates are assigned to the associated instrument. Thus, profit/(loss) on investments and the cost of resources include financial expenses and income amounting to 176,703 thousand euros and 388,335 thousand euros, respectively, arising from such assignment. In particular, the credit institutions row on the liabilities side includes financial income on negative interest rates applied to balances of credit institutions in the liabilities side, mainly those relating to TLTRO III.

A-639


Thousand euro
											2020
	1st quarter						2nd quarter						3rd quarter						4th quarter
	Average balance		Rate %		Profit/(loss)		Average balance		Rate %		Profit/ (loss)		Average balance		Rate %		Profit/(loss)		Average balance		Rate %		Profit/ (loss)		TOTAL

Return on the investment		220,337,733		2.09		1,143,474		222,558,306		1.83		1,013,548		233,151,256		1.62		949,587		234,373,619		1.59		933,855		4,040,464

Cash and cash equivalents (*)		26,254,634		0.19		12,589		28,340,676		0.10		6,985		36,048,331		(0.08)		(7,385)		38,368,333		(0.17)		(15,959)		(3,770)

Loans and advances		142,034,120		2.80		988,433		143,837,623		2.52		899,910		144,698,464		2.39		869,015		146,228,816		2.37		870,503		3,627,861

Fixed-income portfolio (**)		27,498,622		1.16		79,200		26,549,681		0.96		63,359		29,524,076		0.87		64,674		27,692,825		0.72		50,088		257,321

Equity portfolio		1,000,487		—		—		1,038,194		—		—		1,043,559		0.00		—		955,928		0.00		—		—

Tangible and intangible assets		5,475,464		—		—		5,411,995		—		—		5,353,196		0.00		—		5,385,265		0.00		—		—

Rest of other assets		18,074,406		1.41		63,252		17,380,137		1.00		43,294		16,483,630		0.56		23,283		15,742,452		0.74		29,223		159,052

Cost of resources		220,337,733		(0.47)		(258,988)		222,558,306		(0.35)		(193,507)		233,151,256		(0.19)		(108,716)		234,373,619		(0.14)		(80,137)		(641,348)

Central banks and Credit institutions		22,792,000		(0.14)		(7,687)		23,720,351		0.08		4,841		34,093,243		0.69		59,216		34,379,243		0.69		59,704		116,074

Customer deposits (***)		149,636,087		(0.22)		(82,390)		151,934,692		(0.16)		(60,571)		153,693,757		(0.12)		(45,973)		154,676,457		(0.09)		(34,376)		(223,310)

Capital markets		25,329,889		(1.33)		(83,523)		24,211,144		(1.28)		(77,177)		23,439,410		(1.31)		(77,269)		22,752,551		(1.27)		(72,355)		(310,324)

Other liabilities		9,671,576		(3.55)		(85,388)		9,953,190		(2.45)		(60,600)		9,164,748		(1.94)		(44,690)		9,700,751		(1.36)		(33,110)		(223,788)

Own funds		12,908,181		—		—		12,738,929		—		—		12,760,098		—		—		12,864,617		0.00		—		—
Net interest income						884,486						820,041						840,871						853,718		3,399,116

Average total assets						220,337,733						222,558,306						233,151,256						234,373,619		227,638,874

Ratio (margin/ATA)						1.62						1.48						1.43						1.45		1.49

(*) Includes cash, central banks, credit institutions and reverse repos.

(**) Includes 1,333 thousand euros corresponding to interest on financial assets held for trading.

(***) Includes repos.

Financial income and expense arising from the application of negative interest rates are assigned to the associated instrument. Thus, profit/(loss) on investments and the cost of resources include financial expenses and income amounting to 71,085 thounsand euros and 212,253 thousand euros, respectively, arising from such assignment. In particular, the credit institutions row on the liabilities side includes financial income on negative interest rates applied to balances of credit institutions in the liabilities side, mainly those relating to TLTRO II and TLTRO III.

In terms of annual average, net interest margin on average total assets stood at 1.40% (1.22% ex-TSB), declining by 9 basis points in comparison with the previous year (1.49% in 2020).

Note 29 – Fee and commission income and expenses

Income and expenses arising from fees and commissions on financial assets and liabilities and the provision of services are as follows:


Thousand euro
	2021		2020

Fees from risk transactions		270,392		259,640
Lending operations		168,717		159,148
Sureties and other guarantees		101,675		100,492

Service fees		839,528		755,128
Payment cards		222,539		196,976
Payment orders		74,196		56,888
Securities		66,848		70,554
Sight accounts		293,245		240,011
Other		182,700		190,699

Asset management and marketing fees		357,621		335,560
Mutual funds		121,734		122,952
Sale of pension funds and insurance products		198,338		188,157
Asset management		37,549		24,451
Total		1,467,541		1,350,328

Memorandum item

Fee and commission income		1,661,610		1,538,377
Fee and commission expenses		(194,069)		(188,049)
Fees and commissions (net)		1,467,541		1,350,328

A-640

Note 30 – Gains or (-) losses on financial assets and liabilities (net) and exchange differences (net)

“Gains or (-) losses on financial assets and liabilities, net” groups together a series of headings from the consolidated income statement for the years ended 31 December 2021 and 2020, which are shown below:


Thousand euro
	2021		2020

By heading:
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		340,985		782,143
Financial assets at fair value through other comprehensive income		15,412		54,044
Financial assets at amortised cost		323,840		728,200
Financial liabilities at amortised cost		1,733		(101)
Gains or (-) losses on financial assets and liabilities held for trading, net		(183,555)		444,354
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net		4,466		(9,544)
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net		—		—
Gains or (-) losses from hedge accounting, net		(4,851)		9,464
Total		157,045		1,226,417

By type of financial instrument:
Net gain/(loss) on debt securities		346,978		794,404
Net gain/(loss) other equity instruments		2,396		1,745
Net gain/(loss) on derivatives		(192,370)		446,708
Net gain/(loss) on other items (*)		41		(16,440)
Total		157,045		1,226,417

(*) Mainly includes gains/(losses) on the sale of various loan portfolios sold during the year.

The breakdown of the heading “ Exchange differences [gain or (-) loss], net” of the consolidated income statement for the years ended 31 December 2021 and 2020, are shown below:


Thousand euro
	2021		2020

Exchange differences [gain or (-) loss], net		187,174		(426,777)

During 2021, the Group has carried out sales of certain debt securities which it held in its portfolio of financial assets at fair value through other comprehensive income, generating profits of 15,412 thousand euros (54,044 thousand euros in 2020). Of this profit, 4,127 thousand euros (35,849 thousand euros in the year 2020) derive from the sale of debt securities held with general governments.

In addition, during 2021 and 2020, the Group sold certain debt securities held in the portfolio of financial assets at amortised cost in order to fortify the Group’s solvency as part of a series of actions taken to improve future profitability and the quality of its balance sheet in response to the economic crisis triggered by COVID-19 (see Notes 8 and 33).

Meanwhile, the “Net gain/(loss) on derivatives” heading in the table above includes, mainly, the change in the fair value of derivatives used to hedge against the foreign exchange risk of debit and credit balances denominated in foreign currencies. The results obtained from these derivatives are recognised under the heading “Gains or (-) losses on financial assets and liabilities held for trading, net” of the consolidated income statement, while the exchange differences generated by debit and credit balances denominated in foreign currencies hedged with these derivatives are recognised under the heading “Exchange differences [gain or (-) loss], net” of the consolidated income statement.

A-641

Note 31 – Other operating income

The composition of this heading of the consolidated income statement for the years ended 31 December 2021 and 2020 is as follows:


Thousand euro
	2021		2020

Income from use of investment properties (*)		25,785		38,507
Sales and other income from the provision of non-financial services		11,382		18,675
Other operating income		117,565		168,038
Total		154,732		225,220

(*) The amounts relate mainly to revenues from operating leases in which the group acts as lessor.

The income recognised in “Other operating income” basically corresponds to income from Group entities engaging in non-financial activities (mostly operating leases). The fall in the balance recorded for this item in 2021 is due, mainly, to the sale of the vehicle leasing business managed by Bansabadell Renting, S.L.U. (see Note 2).

Note 32 – Other operating expenses

The composition of this heading of the consolidated income statement for the years ended 31 December 2021 and 2020 is as follows:


Thousand euro
	2021		2020

Contribution to deposit guarantee schemes		(128,883)		(123,437)
Banco Sabadell		(116,341)		(110,587)
TSB		(879)		(166)
BS IBM México		(11,663)		(12,684)

Contribution to resolution fund		(87,977)		(78,388)

Other items		(250,502)		(307,268)
Total		(467,362)		(509,093)

“Other items” includes expenses corresponding to Tax on Deposits of Credit Institutions, amounting to 33,438 thousand euros in 2021 (32,369 thousand euros in 2020), as well as expenses associated with non-financial activities (mostly operating leases).

Note 33 – Administrative expenses

This heading of the consolidated income statement includes expenses incurred by the Group corresponding to staff and other general administrative expenses.

Staff expenses

The staff expenses recognised in the consolidated income statement for the years ended 31 December 2021 and 2020 are as follows:


Thousand euro
	Nota		2021		2020

Payrolls and bonuses for active staff				(1,098,835)		(1,137,159)
Social Security payments				(231,357)		(247,427)
Contributions to defined benefit pension plans		22		(2,865)		(2,683)
Contributions to defined contribution pension plans				(70,132)		(66,807)
Other staff expenses				(373,608)		(430,500)
Of which: restructuring plans in Spain and United Kingdom				(298,272)		(345,150)
Total				(1,776,797)		(1,884,576)

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In October 2021, the Bank reached an agreement with all trade union sections involved in the negotiating committee representing workers, under the framework of a collective dismissal procedure in Spain, which concerns 1,605 employees (496 in 2021 and the rest during the first quarter of 2022). This agreement involved an expenditure of 274,301 thousand euros, which was funded with income from the sale of debt instruments recognised in the amortised cost portfolio (see Notes 8, 22 and 30).

In December 2020, the Group reached an agreement with the trade unions in Spain on voluntary early retirement and incentivised redundancies, which involved expenditure of 304,805 thousand euros in 2020 and concerned approximately 1,800 employees, who left the Group in the first quarter of 2021 (see Notes 8, 22 and 30). In 2020, the Group recognised restructuring costs for its subsidiary, TSB, amounting to 40,345 thousand euros (see Note 22).

As at 31 December 2021 and 2020, the breakdown of the average workforce for all companies within the Group by category and sex is as follows:


Average number of employees
	2021						2020
	Men		Women		Total		Men		Women		Total

Management staff		494		190		684		531		185		716
Middle management		2,227		1,363		3,590		2,433		1,315		3,748
Specialist staff		6,024		8,153		14,177		6,946		9,116		16,062
Administrative staff		739		2,137		2,876		799		2,765		3,564
Total		9,484		11,843		21,327		10,708		13,381		24,089

The breakdown of the Group’s average workforce by category as at 31 December 2021 and 2020 with a disability of 33% or more is as follows:


Average number of employees
	2021		2020
Management staff		9		13
Middle management		33		36
Specialist staff		238		299
Administrative staff		109		160
Total		389		508

As at 31 December 2021 and 2020, the breakdown of the Group workforce by category and sex is as follows:


Number of employees
	2021						2020
	Men		Women		Total		Men		Women		Total

Management staff		515		214		729		516		180		696
Middle management		1,988		1,281		3,269		2,422		1,324		3,746
Specialist staff		5,663		7,766		13,429		6,855		8,970		15,825
Administrative staff		724		1,919		2,643		738		2,453		3,191
Total		8,890		11,180		20,070		10,531		12,927		23,458

Of the total workforce as at 31 December 2021, 344 had some form of recognised disability (482 as at 31 December 2020).

Long-term share-based complementary incentive scheme

Pursuant to the Remuneration Policy, the latest version of which was approved by the Board of Directors at its meeting of 16 December 2021, at the proposal of the Remuneration Committee, members of the Group’s Identified Staff, with the exception of non-executive directors, will be allocated long-term remuneration through the schemes in effect during 2021, as described below:

Share-based complementary incentive scheme

At the Annual General Meeting of 19 April 2018, shareholders approved a long-term complementary incentive based on the increase in value of shares of Banco de Sabadell, S.A., which takes into account multi-year objectives, for members of the Group’s Identified Staff with allocated variable remuneration (ICLP 2018). It consisted of assigning a specific number of stock options to the beneficiaries, carrying the right to receive

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the increase in value of the same number of shares of Banco de Sabadell, S.A., based on the share’s market price, while also being tied to the Bank’s attainment of certain multi-year indicators over a given period of time, and would be paid 55% in the form of Banco de Sabadell, S.A. shares and 45% in cash. In April 2021, this scheme expired with no settlement since the strike price (1,841 euros) was above the listed share price.

As regards TSB, the Share Incentive Plan (SIP) provides its employees with the opportunity to own shares in Banco Sabadell and grants, where applicable, shares to certain senior employees as part of their hiring arrangements.

Long-term remuneration scheme

The Board of Directors, in its meeting of 20 December 2018, at the proposal of the Remuneration Committee, approved Long-Term Remuneration for 2019-2021, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, which consists of the allocation of a certain amount to each beneficiary, which is determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive will be paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of December 2019 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2019 and ended on 31 December 2021, and consisted of two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2019 to 31 December 2019, in which the annual targets of each beneficiary (composed of Group targets, Management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2019 to 31 December 2021, in which multi-year Group targets were measured for the purpose of determining the final incentive, which was also subject to the Risk Correction Factor. The Group’s multi-year targets were related to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%). The results were 0% relative to total shareholder return, 100% relative to the Group’s liquidity coverage ratio, 100% relative to the CET1 capital ratio and 0% relative to the Group’s return on risk-adjusted capital (RoRAC). Based on the above, a final pay-out of 50% of the Target was determined for management staff who had been allocated to receive this incentive.

Furthermore, the Board of Directors, in its meeting of 19 December 2019, at the proposal of the Remuneration Committee, approved Long-Term Remuneration for 2020-2022, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, and which consists of the allocation of a certain amount to each beneficiary, the amount of which is determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive will be paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of the month of December 2020 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2020 and ends on 31 December 2022, and comprises two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2020 to 31 December 2020, in which the annual targets of each beneficiary (composed of Group targets, Management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2020 to 31 December 2022, in which multi-year Group targets are measured for the purpose of determining the final incentive, which is also subject to the Risk Correction Factor. The Group’s multi-year targets relate to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%).

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Furthermore, the Board of Directors, in its meeting of 17 December 2020, at the proposal of the Remuneration Committee, approved Long-Term Remuneration for 2021-2023, aimed at members of the Group’s Identified Staff with allocated variable remuneration, with the exception of management staff who are assigned to TSB Banking Group Plc or its subsidiaries, and which consists of the allocation of a certain amount to each beneficiary, the amount of which is determined based on a monetary amount corresponding to a percentage of each beneficiary’s fixed remuneration. The incentive will be paid 55% in shares of the Bank (using the weighted average price of the last 20 trading sessions of the month of December 2021 to calculate the number of shares) and 45% in cash. The incentive vesting period started on 1 January 2021 and ends on 31 December 2023, and comprises two sub-periods:

–

Individual annual targets measurement period: this is the period from 1 January 2021 to 31 December 2021, in which the annual targets of each beneficiary (composed of Group targets, Management targets and individual targets) established to determine the “Adjusted Target” were measured, which was subject to the Risk Correction Factor, with capital (CET1) and liquidity (Liquidity Coverage Ratio) indicators.

–

Group multi-year targets measurement period: this is the period from 1 January 2021 to 31 December 2023, in which multi-year Group targets are measured for the purpose of determining the final incentive, which is also subject to the Risk Correction Factor. The Group’s multi-year targets relate to the following indicators: total shareholder return (25%), the Group’s liquidity coverage ratio (25%), the CET1 capital indicator (25%) and the Group’s return on risk-adjusted capital (RoRAC) (25%).

As regards the staff expenses associated with share-based incentive schemes (see Note 1.3.15), the balancing entry for such expenses is recognised in equity in the case of stock options settled with shares (see consolidated statement of total changes in equity – share-based payments), while those settled with cash are recognised in the “Other liabilities” heading of the consolidated balance sheet.

Expenditure recognised in relation to incentive schemes and long-term remuneration granted to employees in 2021 and 2020 is shown below:


Thousand euro
	2021		2020

Settled in Shares		3,962		6,285
Settled in Cash		1,390		1,386
Total		5,352		7,671

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Other administrative expenses

The composition of this heading in the consolidated income statement for the years 2021 and 2020 was as follows:


Thousand euro

	2021		2020

Property, plant and equipment		(85,358)		(111,498)
Information technology		(415,128)		(356,122)
Communication		(30,929)		(38,633)
Publicity		(79,452)		(87,783)
Subcontracted administrative services		(113,068)		(156,658)
Contributions and taxes		(130,340)		(143,795)
Technical reports		(32,357)		(49,142)
Security services and fund transfers		(16,899)		(18,442)
Entertainment expenses and staff travel expenses		(4,537)		(6,400)
Membership fees		(5,278)		(5,057)
Other expenses		(90,747)		(80,028)

Total		(1,004,093)		(1,053,558)

Audit firm fees

The fees received by KPMG Auditores, S.L. In the years ended 31 December 2021 and 2020 for audit and other services were as follows:



Thousand euro

	2021		2020

*Statutory audit services ()**		2,495		2,253
Of which: Audit of the Bank’s annual and semi-annual accounts		2,049		1,793
Of which: Audit of the annual accounts of foreign branches (**)		25		25
Of which: Audit of the annual accounts of subsidiaries		421		435
Audit-related services		283		65

Total		2,778		2,318

(*) Including fees corresponding to the year’s audit, irrespective of the date on which that audit was completed.

(**) Corresponding to the branch located in London.

The fees received by other companies forming part of the KPMG network in the years ended 31 December 2021 and 2020 for audit and other services were as follows:



Thousand euro

	2021		2020

*Statutory audit services ()**		6,493		5,109
Of which: Audit of the annual accounts of foreign branches		302		280
Of which: Audit of the annual accounts of Group subsidiaries		6,191		4,829
Audit-related services		219		28
Other services		257		219
Of which: Other		257		219

Total		6,969		5,356

(*) Including fees corresponding to the year’s audit, irrespective of the date on which that audit was completed.

The main items included under “Audit-related services” correspond to fees related to reports that the auditors are required to produce under the applicable regulations, the issuance of comfort letters and other assurance reports required. Furthermore, “Other services” mainly includes fees related to Reviews of the Pillar III Disclosures report and the Non-Financial Disclosures report provided by other companies of the KPMG network.

Finally, the Group engaged auditors other than KPMG to carry out the audits of foreign branches and other Group subsidiaries. Audit and other services provided by those companies amounted to 61 thousand euros and 5 thousand euros in the year ended 31 December 2021, respectively (50 and 5 thousand euros in the year ended 31 December 2020).

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Other information

The cost-to-income ratio as at 2021 year-end (staff and general expenses/gross margin) stood at 55.33% (55.41% in 2020).

Information about the Group’s branches and offices is given below:


Number of branches

	2021		2020

Branches		1,593		2,083

Spain		1,270		1,589
Outside Spain		323		494

Note 34 – Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and modification losses or (-) gains, net

The composition of this heading of the consolidated income statement for the years ended 31 December 2021 and 2020 is as follows:


Thousand euro

	Note		2021		2020

Financial assets at fair value through other comprehensive income				697		288
Debt securities		8		697		288
Other equity instruments				—		—
Financial assets at amortised cost		11		(960,204)		(1,745,302)
Debt securities				73		16
Loans and advances				(960,277)		(1,745,318)

Total				(959,507)		(1,745,014)

Note 35 – Impairment or (-) reversal of impairment on non-financial assets

The composition of this heading of the consolidated income statement for the years ended 31 December 2021 and 2020 is as follows:


Thousand euro

	Note		2021		2020

Property, plant and equipment		15		(58,369)		4,950
Investment properties		15		(7,114)		2,742
Goodwill and other intangible assets		16		(1,570)		(2,025)
Inventories		17		(38,914)		(46,068)

Total				(105,967)		(40,401)

Impairment on property, plant and equipment recognised in 2021 is mainly due to the termination of commercial activity at premises belonging to the Group’s branch network.

The total allowance for the impairment of investment properties in 2021 and 2020 was calculated based on Level 2 valuations (see Note 6). The fair value of impaired assets amounted to 381,261 thousand euros and 319,672 thousand euros in 2021 and 2020, respectively.

Of the total inventory impairment allowances for 2021 and 2020, 20,659 thousand euros and 26,206 thousand euros were allocated based on Level 2 valuations, respectively, and 18,255 thousand euros and 19,862 thousand euros based on Level 3 valuations, respectively. The fair value of impaired assets amounted to 138,216 thousand euros and 173,532 thousand euros at 2021 and 2020 year-end, respectively.

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Note 36 – Gains or (-) losses on derecognition of non-financial assets, net

The composition of this heading of the consolidated income statement for the years ended 31 December 2021 and 2020 is as follows:


Thousand euro

	2021		2021

Property, plant and equipment		(320)		(7,860)
Investment properties		145		3,525
Intangible assets		(36,936)		(4,498)
Interests (*)		14,575		419
Other items		93,657		5,547

Total		71,121		(2,867)

(*) See Schedule I – Companies no longer consolidated.

The “Other items” heading includes 84 million euros in 2021 corresponding to profit recognised on the sale of the institutional depository business to BP2S (see Note 2).

The sale of tangible assets under finance leases in which the Group acts as the lessor did not have a material impact on the 2021 and 2020 consolidated income statements.

Note 37 – Gains or (-) losses on non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

The composition of this heading of the consolidated income statement for the years ended 31 December 2021 and 2020 is as follows:


Thousand euro

	Note		2021		2020

Property, plant and equipment for own use and foreclosed				(63,475)		(217,378)
Gains/losses on sales				(45,563)		10,797
Impairment/Reversal		13		(17,912)		(228,175)
Investment properties				789		406
Interests (*)				40,172		343,169
Other items				15,126		(23,615)

Total				(7,388)		102,582

(*) See Schedule I - Companies no longer consolidated.

The impairment of non-current assets held for sale excludes income from the increase in fair value less sale costs.

The total allowance for the impairment of non-current assets held for sale in 2021 and 2020 was calculated based on Level 2 valuations (see Note 6). The fair value of impaired assets amounted to 452,743 thousand euros and 518,495 thousand euros at 2021 and 2020 year-end, respectively.

Note 38 – Segment reporting

Segmentation criteria

This section gives information regarding earnings and other indicators of the Group’s business units.

For 2021, the criteria that Banco Sabadell Group uses to report on results for each segment are:

–

Three geographical regions: Banking Business in Spain, United Kingdom and Mexico. Banking Business Spain includes the Foreign Branches (OFEX) and the Representative Offices.

–

Each business unit is allocated capital equivalent to 12% of its risk-weighted assets and the surplus of own funds is allocated to Banking Business Spain.

In terms of the other criteria applied, segment information is first structured with a breakdown by region and then broken down based on the customers to which each segment is aimed.

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The information presented is based on the individual accounting records of each Group company, after all consolidation disposals and adjustments have been made.

Each business unit bears its own direct costs, calculated on the basis of general accounting.

Details of profit attributable to the Group and other key figures for each business unit for the years 2021 and 2020 are shown in the table below, along with a reconciliation of the totals shown in the table with those shown in the consolidated Group accounts:


Million euro
	*2021 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Net interest income		2,302		1,011		113		3,425

Fees and commissions (net)		1,336		121		11		1,468
Net banking revenues		3,638		1,132		123		4,893

Net trading income and exchange differences		342		2		—		344
Equity-accounted affiliates and dividends		102		—		—		102
Other operating income/expense		(269)		(33)		(10)		(313)

Gross income		3,812		1,101		114		5,026

Operating expenses and depreciation and amortisation		(2,276)		(942)		(89)		(3,307)
Pre-provisions income		1,536		159		24		1,719

Provisions and impairments		(1,193)		—		(32)		(1,225)
Capital gains on asset sales and other revenue		135		(9)		(0.011)		126

Profit/(loss) before tax		478		150		(8)		620

Corporation tax		(58)		(32)		9		(81)
Profit or loss attributed to minority interests		8		—		—		8

Profit attributable to the Group		412		118		1		530

ROE (profit / average shareholders’ equity)		4.2%		4.5%		0.1%		4.0%
Cost-to-income (general administrative expenses / gross income)		50.2%		71.3%		71.1%		55.3%
NPL ratio		4.6%		1.4%		1.0%		3.7%
Stage 3 exposure coverage ratio (**)		57.6%		38.1%		265.7%		56.3%

Employees		13,855		5,762		453		20,070
Domestic and foreign branches		1,288		290		15		1,593

(*) Exchange rates used in the income statement: GBP 0.8594 (average), MXN 23.9687 (average), USD 1.1865 (average) and MAD 10.4982 (average).

(**) Considering total provisions for losses on transactions in stage 3.

Million euro

2021 (*)

Banking Business

Spain

Banking Business

Mexico

Total Group

Assets

191,162

55,657

5,128

251,947

Gross performing loans to customers

107,089

44,050

3,773

154,912

Non-performing real estate assets (net)

842

—

842

Liabilities

181,389

53,012

4,550

238,950

On-balance sheet customer funds

116,788

42,779

2,453

162,020

Wholesale Funding Capital Markets

18,090

2,975

—

21,065

Allocated capital

9,773

2,645

578

12,996

Off-balance sheet customer funds

41,678

—

41,678

(*) Exchange rates used in the balance sheet: GBP 0.8403, MXN 23.1438, USD 1.1326 and MAD 10.518.

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Million euro
	*2020 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Net interest income		2,400		885		114		3,399

Fees and commissions (net)		1,246		96		7		1,350
Net banking revenues		3,646		981		122		4,749

Net trading income and exchange differences		770		25		4		800
Equity-accounted affiliates and dividends		37		—		—		37
Other operating income/expense		(271)		2		(14)		(284)

Gross income		4,182		1,008		112		5,302

Operating expenses and depreciation and amortisation		(2,344)		(1,035)		(82)		(3,461)
Pre-provisions income		1,838		(27)		30		1,841

Provisions and impairments		(2,007)		(240)		(28)		(2,275)
Capital gains on asset sales and other revenue		317		(4)		—		313

Profit/(loss) before tax		147		(271)		3		(121)

Corporation tax		71		51		1		124
Profit or loss attributed to minority interests		1		—		—		1

Profit attributable to the Group		218		(220)		4		2

ROE (profit / average shareholders’ equity)		2.0%		0.0%		0.8%		0.0%
Cost-to-income (general administrative expenses / gross income)		47.6%		86.8%		64.3%		55.4%
NPL ratio		4.4%		1.3%		0.5%		3.6%
Stage 3 exposure coverage ratio (**)		55.7%		57.4%		231.6%		56.5%

Employees		16,260		6,709		489		23,458
Domestic and foreign branches		1,614		454		15		2,083

(*) Exchange rates used in the income statement: GBP 0.8888 (average), MXN 24.5034 (average), USD 1.1389 (average) and MAD 10.8769 (average).

(**) Considering total provisions for losses on transactions in stage 3.

Million euro

2020 (*)

Banking Business

Spain

Banking Business

Mexico

Total Group

Assets

183,896

47,284

4,584

235,763

Outstanding gross loans and advances

106,327

36,977

3,574

146,878

Non-performing real estate assets (net)

871

—

871

Liabilities

173,664

45,566

4,041

223,272

On-balance sheet customer funds

110,572

38,213

1,993

150,778

Wholesale Funding Capital Markets

18,332

2,319

—

20,651

Allocated capital

10,204

1,736

551

12,492

Off-balance sheet customer funds

38,064

—

38,064

(*) Exchange rates used in the balance sheet: GBP 0.8990, MXN 24.416, USD 1.2271 and MAD 10.882.

The Group’s average total assets as at 31 December 2021 amounted to 245,313,451 thousand euros (227,638,874 thousand euros as at 31 December 2020).

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The types of products and services from which ordinary income is derived are described below for each business unit:

–

Banking Business Spain:

Groups together the Retail Banking, Business Banking and Corporate Banking business units, where Individuals and Businesses are managed under the same Branch Network:

–

Retail Banking: offers financial products and services to individuals for personal use. These include investment products and medium- and long-term finance, such as consumer loans, mortgages and leasing or rental services, as well as short-term finance. Funds come mainly from customer deposits and current accounts, savings insurance, mutual funds and pension plans. The main services also include payment methods such as cards and insurance linked to consumer loans and mortgages. High value-added products and services are also offered to Private Banking customers.

–

Business Banking: offers financial products and services to companies and self-employed persons. These include investment and financing products, such as working capital products, revolving loans and medium- and long-term finance. It also offers customised structured finance and capital market solutions, as well as specialised advice for businesses. Funds mainly come from customer deposits, current accounts and mutual funds. The main services also include collection/payment methods such as cards and POS terminals, as well as import and export services.

–

Banking Business United Kingdom:

The TSB franchise includes business conducted in the United Kingdom, which includes current and savings accounts, loans, credit cards and mortgages.

–

Banking Business Mexico:

Offers corporate banking and commercial banking financial services.

Details of income from ordinary activities and the pre-tax profit/(loss) generated by each business unit, are set out below for the years 2021 and 2020:


Thousand euro
	Consolidated

	*Income from ordinary activities ()**				Profit/(loss) before tax

SEGMENTS	2021		2020		2021		2020

Banking Business Spain		4,680,955		5,843,283		477,976		147,359
Banking Business UK		1,200,385		1,196,722		150,144		(271,072)
Banking Business Mexico		240,858		274,829		(8,131)		2,883

Total		6,122,198		7,314,834		619,989		(120,830)

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The table below shows the balance of net interest income and net fees and commissions income generated by each business unit as a percentage of the total for 2021 and 2020:


%
	2021

	Breakdown net interest income and net fees and commissions

	Customer loans						Customer deposits						Income from services (*)

	% of average balance			% of total yield			% of average balance			% of total cost			% of total balance
SEGMENTS

Banking Business Spain		69.1	%		69.1	%		71.5	%		80.0	%		91.0	%
Banking Business UK		28.5	%		25.5	%		26.4	%		6.1	%		8.2	%
Banking Business Mexico		2.4	%		5.4	%		2.1	%		13.9	%		0.8	%

Total		100	%		100	%		100	%		100	%		100	%

(*) Segment percentage of total net fees and commissions.


%

	2020

	Breakdown net interest income and net fees and commissions

	Customer loans						Customer deposits						Income from services (*)

	% of average balance			% of total yield			% of average balance			% of total cost			% of total balance
SEGMENTS

Banking Business Spain		72.4	%		66.4	%		73.3	%		15.8	%		92.3	%
Banking Business UK		25.2	%		27.6	%		25.4	%		37.7	%		7.1	%
Banking Business Mexico		2.4	%		6.0	%		1.3	%		46.5	%		0.6	%

Total		100	%		100	%		100	%		100	%		100	%

(*) Segment percentage of total net fees and commissions.

Furthermore, a breakdown by region of the “Interest income” heading of the 2021 and 2020 income statements is shown below:


Thousand euro
	Breakdown of interest income by geography
Geography	Individual				Consolidated
	2021		2020		2021		2020

Domestic market		2,601,517		2,797,680		2,625,364		2,844,649
International market		221,413		209,970		1,522,185		1,479,153
European Union		42,689		35,156		42,689		35,156
Euro zone		42,689		35,156		42,689		35,156
Non Euro zone		—		—		—		—
Other		178,724		174,814		1,479,496		1,443,997

Total		2,822,930		3,007,650		4,147,549		4,323,802

Section 4 of the consolidated Directors’ Report gives a more detailed assessment of each of these business units.

Note 39 – Tax situation (income tax relating to continuing operations)

Consolidated tax group

The other companies in the accounting group, both those that are Spanish and those not resident in Spain, are taxed in accordance with the tax regulations applicable to them.

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Reconciliation

The reconciliation of the difference between consolidated accounting results and income subject to corporation tax is as follows:



Thousand euro

	2021		2020

Profit/(loss) before tax		619,989		(120,829)
Increases in taxable income		454,192		776,635
From profits		454,192		772,072
From equity		—		4,563
Decreases in taxable income		(610,249)		(768,077)
From profits		(485,618)		(676,695)
From equity		(124,631)		(91,382)

Taxable income		463,932		(112,271)

Tax payable (30%)		(139,180)		33,681

Deductions for double taxation, training and other		12,891		11,911

Tax payable (less tax credits)		(126,289)		45,592

Due to timing differences (net)		49,710		88,753
Other adjustments (net)		(4,703)		(10,506)


(Tax expense or (-) income related to profit or loss from continuing operations)		(81,282)		123,839

The reconciliation between the Group‘s corporation tax expense calculated by applying the general tax rate and the expense recognised for this corporation tax in the consolidated income statements is as follows:



Thousand euro

	2021		2020

Profit or loss before tax		619,989		(120,829)
Corporation tax, applying national tax rate (30%)		(185,997)		36,249
Reconciliation:
Gains/(losses) on sale of equity instruments (exempt)		3,432		95,289
Remuneration of preference shares		30,178		21,968
Profit/(loss) of entities accounted for using the equity method		29,079		10,778
Difference in effective tax rate on companies outside Spain () (*)		33,594		(25,599)
Generated deductions/Non-deductible expenses		1,489		5,176
Other		6,943		(20,022)

(Tax expense or (-) income related to profit or loss from continuing operations)		(81,282)		123,839

(*) Calculated applying the difference between the current tax rate for the Group in Spain (30%) and the effective tax rate applied to the Group’s profit/(loss) in each jurisdiction.

(**) In 2021, the United Kingdom’s corporation tax rate was changed to 25% (from 19%). As a result, deferred tax assets have increased by 17.9 million euros.

Taxable income – increases and decreases

The increases and decreases in taxable income are analysed in the following table on the basis of whether they arose from temporary or permanent differences:



Thousand euro

	2021		2020

Permanent difference		53,479		109,462
Temporary difference arising during the year		349,070		630,717
Temporary difference arising in previous years		51,643		36,456


Increases		454,192		776,635

Permanent difference		(375,237)		(396,748)
Temporary difference arising during the year		—		(513)
Temporary difference arising in previous years		(235,012)		(370,816)

Decreases		(610,249)		(768,077)

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Deferred tax assets and liabilities

Under current tax and accounting regulations, certain temporary differences should be taken into account when quantifying the relevant tax expense related to profit from continuing operations.

Monetisable tax assets can be converted into credit enforceable against the Spanish Tax Authority in cases where the taxable person incurs accounting losses or the Institution is liquidated or legally declared insolvent. Similarly, they can be exchanged for public debt securities, once the 18-year term has elapsed, calculated from the last day of the tax period in which these assets were recognised in the accounting records. To retain the State guarantee, in order to keep their status as monetisable tax assets, deferred tax assets generated before 2016 are subject to an annual capital contribution of 1.5% of the deferred tax assets that meet the legal requirements.

The sources of the deferred tax assets / liabilities recognised in the consolidated balance sheets as at 31 December 2021 and 2020 are as follows:



Thousand euro

Deferred tax assets	2021		2020

Monetisable		5,042,392		5,058,733
Due to credit impairment		3,355,733		3,358,141
Due to real estate asset impairment		1,560,908		1,574,672
Due to pension funds		125,751		125,920

Non-monetisable		1,156,067		1,066,199

Tax credits for losses carried forward		478,826		483,831

Deductions not applied		30,242		35,975


Total		6,707,527		6,644,738


Deferred tax liabilities	2021		2020

Property restatements		55,838		56,677
Adjustments to value of wholesale debt issuances arising in business combinations		12,916		19,871
Other financial asset value adjustments		1,475		34,666
Other		53,536		55,303


Total		123,765		166,517

The breakdown by country of deferred tax assets and liabilities is as follows:


Thousand euro
	2021				2020
Country	Deferred tax assets		Deferred tax liabilities		Deferred tax assets		Deferred tax liabilities

Spain		6,461,238		111,904		6,417,678		151,614
United Kingdom		155,795		11,861		166,992		12,762
US		23,781		—		7,737		1,925
Mexico		60,260		—		43,434		—
Other		6,453		—		8,897		216


Total		6,707,527		123,765		6,644,738		166,517

As indicated in Note 1.3.20, according to the information available as at year-end, and the projections taken from the Group’s business plan for the coming years, the Group estimates that it will be able to generate sufficient taxable income to offset tax loss carryforwards and non-monetisable tax assets when these can be deducted on the basis of current tax regulations, and that it will be able to generate this within a period of 10 years.

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the projected results of each entity or fiscal group are based and the estimated reversal of timing differences. With respect to Spain, the variables included are those used in the sensitivity analysis of the calculation of the recoverable amount of goodwill (see Note 16). The conclusions arising from that analysis are not significantly different from those reached without stressing the significant variables.

In 2021 and 2020, the Group has applied the same criteria and assumptions for the recognition and review of the recoverability of deferred tax assets generated in those years as a result of the COVID-19 pandemic as those applied to other deferred tax assets.

Monetisable tax assets are guaranteed by the State; therefore, their recoverability does not depend on the generation of future tax benefits.

As at 31 December 2021, the Group had deferred tax assets for tax loss carryforwards and unused deductions of 74.5 million euros not recognised in the balance sheet (generated in financial years prior to the integration of the company giving rise to them into the Spanish tax group). The maximum time limit for applying unused deductions is 2025, while there is no time limit for the application of tax loss carryforwards.

Years subject to tax inspection

As at 31 December 2021, corporation tax for the consolidated tax group in Spain is open to review for 2015 and subsequent years.

In relation to value added tax (VAT) corresponding to entities forming part of the VAT group in Spain, 2016 and subsequent periods are open to review.

Procedures

On 11 January 2022, the State Agency for Tax Administration (AEAT by its Spanish acronym) gave notice of the commencement of verification and investigation procedures into Banco Sabadell, as the parent company of the consolidated tax group, in relation to Corporation Tax (2015 to 2019), Value Added Tax (2018 and 2019), Withholdings and payments on account (2018 and 2019) and Tax on Deposits of Credit Institutions (2017 to 2019).

As at 31 December 2021, the Income Tax (Impuesto sobre la Renta or ISR) corresponding to the Mexican subsidiary, Banco Sabadell. S.A. Institución de Banca Múltiple, for the financial year 2018 is currently undergoing an investigation by the Mexican tax authorities (Servicio de Administración Tributaria or SAT); the process is currently at the documentation submission stage.

Ongoing disputes

As at 31 December 2021, the main ongoing disputes related to tax are those described below:

–

Administrative-financial claim lodged before the Central Tax Appeal Board on 25 March 2019 against the settlement agreement issued in relation to the disputed tax assessment concerning VAT for the period 07/2012 to 12/2014 which contained an adjustment for an amount of tax due of 5,638 thousand euros (6,938 thousand euros in total including late-payment interest) in relation to various sector-based issues. On 15 October 2019, the corresponding representations were submitted. As at 31 December 2021, the aforesaid board had not yet issued a ruling

–

Appeal for judicial review before the Spanish National Court in relation to the rebuttal of the settlement of the disputed VAT assessment for Banco Sabadell between 2008-2010 for an amount of tax due of 1,831 thousand euros (2,337 thousand euros in total including late-payment interest), after a tax settlement was issued in execution of a decision made by the Central Tax Appeal Board partially upholding the claim.

The Group has, in any event, made suitable provisions for any contingencies that it is considered may arise in relation to these tax settlements.

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Note 40 – Related party transactions

In accordance with the provisions of Chapter VII bis. Related Party Transactions, of the Capital Companies Act, introduced by Law 5/2021, of 12 April, amending the restated text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010, of 2 July, and other financial regulations, with regard to the promotion of long-term shareholder involvement in listed companies, there are no transactions with officers and directors of the company that could be considered relevant, other than those considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, carried out following the corresponding approval procedure and, where applicable, reported in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act. Those that did take place were performed in the normal course of the company’s business or were performed on an arm’s-length basis or under the terms available to any employee. There is no record of any transactions being performed other than on an arm’s-length basis with persons or entities related to directors or senior managers.

With regard to transactions, significant because of their size or relevant because of their purpose, carried out by the Bank with related parties, following a favourable report from the Audit and Control Committee on 18 November 2021, the Board of Directors approved a related party transaction consisting of a loan to Acerinox, S.A. in the amount of 205 million euros for a five year term (the first two years being arranged as a grace period), which was entered into on 23 December 2021. The transaction is considered a related-party transaction given that a director of Banco Sabadell is also an independent director of Acerinox, S.A. and sits on its Committees (member of the Executive Committee and Chairman of the Audit Committee of Acerinox, S.A.). As the transaction amount exceeded 2.5% of turnover as stated in the 2020 consolidated annual financial statements of Banco Sabadell, it was reported, together with the corresponding report of the Audit and Control Committee, to the Spanish National Securities Market Commission (Comisión Nacional del Mercado de Valores or CNMV) and published as Other Relevant Information on 23 December 2021 with registration reference number 13,328, in accordance with the provisions set forth in Article 529 unvicies of the Capital Companies Act.

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The most significant balances held with related parties, and the effect on the income statement of related party transactions, are shown below:


Thousand euro
							2021				2020

	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related *parties ()**		TOTAL		TOTAL
Assets:

Customer lending and other financial assets		—		173,423		4,774		540,008		718,205		329,540

Liabilities:

Customer deposits and other financial liabilities		—		199,883		7,450		87,272		294,605		527,333

Off-balance sheet exposures:

Financial guarantees provided		—		302		—		10,042		10,344		672

Loan commitments given		—		102		449		108,373		108,924		40,896

Other commitments provided		—		6,749		—		112,112		118,861		7,566

Income statement:

Interest and similar income		—		3,625		25		5,004		8,654		7,139

Interest and similar charges		—		(76)		1		(20)		(95)		(83)

Return on capital instruments		—				—		—		—		—

Fees and commissions (net)		—		139,930		48		1,444		141,422		131,376

Other operating income/expense		—		13,538		(1)		1		13,538		18,900

(*) Includes employee pension schemes.

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Note 41 – Remuneration of members of the Board of Directors and Senior Management and their respective balances

The following table shows, for the years ended 31 December 2021 and 2020, the amount paid to directors in remuneration and in contributions to meet their pension commitments for services provided by them in that capacity:


Thousand euro

	Remuneration				Pension commitments		Total
	2021		2020		2021	2020	2021		2020

Josep Oliu Creus (1)		1,259		234	—	35		1,259		269

Pedro Fontana García (2)		257		198	—	—		257		198

José Javier Echenique Landiríbar (3)		185		207	—	—		185		207

César González-Bueno Mayer (*) (4)		83		—	—	—		83		—

Jaime Guardiola Romojaro (5)		17		100	—	—		17		100

Anthony Frank Elliott Ball		162		150	—	—		162		150

Aurora Catá Sala		178		166	—	—		178		166

Luis Deulofeu Fuguet (6)		39		—	—	—		39		—

María José García Beato (7)		166		100	—	—		166		100

Maria Teresa Garcia-Milà Lloveras (8)		—		38	—	—		—		38

Mireya Giné Torrens		150		39	—	—		150		39

George Donald Johnston III		188		188	—	—		188		188

David Martínez Guzmán		100		100	—	—		100		100

José Manuel Martínez Martínez		167		138	—	—		167		138

José Ramón Martínez Sufrategui		135		140	—	—		135		140

José Luis Negro Rodríguez (9)		—		74	—			—		74

Alicia Reyes Revuelta		164		—	—	—		164		—

Manuel Valls Morató		145		160	—	—		145		160

David Vegara Figueras (*)		100		100	—	—		100		100

Total		3,495		2,132	—	35		3,495		2,167

(*) Perform executive functions.

(1) Non-Executive Chair (Other External Director) since 26 March 2021.

(2) Appointed Deputy Chair of the Board on 28 July 2021.

(3) Submitted resignation from position as Director on 28 July 2021.

(4) On 17 December 2020, the Board of Directors approved his appointment as Chief Executive Officer. He accepted the position on 18 March 2021.

(5) Submitted resignation from position as Chief Executive Officer on 18 March 2021.

(6) On 28 July 2021, the Board of Directors approved his appointment as member of the Board of Directors, in the capacity of Independent Director. He accepted the position on 26 October 2021.

(7) Other External Director, effective from 31 March 2021.

(8) Submitted resignation from position as Director, effective from 26 March 2020.

(9) Submitted resignation from position as Director, effective from 24 September 2020.

In 2021, following the changes to the Articles of Association introduced at the General Shareholders’ Meeting of 26 March 2021, the directorship of the Chairman of the Board of Directors, Josep Oliu Creus, changed to non-executive status in the category of Other External Director.

The Chairman, through the performance of his duties, is ultimately responsible for the effective operation of the Board of Directors and, as such, he represents the Bank in all matters and signs on its behalf, convenes and chairs meetings of the Board of Directors, sets the meeting agenda, leads discussions and deliberations during Board meetings and ensures the fulfilment of the motions adopted by the Board of Directors. Due to the broad scope and particular nature of the duties assigned to him, the contract of the Chairman in his non-executive capacity provides for a fixed annual remuneration of 1,500 thousand euros, in addition to remuneration corresponding to him due to his membership of the Board. In 2021 he received a proportional amount in line with the date on which he assumed non-executive status.

The directorship of María José García Beato also changed to the category of Other External Director, effective as from 31 March 2021.

Aside from the items mentioned above, members of the Board of Directors received 124 thousand euros as fixed remuneration in 2021 (60 thousand euros in 2020) by reason of their membership of boards of directors in Banco Sabadell Group companies or advisory boards (these amounts are included in the Annual Report on Directors’ Remuneration).

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Remuneration corresponding to directors for discharging their executive duties amounted to 6,563 thousand euros in 2021.

In the case of the Chairman and the Directors who gave up their executive duties during 2021, the amounts correspond to the amounts earned in the period during which they performed those executive duties.

Thousand euro

Total

Fixed

Variable

Long-term

ordinary

Severance

remuneration

pay

Total 2021

Total 2020

Josep Oliu Creus

468

355

165

988

—

988

1,752

César González-Bueno Mayer

1,597

558

—

2,155

—

2,155

—

Jaime Guardiola Romojaro

304

264

129

697

—

697

1,363

María José García Beato

145

—

188

1,849

2,037

511

David Vegara Figueras

535

100

686

—

686

455

José Luis Negro Rodríguez

—

507

Total

3,049

1,277

388

4,714

1,849

6,563

4,588

For comparative purposes, it is important to note that in 2020, the Chairman and the Executive Directors voluntarily waived payment of their annual variable remuneration for 2020, and that no long-term remuneration allocation was made. Additionally, the figures in 2021 include extraordinary amounts in respect of severance payments, amounting to 1,849 thousand euros.

In 2021, pension rights were vested in favour of Directors for discharging their executive duties in the amount of 36,066 thousand euros, including 32,134 thousand euros corresponding to contributions made prior to 2021 (no pension rights were vested in 2020).

The contributions made in 2021 in this respect, insurance premiums covering pension contingencies, amount to 4,381 thousand euros (2,174 thousand euros in 2020), including 4,286 thousand euros corresponding to pre-existing legal or contractual obligations.

Total risk transactions granted by the Bank and consolidated companies to directors of the parent company amounted to 1,068 thousand euros as at 31 December 2021, of which 909 thousand euros corresponded to loans and receivables and 159 thousand euros related to loan commitments given (2,037 thousand euros as at 31 December 2020, consisting of 1,850 thousand euros in loans and receivables and 187 thousand euros in loan commitments given). These transactions form part of the ordinary business of the Bank and are carried out under normal market conditions. Liabilities amounted to 5,928 thousand euros as at 31 December 2021 (5,254 thousand euros as at 31 December 2020).

Total Senior Management remuneration earned during 2021 amounted to 11,578 thousand euros. Pursuant to applicable regulations, this amount includes the remuneration of Senior Management members plus the Internal Audit Officer. The total remuneration of Senior Management includes amounts received by all those who were members of Senior Management at any time during 2021, in proportion to the time they spent in that position.

Thousand euro

Ordinary

remuneration

Severance pay

Total 2021

Total 2020

Senior Management and Internal Audit remuneration

6,418

5,340

11,758

5,077

For comparative purposes, it is important to note that in 2020, Senior Management staff voluntarily waived payment of their annual variable remuneration for 2020, amounting to 1,223 thousand euros, and that no long-term remuneration allocation was made.

Additionally, for 2021, extraordinary amounts in respect of severance payments amount to 5,340 thousand euros and correspond to pre-existing legal or contractual obligations.

Risk transactions granted by the Bank and consolidated companies to Senior Management staff (with the exception of those who are also executive directors, for whom details are provided above) amounted to 4,156 thousand euros as at 31 December 2021 (3,429 thousand euros in 2020), comprising 3,865 thousand euros in loans and receivables and 290 thousand euros related to loan commitments given (in 2020, 3,221 thousand euros related to loans and receivables and 208 thousand euros to loan commitments given).

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Liabilities amounted to 1,520 thousand euros as at 31 December 2021 (1,081 thousand euros as at 31 December 2020).

The accrued expenses corresponding to long-term remuneration schemes granted to members of Senior Management, including Executive Directors (see Note 33), amounted to 1 million euros in 2021 (2 million euros in 2020).

Details of existing agreements between the company and members of the Board and management staff with regard to severance pay are set out in the Group’s Annual Report on Corporate Governance, which forms part of the consolidated Directors’ Report.

For further details on Directors’ remuneration, see the Annual Report on the Remuneration of Directors for 2021, which forms part of the consolidated Directors’ Report.

The amounts included in the Annual Report on the Remuneration of Directors and in the Annual Report on Corporate Governance follow the criteria set forth in CNMV Circular 5/2013, amended by Circular 2/2018, of 12 June, CNMV Circular 1/2020, of 6 October and CNMV Circular 3/2021, of 28 September, therefore, those amounts accrued and not subject to deferral are reported. The amounts included in this Note follow the criteria set forth in the accounting standards applicable to the Bank, and therefore take into account the amounts accrued during 2021, irrespective of the deferral schedule to which they are subject.

The Executive Directors and Senior Management are specified below, indicating the positions they hold in the Bank as at 31 December 2021:



Executive Directors

César González-Bueno Mayer		Sabadell Group CEO
David Vegara Figueras		Director-General Manager

Senior Management
Leopoldo Alvear Trenor		General Manager
Miguel Montes Güell		General Manager
José Nieto de la Cierva		General Manager
Carlos Ventura Santamans		General Manager
Gonzalo Barettino Coloma		Secretary General
Marc Armengol Dulcet		Deputy General Manager
Xavier Comerma Carbonell		Deputy General Manager
Ana Ribalta Roig		Deputy General Manager

Other information relating to the Board

In accordance with the provisions of Article 229 of the Capital Companies Act in relation to the duty to avoid situations of conflict of interest, and without prejudice to the provisions of Article 529 vicies et seq. of the aforesaid Act, directors have reported to the Company that, during 2021, they or persons related to them, as defined in Article 231 of the Capital Companies Act¹, directors have reported to the Company that, during 2021, they or persons related to them, as defined in Article 231 of the Capital Companies Act:

–

Have not carried out transactions with the Company without taking into account usual operations, performed under standard conditions for customers and whose significance is immaterial, understanding such operations to be those that do not need to be reported to give a true and fair view of the Company’s equity, financial situation and income, or any operations carried out and considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, having applied with the corresponding approval procedure and reporting requirement, in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act.

–

Have not used the name of the Company or their position as administrator to unduly influence the performance of personal transactions.

–

Have not made use of corporate assets, including the Company’s confidential information, for personal purposes.

–

Have not taken undue advantage of the Company’s business opportunities.

1 The regulation of related-party transactions is governed by its own special regime.

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–

Have not obtained advantages or remuneration from third parties other than the Company or Group in connection with the discharge of their duties, with the exception of acts of mere courtesy.

–

Have not carried out activities on their own behalf or on behalf of a third party that involve competition with the Company, whether on an isolated or potential basis, or that might otherwise place them in permanent conflict with the Company’s interests.

The Bank has entered into a liability insurance policy for 2021 that covers the Institution’s Directors and Senior Management staff. The total premium paid was 5,420 thousand euros (2,651 thousand euros in 2020).)

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Note 42 – Other information

Transactions with significant shareholders

No major transactions with significant shareholders have been carried out during 2021 and 2020.

Environmental disclosures

The Group examines the materiality of ESG matters by adopting a “double materiality” approach. Specifically, it considers the main positive or negative impacts from two perspectives: the impact of environmental matters on the Group and that of the Group on its stakeholders, in line with the guidelines of the main bodies currently recommending this approach.

In the specific case of climate change and the environment, this dual perspective is reflected in the impacts set out below:

–

Impact of the climate and the environment on Banco Sabadell Group

The correct management of this aspect allows the Group to reduce its exposure to climate and environment-related risks in the future, improving the Bank’s reputation and its relationship with its stakeholders, and allowing the Group to maintain its alignment with the regulatory requirements in this regard.

The management of this aspect requires continuous investment by the Group so that it may continue to develop a high level of market monitoring with improvements to information systems, design of specialised continuous training plans for employees and the hiring of qualified profiles.

–

Impact of Banco Sabadell Group on climate and the environment

This aspect involves incentivising investment in sectors and products that are aligned with ecological transition, introducing new sustainable products for customers and generating greater confidence among investors and in society.

The management of climate change and environmental risks may involve greater control and tougher funding conditions for those activities that carry a higher risk.

The Bank’s activity is governed by compliance with the regulations in force with regard to environmental protection and health and safety in the workplace. Consequently, the Bank maintains procedures that are designed to foster and ensure compliance with the aforesaid regulations.

In this respect, the Bank measures and discloses its impacts on the environment in the form of Scope 1, 2 and 3 Greenhouse Gas (GHG) emissions, as well as other waste generated as a result of its activities. In this way, the Bank has adopted the corresponding measures relating to the protection and improvement of the environment and the minimisation of any environmental impacts of its activities, complying with the regulations in force in this regard. In 2021, the Bank has continued to carry out plans related to waste treatment, recycling of consumables, energy saving, as well reducing its GHG emissions and, in that regard, it has set up GHG offset projects.

It has not considered it necessary to recognise any provision for risks or expenses relating to the environment, as there are no contingencies related to the protection and improvement of the environment.

For further details, see the Non-Financial Disclosures Report, which is included as part of the consolidated Directors’ Report.

Customer Care Service (SAC)

The Customer Care Service (hereinafter, SAC as per its Spanish acronym) and its head, who is appointed by the Board of Directors, report directly to the Compliance Division and is independent of the Bank’s business and operational lines. Its main function is to handle and resolve complaints and claims brought forward by customers and users of the financial services of Banco de Sabadell, S.A., when these relate to their interests and legally recognised rights arising from contracts, transparency and customer protection regulations or good financial practices and uses, in accordance with Banco Sabadell Regulations for the Protection of Customers and Users of Financial Services.

The SAC, in accordance with its Regulations, handles and resolves complaints and claims from customers and users of Banco de Sabadell, S.A., as well as those deriving from other entities associated with it:

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Bansabadell Financiación, E.F.C., S.A., Sabadell Asset Management, S.A., S.G.I.I.C. Sociedad Unipersonal, Urquijo Gestión, S.G.I.I.C, S.A. and Sabadell Consumer Finance, S.A.U.

On 21 July 2021, guidelines on the criteria for the organisation and operation of customer care services of institutions supervised by the Bank of Spain came into force, which provide control mechanisms for the SAC to evaluate all complaints and claims handled in the Institution. The implementation of these control mechanisms is planned during 2022.

A total of 49,720 complaints and claims were received in 2021, of which 2,489 were complaints (5.01%), and 47,231 were claims (94.99%), in addition to a further 1,143 cases that were pending as at 31 December 2020.

Of this total, 49,949 were processed in 2021, of which a total of 34,701 were accepted for processing and resolved, 15,248 were declined and 914 remained pending as at 31 December 2021.

The five products that received the most claims are detailed below:



Product	No. of claims		% of total received
Current accounts		18,198		36.60 %
Mortgage loans		15,530		31.23 %
Credit/Debit cards		6,305		12.68 %
Personal loans		2,168		4.36 %
Direct debits		878		1.77 %
Other		6,641		13.36 %
Total		49,720		100.00 %

Complaints and claims processed by SAC at first instance

During 2021, the SAC received 45,943 complaints and claims, of which 32,000 were accepted for processing and resolved, in accordance with the provisions of Order ECO 734/2004 of 11 March.

Of the total number of complaints and claims accepted for processing and resolved by the SAC, 15,328 (47.90%) were resolved in the customer’s favour and 16,666 (52.08%) in the Institution’s favour and in 6 cases (0.02%) the customer withdrew their complaint.

Of the total number of complaints and claims accepted for processing and resolved by the SAC, 16,435 (51.36%) were processed within a period of 15 working days, 14,110 (44.09%) within a period of less than 1 month and 1,455 (4.55%) within a period longer than 1 month.

Complaints and claims managed by the Ombudsman

At Banco Sabadell, the role of Customer Ombudsman is assumed by Mr José Luis Gómez-Dégano y Ceballos-Zúñiga. The Ombudsman is responsible for resolving the complaints brought forward by the customers and users of Banco de Sabadell, S.A., and of the other aforementioned entities associated with it, both at first and second instance, and for resolving issues that are passed on by the SAC. The Ombudsman’s decisions are binding on the Institution.

In 2021, the SAC received a total of 3,144 complaints and claims via the Customer Ombudsman, of which 2,063 were accepted for processing and resolved during the year.

Of the claims and complaints accepted for processing and resolved, the Ombudsman decided in favour of the customer in 118 (5.72%) cases, and in favour of the Institution in 726 (35.19%) cases, and 5 claims were withdrawn by the customer (0.24%). Furthermore, the SAC acquiesced to the claimant’s request in 1,185 (57.44%) cases. The other 29 complaints and claims (1.41%) remained pending final resolution by the Ombudsman, following dispatch of arguments by the SAC.

Complaints and claims managed by the Bank of Spain and the CNMV

Under current legislation, customers or users who are dissatisfied with the response received from the SAC or from the Customer Ombudsman may submit their claims and complaints to the Market Conduct and Complaints Department of the Bank of Spain, to the CNMV or to the Directorate General for Insurance and Pension Funds, subject to the essential prerequisite of having previously addressed their complaint or claim to the Institution.

The SAC received a total of 633 claims referred by the Bank of Spain and the CNMV until 31 December 2021. This year, taking into account claims that remained pending at the end of the previous year, 639 claims were accepted and resolved.

A-663

Note 43 – Subsequent events

Since 31 December 2021, there have been no significant events worthy of mention.

A-664

Schedule I – Banco Sabadell Group companies

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data				Group investment		Contribution to reserves or losses in consolidated companies	Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)	Dividends paid	Total assets

Arrendamiento de Bienes Inmobiliarios del Mediterráneo, S.L. en Liquidación (1)	Real estate	Alicante - Spain		100.00		—		100		339	(10)	—		427		10,538	(10,099)	(10)
Aurica Coinvestments, S.L.	Holding	Barcelona - Spain		—		61.76		50,594		(1,045)	1,880	1,043		51,459		31,247	(1,758)	(4,165)
Banco Atlantico (Bahamas) Bank & Trust Ltd.	Credit institution	Nassau - Bahamas		99.99		0.01		1,598		709	(25)	—		3,001		2,439	(378)	(25)
Banco de Sabadell, S.A.	Credit institution	Alicante - Spain		—		—		703,371		10,271,463	328,412	—		197,187,820		—	12,378,089	366,036
Banco Sabadell, S.A., Institución de Banca Múltiple	Credit institution	Mexico DF - Mexico		99.99		0.01		573,492		(57,153)	(12,296)	—		3,851,192		576,941	(54,325)	(24,286)
BanSabadell Factura, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		100		(276)	157	—		2,602		299	(475)	157
BanSabadell Financiación, E.F.C., S.A.	Credit institution	Sabadell - Spain		100.00		—		24,040		12,339	517	—		649,954		24,040	12,339	517
BanSabadell Inversió Desenvolupament, S.A.U.	Holding	Barcelona - Spain		100.00		—		16,975		103,159	(213)	—		198,505		108,828	19,810	(2,401)
Bansabadell Mediación, Operador De Banca-Seguros Vinculado Del Grupo Banco Sabadell, S.A.	Other regulated companies	Alicante - Spain		—		100.00		301		59	8,232	9,288		53,763		524	(4,174)	10,809
Bitarte, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		6,506		(2,117)	(59)	—		4,416		9,272	(4,405)	(83)
BStartup 10, S.L.U.	Holding	Barcelona - Spain		—		100.00		1,000		3,768	384	—		9,605		1,000	(621)	(157)
Business Services for Operational Support, S.A.	Other ancillary activities	Sant Cugat del Valles - Spain		80.00		—		530		(8,052)	(1,938)	—		35,059		1,160	(6,290)	(1,372)
Compañía de Cogeneración del Caribe Dominicana, S.A.	Power generation	Santo Domingo - Dominican Republic		—		100.00		5,016		(4,606)	—	—		427		—	(312)	—
Crisae Private Debt, S.L.U.	Other ancillary activities	Barcelona - Spain		—		100.00		3		196	(14)	—		199		200	(1)	(15)
Desarrollos y Participaciones Inmobiliarias 2006, S.L.U. en Liquidación	Real estate	Elche - Spain		—		100.00		1,942		(90,935)	1,109	—		2		1,919	(90,912)	1,109
Duncan de Inversiones S.I.C.A.V., S.A.	UCITS, funds and similar financial corporations	Sant Cugat del Valles - Spain		99.81		—		7,842		(5,242)	(53)	—		2,553		2,887	(291)	(53)
Ederra, S.A.	Real estate	San Sebastián - Spain		97.85		—		2,036		34,219	(31)	—		36,331		36,062	(405)	108
ESUS Energía Renovable, S.L.	Power generation	Vigo - Spain		—		90.00		50		(727)	(44)	—		3,701		23	(1,367)	(173)
Europea Pall Mall Ltd.	Real estate	London - United Kingdom		100.00		—		20,843		(1,412)	633	—		24,194		20,843	(5,173)	347
Fonomed Gestión Telefónica Mediterráneo, S.A.U.	Other ancillary activities	Alicante - Spain		100.00		—		1,232		2,458	502	—		7,096		2,771	1,763	199

A-665

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data				Group investment	Contribution to reserves or losses in consolidated companies	Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)	Dividends paid	Total assets
Fuerza Eólica De San Matías, S. de R.L. de C.V.	Power generation	Monterrey - Mexico		—		99.99		8,144		(10,146)	(3,981)	—		51,515	5,951	(4,845)	(4,688)
Galeban 21 Comercial, S.L.U.	Services	A Coruña - Spain		100.00		—		10,000		(4,292)	—	—		5,708	14,477	(8,769)	—
Gazteluberri, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		53		(20,740)	(49)	—		1,695	23,891	(44,578)	(49)
Gest 21 Inmobiliaria, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		7,810		1,142	(34)	—		8,926	80,516	(46,718)	(8)
Gestión Financiera del Mediterráneo, S.A.U.	Other financial services	Alicante - Spain		100.00		—		13,000		2,551	12,043	2,789		27,903	66,787	(41,914)	3,614
Guipuzcoano Promoción Empresarial, S.L.	Holding	San Sebastián - Spain		—		100.00		53		(75,502)	(161)	—		6,774	7,160	(82,600)	(161)
Hobalear, S.A.U.	Real estate	Barcelona - Spain		—		100.00		60		61	11	—		135	414	61	11
Hondarriberri, S.L.	Holding	San Sebastián - Spain		99.99		0.01		41		18,545	(386)	—		59,216	120,669	95,578	(138)
Hotel Management 6 Gestión Activa, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		135,730		29,104	(835)	—		163,999	136,335	49,803	532
Hotel Management 6 Holdco, S.L.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		29,074		(22,041)	(2,093)	—		61,620	27,611	(20,405)	(2,266)
Interstate Property Holdings, LLC.	Holding	Miami - United States		100.00		—		7,293		(1,349)	5	—		5,951	3,804	6,387	1,462
Inverán Gestión, S.L. en Liquidación (2)	Real estate	Sant Cugat del Valles - Spain		44.83		55.17		90		(34)	(46)	—		70	45,090	(45,034)	(46)
Inversiones Cotizadas del Mediterráneo, S.L.	Holding	Alicante - Spain		100.00		—		308,000		198,920	3,717	—		727,461	589,523	(83,233)	(554)
Inversiones en Resorts Mediterráneos, S.L. en liquidación	Real estate	Torre Pacheco - Spain		—		55.06		299,090		(302,367)	—	—		68	175,124	—	—
LSP Finance, S.L.U.	Provision of technology services	Sant Cugat del Valles - Spain		—		100.00		252		(1,825)	1,229	—		3,012	6,484	(3,865)	(2,964)
Manston Invest, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		33,357		(12,930)	(665)	—		20,055	33,357	(12,930)	(665)
Mariñamendi, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		62		(65,791)	(316)	—		6,661	55,013	(120,741)	(316)
Mediterráneo Sabadell, S.L.	Holding	Alicante - Spain		50.00		50.00		85,000		16,853	(171)	9		101,685	510,829	(408,829)	(171)
Paycomet, S.L.U.	Payment institution	Torrelodones - Spain		—		100.00		200		223	517	—		8,458	8,853	(275)	509
Plataforma de Innovación Sabadell, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		(1)	(3)	—		4	3	(1)	(3)
Puerto Pacific Vallarta, S.A. de C.V.	Real estate	Mexico DF - Mexico		—		100.00		28,947		(16,979)	(150)	—		11,820	29,164	(11,571)	(379)
Ripollet Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		20		(290)	(11)	—		356,364	20	(290)	(11)
Rubí Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		3		(24)	(6)	—		479,591	3	(24)	(6)
Sabadell Brasil Trade Services - Assessoria Comercial Ltda.	Other financial services	São Paulo - Brazil		99.99		0.01		905		(845)	—	—		78	250	393	—
Sabadell Consumer Finance, S.A.U.	Credit institution	Sabadell - Spain		100.00		—		35,720		56,936	20,444	—		1,777,133	72,232	25,069	20,722

A-666

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies	Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)		Dividends paid	Total assets
Sabadell Corporate Finance, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		70		8,078		(131)	—		8,134		9,373	(1,204)	(152)
Sabadell Information Systems Limited	Provision of technology services	London - United Kingdom		—		100.00		12,036		22,563		(115)	—		61,548		41,296	(8,266)	(115)
Sabadell Information Systems, S.A.U.	Provision of technology services	Sabadell - Spain		100.00		—		40,243		36,312		23,004	—		1,561,069		143,695	(67,662)	15,589
Sabadell Innovation Capital, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		3,824		(2,073)	—		45,555		1,000	(2,651)	(600)
Sabadell Innovation Cells, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		(2,988)		169	—		2,929		3	(3,041)	(320)
Sabadell Patrimonio Inmobiliario, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		30,116		813,910		(17,922)	—		888,175		863,895	(19,869)	(8,101)
Sabadell Real Estate Activos, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		100,060		235,327		(1,123)	—		334,842		500,622	(165,235)	(1,123)
Sabadell Real Estate Development, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		15,807		(2,406,085)		(36,983)	—		1,151,093		2,147,442	(4,513,277)	(39,337)
Sabadell Real Estate Housing, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		2,073		122		(2,893)	—		25,235		14,292	(11,836)	(3,154)
Sabadell Securities USA, Inc.	Other financial services	Miami - United States		100.00		—		551		5,266		530	—		6,547		551	4,873	539
Sabadell Strategic Consulting, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		320		168	—		1,018		3	275	213
Sabadell Venture Capital, S. L.U.	Holding	Barcelona - Spain		—		100.00		3		12,061		1,763	—		56,417		3	2,964	582
Sabcapital, S.A de C.V., SOFOM, E.R.	Credit institution	Mexico DF - Mexico		49.00		51.00		164,828		20,841		24,759	4,826		1,493,425		151,709	55,610	24,779
Sinia Capital, S.A. de C.V.	Holding	Mexico DF - Mexico		—		100.00		20,830		6,542		(526)	—		75,454		18,150	6,538	(1,563)
Sinia Renovables, S.A.U.	UCITS, funds and similar financial corporations	Barcelona - Spain		100.00		—		15,000		1,338		505	—		60,915		15,000	3,400	718
Sogeviso Servicios Gestión Vivienda Innovación Social, S.L.U.	Real estate	Alicante - Spain		100.00		—		3		9,893		70	—		11,707		3	10,026	(62)
Stonington Spain, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		60,729		(11,092)		(613)	—		49,496		60,729	(11,092)	(613)
Tasaciones de Bienes Mediterráneo, S.A. en Liquidación	Other ancillary activities	Alicante - Spain		99.88		0.12		1,000		1,416		—	—		2,420		5,266	(2,876)	26
Tenedora de Inversiones y Participaciones, S.L.	Holding	Alicante - Spain		100.00		—		296,092		(528,628)		(11,037)	—		351,343		2,564,914	(2,725,376)	(13,159)
TSB Bank PLC	Credit institution	Edinburgh - United Kingdom		—		100.00		90,710		1,981,428		149,533	—		55,583,840		1,814,636	193,342	137,490
TSB Banking Group PLC	Holding	London - United Kingdom		100.00		—		7,028		1,864,273		1,979	—		2,787,944		2,213,148	(189,474)	(38,646)
TSB Banking Group plc Employee Share Trust	Other ancillary activities	Saint Helier - Jersey		—		100.00		1		(12,225)		44	—		526		—	(11,183)	—

A-667

Banco Sabadell Group companies as at 31 December 2021 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies	Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)		Dividends paid	Total assets

TSB Covered Bonds (Holdings) Limited	Holding	London - United Kingdom		—		100.00		1		—		—	—		1		—	—	—

TSB Covered Bonds (LM) Limited	Other ancillary activities	London - United Kingdom		—		100.00		1		—		—	—		1		—	—	—

TSB Covered Bonds LLP	UCITS, funds and similar financial corporations	London - United Kingdom		—		100.00		1		14		3	—		61		—	14	3

Urquijo Gestión, S.A.U., S.G.I.I.C.	Funds management activities	Madrid - Spain		100.00		—		3,606		4,858		4,213	2,717		18,542		3,084	5,380	4,213

Urumea Gestión, S.L. en Liquidación	Other ancillary activities	San Sebastián - Spain		—		100.00		9		(13)		(1)	—		1		9	(12)	(1)

VeA Rental Homes , S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		5,000		(17,022)		1,380	—		44,202		5,000	(17,022)	1,380

Venture Debt SVC, S.L.U.	Holding	Barcelona - Spain		—		100.00		3		—		—	—		3		3	—	—



TOTAL													20,672				13,418,379	4,004,030	439,553

(1) Formerly, Arrendamiento de Bienes Inmobiliarios del Mediterráneo, S.L.

(2) Formerly, Inveran Gestión, S.L.

A-668

Banco Sabadell Group companies as at 31 December 2021 consolidated by the equity method (*)



Thousand euro

Company name	Line of business	Registered office	% Shareholding						Company data (a)								Group investment		Contribution to reserves or losses in consolidated companies	Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss) (b)		Dividends paid (c)		Total assets


Atrian Bakers, S.L.	Manufacturing	Castellgalí - Spain		—		22.41		26,249		(11,299)		(1,380)		—		32,988		2,000	(854)	(1,146)

Aurica Capital Desarrollo, S.G.E.I.C., S.A.	Funds management activities	Barcelona - Spain		20.00		—		750		(79)		596		602		2,078		161	119	35

Aurica III, Fondo de Capital Riesgo	UCITS, funds and similar financial corporations	Barcelona - Spain		—		47.50		76,699		(8,760)		217		—		69,308		37,183	1,992	33,282

Aurica IIIB, S.C.R., S.A.	UCITS, funds and similar financial corporations	Barcelona - Spain		—		42.85		51,839		(5,990)		142		—		46,771		22,680	1,207	21,313

BanSabadell Pensiones, E.G.F.P., S.A.	Other regulated companies	Madrid - Spain		50.00		—		7,813		35,176		737		—		49,466		40,378	(18,913)	369

BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		10,000		77,263		22,658		5,000		297,303		34,000	9,311	11,330

BanSabadell Vida, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		—		43,858		537,011		92,570		52,500		10,418,907		27,106	236,190	49,328

Doctor Energy Central Services, S.L.	Other business management consulting activities	Granollers - Spain		—		24.99		7		(2)		1		—		23		12	(11)	—

Parque Eólico Casa Vieja S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		629		267	(15)	—

Parque Eólico Villaumbrales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		628		267	(15)	—

Parque Eólico Perales S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		628		267	(15)	—

Parque Eólico Los Pedrejones S. L.	Power generation	Ponferrada - Spain		—		50.00		3		500		—		—		628		267	(15)	—

Energíes Renovables Terra Ferma, S.L.	Power generation	Barcelona - Spain		—		50.00		6		(55)		(13)		—		1,531		3	(3)	—

Financiera Iberoamericana, S.A.	Credit institution	Havana - Cuba		50.00		—		38,288		11,436		5,620		1,407		95,226		19,144	3,062	2,868

Flex Equipos de Descanso, S.A.	Manufacturing	Getafe - Spain		—		19.16		66,071		21,237		19,472		1,917		268,777		50,930	2,912	10,834

Gestora de Aparcamientos del Mediterráneo, S.L. en Liquidación	Services	Alicante - Spain		—		40.00		1,000		(10,551)		(207)		—		2,006		7,675	(7,675)	—

Murcia Emprende, S.C.R. de R.S., S.A.	Other financial services	Murcia - Spain		28.70		—		2,557		(316)		(169)		—		2,307		2,026	(1,337)	(103)

Plaxic Estelar, S.L.	Real estate	Barcelona - Spain		—		45.01		3		(15,260)		(25)		—		31,967		3,057	(3,057)	—

Portic Barcelona, S.A.	Data processing, hosting and related activities	Barcelona - Spain		25.00		—		291		1,754		131		—		2,392		486	506	33

Promontoria Challenger I, S.A.	Holding	Madrid - Spain		20.00		—		60		1,046,526		(180,635)		—		2,895,135		225,206	(18,446)	(46,907)

SBD Creixent, S.A.	Real estate	Sabadell - Spain		23.05		—		5,965		(1,168)		90		—		5,437		3,524	(2,414)	17

Solvia Servicios Inmobiliarios, S.L.	Real estate	Alicante - Spain		20.00		—		660		143,772		37,703		—		221,138		16,517	32,924	9,432

Total														61,426				493,156	235,453	90,685

(*) Companies consolidated by the equity method as the Group does not have control over them but does have significant influence.

(a) Figures for foreign companies were translated to euro at the historical exchange rate, and amounts in the consolidated income statement were translated at the average exchange rate.

(b) Results pending approval by Annual General Meeting of Shareholders and Partners.

(1) Formerly, Aurica Capital Desarrollo, S.G.E.I.C., S.A.U.

The balance of total ordinary income from associates consolidated by the equity method and individually considered to be non-material amounted to 709,825 thousand euros as at 31 December 2021. The balance of liabilities as at the end of 2021 amounts to 519,694 thousand euros. The key figures as at 2021 year-end for BanSabadell Vida, S.A. are included in Note 14 of the consolidated annual financial statements.

A-669

Changes in the scope of consolidation in 2021

Additions to the scope of consolidation:



Thousand euro

Name of entity (or line of business) acquired or merged	Category		Effective date of the transaction		Fair value of equity instruments issued for the acquisition				% Voting rights acquired			% Total voting rights			Type of shareholding	Method		Reason
Name of entity (or line of business) acquired or merged	Category		Effective date of the transaction		Cost of acquisition		Fair value of equity instruments issued for the acquisition		% Voting rights acquired			% Total voting rights			Type of shareholding	Method		Reason


Parque Eólico Casa Vieja S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%	Indirect		Equity method		a

Parque Eólico Villaumbrales S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%	Indirect		Equity method		a

Parque Eólico Perales S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%	Indirect		Equity method		a

Parque Eólico Los Pedrejones S. L.		Associate		15/4/2021		267		—		50.00	%		50.00	%	Indirect		Equity method		a

Aurica Capital Desarrollo, S.G.E.I.C., S.A.		Associate		6/5/2021		248		—		20.00	%		20.00	%	Direct		Equity method		b

Doctor Energy Central Services, S.L.		Associate		5/10/2021		12		—		24.99	%		24.99	%	Indirect		Equity method		a

Portic Barcelona, S.A.		Associate		1/7/2021		486		—		25.00	%		25.00	%	Direct		Equity method		a

Venture Debt SVC, S.L.U.		Subsidiary		24/11/2021		3		—		100.00	%		100.00	%	Indirect		Full consolidation		c



Total newly consolidated subsidiaries						3

Total newly consolidated associates						1,814

(b) Acquisition of associates.

(b) Change in consolidation method.

A-670

Exclusions from the scope of consolidation:



Thousand euro

Name of entity (or line of business) sold, spun off or otherwise disposed of	Category	Effective date of the transaction	% Voting rights disposed of			% Total voting rights following disposal			Profit/(loss) generated		Type of shareholding	Method	Reason


Caminsa Urbanismo, S.A.U. en Liquidación	Subsidiary	20/1/2021		100.00	%		0.00	%		—	Indirect	Full consolidation	b

Gestión de Proyectos Urbanísticos del Mediterráneo, S.L.U. en Liquidación	Subsidiary	19/1/2021		100.00	%		0.00	%		—	Indirect	Full consolidation	b

Guipuzcoano Valores, S.A. en Liquidación	Subsidiary	8/2/2021		100.00	%		0.00	%		(37)	Direct	Full consolidation	b

Tierras Vega Alta del Segura, S.L. en Liquidación	Subsidiary	19/1/2021		100.00	%		0.00	%		—	Indirect	Full consolidation	b

Mercurio Alicante Sociedad de Arrendamientos 1, S.L.	Subsidiary	2/6/2021		100.00	%		0.00	%		(31)	Direct	Full consolidation	b

Verum Inmobiliaria Urbanismo y Promoción, S.A.	Subsidiary	14/5/2021		97.20	%		0.00	%		(2)	Indirect	Full consolidation	b

Duncan Holdings 2020-1 Limited	Subsidiary	23/7/2021		100.00	%		0.00	%		—	Indirect	Full consolidation	b

Sociedad de Cartera del Vallés, S.I.C.A.V., S.A.	Associate	5/8/2021		47.81	%		0.00	%		(17)	Direct	Equity method	b

Termosolar Borges, S.L.	Associate	5/8/2021		47.50	%		0.00	%		(13,920)	Direct	Equity method	a

Villoldo Solar, S.L.	Associate	5/8/2021		50.00	%		0.00	%		52	Direct	Equity method	a

Aurica Capital Desarrollo, S.G.E.I.C., S.A.U.	Subsidiary	6/5/2021		80.00	%		20.00	%		(99)	Direct	Full consolidation	c

Assegurances Segur Vida, S.A.U.	Subsidiary	5/10/2021		50.97	%		0.00	%		—	Indirect	Full consolidation	a

BancSabadell d’Andorra, S.A.	Subsidiary	5/10/2021		50.97	%		0.00	%		11,725	Direct	Full consolidation	a

Sabadell d’Andorra Inversions, S.G.O.I.C., S.A.U.	Subsidiary	5/10/2021		50.97	%		0.00	%		—	Indirect	Full consolidation	a

Serveis i Mitjans de Pagament XXI, S.A.	Associate	5/10/2021		20.00	%		0.00	%		—	Indirect	Equity method	a

BanSabadell Renting, S.L.U.	Subsidiary	30/11/2021		100.00	%		0.00	%		41,907	Direct	Full consolidation	a

Duncan Holdings 2016 -1 Limited	Subsidiary	21/12/2021		100.00	%		0.00	%		—	Indirect	Full consolidation	b

Duncan Holdings 2015-1 Limited	Subsidiary	21/12/2021		100.00	%		0.00	%		—	Indirect	Full consolidation	b

Other										15,169



TOTAL										54,747

(a) Disposals from the scope of consolidation due to sale of shareholding.

(b) Disposals from the scope due to dissolution and/or liquidation.

A-671

Banco Sabadell Group companies as at 31 December 2020 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)		Dividends paid		Total assets


Arrendamiento de Bienes Inmobiliarios del Mediterráneo, S.L.	Real estate	Alicante - Spain		100.00		—		100		716		(377)		—		437		10,538		(9,722)		(377)

Assegurances Segur Vida, S.A.U.	Other regulated companies	Andorra la Vella - Andorra		—		50.97		602		834		151		—		47,913		802		323		77

Aurica Capital Desarrollo, S.G.E.I.C., S.A.U.	Funds management activities	Barcelona - Spain		100.00		—		3,601		727		926		—		6,208		4,342		(7)		919

Aurica Coinvestments, S.L.	Holding	Barcelona - Spain		—		61.76		50,594		(1,266)		1,909		1,050		51,242		31,247		(1,948)		2,282

Banco Atlantico (Bahamas) Bank & Trust Ltd.	Credit institution	Nassau - Bahamas		99.99		0.01		1,598		604		(72)		—		2,794		2,439		(298)		(80)

Banco de Sabadell, S.A.	Credit institution	Alicante - Spain		—		—		703,371		10,299,269		93,781		—		188,909,020		—		12,158,438		213,991

Banco Sabadell, S.A., Institución de Banca Múltiple	Credit institution	Mexico DF - Mexico		99.99		0.01		573,492		(83,163)		459		—		3,427,477		558,017		(48,446)		(12,831)

BancSabadell d’Andorra, S.A.	Credit institution	Andorra la Vella - Andorra		50.97		—		30,069		61,399		9,878		—		991,035		15,326		30,661		5,015

BanSabadell Factura, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		100		(659)		383		—		2,520		299		(857)		383

BanSabadell Financiación, E.F.C., S.A.	Credit institution	Sabadell - Spain		100.00		—		24,040		11,574		765		—		722,649		24,040		5,232		7,107

BanSabadell Inversió Desenvolupament, S.A.U.	Holding	Barcelona - Spain		100.00		—		16,975		99,719		783		—		186,066		108,828		18,216		(906)

Bansabadell Mediación, Operador De Banca-Seguros Vinculado Del Grupo Banco Sabadell, S.A.	Other regulated companies	Alicante - Spain		—		100.00		301		60		7,832		2,748		54,330		524		(164)		5,278

BanSabadell Renting, S.L.U.	Vehicle and equipment leasing	Sant Cugat del Valles - Spain		100.00		—		2,000		2,589		7,180		—		611,805		3,861		728		7,180

Bitarte, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		6,506		1,021		(3,137)		—		4,633		9,272		(1,960)		(2,342)

BStartup 10, S.L.U.	Holding	Barcelona - Spain		—		100.00		1,000		2,757		244		—		8,160		1,000		(1,186)		(79)

Business Services for Operational Support, S.A.	Other ancillary activities	Sant Cugat del Valles - Spain		80.00		—		530		547		(8,605)		—		31,722		1,160		396		(6,686)

Caminsa Urbanismo, S.A.U. en Liquidación	Real estate	Alicante - Spain		—		100.00		—		—		—		—		32		—		37		(37)

Compañía de Cogeneración del Caribe Dominicana, S.A.	Power generation	Santo Domingo - Dominican Republic		—		100.00		5,016		(4,638)		—		—		394		—		(312)		—

Crisae Private Debt, S.L.U.	Other ancillary activities	Barcelona - Spain		—		100.00		3		197		—		—		200		200		—		—

Desarrollos y Participaciones Inmobiliarias 2006, S.L.U. en Liquidación	Real estate	Elche - Spain		—		100.00		1,942		(91,065)		130		—		7		1,919		(91,042)		130

Duncan de Inversiones S.I.C.A.V., S.A.	UCITS, funds and similar financial corporations	Sant Cugat del Valles - Spain		87.35		—		7,842		(5,195)		(47)		—		2,607		2,560		(248)		(41)

Duncan Holdings 2015-1 Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		1		—		—

A-672

Banco Sabadell Group companies as at 31 December 2020 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data						Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)		Dividends paid		Total assets

Duncan Holdings 2016 -1 Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		1		—		—

Duncan Holdings 2020-1 Limited	Holding	London - United Kingdom		—		100.00		1		—		—		—		1		—		—		—

Ederra, S.A.	Real estate	San Sebastián - Spain		97.85		—		2,036		34,089		151		—		36,537		36,062		(723)		339

Europea Pall Mall Ltd.	Real estate	London - United Kingdom		100.00		—		20,843		(2,369)		(1,017)		—		20,057		20,843		(3,682)		(1,491)

Fonomed Gestión Telefónica Mediterráneo, S.A.U.	Other ancillary activities	Alicante - Spain		100.00		—		1,232		1,539		931		—		5,763		2,771		554		1,208

Fuerza Eólica De San Matías, S. de R.L. de C.V.	Power generation	Monterrey - Mexico		—		99.99		8,144		(13,093)		(1,343)		—		50,869		5,951		(2,793)		(2,052)

Galeban 21 Comercial, S.L.U.	Services	A Coruña - Spain		100.00		—		10,000		(4,291)		(1)		—		5,709		14,477		(8,768)		(1)

Gazteluberri, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		53		(20,672)		(68)		—		1,756		23,891		(44,510)		(68)

Gest 21 Inmobiliaria, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		7,810		609		533		—		8,968		80,516		(32,920)		(2,142)

Gestión de Proyectos Urbanísticos del Mediterráneo, S.L.U. en Liquidación	Real estate	Sant Cugat del Valles - Spain		—		100.00		—		—		—		—		314		—		(840)		840

Gestión Financiera del Mediterráneo, S.A.U.	Other financial services	Alicante - Spain		100.00		—		13,000		2,600		2,789		1,531		18,398		66,787		(48,392)		(7)

Guipuzcoano Promoción Empresarial, S.L.	Holding	San Sebastián - Spain		—		100.00		53		(75,438)		(64)		—		6,933		7,160		(81,533)		(1,067)

Guipuzcoano Valores, S.A.	Real estate	Sant Cugat del Valles - Spain		99.99		0.01		4,514		(3,712)		(783)		1,745		34		4,181		(3,379)		(783)

Hobalear, S.A.U.	Real estate	Barcelona - Spain		—		100.00		60		50		11		—		125		414		50		11

Hondarriberri, S.L.	Holding	San Sebastián - Spain		99.99		0.01		41		21,859		(3,314)		—		60,403		120,669		96,534		(955)

Hotel Management 6 Gestión Activa, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		135,730		36,251		(6,475)		—		165,781		136,335		58,741		(8,938)

Hotel Management 6 Holdco, S.L.U.	Real estate	Sant Cugat del Valles - Spain		—		100.00		29,074		(22,282)		414		—		63,859		27,611		(20,726)		321

Interstate Property Holdings, LLC.	Holding	Miami - United States		100.00		—		7,293		(3,250)		34		—		5,868		3,804		6,353		34

Inverán Gestión, S.L.	Real estate	Sant Cugat del Valles - Spain		44.83		55.17		90		(12,055)		12,021		—		117		45,090		(43,456)		(1,579)

Inversiones Cotizadas del Mediterráneo, S.L.	Holding	Alicante - Spain		100.00		—		308,000		196,051		3,635		—		508,905		589,523		(86,868)		3,635

Inversiones en Resorts Mediterráneos, S.L. en liquidación	Real estate	Torre Pacheco - Spain		—		55.06		299,090		(302,367)		—		—		68		175,124		—		—

LSP Finance, S.L.U.	Provision of technology services	Barcelona - Spain		—		100.00		252		(1,124)		(703)		—		2,194		6,484		(1,136)		(2,728)

Manston Invest, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		33,357		(12,809)		(121)		—		20,447		33,357		(12,809)		(121)

Mariñamendi, S.L.	Real estate	Sant Cugat del Valles - Spain		—		100.00		62		(52,688)		(13,102)		—		15,090		55,013		(107,639)		(13,102)

Mediterráneo Sabadell, S.L.	Holding	Alicante - Spain		50.00		50.00		85,000		16,999		9		53		102,012		510,829		(408,829)		9

A-673

Banco Sabadell Group companies as at 31 December 2020 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)		Dividends paid	Total assets

Mercurio Alicante Sociedad de Arrendamientos 1, S.L.	Real estate	Alicante - Spain		100.00		—		795		(3,000)		(25)	—		5,063		986		(3,192)		(25)

Paycomet, S.L.U.	Payment institution	Torrelodones - Spain		—		100.00		200		430		(199)	—		3,336		8,500		(75)		(200)

Plataforma de Innovación Sabadell, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		(1)		—	—		2		3		(1)		—

Puerto Pacific Vallarta, S.A. de C.V.	Real estate	Mexico DF - Mexico		—		100.00		28,947		(17,315)		(58)	—		11,574		29,164		(11,513)		(58)

Ripollet Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		20		(287)		(3)	—		293,417		20		(287)		(3)

Rubí Gestión, S.L.U.	Other financial services	Barcelona - Spain		100.00		—		3		(14)		(10)	—		552,295		3		(14)		(10)

Sabadell Brasil Trade Services - Assessoria Comercial Ltda.	Other financial services	São Paulo - Brazil		99.99		0.01		905		(846)		—	—		75		250		393		—

Sabadell Consumer Finance, S.A.U.	Credit institution	Sabadell - Spain		100.00		—		35,720		45,998		10,938	—		1,672,099		72,232		14,408		10,661

Sabadell Corporate Finance, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		70		4,271		3,828	—		10,371		9,373		2,827		3,828

Sabadell d’Andorra Inversions, S.G.O.I.C., S.A.U.	Funds management activities	Andorra la Vella - Andorra		—		50.97		300		1,155		98	—		2,217		300		623		51

Sabadell Information Systems Limited	Provision of technology services	London - United Kingdom		100.00		—		12,036		20,943		(508)	—		70,664		41,296		1,216		(482)

Sabadell Information Systems, S.A.U.	Provision of technology services	Sabadell - Spain		100.00		—		40,243		33,268		18,025	—		1,804,100		143,695		(87,632)		21,841

Sabadell Innovation Capital, S.L.U.	Holding	Sant Cugat del Valles - Spain		—		100.00		1,000		646		(3,270)	—		37,792		1,000		(1,062)		(1,145)

Sabadell Innovation Cells, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		(3,582)		541	—		2,607		3		(3,708)		667

Sabadell Patrimonio Inmobiliario, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		30,116		819,109		(5,199)	—		911,472		863,895		(13,663)		(6,206)

Sabadell Real Estate Activos, S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		100,060		232,843		2,483	—		338,208		500,622		(167,718)		2,483

Sabadell Real Estate Development, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		15,807		(2,336,904)		(67,382)	—		1,273,692		2,147,442		(4,452,738)		(62,120)

Sabadell Real Estate Housing, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		2,073		553		(170)	—		29,170		14,292		(11,666)		(170)

Sabadell Securities USA, Inc.	Other financial services	Miami - United States		100.00		—		551		3,862		923	—		5,677		551		3,945		928

Sabadell Strategic Consulting, S.L.U.	Other ancillary activities	Sant Cugat del Valles - Spain		100.00		—		3		139		136	—		896		3		139		136

Sabadell Venture Capital, S. L.U.	Holding	Barcelona - Spain		—		100.00		3		7,597		1,764	—		49,408		3		1,327		529

Sabcapital, S.A de C.V., SOFOM, E.R.	Credit institution	Mexico DF - Mexico		49.00		51.00		164,828		4,813		17,026	—		1,261,679		150,351		50,317		17,027

Sinia Capital, S.A. de C.V.	Holding	Mexico DF - Mexico		—		100.00		20,830		4,665		2,275	—		78,652		17,204		5,694		844

Sinia Renovables, S.A.U.	UCITS, funds and similar financial corporations	Barcelona - Spain		100.00		—		15,000		(9,682)		11,020	—		42,278		15,000		(15,217)		15,871

A-674

Banco Sabadell Group companies as at 31 December 2020 consolidated by the full consolidation method



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data					Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss)		Dividends paid	Total assets

Sogeviso Servicios Gestión Vivienda Innovación Social, S.L.U.	Real estate	Alicante - Spain		100.00		—		3		9,718		308	—		12,891		3		9,681		344

Stonington Spain, S.L.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		60,729		(10,471)		(621)	—		49,809		60,729		(10,471)		(621)

Tasaciones de Bienes Mediterráneo, S.A. en Liquidación	Other ancillary activities	Alicante - Spain		99.88		0.12		1,000		1,389		1	—		2,395		5,266		(2,878)		2

Tenedora de Inversiones y Participaciones, S.L.	Holding	Alicante - Spain		100.00		—		296,092		(522,554)		(3,138)	—		375,783		2,564,914		(2,721,195)		(4,181)

Tierras Vega Alta del Segura, S.L. en Liquidación	Real estate	Sant Cugat del Valles - Spain		—		100.00		—		—		—	—		59		—		3,155		(3,155)

TSB Bank PLC	Credit institution	Edinburgh - United Kingdom		—		100.00		90,710		2,003,814		(175,893)	—		47,138,659		1,814,636		370,653		(177,437)

TSB Banking Group PLC	Holding	London - United Kingdom		100.00		—		7,028		1,745,350		(3,406)	—		2,705,089		2,196,583		(146,786)		(42,688)

TSB Banking Group plc Employee Share Trust	Other ancillary activities	Saint Helier - Jersey		—		100.00		1		(10,438)		(414)	—		580		—		(10,571)		(6)

TSB Covered Bonds (Holdings) Limited	Holding	London - United Kingdom		—		100.00		1		—		—	—		1		—		—		—

TSB Covered Bonds (LM) Limited	Other ancillary activities	London - United Kingdom		—		100.00		1		—		—	—		1		—		—		—

TSB Covered Bonds LLP	UCITS, funds and similar financial corporations	London - United Kingdom		—		100.00		1		9		3	—		47		—		10		3

Urquijo Gestión, S.A.U., S.G.I.I.C.	Funds management activities	Madrid - Spain		—		100.00		3,606		4,858		2,717	—		16,119		3,084		5,082		3,015

Urumea Gestión, S.L. en Liquidación	Other ancillary activities	San Sebastián - Spain		—		100.00		9		(11)		(1)	—		—		9		(11)		(1)

VeA Rental Homes , S.A.U.	Real estate	Sant Cugat del Valles - Spain		100.00		—		5,000		(18,678)		1,655	—		47,621		5,000		(18,677)		1,655

Verum Inmobiliaria Urbanismo y Promoción, S.A.	Real estate	Sant Cugat del Valles - Spain		—		97.20		12,000		(44,495)		32,501	—		62		11,662		(9,711)		(1,944)


TOTAL													7,127				13,421,342		4,091,754		(30,221)

A-675

Banco Sabadell Group companies as at 31 December 2020 consolidated by the equity method (*)



Thousand euro

Company name	Line of business	Registered office	% Shareholding								Company data (a)					Group investment		Contribution to reserves or losses in consolidated companies		Contribution to Group consolidated profit/(loss)

			Direct		Indirect		Capital		Other equity		Profit/(loss) (b)		Dividends paid (c)	Total assets


Atrian Bakers, S.L.	Manufacturing	Castellgalí - Spain		-		22.41		26,249		(7,536)		(2,591)	-		33,082		2,000		225		(1,079)

Aurica III, Fondo de Capital Riesgo	UCITS, funds and similar financial corporations	Barcelona - Spain		-		48.15		75,497		(2,651)		(2,081)	-		70,965		36,933		(1,274)		3,266

Aurica IIIB, S.C.R., S.A.	UCITS, funds and similar financial corporations	Barcelona - Spain		-		43.43		41,524		(1,825)		(1,411)	-		47,345		22,528		(803)		2,010

BanSabadell Pensiones, E.G.F.P., S.A.	Other regulated companies	Madrid - Spain		50.00		-		7,813		35,935		(656)	-		45,882		40,378		(18,585)		(328)

BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		-		10,000		70,333		18,307	5,000		273,370		34,000		5,159		9,154

BanSabadell Vida, S.A. de Seguros y Reaseguros	Other regulated companies	Madrid - Spain		50.00		-		43,858		567,012		89,346	37,500		10,866,241		27,106		241,319		48,139

Energíes Renovables Terra Ferma, S.L.	Power generation	Barcelona - Spain		-		50.00		6		(3)		(68)	-		1,136		3		(2)		(1)

ESUS Energía Renovable, S.L.	Power generation	Vigo - Spain		-		45.00		50		(701)		(34)	-		2,938		23		(23)		-

Financiera Iberoamericana, S.A.	Credit institution	Havana - Cuba		50.00		-		38,288		7,137		3,090	2,931		71,854		19,144		2,725		1,744

Flex Equipos de Descanso, S.A.	Manufacturing	Getafe - Spain		-		19.16		66,071		21,081		3,439	-		242,481		50,930		8,892		(5,980)

Gestora de Aparcamientos del Mediterráneo, S.L. en Liquidación	Services	Alicante - Spain		-		40.00		1,000		(10,072)		(495)	-		2,080		7,675		(7,675)		-

Murcia Emprende, S.C.R. de R.S., S.A.	Other financial services	Murcia - Spain		28.70		-		5,399		(2,838)		(160)	-		2,435		2,026		(1,629)		292

Plaxic Estelar, S.L.	Real estate	Barcelona - Spain		-		45.01		3		(15,260)		(3)	-		31,984		3,004		(3,004)		-

Promontoria Challenger I, S.A.	Holding	Madrid - Spain		20.00		-		60		1,127,382		(139,813)	-		3,203,880		224,019		—		(18,059)

SBD Creixent, S.A.	Real estate	Sabadell - Spain		23.05		-		5,965		(1,227)		75	-		5,337		3,524		(2,447)		33

Serveis i Mitjans de Pagament XXI, S.A.	Other ancillary activities	Andorra la Vella - Andorra		-		20.00		60		129		77	-		1,467		12		-		21

Sociedad de Cartera del Vallés, S.I.C.A.V., S.A.	UCITS, funds and similar financial corporations	Sabadell - Spain		48.46		-		4,818		(175)		(333)	-		4,345		397		1,853		(161)

Solvia Servicios Inmobiliarios, S.L.	Real estate	Alicante - Spain		20.00		-		660		132,300		2,015	-		177,269		16,517		39,753		(6,828)

Termosolar Borges, S.L.	Power generation	Barcelona - Spain		47.50		-		14,700		(37,468)		(12)	-		134,054		11,800		-		-

Villoldo Solar, S.L.	Power generation	Barcelona - Spain		50.00		-		3		36		63	24		178		-		-		-

Total													45,455				502,019		264,484		32,223

(*) Companies consolidated by the equity method as the Group does not have control over them but does have significant influence.

(a) Figures for foreign companies were translated to euro at the historical exchange rate, and amounts in the consolidated income statement were translated at the average exchange rate.

(b) Results pending approval by Annual General Meeting of Shareholders and Partners.

The balance of total ordinary income from associates consolidated by the equity method and individually considered to be non-material amounted to 560,797 thousand euros as at 31 December 2020. The balance of liabilities as at the end of 2020 amounts to 636,908 thousand euros. The key figures as at 2020 year-end for BanSabadell Vida and Promontoria Challenger I, S.A. are included in Notes 13 and 14 to the consolidated annual financial statements for that year.

A-676

Changes in the scope of consolidation in 2020

Additions to the scope of consolidation:

Thousand euro

Name of entity (or line of business) acquired or merged

Category

Effective date of
the transaction

Fair value of equity instruments issued for the acquisition

% Voting rights
acquired

% Total voting
rights

Type of
shareholding

Method

Reason

Cost of

acquisition

Fair value of equity instruments
issued for the acquisition

Same Age Wallets, S.L.

Associate

1/1/2020

1,011

—

20.00

Indirect

Equity method

Serveis i Mitjans de Pagament XXI, S.A.

Associate

1/1/2020

—

20.00

Indirect

Equity method

Torenia Solar, S.L.

Subsidiary

21/2/2020

193

—

100.00

Indirect

Full consolidation

Gate Solar 21, S.L.

Subsidiary

21/2/2020

213

—

100.00

Indirect

Full consolidation

Crisae Private Debts, S.L.U.

Subsidiary

2/12/2020

200

—

100.00

Indirect

Full consolidation

Total newly consolidated subsidiaries

606

Total newly consolidated associates

1,023

(a) Acquisition of subsidiaries.

(b) Acquisition or incorporation of associates

(d) Incorporation of subsidiaries.

A-677

Exclusions from the scope of consolidation:

Thousand euro

Name of entity (or line of business) sold, spun off or otherwise

disposed of

Category

Effective date of the
transaction

% Voting rights
disposed of

% Total voting rights following
disposal

Profit/(loss)
generated

Type of shareholding

Method

Reason

Gate Huerta Solar 44, S.L

Subsidiary

29/5/2020

100.00%

— %

133

Indirect

Full consolidation

Gate Solar 21 S.L.

Subsidiary

29/5/2020

100.00%

— %

Indirect

Full consolidation

Inversiones Samiac 14 S.L.

Subsidiary

29/5/2020

100.00%

— %

Indirect

Full consolidation

Nueva Pescanova, S.L.

Associate

3/4/2020

25.00%

— %

25,272

Direct

Equity method

Sabadell Asset Management Luxembourg, S.A.

Subsidiary

30/6/2020

100.00%

— %

—

Indirect

Full consolidation

Sabadell Asset Management, S.A., S.G.I.I.C.

Subsidiary

30/6/2020

100.00%

— %

292,507

Direct

Full consolidation

Torenia Solar, S.L.

Subsidiary

29/5/2020

100.00%

— %

118

Indirect

Full consolidation

Gate Solar Gestión, S.L.

Associate

27/11/2020

50.00%

— %

516

Direct

Equity method

Hydrophytic, S.L.

Associate

23/12/2020

50.00%

— %

Indirect

Equity method

Sdin Residencial, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

28,947

Direct

Full consolidation

Promontoria Challenger Industrial Assets, S.L.U. en liquidacion

Subsidiary

26/8/2020

100.00%

— %

(3)

Direct

Full consolidation

Promontoria Challenger Land, S.L.U. en liquidacion

Subsidiary

26/8/2020

100.00%

— %

(3)

Direct

Full consolidation

Promontoria Challenger Real Estate, S.L.U. en liquidacion

Subsidiary

26/8/2020

100.00%

— %

(3)

Direct

Full consolidation

Promontoria Challenger Residential, S.L.U. en liquidacion

Subsidiary

26/8/2020

100.00%

— %

(3)

Direct

Full consolidation

Grecoholdco, S.A.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 1, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 2, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 3, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 4, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 5, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 6, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 7, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 8, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 9, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 10, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 11, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 12, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 13, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 14, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Grecopropco 15, S.L.U.

Subsidiary

21/9/2020

100.00%

— %

—

Direct

Full consolidation

Hotel Value Added Primera, S.L.U. en liquidacion

Subsidiary

27/8/2020

100.00%

— %

(115)

Indirect

Full consolidation

Redes 2 Promotora Unica, S.L.

Associate

21/9/2020

20.00%

— %

412

Indirect

Equity method

Same Age Wallets, S.L.

Associate

16/7/2020

20.37%

— %

(935)

Indirect

Equity method

Sabadell BS Select Fund of Hedge Funds SICAV (Luxembourg) in Liquidation

Subsidiary

22/2/2020

100.00%

— %

(276)

Direct

Full consolidation

Xunqueira Eólica, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

366

Indirect

Full consolidation

Vitigudina FV, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

7,896

Indirect

Full consolidation

Orión Energía 1, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 2, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 3, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 4, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 5, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 6, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

A-678

Thousand euro

Name of entity (or line of business) sold, spun off or otherwise

disposed of

Category

Effective date of the
transaction

% Voting rights
disposed of

% Total voting rights following
disposal

Profit/(loss)
generated

Type of shareholding

Method

Reason

Orión Energía 7, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 8, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 9, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 10, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 11, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 12, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 13, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 14, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 15, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 16, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 17, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 18, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 19, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 20, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 21, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 22, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 23, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 24, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 25, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 26, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 27, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 28, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 29, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Orión Energía 30, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Indirect

Full consolidation

Sabadell Asabys Health Innovation Investments, S.C.R., S.A.

Associate

30/10/2020

— %

309

Indirect

Equity method

Parque Eólico Lecrín, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Direct

Full consolidation

Parque Eólico Las Lomas de Lecrín, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

123

Direct

Full consolidation

Parque Eólico Lomas de Manteca, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

373

Direct

Full consolidation

Parque Eólico Jaufil, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

—

Direct

Full consolidation

Parque Eólico Zorreras, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

1,763

Direct

Full consolidation

Parque Eólico Tahuna, S.L.U.

Subsidiary

22/12/2020

100.00%

— %

1,106

Direct

Full consolidation

Other (*)

(15,049)

TOTAL

343,588

(a) Disposals from the scope of consolidation due to sale of shareholding.

(b) Disposals from the scope due to dissolution and/or liquidation.

(*) Corresponds, mainly, to a negative adjustment of 17,001 thousand euros of the sale price of Solvia Servicios Inmobiliarios, S.L. (Solvia), a company 80% of whose share capital was sold in 2019 (see Note 2).

A-679

Schedule II – Structured entities - Securitisation funds

Thousand euro



Year	Securitisation funds fully retained on the balance sheet	Entity	Total securitised assets as at 31/12/2021


2005	TDA 23, F.T.A	Banco Guipuzcoano		18,445

2005	TDA CAM 4 F.T.A	Banco CAM		144,740

2005	TDA CAM 5 F.T.A	Banco CAM		325,213

2006	TDA 26-MIXTO, F.T.A	Banco Guipuzcoano		54,766

2006	TDA CAM 6 F.T.A	Banco CAM		230,636

2006	FTPYME TDA CAM 4 F.T.A	Banco CAM		71,985

2006	TDA CAM 7 F.T.A	Banco CAM		360,160

2006	CAIXA PENEDES 1 TDA, FTA	BMN- Penedés		142,145

2007	TDA 29, F.T.A	Banco Guipuzcoano		74,442

2007	TDA CAM 8 F.T.A	Banco CAM		336,083

2007	TDA CAM 9 F.T.A	Banco CAM		337,662

2007	CAIXA PENEDES PYMES 1 TDA, FTA	BMN- Penedés		27,305

2007	CAIXA PENEDES 2 TDA, FTA	BMN- Penedés		111,476

2008	CAIXA PENEDES FTGENCAT 1 TDA, FTA	BMN- Penedés		43,501

2009	GAT-ICO-FTVPO 1, F.T.H (CP)	BMN- Penedés		2,636

2017	TDA SABADELL RMBS 4, FT	Banco Sabadell		4,288,843
2017	IM SABADELL PYME 11, FT	Banco Sabadell		380,668
Total				6,950,706

Thousand euro



Year	Securitisation funds fully derecognised from the balance sheet	Entity	Total securitised assets as at 31/12/2021


2006	TDA 25, FTA (*)	Banco Gallego		3,480

2010	FPT PYMES 1 LIMITED	Banco CAM		147,101
2019	SABADELL CONSUMO 1, FT	Banco Sabadell		365,772
Total				516,353

(*) Securitisation fund in process of early liquidation.

A-680

Schedule III – Information required to be kept by issuers of mortgage market securities and the special accounting mortgage register

Details of the data from the special accounting register of the issuing entity Banco Sabadell, referred to in Article 21 of Royal Decree 716/2009, required by Bank of Spain Circular 5/2011, are given below:

A) Asset-side transactions

Details of the aggregate nominal values of mortgage loans and credit as at 31 December 2021 and 2020 used as collateral for issues, their eligibility and the extent to which they qualify as such for mortgage market purposes, are presented in the following table:

Thousand euro


Analysis of overall mortgage loan & credit portfolio; eligibility and qualifying amounts (nominal values)
	2021		2020

Total mortgage loan and credit portfolio		50,225,414		50,756,669

Participation mortgages issued		1,535,765		1,918,951

Of which: Loans held on balance sheet		1,502,504		1,875,011

Mortgage transfer certificates		5,466,788		6,087,432

Of which: Loans held on balance sheet		5,219,354		5,855,389

Mortgage loans pledged as security for financing received		—		—

Loans backing issues of mortgage bonds and covered bonds		43,222,861		42,750,286

Ineligible loans		8,794,185		10,169,340

Fulfil eligibility requirements except for limit under Article 5.1 of Royal Decree		8,429,918		9,603,831
716/2009		8,429,918		9,603,831

Other		364,267		565,509

Eligible loans		34,428,676		32,580,946

Non-qualifying portions		59,146		91,307

Qualifying portions		34,369,530		32,489,639

Loans covering mortgage bond issues		—		—

Loans eligible as coverage for covered bond issues		34,369,530		32,489,639

Substitution assets for covered bond issues		—		—

A-681

A breakdown of these nominal values according to different attributes is given below:

Thousand euro

Analysis of total mortgage loan and credit portfolio backing mortgage market issues

2021

2020

Total

Of which:

Eligible loans

Total

Of which: Eligible

loans

Total mortgage loan and credit portfolio

43,222,861

34,428,676

42,750,286

32,580,946

Origin of operations

43,222,861

34,428,676

42,750,286

32,580,946

Originated by the institution

42,655,304

34,016,806

42,183,959

32,174,163

Subrogated from other entities

292,307

256,014

269,499

233,253

Other

275,250

155,856

296,828

173,530

Currency

43,222,861

34,428,676

42,750,286

32,580,946

Euro

43,173,341

34,386,431

42,695,243

32,535,432

Other currencies

49,520

42,245

55,043

45,514

Payment status

43,222,861

34,428,676

42,750,286

32,580,946

Satisfactory payment

39,681,234

32,280,269

38,634,588

30,360,821

Other situations

3,541,627

2,148,407

4,115,698

2,220,125

Average residual maturity

43,222,861

34,428,676

42,750,286

32,580,946

Up to 10 years

9,789,964

8,350,104

9,951,936

8,286,771

10 to 20 years

16,907,433

13,923,891

16,848,912

13,429,613

20 to 30 years

16,088,183

11,979,015

14,764,169

10,498,681

More than 30 years

437,281

175,666

1,185,269

365,881

Interest rate

43,222,861

34,428,676

42,750,287

32,580,946

Fixed

21,087,632

17,206,952

17,799,195

14,337,428

Variable

22,135,229

17,221,724

24,951,092

18,243,518

Mixed

Borrowers

43,222,861

34,428,676

42,750,287

32,580,946

Legal entities and individual entrepreneurs

11,403,204

8,578,554

12,077,615

8,481,935

Of which: Real estate developments

1,805,426

1,062,649

2,426,325

1,223,926

Other individuals and NPISHs

31,819,657

25,850,122

30,672,672

24,099,011

Type of guarantee

43,222,861

34,428,676

42,750,287

32,580,946

Assets /finished buildings

42,517,282

33,960,470

41,869,228

32,013,323

Residential

35,052,356

28,295,021

34,365,662

26,602,780

Of which: Subsidised housing

1,360,692

1,120,368

1,460,161

1,185,576

Commercial

7,238,866

5,491,003

7,300,429

5,258,460

Other

226,060

174,446

203,137

152,083

Assets/ buildings under construction

139,896

132,851

193,026

174,259

Residential

125,565

118,595

153,794

138,421

Of which: Subsidised housing

137

Commercial

13,977

13,902

38,991

35,598

Other

354

241

240

Land

565,683

335,355

688,033

393,364

Developed

68,582

22,181

127,609

52,908

Rest

497,101

313,174

560,424

340,456

The nominal value of available funds (undrawn commitments) of mortgage loans and credit as at 31 December 2021 and 2020 is as follows:


Thousand euro

Undrawn balances (nominal value). Total mortgage loans and credit backing the issue of mortgage bonds and covered bonds

	2021		2020

Potentially eligible		1,051,888		1,067,752
Ineligible		1,969,968		2,040,402

A-682


Thousand euro

LTV ratio by type of security. Eligible loans for the issue of mortgage bonds and covered bonds

	2021		2020

Secured on residential property		28,408,838		26,756,164
Of which LTV <= 40%		8,015,059		7,774,941
Of which LTV 40%-60%		9,912,812		9,511,514
Of which LTV 60%-80%		10,480,967		9,469,709
Of which LTV > 80%		—		—

Secured on other property		6,019,838		5,824,782
Of which LTV <= 40%		3,666,010		3,488,807
Of which LTV 40%-60%		2,353,828		2,335,975
Of which LTV > 60%		—		—

Changes during 2021 and 2020 in the nominal values of mortgage loans that secure issues of mortgage bonds and mortgage covered bonds (eligible and ineligible) are as follows:


Thousand euro

Changes in nominal values of mortgage loans

	Eligible		Ineligible
Balance as at 31 December 2019		31,386,834		11,478,524

Derecognised during the year		(5,479,375)		(3,865,051)
Terminations at maturity		(2,335,360)		(382,752)
Early terminations		(1,302,776)		(469,732)
Subrogations by other entities		(35,810)		(5,249)
Derecognised due to securitisations		—		—
Other		(1,805,429)		(3,007,318)

Additions during the year		6,673,487		2,555,867
Originated by the institution		3,676,398		1,335,728
Subrogations by other entities		24,685		6,543
Other		2,972,404		1,213,596
Balance as at 31 December 2020		32,580,946		10,169,340

Derecognised during the year		(5,351,119)		(3,764,409)
Terminations at maturity		(2,694,833)		(523,277)
Early terminations		(2,037,072)		(1,205,645)
Subrogations by other entities		(47,071)		(6,509)
Derecognised due to securitisations		—		—
Other		(572,143)		(2,028,978)

Additions during the year		7,198,849		2,389,254
Originated by the institution		4,816,896		1,835,061
Subrogations by other entities		56,991		2,358
Other		2,324,962		551,835
Balance as at 31 December 2021		34,428,676		8,794,185

A-683

B) Liability-side transactions

Information on issues carried out and secured with Banco Sabadell’s mortgage loans and credit portfolio is provided in the following table, broken down according to whether the sale was by public offering or otherwise and by their residual maturity:


Thousand euro

Nominal value	2021		2020

Covered bonds issued		14,986,254		16,653,854
Of which: Not reflected under liabilities on the balance sheet		7,315,000		7,182,000
Debt securities. Issued through public offering		4,100,000		5,450,000
Time to maturity up to one year		—		1,350,000
Time to maturity from one to two years		1,000,000		—
Time to maturity from two to three years		1,000,000		1,000,000
Time to maturity from three to five years		—		2,100,000
Time to maturity from five to ten years		2,100,000		1,000,000
Time to maturity more than ten years		—		—
Debt securities. Other issues		9,755,400		9,773,000
Time to maturity up to one year		1,677,400		3,000,000
Time to maturity from one to two years		338,000		1,695,000
Time to maturity from two to three years		1,600,000		338,000
Time to maturity from three to five years		5,140,000		4,350,000
Time to maturity from five to ten years		1,000,000		390,000
Time to maturity more than ten years		—		—
Deposits		1,130,854		1,430,854
Time to maturity up to one year		694,444		300,000
Time to maturity from one to two years		100,000		694,444
Time to maturity from two to three years		—		100,000
Time to maturity from three to five years		336,410		336,410
Time to maturity from five to ten years		—		—
Time to maturity more than ten years		—		—



	2021		2020

	Nominal value	Average residual maturity	Nominal value	Average residual maturity

	(thousand euro)	(years)	(thousand euro)	(years)

Mortgage transfer certificates	5,466,788	20	6,087,432	21

Issued through public offering			—	—

Other issues	5,466,788	20	6,087,432	21

Participation mortgages	1,535,765	12	1,918,951	12

Issued through public offering			—	—

Other issues	1,535,765	12	1,918,951	12

Banco de Sabadell, S.A.’s overcollateralisation ratio (the nominal value of the full mortgage loans and credit portfolio backing the issuance of mortgage covered bonds, divided by the nominal value of issued mortgage covered bonds), stood at 288% as at 31 December 2021 (257% as at 31 December 2020).

As required by Royal Decree 716/2009, implementing certain aspects of Law 2/1981 of 25 March on the regulation of the mortgage market and other matters relating to mortgage lending, the Board of Directors declares that it is responsible for ensuring that the Institution has a set of policies and procedures in place to assure compliance with mortgage market regulations.

In line with these policies and procedures related to the Group’s mortgage market activities, the Board of Directors is responsible for ensuring compliance with mortgage market regulations and for implementing the Group’s risk management and control procedures (see Note 4.3 “General Principles of Risk Management”). In terms of credit risk, in particular, the Board of Directors confers powers and discretions to the Delegated Credit Committee, which then sub-delegates authority to the various decision-making levels. The internal procedures set up to handle the origination and monitoring of assets that make up the Group’s lending, and particularly those secured by mortgages, which back the Group’s mortgage covered bond issues, are described in detail below for each type of loan applicant.

A-684

Individuals

Loans to individuals are approved and decided on using the credit scoring tools described in Note 4.4.2.2 “Risk management models”. Where necessary, these tools are complemented with the work of a risk analyst, who carries out more in-depth studies of supplementary materials and reports. Furthermore, a series of other information and parameters are considered, such as the consistency of customers’ applications and how well their requested products match their repayment possibilities; customers’ ability to pay based on their current and future circumstances; the value of the property provided as security for the loan (as determined by an appraisal carried out by a valuation firm authorised by Bank of Spain and which the Institution’s own internal approval processes will, additionally, have shown to be free of any association with the Group); the availability of any additional guarantees; examinations of internal and external databases of defaulters, etc.

One aspect of the decision-making process involves establishing the maximum amount of the loan, based on the appraisal value of the assets pledged as guarantees as well as the purchase value, if that is the purpose of the loan. As a general rule, under internal Group policies, the maximum amount of the loan relative to the appraisal value or the purchase value, whichever is lower, is applicable to purchases by individuals of properties for use as their primary residence and is fixed at 80%. This provides an upper limit below which a range of other maximum ratios of less than 80% are set, having regard to the purpose of the loan.

A further step that must be taken before an application can be decided upon is to review all charges and liens associated with the property on which the loan is to be secured and also any insurance taken out to cover the security. Once a loan application has been approved, the mortgage must be registered with the Property Registry as part of the formalities for arranging the loan.

Companies unrelated to construction and/or real estate development

Analyses and decisions concerning the approval of risks (lending and guarantees) are based on rating tools and “basic risk management teams”, formed by one person from the business side and one from the risks side at different decision-making levels, both described in Note 4.4.2.2 “Risk management models”. A range of other data and parameters are also taken into account, such as the consistency of the application, ability to pay and the nature of the security provided (as determined by an appraisal carried out by a Bank of Spain-authorised valuation firm which Banco Sabadell’s own approval processes will, additionally, have shown to be free of any association with the Group) and considering any supplementary guarantees, the “fit” between the company’s working capital and its total sales; the appropriateness of the total amount borrowed from the Group based on the business’s capital strength, examinations of internal and external databases of defaulters, etc.

Reviews of charges and liens associated with the security provided and the registration of mortgages with the Property Registry are also applicable in this case.

Discretion figures are assigned based on the expected loss on the transaction/customer/risk group and the total risk of the customer or risk group. There are several levels in the approval process. In each such level there is a “basic management team”, one member of which will be on the business side and one on the risk management side. All loan approvals must be the result of a joint decision. As with individuals, a set of exceptional circumstances has been specified for borrowers and sectors, and these are provided in the Group’s internal procedures.

As in the case of individuals, transactions are monitored using early warning tools. There are also procedures to ensure that the securities and guarantees provided are constantly being reviewed and validated.

A-685

Companies related to construction and/or real estate development

The Bank includes the management of real estate developer loans in the Real Estate Business Division. This unit has its own organisational structure geared towards a specialised management of these assets based on knowledge of the situation and the evolution of the real estate market. Managing the risks in this portfolio is the responsibility of the Real Estate Risk Division, a specialist unit which forms part of the Risk Management Division.

Factors influencing the decision include an assessment of both the developer and the project together with a series of other supplementary considerations such as the financial position and net worth of the developer, revenue and cash flow projections, any business plans relating to the project and, most particularly, an in-depth analysis of the current risk situation, which may cover the finished product, plots or land or other developments.

There is a scale of maximum LTV ratios defined internally by the Group based on the purpose of the loan, the quality of the developer and an internal appraisal of the development.

Loans are subject to the kind of continuous monitoring that asset management necessarily implies. For finished products, monitoring focuses on sales or rental figures; for those under construction, the progress of the work. A system of continuous control is established to check that commitments are being adhered to and, as with other companies, procedures are in place for the continuous review and validation of the guarantees provided.

Other matters

Banco Sabadell Group is an active participant in capital markets and has a number of funding programmes in operation (see section on “Funding strategy and evolution of liquidity in 2021” in Note 4). As one element of the Group’s funding strategy, Banco de Sabadell, S.A. is an issuer of mortgage covered bonds. Mortgage covered bonds are issued with the portfolio of home equity loans granted by the issuer as collateral, adhering to the eligibility criteria defined in Royal Decree 716/2009 regulating the mortgage market and other standards of the financial mortgages system in Spain. The Group has control procedures in place to monitor its entire mortgage lending portfolio (one of which involves keeping special accounting records of all mortgage loans and credit – and any assets that replace them – used to back issues of covered bonds and mortgage bonds, as well as records of any associated financial derivatives). There are also procedures in place to verify that all loans meet the eligibility criteria for use as collateral in issues of mortgage covered bonds, and to ensure that bond issues are kept within their maximum limits at all times. These procedures are all regulated by current mortgage market regulations.

A-686

Schedule IV – Information on issuers of public sector covered bonds and on the special accounting register of public sector covered bonds

Details of the data from the special accounting register of public sector covered bonds of the issuing entity Banco Sabadell, referred to in the sole additional provision of Royal Decree 579/2014, required by Bank of Spain Circular 4/2015, are given below. In 2021, all of the public sector covered bonds issued were redeemed early.

A) Asset-side transactions

Details of the aggregate nominal values of loans and credit with general governments as at 31 December 2021 and 2020 which are used as collateral for issues, their eligibility and the extent to which they qualify as collateral for public sector covered bonds are presented in the following table:


Thousand euro

	2021	2020

Central governments	—	219,036
Regional governments or governments in autonomous communities	—	3,108,232
Local governments	—	1,162,742
Social Security Trust Funds	—	—

Total loans and credit portfolio	—	4,490,010

The entirety of the portfolio of loans and credit with general governments used as collateral for issues, as well as their eligibility and qualifying amounts for the purpose of public sector covered bonds, corresponds to transactions granted to residents in Spain.

B) Liability-side transactions

The balance, as at 31 December 2021 and 2020, of issues carried out and secured with the Bank’s portfolio of loans and credit to general governments is set out below, broken down according to whether or not they involved a public offering and by their residual maturity:


Thousand euro

Nominal value	2021	2020

Public sector covered bonds issued	—	1,600,000

Of which: Not reflected under liabilities on the balance sheet	—	1,600,000

Issued through public offering	—	—

Time to maturity up to one year	—	—

Time to maturity from one to two years	—	—

Time to maturity from two to three years	—	—

Time to maturity from three to five years	—	—

Time to maturity from five to ten years	—	—

Time to maturity more than ten years	—	—

Other issues	—	1,600,000

Time to maturity up to one year	—	—

Time to maturity from one to two years	—	400,000

Time to maturity from two to three years	—	—

Time to maturity from three to five years	—	1,200,000

Time to maturity from five to ten years	—	—

Time to maturity more than ten years	—	—

Banco de Sabadell, S.A.’s overcollateralisation ratio (the nominal value of the full portfolio of loans and credit to general governments backing the issuance of public sector covered bonds, divided by the nominal value of issued public sector covered bonds) stood at 280% as at 31 December 2020.

As required by Royal Decree 579/2014, the Board of Directors declares that it is responsible for ensuring that the Institution has a set of policies and procedures in place relating to the activities for the financing of public entities to assure compliance with regulations governing the issuance of these securities (see Note 4 “Risk management”).

In terms of credit risk, in particular, the Board of Directors confers powers and discretions to the Delegated Credit Committee, which then sub-delegates authority to the various decision-making levels. Internal procedures are in place to handle the origination and monitoring of the assets that make up the Group’s loans and receivables and particularly assets with public entities, which back the Group’s issues of public sector covered bonds.

A-687

Schedule V – Details of outstanding issues and subordinated liabilities of the Group

Debt securities in issue

The breakdown of the Group’s issues as at 31 December 2021 and 2020 is as follows:

Thousand euro

Issuer

Date of issue

Amount

Interest rate ruling as at

31/12/2021

Maturity/call

date

Issue

currency

Target of

offering

31/12/2021

31/12/2020

Banco de Sabadell, S.A.

03/07/2017

10,000

MAX(EURIBOR 3M + 0,30; 0,3%)

04/07/2022

Euros

Retail

Banco de Sabadell, S.A.

28/07/2017

26,800

MAX(EURIBOR 3M; 0,60%)

28/07/2022

Euros

Retail

Banco de Sabadell, S.A.

28/09/2017

10,000

MAX(EURIBOR 3M + 0,30; 0,3%)

28/09/2022

Euros

Retail

Banco de Sabadell, S.A.

05/12/2017

1,000,000

0.875%

05/03/2023

Euros

Institutional

Banco de Sabadell, S.A.

26/02/2018

4,000

MAX(EURIBOR 3M; 0,4%)

27/02/2023

Euros

Retail

Banco de Sabadell, S.A.

16/03/2018

6,000

MAX(EURIBOR 3M; 0,67%)

17/03/2025

Euros

Retail

Banco de Sabadell, S.A.

03/04/2018

6,000

MAX(EURIBOR 3M; 0,4%)

03/04/2023

Euros

Retail

Banco de Sabadell, S.A.

31/05/2018

3,000

MAX(EURIBOR 3M; 0,3%)

31/05/2023

Euros

Retail

Banco de Sabadell, S.A.

07/09/2018

750,000

1.625%

07/03/2024

Euros

Institutional

Banco de Sabadell, S.A.

14/11/2018

1,000

MAX(EURIBOR 3M; 1,1%)

14/11/2023

Euros

Retail

Banco de Sabadell, S.A.

14/11/2018

2,500

MAX(EURIBOR 3M; 1,5%)

14/11/2025

Euros

Retail

Banco de Sabadell, S.A.

28/03/2019

601,415

0.700%

28/03/2022

Euros

Retail

Banco de Sabadell, S.A.

08/04/2019

—

300,000

0.454%

08/04/2021

Euros

Institutional

Banco de Sabadell, S.A.

10/05/2019

1,000,000

1.750%

10/05/2024

Euros

Institutional

Banco de Sabadell, S.A.

22/07/2019

1,000,000

0.875%

22/07/2025

Euros

Institutional

Banco de Sabadell, S.A.

27/09/2019

500,000

1.125%

27/03/2025

Euros

Institutional

Banco de Sabadell, S.A. (*)

07/11/2019

500,000

0.625%

07/11/2024

Euros

Institutional

Banco de Sabadell, S.A. (*)

29/06/2020

500,000

1.750%

29/06/2022

Euros

Institutional

Banco de Sabadell, S.A. (*)

11/09/2020

500,000

1.125%

11/03/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

15/10/2020

120,000

EURIBOR 3M + 0,646%

15/05/2024

Euros

Institutional

TSB Banking Group Plc (*) (**)

29/12/2020

535,536

500,539

SONIA + 2.1%

29/06/2022

Pounds
sterling

Institutional

Banco de Sabadell, S.A. (*)

16/06/2021

500,000

—

0.875%

16/06/2027

Euros

Institutional

Banco de Sabadell, S.A.

29/11/2021

67,000

—

MAX(EURIBOR 12M; 0,77%)

30/11/2026

Euros

Institutional

Subscribed by Group companies

(620,536)

(623,540)

Total straight bonds

7,022,715

6,717,715

(*) “ Maturity/call date” refers to the first call date.

(**) Equivalent amount in EUR as at end December 2021.

Thousand euro

Issuer

Date of issue

Amount

Interest rate ruling as at

31/12/2021

Maturity date

Issue

currency

Target of

offering

31/12/2021

31/12/2020

Banco Guipuzcoano, S.A. (*)

18/04/2007

25,000

1.70%

18/04/2022

Euros

Institutional

Banco de Sabadell, S.A.

25/07/2012

3,000

ref . underlying assets

25/07/2022

Euros

Retail

Banco de Sabadell, S.A.

14/07/2014

10,000

ref . underlying assets

15/07/2024

Euros

Retail

Banco de Sabadell, S.A.

14/07/2014

—

3,000

ref . underlying assets

14/07/2021

Euros

Retail

Banco de Sabadell, S.A.

30/11/2016

—

45,000

ref . underlying assets

30/11/2021

Euros

Retail

Banco de Sabadell, S.A.

05/11/2018

10,000

ref . underlying assets

01/04/2025

Euros

Retail

Banco de Sabadell, S.A.

12/11/2018

3,200

ref . underlying assets

01/04/2025

Euros

Retail

Banco de Sabadell, S.A.

18/02/2019

3,000

ref . underlying assets

18/02/2022

Euros

Retail

Banco de Sabadell, S.A.

04/04/2019

3,000

ref . underlying assets

04/10/2022

Euros

Retail

Subscribed by Group companies

—

(113)

Total structured bonds

57,200

105,087

(*) Company merged with Banco Sabadell.

Thousand euro

Issuer

Date of issue

Amount

Average interest rate

Maturity date

Issue

currency

Target of

offering

31/12/2021

31/12/2020

31/12/2021

Banco de Sabadell, S.A. (*)

12/05/2021

903,897

782,221

0.00%

Various

Euros

Institutional

Subscribed by Group companies

(477,803)

(407,904)

Total commercial paper

426,094

374,317

A-688

Thousand euro

Issuer

Date of issue

Amount

Interest rate ruling as at

31/12/2021

Maturity date

Issue

currency

Target of

offering

31/12/2021

31/12/2020

Banco de Sabadell, S.A.

08/05/2009

—

100,000

EURIBOR 3M + 1

08/05/2021

Euros

Institutional

Banco de Sabadell, S.A.

13/07/2011

—

50,000

EURIBOR 3M + 2,60

13/07/2021

Euros

Institutional

Banco de Sabadell, S.A.

12/12/2011

—

150,000

EURIBOR 3M + 3,10

12/12/2021

Euros

Institutional

Banco de Sabadell, S.A.

05/10/2012

77,400

95,000

EURIBOR 3M + 4,80

05/10/2022

Euros

Institutional

Banco de Sabadell, S.A.

09/12/2013

—

200,000

EURIBOR 3M+ 1,60

09/12/2021

Euros

Institutional

Banco de Sabadell, S.A.

26/09/2014

250,000

EURIBOR 3M + 0,70

26/09/2022

Euros

Institutional

Banco de Sabadell, S.A.

03/10/2014

38,000

EURIBOR 3M + 0,68

03/10/2023

Euros

Institutional

Banco de Sabadell, S.A.

12/11/2014

—

1,350,000

0.88%

12/11/2021

Euros

Institutional

Banco de Sabadell, S.A.

05/12/2014

100,000

EURIBOR 3 M + 0,40

05/12/2022

Euros

Institutional

Banco de Sabadell, S.A.

04/05/2015

250,000

EURIBOR 3 M + 0,13

04/05/2023

Euros

Institutional

Banco de Sabadell, S.A.

03/07/2015

50,000

EURIBOR 3 M + 0,20

03/07/2023

Euros

Institutional

Banco de Sabadell, S.A.

26/01/2016

550,000

EURIBOR 3M + 0,80

26/01/2024

Euros

Institutional

Banco de Sabadell, S.A.

24/05/2016

50,000

EURIBOR 3M + 0,535

24/05/2024

Euros

Institutional

Banco de Sabadell, S.A.

10/06/2016

1,000,000

0.63%

10/06/2024

Euros

Institutional

Banco de Sabadell, S.A.

20/10/2016

1,000,000

0.13%

20/10/2023

Euros

Institutional

Banco de Sabadell, S.A.

21/12/2016

—

500,000

EURIBOR 12M + 0,27

21/12/2021

Euros

Institutional

Banco de Sabadell, S.A.

29/12/2016

250,000

0.97%

27/12/2024

Euros

Institutional

Banco de Sabadell, S.A.

26/04/2017

1,100,000

1.00%

26/04/2027

Euros

Institutional

Banco de Sabadell, S.A.

21/07/2017

500,000

0.89%

21/07/2025

Euros

Institutional

Banco de Sabadell, S.A.

18/12/2018

—

1,000,000

EURIBOR 12M + 0,085

18/06/2021

Euros

Institutional

Banco de Sabadell, S.A.

18/12/2018

—

1,000,000

EURIBOR 12M + 0,086

18/07/2021

Euros

Institutional

Banco de Sabadell, S.A.

21/12/2018

390,000

1.09%

21/12/2026

Euros

Institutional

Banco de Sabadell, S.A.

30/01/2019

1,250,000

EURIBOR 12M + 0,130

30/01/2022

Euros

Institutional

Banco de Sabadell, S.A.

20/12/2019

750,000

EURIBOR 12M + 0,074

20/12/2024

Euros

Institutional

Banco de Sabadell, S.A.

20/12/2019

750,000

EURIBOR 12M + 0,104

22/12/2025

Euros

Institutional

Banco de Sabadell, S.A.

20/01/2020

1,000,000

0.13%

10/02/2028

Euros

Institutional

Banco de Sabadell, S.A.

23/06/2020

1,500,000

EURIBOR 12M + 0,080

23/06/2025

Euros

Institutional

Banco de Sabadell, S.A.

30/03/2021

1,000,000

—

EURIBOR 12M + 0,018

30/03/2026

Euros

Institucional

Banco de Sabadell, S.A.

08/06/2021

1,000,000

—

EURIBOR 12M + 0,012

08/06/2026

Euros

Institucional

Banco de Sabadell, S.A.

08/06/2021

1,000,000

—

EURIBOR 12M + 0,022

08/06/2027

Euros

Institucional

Subscribed by Group companies

(7,315,000)

(7,182,000)

Total covered bonds

6,540,400

8,041,000

Thousand euro

Issuer

Date of issue

Amount

Interest rate ruling as at

31/12/2021

Maturity date

Issue

currency

Target of

offering

31/12/2021

31/12/2020

Banco de Sabadell, S.A.

18/12/2018

—

800,000

EURIBOR 12M + 0,242

18/12/2024

Euros

Institutional

Banco de Sabadell, S.A.

16/12/2019

—

400,000

EURIBOR 12M + 0,007

16/12/2022

Euros

Institutional

Banco de Sabadell, S.A.

16/12/2019

—

400,000

EURIBOR 12M + 0,104

16/12/2025

Euros

Institutional

Subscribed by Group companies

—

(1,600,000)

Total public sector covered bonds

—

In 2021, all of the public sector covered bonds issued were redeemed early.

Thousand euro

Issuer

Date of issue

Amount

Interest rate ruling as at

31/12/2021

Maturity date

Issue currency

Target of

offering

31/12/2021

31/12/2020

TSB Banking Group Plc

7/12/2017

595,040

556,155

SONIA + 0.372

7/12/2022

Pounds sterling

Institutional

TSB Banking Group Plc

15/2/2019

892,560

834,232

SONIA + 0.870

15/2/2024

Pounds sterling

Institutional

TSB Banking Group Plc

22/6/2021

595,040

—

SONIA + 0.370

22/6/2028

Pounds sterling

Institutional

Subscribed by Group companies

—

Total Covered Bonds

2,082,640

1,390,387

A-689

Securitisations

The following table shows the bonds issued by asset securitisation funds outstanding as at 31 December 2021 and 2020, respectively:


Thousand euro
				Issue				Outstanding balance of liabilities

		Types of		Number of

Year	*Name of fund ()**	issue		securities		Amount		2021		2020		Yield

2005	TDA CAM 4,FTA		RMBS		20,000		2,000,000		72,293		101,353	EURIBOR 3M + (between 0,09% y 0,24%)

2005	TDA CAM 5,FTA		RMBS		20,000		2,000,000		126,029		147,402	EURIBOR 3M + (between 0,12% y 0,35%)

2006	TDA CAM 6 F.T.A		RMBS		13,000		1,300,000		83,863		99,601	EURIBOR 3M + (between 0,13% y 0,27%)

2006	TDA CAM 7 F.T.A		RMBS		15,000		1,500,000		101,682		118,552	EURIBOR 3M + (between 0,14% y 0,3%)

2006	CAIXA PENEDES 1 TDA, FTA		RMBS		10,000		1,000,000		37,882		44,451	EURIBOR 3M + 0,14%

2006	FTPYME TDA CAM 4 F.T.A		PYMES		11,918		1,191,800		33,739		40,458	EURIBOR 3M + (between 0,29% y 0,61%)

2007	TDA CAM 8 F.T.A		RMBS		17,128		1,712,800		87,919		100,207	EURIBOR 3M + (between 0,13% y 0,47%)

2007	CAIXA PENEDES PYMES 1 TDA, FTA		PYMES		7,900		790,000		300		300	EURIBOR 3M + 0,8%

2007	TDA CAM 9 F.T.A		RMBS		15,150		1,515,000		124,231		139,481	EURIBOR 3M + (between 0,19% y 0,75%)

2017	IM SABADELL PYME 11, F.T.		PYMES		19,000		1,900,000		3,379		82,244	EURIBOR 3M + 0,75%
Total securitisation funds									671,317		874,049

(*) The bonds issued by securitisation funds are listed in the AIAF market.

Subordinated liabilities

Subordinated liabilities issued by the Group as at 31 December 2021 and 2020 are as follows:

Thousand euro

Issuer

Date of issue

Amount

Interest rate

ruling as at

31/12/2021

Maturity/call date

Issue currency

Target of

offering

31/12/2021

31/12/2020

TSB Banking Group Plc (*)

01/05/2014

—

428,239

5.75%

06/05/2021

Pounds sterling

Institutional

Banco de Sabadell, S.A.

06/05/2016

500,000

5.63%

06/05/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

12/12/2018

500,000

5.38%

12/12/2023

Euros

Institutional

Banco de Sabadell, S.A. (*)

17/01/2020

300,000

2.00%

17/01/2025

Euros

Institutional

TSB Banking Group Plc (*)

01/05/2014

357,024

—

3.45%

30/03/2026

Pounds sterling

Institutional

Banco de Sabadell, S.A. (*)

15/01/2021

500,000

—

2.50%

15/04/2026

Euros

Institutional

Subscribed by Group companies

(357,024)

(5,000)

Total subordinated bonds

1,800,000

1,723,239

(*) “ Maturity/call date” refers to the first call date.

Thousand euro

Issuer

Date of issue

Amount

Interest rate ruling

as at 31/12/2021

Maturity/call

date

Issue

currency

Target of offering

31/12/2021

31/12/2020

Banco de Sabadell, S.A. (*)

18/05/2017

750,000

6.50%

18/05/2022

Euros

Institutional

Banco de Sabadell, S.A. (*)

23/11/2017

400,000

6.13%

23/11/2022

Euros

Institutional

Banco de Sabadell, S.A. (*)

15/03/2021

500,000

—

5.75%

15/09/2026

Euros

Institutional

Banco de Sabadell, S.A. (*)

19/11/2021

750,000

—

5.00%

19/11/2027

Euros

Institutional

Total preference shares

2,400,000

1,150,000

(*) Perpetual issue. The date of the first call option is reported as the “maturity/redemption date”. The aforesaid subordinated securities and undated securities are perpetual, although they may be converted into newly issued Banco Sabadell shares, if either Banco Sabadell or its consolidated group has a Common Equity Tier 1 (CET1) ratio lower than 5.125%, calculated in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, of 26 June, on prudential requirements for credit institutions and investment firms.

The issues included in subordinated liabilities, for the purposes of credit priority, are ranked below all of the Group’s regular creditors.

A-690

For the purpose of complying with the requirements of IAS 7, the table below shows the reconciliation of liabilities derived from funding activities, identifying the components of their movements:


Thousand euro
Total subordinated liabilities as at 31 December 2019			3,010,465

New issuances			300,000
Amortised			(424,600)
Capitalisation			—
Exchange rate			(24,276)
Variation in subordinated liabilities subscribed by group companies.			11,650
Total subordinated liabilities as at 31 December 2020			2,873,239

New issuances			1,750,000
Amortised			(443,497)
Capitalisation			—
Exchange rate			15,258
Variation in subordinated liabilities subscribed by group companies.			5,000
Total subordinated liabilities as at 31 December 2021			4,200,000

A-691

Schedule VI – Other risk information

Credit risk exposure

Loans and advances to customers, broken down by activity and type of guarantee

The breakdown of the balance of the heading “Loans and advances – Customers” by activity and type of guarantee, excluding advances not classed as loans, as at 31 December 2021 and 2020, respectively, is as follows:


Thousand euro
							2021
	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Collateralised loans. Carrying amount based on last available
							valuation. Loan to value
							Less than or equal to 40%		Over 40% and less than or equal to 60%		Over 60% and less than or equal to 80%		Over 80% and less than or equal to 100%		Over 100%


General governments		9,408,771		33,916		553,176		13,891		11,091		—		963		561,147

Other financial corporations and individual entrepreneurs (financial business activity)		948,435		188,751		370,675		394,379		119,440		26,501		6,063		13,043

Non-financial corporations and individual entrepreneurs (non-financial business activity)		60,321,572		13,494,991		5,387,073		7,661,213		4,648,179		2,596,527		1,397,013		2,579,132

Construction and real estate development (including land)		2,652,955		1,569,215		320,736		829,524		496,816		248,870		144,481		170,260

Civil engineering construction		819,200		32,852		25,371		26,128		12,252		2,556		2,803		14,484

Other purposes		56,849,417		11,892,924		5,040,966		6,805,561		4,139,111		2,345,101		1,249,729		2,394,388

Large enterprises		24,465,428		1,893,913		1,944,357		1,992,477		332,307		294,649		505,815		713,022

SMEs and individual entrepreneurs		32,383,989		9,999,011		3,096,609		4,813,084		3,806,804		2,050,452		743,914		1,681,366

Rest of households		86,247,200		78,518,084		1,316,948		16,755,153		23,692,853		28,115,931		7,955,458		3,315,637

Home loans		77,741,032		77,267,421		324,331		15,851,014		23,061,319		27,752,944		7,775,459		3,151,016

For consumption		5,387,338		48,559		622,025		164,816		245,859		127,265		74,417		58,227

Other purposes		3,118,830		1,202,104		370,592		739,323		385,675		235,722		105,582		106,394
TOTAL		156,925,978		92,235,742		7,627,872		24,824,636		28,471,563		30,738,959		9,359,497		6,468,959

MEMORANDUM ITEM Forbearance (refinanced and restructured loans)		5,503,333		3,117,314		397,856		955,550		949,483		742,577		409,411		458,149

A-692


Thousand euro
							2020
	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Collateralised loans. Carrying amount based on last available valuation.
							Loan to value
							Less than or equal to 40%		Over 40% and less than or equal to 60%		Over 60% and less than or equal to 80%		Over 80% and less than or equal to 100%		Over 100%


General governments		10,117,502		37,367		1,195		16,791		13,547		449		—		7,775

Other financial corporations and individual entrepreneurs (financial business activity)		1,026,650		200,685		343,959		391,825		147,582		2,513		1,042		1,682

Non-financial corporations and individual entrepreneurs (non-financial business activity)		59,195,501		14,252,188		5,925,953		7,487,468		5,230,205		2,753,867		1,991,429		2,715,172

Construction and real estate development (including land)		3,225,295		2,133,149		363,967		821,140		741,075		469,467		276,798		188,636

Civil engineering construction		864,217		34,541		47,841		27,048		14,647		2,734		3,400		34,553

Other purposes		55,105,989		12,084,498		5,514,145		6,639,280		4,474,483		2,281,666		1,711,231		2,491,983

Large enterprises		24,318,504		2,039,938		1,858,595		1,901,801		504,081		324,836		415,900		751,915

SMES and individual entrepreneurs		30,787,485		10,044,560		3,655,550		4,737,479		3,970,402		1,956,830		1,295,331		1,740,068

Rest of households		77,989,598		70,324,572		984,767		15,063,405		20,698,838		23,929,365		7,933,957		3,683,774

Home loans		69,488,848		69,015,248		32,602		14,145,483		20,096,602		23,567,589		7,772,722		3,465,454

For consumption		5,199,956		55,329		575,512		158,939		211,889		105,013		56,647		98,353

Other purposes		3,300,794		1,253,995		376,653		758,983		390,347		256,763		104,588		119,967
TOTAL		148,329,251		84,814,812		7,255,874		22,959,489		26,090,172		26,686,194		9,926,428		6,408,403

MEMORANDUM ITEM Forbearance (refinanced and restructured loans)		4,211,651		2,511,856		225,603		582,300		718,600		583,768		410,712		442,080

In terms of risks with LTV >80%, these mainly correspond to transactions from acquired entities or business operations in which, as a supplement to the valuation of the transaction, a mortgage guarantee is available to cover that transaction. Similarly, there are other additional reasons for approval, which mainly correspond to solvent borrowers with a proven payment capacity, as well as customers with a good profile who contribute guarantees (personal guarantees and/or pledges) which are additional to the mortgage guarantees already considered in the LTV ratio.

A-693

Refinancing and restructuring transactions

The outstanding balance of refinanced and restructured transactions as at 31 December 2021 and 2020 is as follows:


Thousand euro
							2021

	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		Of which: lending for construction and real estate development (including land)		Rest of households		Total

TOTAL

Not secured with collateral

Number of transactions		—		14		173		35,608		688		64,850		100,645

Gross carrying amount		—		9,055		28,192		2,571,808		138,613		332,020		2,941,075

Secured with collateral

Number of transactions		—		2		17		8,732		1,367		14,957		23,708

Gross carrying amount		—		203		2,492		2,329,048		170,870		1,561,620		3,893,363

Impairment allowances		—		1,255		16,215		972,963		78,863		340,664		1,331,097

*Of which, non-performing loans*

*Not secured with collateral*

Number of transactions		—		12		58		17,603		410		44,497		*62,170*

Gross carrying amount		—		8,133		17,719		977,368		64,623		210,091		*1,213,311*

*Secured with collateral*

Number of transactions		—		1		9		5,543		1,253		8,417		*13,970*

Gross carrying amount		—		126		627		916,569		78,527		879,217		*1,796,539*

*Impairment allowances*		—		1,255		15,978		823,960		69,424		302,977		*1,144,170*


TOTAL

Number of transactions		—		16		190		44,340		2,055		79,807		124,353

Gross amount		—		9,258		30,684		4,900,856		309,483		1,893,640		6,834,438

Impairment allowances		—		1,255		16,215		972,963		78,863		340,664		1,331,097
Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—		—

A-694


Thousand euro
							2020

	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		Of which: lending for construction *and real* estate development (including *land)*		Rest of households		Total

TOTAL

Not secured with collateral

Number of transactions		—		14		78		27,484		537		53,083		80,659

Gross carrying amount		—		13,615		5,520		1,797,259		166,133		347,615		2,164,009

Secured with collateral

Number of transactions		—		4		20		9,513		1,434		15,511		25,048

Gross carrying amount		—		1,188		13,854		1,730,287		142,435		1,428,279		3,173,608

Impairment allowances		—		1,104		11,939		864,030		84,100		257,531		1,134,604

*Of which, non-performing loans*

*Not secured with collateral*

Number of transactions		—		12		42		13,451		289		32,807		*46,312*

Gross carrying amount		—		8,593		699		936,595		72,557		197,421		*1,143,308*

*Secured with collateral*

Number of transactions		—		3		13		4,633		268		10,321		*14,970*

Gross carrying amount		—		271		13,647		769,606		63,498		780,523		*1,564,047*

*Impairment allowances*		—		1,104		11,756		729,115		71,097		215,213		*957,188*


TOTAL

Number of transactions		—		18		98		36,997		1,971		68,594		105,707

Gross amount		—		14,803		19,374		3,527,546		308,568		1,775,894		5,337,617

Impairment allowances		—		1,104		11,939		864,030		84,100		257,531		1,134,604
Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		—		—		—		—

The value of the guarantees received to ensure collection associated with refinanced and restructured transactions, broken down into collateral and other guarantees, as at 31 December 2021 and 2020, is as follows:


Thousand euro

Guarantees received	2021		2020

Value of collateral		3,430,237		2,742,754
Of which: securing Stage 3 loans		1,382,700		1,223,896

Value of other guarantees		1,281,854		702,241
Of which: securing Stage 3 loans		316,047		282,816
Total value of guarantees received		4,712,091		3,444,995

Detailed movements of the balance of refinancing and restructuring transactions during 2021 and 2020 are as follows:


Thousand euro

	2021		2020

Opening balance		5,337,617		4,554,370

(+) Forbearance (refinancing and restructuring) in the period		3,190,252		2,397,895
Memorandum item: impact recognised on the income statement for the period		227,263		223,082

(-) Debt amortisations		(854,208)		(938,644)

(-) Foreclosures		(13,460)		(41,267)

(-) Derecognised from the balance sheet (reclassified as write-offs)		(137,743)		(156,458)

(+)/(-) Other changes (*)		(688,020)		(478,279)
Year-end balance		6,834,438		5,337,617

(*) Includes transactions no longer classified as refinancing, refinanced or restructured due to meeting the requirements for reclassification from stage 2 to stage 1 risks (see note 1.3.4).

A-695

The table below shows the value of transactions which, after refinancing or restructuring, have been classified as stage 3 exposures during 2021 and 2020:


Thousand euro

	2021		2020

General governments		—		—

Other legal entities and individual entrepreneurs		297,088		185,514
Of which: Lending for construction and real estate development		15,882		16,906

Other natural persons		209,610		208,074
Total		506,698		393,588

The average probability of default on current refinanced and restructured transactions broken down by activity as at 31 December 2021 and 2020 is as follows:


%

	2021		2020

*General governments ()**		—		—

Other legal entities and individual entrepreneurs		13		8
Of which: Lending for construction and real estate development		12		9

Other natural persons		10		10

(*) Authorisation has not been granted for the use of internal models in the calculation of capital requirements.

Average probability of default calculated as at 30 September 2021.

Concentration risk

Geographical exposure

Global

The breakdown of risk concentration, by activity and at a global level, as at 31 December 2021 and 2020 is as follows:


Thousand euro
					2021

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and Credit institutions		56,135,227		42,901,463		4,324,590		1,937,097		6,972,077

General governments		30,944,737		23,058,110		2,905,921		1,521,875		3,458,831

Central governments		22,243,892		15,386,550		2,905,917		492,765		3,458,660

Other		8,700,845		7,671,560		4		1,029,110		171

Other financial corporations and individual entrepreneurs		3,029,456		1,281,242		773,852		478,222		496,140

Non-financial corporations and individual entrepreneurs		62,991,664		48,323,248		3,330,753		8,599,608		2,738,055

Construction and real estate development		2,721,772		2,296,122		3,961		300,391		121,298

Civil engineering construction		916,490		872,392		19,718		5,013		19,367

Other purposes		59,353,402		45,154,734		3,307,074		8,294,204		2,597,390

Large enterprises		26,326,637		15,295,916		2,159,755		7,218,989		1,651,977

SMEs and individual entrepreneurs		33,026,765		29,858,818		1,147,319		1,075,215		945,413

Rest of households		86,396,456		39,304,626		979,842		515,497		45,596,491

Home loans		77,782,121		33,274,507		952,291		218,760		43,336,563

For consumption		5,387,338		3,297,195		6,812		5,521		2,077,810

Other purposes		3,226,997		2,732,924		20,739		291,216		182,118
TOTAL		239,497,540		154,868,689		12,314,958		13,052,299		59,261,594

A-696


Thousand euro
					2020

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and Credit institutions		44,185,857		29,420,936		4,917,055		1,516,600		8,331,266

General governments		32,730,612		25,586,932		3,846,229		1,242,360		2,055,091

Central governments		24,976,083		18,620,808		3,835,065		495,085		2,025,125

Other		7,754,529		6,966,124		11,164		747,275		29,966

Other financial corporations and individual entrepreneurs		4,091,799		1,838,198		1,207,143		562,420		484,038

Non-financial corporations and individual entrepreneurs		62,377,945		47,376,248		4,218,718		8,200,957		2,582,022

Construction and real estate development		3,298,822		2,834,328		6,997		264,304		193,193

Civil engineering construction		948,975		888,596		21,662		10,042		28,675

Other purposes		58,130,148		43,653,324		4,190,059		7,926,611		2,360,154

Large enterprises		26,736,168		14,873,770		3,546,002		6,906,457		1,409,939

SMEs and individual entrepreneurs		31,393,980		28,779,554		644,057		1,020,154		950,215

Rest of households		78,372,221		38,312,557		927,035		501,945		38,630,684

Home loans		69,704,167		32,161,472		819,070		208,093		36,515,532

For consumption		5,199,966		3,282,539		8,061		4,939		1,904,427

Other purposes		3,468,088		2,868,546		99,904		288,913		210,725
TOTAL		221,758,434		142,534,871		15,116,180		12,024,282		52,083,101

By autonomous communities

The breakdown of risk concentration, by activity and at the level of Spanish autonomous communities, as at 31 December 2021 and 2020, respectively, is as follows:


Thousand euro
											2021

	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragón		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla- La Mancha		Castilla y León		Catalonia

Central banks and Credit institutions		42,901,463		5,610		8		2		—		2		290,083		1		—		270,562

General governments		23,058,110		350,471		119,243		360,503		383,630		299,697		6,647		105,290		709,478		904,436

Central governments		15,386,550		—		—		—		—		—		—		—		—		—

Other		7,671,560		350,471		119,243		360,503		383,630		299,697		6,647		105,290		709,478		904,436

Other financial corporations and individual entrepreneurs		1,281,242		5,325		2,810		3,642		1,323		837		287		833		14,705		536,990

Non-financial corporations and individual entrepreneurs		48,323,248		2,477,885		1,027,327		1,490,319		2,294,312		1,261,855		201,262		625,905		1,106,996		14,226,345

Construction and real estate development		2,296,122		84,280		40,585		46,909		90,043		26,854		10,497		15,220		26,690		556,249

Civil engineering construction		872,392		33,172		9,461		20,230		7,502		3,639		5,580		6,740		17,163		143,110

Other purposes		45,154,734		2,360,433		977,281		1,423,180		2,196,767		1,231,362		185,185		603,945		1,063,143		13,526,986

Large enterprises		15,295,916		520,792		312,677		446,085		932,259		351,140		55,657		143,991		199,151		4,413,074

SMEs and individual entrepreneurs		29,858,818		1,839,641		664,604		977,095		1,264,508		880,222		129,528		459,954		863,992		9,113,912

Rest of households		39,304,626		2,764,232		547,729		1,163,902		1,435,534		596,049		114,198		496,557		773,274		15,321,766

Home loans		33,274,507		2,285,812		470,373		929,102		1,276,716		424,622		96,902		401,705		617,482		13,241,197

For consumption		3,297,195		344,663		42,835		89,927		85,105		147,048		9,043		64,404		86,338		1,020,198

Other purposes		2,732,924		133,757		34,521		144,873		73,713		24,379		8,253		30,448		69,454		1,060,371

TOTAL		154,868,689		5,603,523		1,697,117		3,018,368		4,114,799		2,158,440		612,477		1,228,586		2,604,453		31,260,099

A-697


Thousand euro
									2021

	AUTONOMOUS COMMUNITIES

	Extremadura		Galicia		Madrid		Murcia		Navarre		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and Credit institutions		—		5,136		42,024,234		2		180		116,748		188,895		—		—

General governments		87,251		419,626		1,876,784		55,766		291,266		701,521		859,215		110,090		30,646

Central governments		—		—		—		—		—		—		—		—		—

Other		87,251		419,626		1,876,784		55,766		291,266		701,521		859,215		110,090		30,646

Other financial corporations and individual entrepreneurs		99		4,380		655,805		3,107		477		27,658		22,862		84		18

Non-financial corporations and individual entrepreneurs		176,135		2,348,363		12,190,026		1,133,579		601,156		4,889,933		2,063,837		187,401		20,612

Construction and real estate development		2,071		64,311		1,023,028		35,361		20,977		146,930		96,077		9,698		342

Civil engineering construction		2,039		47,318		429,982		12,463		2,607		63,133		65,976		1,815		462

Other purposes		172,025		2,236,734		10,737,016		1,085,755		577,572		4,679,870		1,901,784		175,888		19,808

Large enterprises		19,967		726,793		4,587,849		235,642		205,908		1,392,587		705,700		46,124		520

SMEs and individual entrepreneurs		152,058		1,509,941		6,149,167		850,113		371,664		3,287,283		1,196,084		129,764		19,288

Rest of households		139,718		900,696		5,226,038		2,038,198		171,896		6,183,773		1,274,889		80,285		75,892

Home loans		103,585		669,564		4,339,875		1,735,994		138,787		5,283,696		1,128,245		59,509		71,341

For consumption		28,185		137,929		533,090		157,659		12,085		451,813		69,924		14,684		2,265

Other purposes		7,948		93,203		353,073		144,545		21,024		448,264		76,720		6,092		2,286

TOTAL		403,203		3,678,201		61,972,887		3,230,652		1,064,975		11,919,633		4,409,698		377,860		127,168


Thousand euro
											2020

	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragón		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla- La Mancha		Castilla y León		Catalonia

Central banks and Credit institutions		29,420,936		4,598		993		1		6,074		2		617,150		2		3		212,048

General governments		25,586,932		380,489		21,587		330,312		248,961		150,713		33,214		9,717		553,752		1,051,831

Central governments		18,620,808		—		—		—		—		—		—		—		—		—

Other		6,966,124		380,489		21,587		330,312		248,961		150,713		33,214		9,717		553,752		1,051,831

Other financial corporations and individual entrepreneurs		1,838,198		5,004		2,465		2,019		2,462		820		343		619		11,946		453,208

Non-financial corporations and individual entrepreneurs		47,376,248		2,382,035		936,636		1,431,427		2,357,582		1,349,760		225,878		600,582		1,077,727		13,732,232

Construction and real estate development		2,834,328		124,291		40,290		60,513		91,105		29,161		12,387		18,660		28,684		654,353

Civil engineering construction		888,596		29,629		9,548		16,756		8,876		2,476		4,427		4,927		13,931		186,360

Other purposes		43,653,324		2,228,115		886,798		1,354,158		2,257,601		1,318,123		209,064		576,995 1,035,112				12,891,519

Large enterprises		14,873,770		514,509		267,324		211,558		1,069,219		325,161		85,436		153,827		226,559		4,042,935

SMEs and individual entrepreneurs		28,779,554		1,713,606		619,474		1,142,600		1,188,382		992,962		123,628		423,168		808,553		8,848,584

Rest of households		38,312,557		2,682,667		511,530		1,172,830		1,392,281		591,397		106,171		500,511		764,662		14,719,983

For house purchase		32,161,472		2,212,757		430,222		932,081		1,226,686		417,738		89,760		403,838		598,153		12,569,748

For consumption		3,282,539		322,301		43,904		91,289		89,420		149,524		7,611		62,097		85,029		1,032,314

Other purposes		2,868,546		147,609		37,404		149,460		76,175		24,135		8,800		34,576		81,480		1,117,921

TOTAL		142,534,871		5,454,793		1,473,211		2,936,589		4,007,360		2,092,692		982,756		1,111,431		2,408,090		30,169,302


Thousand euro
									2020

	AUTONOMOUS COMMUNITIES

	Extremadura		Galicia		Madrid		Murcia		Navarre		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and Credit institutions		—		2,822		27,987,038		3		180		183,709		406,313		—		—

General governments		94,267		323,727		1,936,240		42,329		291,466		692,996		691,704		78,151		34,668

Central governments		—		—		—		—		—		—		—		—		—

Other		94,267		323,727		1,936,240		42,329		291,466		692,996		691,704		78,151		34,668

Other financial corporations and individual entrepreneurs		121		4,628		1,300,197		2,928		633		30,025		20,681		99		—

Non-financial corporations and individual entrepreneurs		127,200		2,222,322		12,237,925		1,086,692		550,895		4,575,097		2,261,729		202,443		18,086

Construction and real estate development		1,838		60,853		1,398,386		38,359		21,677		159,377		81,831		12,207		356

Civil engineering construction		2,325		60,171		427,546		10,155		2,468		48,827		58,863		1,254		57

Other purposes		123,037		2,101,298		10,411,993		1,038,178		526,750		4,366,893		2,121,035		188,982		17,673

Large enterprises		17,071		635,883		4,655,580		209,291		195,585		1,242,267		964,218		56,638		709

SMEs and individual entrepreneurs		105,966		1,465,415		5,756,413		828,887		331,165		3,124,626		1,156,817		132,344		16,964

Rest of households		134,837		832,278		5,057,519		2,026,821		171,367		6,295,414		1,196,673		83,366		72,250

For house purchase		98,729		612,786		4,144,488		1,735,126		129,863		5,391,483		1,040,818		59,129		68,067

For consumption		28,663		129,891		545,091		143,836		17,644		442,613		74,317		14,868		2,127

Other purposes		7,445		89,601		367,940		147,859		23,860		461,318		81,538		9,369		2,056

TOTAL		356,425		3,385,777		48,518,919		3,158,773		1,014,541		11,777,241		4,577,100		364,059		125,004

A-698

Sovereign risk exposure

Sovereign risk exposures, broken down by type of financial instrument and applying the criteria required by the EBA, as at 31 December 2021 and 2020, are as follows:


Thousand euro
										2021

	Sovereign debt securities											*Of which:*	Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss	Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		*Financial* *assets FVOCI* or non- derivative and non-trading financial assets measured at fair value to equity	With positive fair value		With negative fair value		Total		Other off- balance sheet exposures (***)	%

Spain		74,979		(46,751)	—		3,807,149		9,747,536		10,486,762	—		15,323		(16)		24,084,982	—		75.3%

Italy		202,456		—	—		49,021		2,135,300		—	—		—		—		2,386,777	—		7.5%

United States		—		—	2,727		887,114		197,875		233	—		—		—		1,087,949	—		3.4%

United Kingdom		—		—	—		1,284,232		1,921,159		34,011	—		—		—		3,239,402	—		10.1%

Portugal		5		—	—		—		355,552		1,949	—		—		—		357,506	—		1.1%

Mexico		—		—	—		311,831		100,194		12,499	—		—		—		424,524	—		1.3%

Rest of the world		261,156		—	—		106,623		—		22,704	—		—		—		390,483	—		1.2%

Total		538,596		(46,751)	2,727		6,445,970		14,457,616		10,558,158	—		15,323		(16)		31,971,623	—		100%

(*) Sovereign exposure positions shown in accordance with EBA criteria.

(**) Includes those available under credit transactions and other contingent risks (1,084 million euros as at 31 December 2021).

(***) Relates to commitments for cash purchases and sales of financial assets.


Thousand euro

										2020
	Sovereign debt securities											*Of which:* *Financial assets* FVOCI or non- derivative and non-trading financial assets measured at fair value to equity	Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss	Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)			With positive fair value		With negative fair value	Total		Other off- balance sheet exposures (***)	%


Spain		61,869		(98,627)	—		3,418,696		11,974,783		11,591,514	—		23,390	(13)		26,971,612	—		79.1%

Italy		5,013		—	—		—		2,792,307		—	—		—	—		2,797,320	—		8.2%

United States		—		—	2,516		509,136		300,555		159	—		—	—		812,366	—		2.4%

United Kingdom		—		—	—		1,336,434		617,616		11	—		—	—		1,954,061	—		5.7%

Portugal		5		—	—		—		925,500		—	—		—	—		925,505	—		2.7%

Mexico		—		—	—		328,974		101,017		—	—		—	—		429,991	—		1.3%

Rest of the world		3,940		—	—		109,619		38,565		61,210	—		—	—		213,334	—		0.6%

Total		70,827		(98,627)	2,516		5,702,859		16,750,343		11,652,894	—		23,390	(13)		34,104,189	—		100%

(*) Sovereign exposure positions shown in accordance with EBA criteria.

(**) Includes those available under credit transactions and other contingent risks (1,492 million euros as at 31 December 2020).

(***) Relates to commitments for cash purchases and sales of financial assets.

A-699

Exposure to construction and real estate development sector

Details of lending for construction and real estate development and the relevant allowances are as follows: The lending items shown have been classified in terms of their intended purpose, rather than by the debtor’s NACE code. This implies, for example, that if a debtor is: (a) a real estate company, but uses the financing for a purpose other than construction or real estate development, it is not included in this table; or (b) a company whose primary activity is not construction or real estate, but where the loan is used for the financing of properties intended for real estate development, it is included in the table:

Million euro

2021

Gross carrying amount

Excess value of the
collateral

Adjustments

due to
impairment (*)

Lending for construction and real estate development (including land) (business in Spain)

2,554

607

135

Of which: risks classified as Stage 3

218

111

Million euro

2020

Gross carrying amount

Excess value of the
collateral

Adjustments

due to
impairment (*)

Lending for construction and real estate development (including land) (business in Spain)

3,099

766

161

Of which: risks classified as Stage 3

228

107

117

(*) Allowances for the exposure for which the bank retains the credit risk. Does not include allowances for exposures with transferred risk.


Million euro

Gross carrying amount

*Memorandum item:*	2021		2020
Write-offs (*)		15		44

Million euro

*Memorandum item:*	2021		2020

Loans to customers, excluding General Governments (business in Spain) (carrying amount)		90,569		88,196

Total assets (total business) (carrying amount)		251,947		235,763

Allowances and provisions for exposures classed as Stage 2 or Stage 1 (total operations)		942		913

(*) Refers to lending for construction and real estate development reclassified as write-offs during the year.

A-700

The breakdown of lending for construction and real estate development for transactions registered by credit institutions (business in Spain) is as follows:


Million euro

	Gross carrying amount	Gross carrying amount
	2021	2020

Not secured with real estate	745	719

Secured with real estate	1,809	2,380

Buildings and other finished constructions	835	883

Housing	596	630

Other	239	253

Buildings and other construction in progress	784	1,234

Housing	751	1,165

Other	33	69

Land	190	262

Consolidated urban land	154	225

Other land	36	37
Total	2,554	3,099

The figures presented do not show the total value of guarantees received, but rather the net carrying amount of the associated exposure.

Guarantees received associated with lending for construction and real estate development are shown hereafter, for both periods:


Million euro
Guarantees received	2021		2020

Value of collateral		1,727		2,425

Of which: securing Stage 3 loans		88		94

Value of other guarantees		321		328

Of which: securing Stage 3 loans		13		10
Total value of guarantees received		2,048		2,753

The breakdown of lending to households for house purchase for transactions recorded by credit institutions (business in Spain) is as follows:


Million euro

			2021

	Gross carrying amount		*Of which: Stage 3 exposures*

Lending for house purchase		35,253		924

Not secured with real estate		553		44

Secured with real estate		34,700		880


Million euro

			2020

	Gross carrying amount		*Of which: Stage 3 exposures*

Lending for house purchase		33,953		819

Not secured with real estate		475		41

Secured with real estate		33,478		778

A-701

The tables below show mortgage-secured lending to households for house purchase broken down by the loan-to-value ratio of transactions recorded by credit institutions (business in Spain):


Million euro

	2021

	Gross amount		*Of which: Stage 3 exposures*

LTV ranges		34,700		*880*

LTV <= 40%		6,500		120

40% < LTV <= 60%		9,112		180

60% < LTV <= 80%		11,783		210

80% < LTV <= 100%		4,443		160

LTV > 100%		2,862		210


Million euro

	2020

	Gross amount		*Of which: Stage 3 exposures*

LTV ranges		33,478		*778*

LTV <= 40%		6,103		87

40% < LTV <= 60%		8,709		131

60% < LTV <= 80%		10,733		160

80% < LTV <= 100%		4,475		165

LTV > 100%		3,459		236

A-702


Million euro
	2021
	Gross carrying amount		Allowances		*Gross* **amount ()***		*Allowances* **()***

Real estate assets acquired through lending for construction and real estate development		639		204		*686*		*264*

Finished buildings		594		185		631		236

Housing		378		114		400		145

Rest		216		71		230		91

Buildings under construction		5		2		7		4

Housing		5		2		6		4

Rest		—		—		—		—

Land		40		17		48		24

Building land		23		9		30		13

Other land		17		8		19		11

Real estate assets acquired through mortgage lending to households for house purchase		566		154		*646*		*242*

Rest of real estate assets foreclosed or received in lieu of debt		24		5		30		13

Capital instruments foreclosed or received in lieu of debt		3		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

TOTAL		1,232		363		1,362		520

A-703


Million euro
	2020
	Gross carrying amount		Allowances		*Gross* **amount ()***		Allowances (*)

Real estate assets acquired through lending for construction and real estate development		747		240		*713*		*259*

Finished buildings		690		214		654		230

Housing		439		125		413		137

Rest		251		89		241		93

Buildings under construction		12		5		8		4

Housing		11		5		7		4

Rest		—		—		—		—

Land		44		21		51		25

Building land		25		11		31		14

Other land		19		10		20		11

Real estate assets acquired through mortgage lending to households for house purchase		629		180		*632*		*231*

Rest of real estate assets foreclosed or received in lieu of debt		28		7		29		12

Capital instruments foreclosed or received in lieu of debt		14		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

TOTAL		1,418		427		1,373		502

The table below sets out the reconciliation between assets foreclosed or received in lieu of debt and real estate assets considered problematic by the Group as at 31 December 2021 and 2020:

Million euro

2021

Gross amount

Allowances

Net carrying
value

Total real estate portfolio in the national territory (in books)

1,229

363

867

Total operations outside the national territory and others

Provision allocated in original loan

194

—

Credit risk transferred in portfolio sales

(69)

(40)

(29)

Total non-performing real estate

1,362

520

842


Million euro
			2020

	Gross amount		Allowances		Net carrying value

Total real estate portfolio in the national territory (in books)		1,404		427		977

Performing real estate (*)		(16)		(2)		(14)

Total operations outside the national territory and others		22		7		15

Provision allocated in original loan		242		242		—

Credit risk transferred in portfolio sales		(279)		(172)		(107)
Total non-performing real estate		1,373		502		871

(*) Performing real estate refers to assets classified as investment property with significant unrealised capital gains and those under lease for which there is a final agreement for a sale to take place following refurbishment, on which a profit is expected to be realised.

A-704

Loans and advances subject to statutory and sector moratoria and financing granted subject to government guarantee schemes and operations modified in accordance with the Code of Good Practice

Information concerning loans and credit granted by the Group that are subject to statutory or sector moratoria, as well as financing granted that has benefited from the government guarantee schemes established to enable the Group’s customers to cope with the impact of COVID-19, as at 31 December 2021 and 2020, is set out below:

Thousand euro

31/12/2021

Gross
carrying
amount

Performing

Of which:
exposures
with
forbearance
measures

Of which:
Instruments with

significant increase
in credit risk since

initial recognition
but not credit-
impaired (Stage 2)

Non
performing

Of which:
exposures
with
forbearance
measures

Of which:
Unlikely to
pay that are
not past-due

or past-due
<= 90 days

Loans and advances subject to moratorium

197,135

195,611

52,126

53,927

1,524 (*

)

1,394

1,408

Of which: Households

8,100

6,666

650

2,180

1,434

1,366

1,380

Of which: Collateralised by residential immovable property

2,804

1,549

528

977

1,255

Of which: Non-financial corporations

189,034

188,945

51,476

51,747

Of which: Small and Medium-sized Enterprises

158,210

158,121

51,476

51,747

Of which: Collateralised by commercial immovable property

51,936

51,875

40,532

40,649

—

(*) Of which 1.5 million euro correspond to stage 3 transactions.

Thousand euro

31/12/2021

Accumulated
impairment,
accumulated
negative
changes in fair
value due to
credit risk

Performing

Of which:
exposures
with
forbearance
measures

Of which:
Instruments with
significant increase
in credit risk since
initial recognition
but not credit-
impaired (Stage 2)

Non
performing

Of which:
exposures
with
forbearance
measures

Of which:
Unlikely to
pay that are
not past-due

or past-due
<= 90 days

Loans and advances subject to moratorium

(3,258

)

(3,072

)

(3,054

)

(2,172

)

(2,201

)

(186

)

(67

)

Of which: Households

(210

)

(48

)

(29

)

(34

)

(163

)

(44

)

Of which: Collateralised by residential immovable property

(129

)

(14

)

—

)

(14

)

(115

)

—

Of which: Non-financial corporations

(3,048

)

(3,025

)

(3,025

)

(2,166

)

(2,168

)

(23

)

(23

)

Of which: Small and Medium-sized Enterprises

(2,964

)

(2,941

)

(2,941

)

(2,166

)

(2,168

)

(23

)

(23

)

Of which: Collateralised by commercial immovable property

(1,634

)

(1,622

)

(1,622

)

(1,603

)

(1,604

)

(11

)

(11

)

Thousand euro

31/12/2020

Gross
carrying
amount

Performing

Of which:
exposures
with
forbearance
measures

Of which:
Instruments with

significant increase
in credit risk since

initial recognition
but not credit-
impaired (Stage 2)

Non
performing

Of which:
exposures
with
forbearance
measures

Of which:
Unlikely to pay

that are not

past-due or
past-due
<= 90 days

Loans and advances subject to moratorium

3,197,211

2,865,616

189,727

1,275,154

331.595 (*

)

257,008

307,688

Of which: Households

2,863,089

2,536,220

181,770

1,226,601

326,869

256,373

306,906

Of which: Collateralised by residential immovable property

2,604,776

2,317,591

161,727

1,139,159

287,185

220,552

269,379

Of which: Non-financial corporations

334,107

329,381

7,957

48,553

4,726

636

782

Of which: Small and Medium-sized Enterprises

227,431

222,706

7,957

26,687

4,726

636

782

Of which: Collateralised by commercial immovable property

183,349

182,628

6,918

46,762

721

574

721

(*) Of which 289 million euro correspond to stage 3 transactions.

A-705

Thousand euro

31/12/2020

Accumulated
impairment,
accumulated
negative
changes in fair
value due to
credit risk

Performing

Of which:
exposures
with
forbearance
measures

Of which:
Instruments with
significant

increase in credit
risk since initial
recognition but not
credit-impaired
(Stage 2)

Non
performing

Of which:
exposures
with
forbearance
measures

Of which:
Unlikely to
pay that

are not

past-due or
past-due
<= 90 days

Loans and advances subject to moratorium

(76,531

)

(42,223

)

(14,198

)

(36,258

)

(34,308

)

(29,896

)

(31,057

)

Of which: Households

(68,361

)

(36,007

)

(11,158

)

(31,758

)

(32,354

)

(29,847

)

(30,949

)

Of which: Collateralised by residential immovable property

(53,894

)

(27,182

)

(9,254

)

(24,068

)

(26,712

)

(24,942

)

(25,910

)

Of which: Non-financial corporations

(8,169

)

(6,215

)

(3,040

)

(4,500

)

(1,954

)

(49

)

(107

)

Of which: Small and Medium-sized Enterprises

(7,636

)

(5,681

)

(3,040

)

(4,275

)

(1,954

)

(49

)

(107

)

Of which: Collateralised by commercial immovable property

(4,955

)

(4,864

)

(2,950

)

(4,338

)

(91

)

(33

)

(91

)

Thousand euro

31/12/2021

Gross
carrying
amount

Of which:
legislative

moratoria

Of which:
expired

Residual maturity of moratoria

<= 3

months

> 3
months
<= 6
months

> 6

months
<= 9

months

> 9

months
<= 12

months

> 1 year

Loans and advances subject to moratorium (granted)

8,544,562

5,641,866

8,347,428

171,892

25,243

—

Of which: Households

8,021,621

5,258,623

8,013,520

8,100

—

Of which: Collateralised by residential immovable property

7,457,730

5,060,563

7,454,926

2,804

—

Of which: Non-financial corporations

522,591

382,892

333,557

163,791

25,243

—

Of which: Small and Medium-sized Enterprises

451,817

343,018

293,606

132,967

25,243

—

Of which: Collateralised by commercial immovable property

329,570

317,178

277,634

26,693

25,243

—

Thousand euro

31/12/2020

Gross
carrying
amount

Of which:

legislative

moratoria

Of which:
expired

Residual maturity of moratoria

<= 3

months

> 3
months <=
6 months

> 6

months <=

9 months

> 9

months <=
12 months

> 1 year

Loans and advances subject to moratorium (granted)

9,195,082

6,296,696

5,997,872

1,569,324

1,286,121

332,826

8,939

—

Of which: Households

8,834,333

6,075,190

5,971,244

1,520,515

1,134,637

202,710

5,228

—

Of which: Collateralised by residential immovable property

8,118,259

5,792,984

5,513,482

1,370,350

1,045,157

184,732

4,539

—

Of which: Non-financial corporations

360,734

221,491

26,627

48,794

151,484

130,116

3,714

—

Of which: Small and Medium-sized Enterprises

248,083

177,384

20,652

48,794

86,588

88,337

3,713

—

Of which: Collateralised by commercial immovable property

194,538

194,211

11,190

43,635

24,080

115,516

117

—



Thousand euro

	31/12/2021

	Gross carrying amount	Of which: forborne		Maximum amount of the guarantee that can be considered
	Gross carrying amount	Of which: forborne		Public guarantees received

Newly originated loans and advances subject to public guarantee schemes	*9,362,892 ()**		909,670	7,189,136

Of which: Households	1,014,618		—	—

Of which: Collateralised by residential immovable property	—		—	—

Of which: Non-financial corporations	8,345,090		859,706	6,371,037

Of which: Small and Medium-sized Enterprises	6,345,176		—	—

Of which: Collateralised by commercial immovable property	34,650		—	—

(*) Of which 341 million euro correspond to stage 3 transactions.

A-706


Thousand euro

	31/12/2020

	Gross carrying amount	Of which: forborne		Maximum amount of the guarantee that can be considered
	Gross carrying amount	Of which: forborne		Public guarantees received

Newly originated loans and advances subject to public guarantee schemes	*8,679,922 ()**		216,875	6,163,719

Of which: Households	942,257		—	—

Of which: Collateralised by residential immovable property	—		—	—

Of which: Non-financial corporations	7,734,462		193,912	5,953,889

Of which: Small and Medium-sized Enterprises	5,687,668		—	—

Of which: Collateralised by commercial immovable property	7,921		—	—

(*) Of which 93 million euro correspond to stage 3 transactions.

As at 31 December 2021, in accordance with the Code of Good Practice, Banco Sabadell has modified a total of 718 transactions that had an outstanding principal amount of 127 million euros on the date of modification. The total amount corresponds to loan term extensions, with no conversion of profit participation loans and/or write-downs carried out.

A-707

Schedule VII – Annual banking report

INFORMATION REQUIRED UNDER ARTICLE 89 OF DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 26 JUNE 2013

This information has been prepared pursuant to Article 89 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and the transposition thereof into Spanish national legislation in accordance with Article 87 and Transitional Provision 12 of Law 10/2014 of 26 June on the organisation, supervision and solvency of credit institutions, published in the Official State Gazette of 27 June 2014.

In accordance with the above regulations, the following information is presented on a consolidated basis and corresponds to the end of the 2021 financial year:


Thousand euro

	Revenue		No. full time equivalents	Gross income before tax	Corporation tax

Spain		3,613,484	13,368	364,677	(39,147)
United Kingdom		1,076,543	5,404	166,089	(31,084)
Mexico		109,865	463	(14,118)	7,981
United States		153,743	243	66,432	(13,084)
Other		72,493	99	36,909	(5,948)


Total		5,026,128	19,577	619,989	(81,282)

As at 31 December 2021, the return on Group assets, calculated by dividing the consolidated gains/(losses) for the year by total assets on the consolidated balance sheet, amounts to 0.21%.

The name, geographical location and nature of the business activity of the companies operating in each jurisdiction are set out in Schedule I to these Group consolidated annual financial statements.

As can be seen in Schedule I, the main activity carried out by the Group in the different jurisdictions in which it operates is banking, and fundamentally commercial banking through a wide range of products and services for large and medium-sized enterprises, SMEs, retailers and self-employed workers, professional groups, other individuals and bancassurance.

For the purposes of this information, business turnover is regarded as the gross margin recognised on the consolidated income statement at year-end 2021. Data on full-time equivalent staff have been obtained from the workforce of each company/country as at the end of 2021.

The amount of public subsidies and aid received is not material.

A-708

Condensed consolidated interim financial

statements of Banco Sabadell

as of and for the six-month

period ended June 30, 2024

A-709

Condensed consolidated balance sheets of Banco Sabadell Group

As at 30 June 2024 and 31 December 2023


Thousand euro
Assets	Note	30/06/2024		*31/12/2023 ()**
Cash, cash balances at central banks and other demand deposits ()**	7		29,501,930		29,985,853
Financial assets held for trading			2,949,768		2,706,489
Derivatives			2,294,766		2,563,994
Equity instruments			—		—
Debt securities	8		655,002		142,495
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			180,828		1,915
Non-trading financial assets mandatorily at fair value through profit or loss			159,758		153,178
Equity instruments	9		62,791		52,336
Debt securities	8		71,397		65,744
Loans and advances	10		25,570		35,098
Central banks			—		—
Credit institutions			—		—
Customers			25,570		35,098
Memorandum item: loaned or pledged as security with sale or pledging rights			—		—
Financial assets designated at fair value through profit or loss			—		—
Debt securities			—		—
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			—		—
Financial assets at fair value through other comprehensive income			6,527,876		6,269,297
Equity instruments	9		200,784		183,938
Debt securities	8		6,327,092		6,085,359
Loans and advances			—		—
Central banks			—		—
Credit institutions			—		—
Customers			—		—
Memorandum item: loaned or pledged as security with sale or pledging rights			1,950,900		557,303
Financial assets at amortised cost			190,489,286		180,913,793
Debt securities	8		22,638,784		21,500,927
Loans and advances	10		167,850,502		159,412,866
Central banks			—		156,516
Credit institutions			10,424,983		6,995,951
Customers			157,425,519		152,260,399
Memorandum item: loaned or pledged as security with sale or pledging rights			16,508,749		5,996,602
Derivatives – Hedge accounting			2,600,876		2,424,598
Fair value changes of the hedged items in portfolio hedge of interest rate risk			(885,088)		(567,608)

Investments in joint ventures and associates			461,874		462,756
Joint ventures			—		—
Associates			461,874		462,756
Assets under insurance or reinsurance contracts			—		—
Tangible assets	11		2,215,795		2,296,704
Property, plant and equipment			2,001,584		2,067,106
For own use			1,993,094		2,058,058
Leased out under operating leases			8,490		9,048
Investment properties			214,211		229,598
Of which: leased out under operating leases			214,211		229,598
Memorandum item: acquired through leases			851,852		872,305
Intangible assets	12		2,493,738		2,483,074
Goodwill			1,018,311		1,018,311
Other intangible assets			1,475,427		1,464,763
Tax assets			6,492,052		6,837,820
Current tax assets			542,098		452,289
Deferred tax assets	32		5,949,954		6,385,531
Other assets	13		462,251		436,123
Insurance contracts linked to pensions			78,747		80,693
Inventories			54,235		62,344
Rest of other assets			329,269		293,086
Non-current assets and disposal groups classified as held for sale	14		857,685		770,878
TOTAL ASSETS			244,327,801		235,172,955

(*) Shown for comparative purposes only (see Note 1.5).

(**) See details in the condensed consolidated cash flow statement of the Group.

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated balance sheet as at 30 June 2024.

A-710

Condensed consolidated balance sheets of Banco Sabadell Group

As at 30 June 2024 and 31 December 2023


Thousand euro
Liabilities	Note		30/06/2024		*31/12/2023 ()**
Financial liabilities held for trading				2,862,400		2,867,459
Derivatives				2,461,699		2,530,086
Short positions				400,701		337,373
Deposits				—		—
Central banks				—		—
Credit institutions				—		—
Customers				—		—
Debt securities issued				—		—
Other financial liabilities				—		—
Financial liabilities designated at fair value through profit or loss				—		—
Deposits				—		—
Central banks				—		—
Credit institutions				—		—
Customers				—		—
Debt securities issued				—		—
Other financial liabilities				—		—
Memorandum item: subordinated liabilities				—		—
Financial liabilities at amortised cost				225,027,229		216,071,766
Deposits				192,638,382		183,947,196
Central banks		15		3,283,137		9,776,360
Credit institutions		15		13,807,211		13,840,183
Customers		16		175,548,034		160,330,653
Debt securities issued		17		25,395,988		25,791,284
Other financial liabilities				6,992,859		6,333,286
Memorandum item: subordinated liabilities				4,097,971		3,607,858
Derivatives – Hedge accounting				981,110		1,171,957
Fair value changes of the hedged items in portfolio hedge of interest rate risk				(544,748)		(422,347)
Liabilities under insurance or reinsurance contracts				—		—
Provisions		18		478,746		536,092
Pensions and other post employment defined benefit obligations				54,668		58,308
Other long term employee benefits				37		69
Pending legal issues and tax litigation				69,287		60,550
Commitments and guarantees given				138,346		165,376
Other provisions				216,408		251,789
Tax liabilities				388,537		332,951
Current tax liabilities				277,460		217,981
Deferred tax liabilities		32		111,077		114,970
Share capital repayable on demand				—		—
Other liabilities		13		677,658		722,524
Liabilities included in disposal groups classified as held for sale		14		59,010		13,347
TOTAL LIABILITIES				229,929,942		221,293,749

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated balance sheet as at 30 June 2024.

A-711

Condensed consolidated balance sheets of Banco Sabadell Group

As at 30 June 2024 and 31 December 2023


Thousand euro
Equity	Note		30/06/2024		*31/12/2023 ()**
Shareholders’ equity				14,819,570		14,343,946
Capital		19		680,028		680,028
Paid up capital				680,028		680,028
Unpaid capital called up				—		—
Memorandum item: capital not called up				—		—
Share premium				7,695,227		7,695,227
Equity instruments issued other than capital				—		—
Equity component of compound financial instruments				—		—
Other equity instruments issued				—		—
Other equity				21,324		21,268
Retained earnings				7,356,076		6,401,782
Revaluation reserves				—		—
Other reserves				(1,604,987)		(1,584,816)
Reserves or accumulated losses of investments in joint ventures and associates				94,275		54,836
Other				(1,699,262)		(1,639,652)
(-) Treasury shares				(119,266)		(39,621)
Profit or loss attributable to owners of the parent				791,168		1,332,181
(-) Interim dividends				—		(162,103)
Accumulated other comprehensive income				(456,650)		(498,953)
Items that will not be reclassified to profit or loss				(19,596)		(30,596)
Actuarial gains or (-) losses on defined benefit pension plans				(3,377)		(3,313)
Non-current assets and disposal groups classified as held for sale				—		—
Share of other recognised income and expense of investments in joint ventures and associates				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income				(16,219)		(27,283)
Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]				—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]				—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk				—		—
Items that may be reclassified to profit or loss				(437,054)		(468,357)
Hedge of net investments in foreign operations [effective portion]				73,456		77,997
Foreign currency translation				(316,373)		(384,086)
Hedging derivatives. Cash flow hedges reserve [effective portion]				(59,227)		(49,215)
Fair value changes of debt instruments measured at fair value through other comprehensive income				(166,132)		(145,732)
Hedging instruments [not designated elements]				—		—
Non-current assets and disposal groups classified as held for sale				—		—
Share of other recognised income and expense of investments in joint ventures and associates				31,222		32,679
Minority interests [non-controlling interests]				34,939		34,213
Accumulated other comprehensive income				—		—
Other items				34,939		34,213
TOTAL EQUITY				14,397,859		13,879,206
TOTAL EQUITY AND TOTAL LIABILITIES				244,327,801		235,172,955

Memorandum item: off-balance sheet exposures

Loan commitments given		20		27,631,400		27,035,812
Financial guarantees given		20		1,903,075		2,064,396
Other commitments given		20		8,327,242		7,942,724

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated balance sheet as at 30 June 2024.

A-712

Condensed consolidated income statements of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	Note	30/06/2024		*30/06/2023 ()**
Interest income	21		4,844,582		3,950,670
Financial assets at fair value through other comprehensive income			103,204		57,760
Financial assets at amortised cost			4,309,362		3,531,941
Other interest income			432,016		360,969
(Interest expenses)	21		(2,351,226)		(1,680,675)
(Expenses on share capital repayable on demand)			—		—
Net interest income			2,493,356		2,269,995
Dividend income			1,648		7,167
Profit or loss of entities accounted for using the equity method			85,006		64,705
Fee and commission income	22		839,860		831,956
(Fee and commission expenses)	22		(165,537)		(134,842)
Net profit or net loss on financial operations	23		(136,652)		34,837
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net			6,932		1,229
Financial assets at amortised cost			565		(3,923)
Other financial assets and liabilities			6,367		5,152
Gains or (-) losses on financial assets and liabilities held for trading, net			(134,151)		26,627
Reclassification of financial assets from fair value through other comprehensive income			—		—
Reclassification of financial assets from amortised cost			—		—
Other gains or (-) losses			(134,151)		26,627
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net			6,902		12,891
Reclassification of financial assets from fair value through other comprehensive income			—		—
Reclassification of financial assets from amortised cost			—		—
Other gains or (-) losses			6,902		12,891
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net			—		—
Gains or (-) losses from hedge accounting, net			(16,335)		(5,910)
Exchange differences [gain or (-) loss], net	23		173,849		(3,409)
Other operating income	24		43,142		38,568
(Other operating expenses)	25		(273,390)		(299,836)
Income from assets under insurance or reinsurance contracts			—		—
(Expenses on liabilities under insurance or reinsurance contracts)			—		—
Gross income			3,061,282		2,809,141

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated income statement for the six-month period ended 30 June 2024.

A-713

Condensed consolidated income statements of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	Note	30/06/2024		*30/06/2023 ()**
(Administrative expenses)			(1,266,212)		(1,204,029)
(Staff expenses)	26		(743,889)		(716,983)
(Other administrative expenses)	26		(522,323)		(487,046)
(Depreciation and amortisation)			(249,140)		(273,855)
(Provisions or (-) reversal of provisions)	18		497		(2,572)
(Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains)	27		(360,677)		(436,938)
(Financial assets at fair value through other comprehensive income)			182		852
(Financial assets at amortised cost)			(360,859)		(437,790)
Profit/(loss) on operating activities			1,185,750		891,747
(Impairment or (-) reversal of impairment on investments in joint ventures and associates)			—		—
(Impairment or (-) reversal of impairment on non-financial assets)	28		(6,417)		(7,539)
(Tangible assets)			(3,137)		(1,138)
(Intangible assets)			—		—
(Other)			(3,280)		(6,401)
Gains or (-) losses on derecognition of non-financial assets, net	29		(526)		(11,078)
Negative goodwill recognised in profit or loss			—		—
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	30		(24,732)		(23,820)
Profit or (-) loss before tax from continuing operations			1,154,075		849,310
(Tax expense or (-) income related to profit or loss from continuing operations)			(362,183)		(284,912)
Profit or (-) loss after tax from continuing operations			791,892		564,398
Profit or (-) loss after tax from discontinued operations			—		—
PROFIT OR LOSS FOR THE PERIOD			791,892		564,398
Attributable to minority interests [non-controlling interests]			724		679
Attributable to owners of the parent			791,168		563,719

Earnings per share (euros)	3		0.14		0.09
Basic (euros)			0.14		0.09
Diluted (euros)			0.14		0.09

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated income statement for the six-month period ended 30 June 2024.

A-714

Condensed consolidated statements of recognised income and expenses

of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	30/06/2024		*30/06/2023 ()**
Profit or loss for the period		791,892		564,398
Other comprehensive income		42,303		79,298
Items that will not be reclassified to profit or loss		11,000		(2,944)
Actuarial gains or (-) losses on defined benefit pension plans		(91)		27
Non-current assets and disposal groups held for sale		—		—
Share of other recognised income and expense of investments in joint ventures and associates		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income		14,241		(2,527)
Gains or (-) losses from hedge accounting of equity instruments at fair value through other comprehensive income, net		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—
Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—
Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—
Income tax relating to items that will not be reclassified		(3,150)		(444)
Items that may be reclassified to profit or loss		31,303		82,242
Hedge of net investments in foreign operations [effective portion]		(4,541)		(60,485)
Valuation gains or (-) losses taken to equity		(4,541)		(60,485)
Transferred to profit or loss		—		—
Other reclassifications		—		—
Foreign currency translation		67,715		149,468
Translation gains or (-) losses taken to equity		67,715		149,468
Transferred to profit or loss		—		—
Other reclassifications		—		—
Cash flow hedges [effective portion]		(14,581)		(36,390)
Valuation gains or (-) losses taken to equity		(10,225)		(35,324)
Transferred to profit or loss		(4,356)		(2,799)
Transferred to initial carrying amount of hedged items		—		1,733
Other reclassifications		—		—
Hedging instruments [not designated elements]		—		—
Valuation gains or (-) losses taken to equity		—		—
Transferred to profit or loss		—		—
Other reclassifications		—		—
Debt instruments at fair value through other comprehensive income		(28,274)		(3,546)
Valuation gains or (-) losses taken to equity		(21,591)		1,555
Transferred to profit or loss		(6,683)		(5,101)
Other reclassifications		—		—
Non-current assets and disposal groups held for sale		—		—
Valuation gains or (-) losses taken to equity		—		—
Transferred to profit or loss		—		—
Other reclassifications		—		—
Share of other recognised income and expense of investments in joint ventures and associates		(1,457)		22,047
Income tax relating to items that may be reclassified to profit or (-) loss		12,441		11,148
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		834,195		643,696
Attributable to minority interests [non-controlling interests]		724		678
Attributable to owners of the parent		833,471		643,018

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated statement of recognised income and expenses for the six-month period ended 30 June 2024.

A-715

Condensed consolidated statements of total changes in equity of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests : Other items		Total
Closing balance 31/12/2023		680,028		7,695,227		—		21,268		6,401,782		—		(1,584,816)		(39,621)		1,332,181		(162,103)		(498,953)		—		34,213		13,879,206
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Opening balance 01/01/2024		680,028		7,695,227		—		21,268		6,401,782		—		(1,584,816)		(39,621)		1,332,181		(162,103)		(498,953)		—		34,213		13,879,206
Total comprehensive income for the period		—		—		—		—		—		—		—		—		791,168				42,303		—		724		834,195
Other equity changes		—		—		—		56		954,294		—		(20,171)		(79,645)		(1,332,181)		162,103		—		—		2		(315,542)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		(164,310)		—		—		—		—		—		—		—		—		(164,310)
Purchase of treasury shares		—		—		—		—		—		—		—		(111,229)		—		—		—		—		—		(111,229)
Sale or cancellation of treasury shares		—		—		—		—		—		—		1,350		31,584		—		—		—		—		—		32,934
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity		—		—		—		—		1,170,078		—		—		—		(1,332,181)		162,103		—		—		—		—
Equity increase or (-) decrease resulting from		—		—		—		—		—		—		—		—		—		—		—		—		—		—
business combinations
Share based payments		—		—		—		56		—		—		—		—		—		—		—		—		—		56
Other increase or (-) decrease in equity		—		—		—		—		(51,474)		—		(21,521)		—		—		—		—		—		2		(72,993)
Closing balance 30/06/2024		680,028		7,695,227		—		21,324		7,356,076		—		(1,604,987)		(119,266)		791,168		—		(456,650)		—		34,939		14,397,859

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated statement of total changes in equity for the six-month period ended 30 June 2024.

A-716

Condensed consolidated statements of total changes in equity of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss attributable to owners of the parent		(-) Interim dividends		Accumulated other comprehensive income		Minority interests: Accumulated other comprehensive income		Minority interests : Other items		Total
*Closing balance 31/12/2022 ()**		703,371		7,899,227		—		21,548		5,859,520		—		(1,365,777)		(23,767)		858,642		(112,040)		(650,647)		—		34,344		13,224,421
Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Effects of changes in accounting policies		—		—		—		—		—		—		(236,302)		—		30,750		—		67,247		—		—		(138,305)
Opening balance 01/01/2023		703,371		7,899,227		—		21,548		5,859,520		—		(1,602,079)		(23,767)		889,392		(112,040)		(583,400)		—		34,344		13,086,116
Total comprehensive income for the period		—		—		—		—		—		—		—		—		563,719		—		79,299		(1)		679		643,696
Other equity changes		—		—		—		(3,102)		526,887		—		66,184		(22,007)		(889,392)		112,040		—		—		26		(209,364)
Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Dividends (or shareholder remuneration)		—		—		—		—		(111,645)		—		—		—		—		—		—		—		—		(111,645)
Purchase of treasury shares		—		—		—		—		—		—		—		(60,887)		—		—		—		—		—		(60,887)
Sale or cancellation of treasury shares		—		—		—		—		—		—		1,349		38,880		—		—		—		—		—		40,229
Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Transfers among components of equity		—		—		—		—		777,352		—		—		—		(889,392)		112,040		—		—		—		—
Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Share based payments		—		—		—		(3,102)		—		—		—		—		—		—		—		—		—		(3,102)
Other increase or (-) decrease in equity		—		—		—		—		(138,820)		—		64,835		—		—		—		—		—		26		(73,959)
Closing balance 30/06/2023		703,371		7,899,227		—		18,446		6,386,407		—		(1,535,895)		(45,774)		563,719		—		(504,101)		(1)		35,049		13,520,448

Shown for comparative purposes only (see Note 1.5).

(*) Correspond to balances included in the consolidated annual financial statements for 2022 signed off by the directors of Banco de Sabadell, S.A.

A-717

Condensed consolidated cash flow statements of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	Note	30/06/2024		*30/06/2023 ()**
Cash flows used in operating activities			(627,027)		(10,797,092)
Profit or loss for the period			791,892		564,398
Adjustments to obtain cash flows from operating activities			920,956		976,909
Depreciation and amortisation			249,140		273,855
Other adjustments			671,816		703,054
Net increase/decrease in operating assets			(10,085,030)		(3,183,054)
Financial assets held for trading			(243,279)		(20,485)
Non-trading financial assets mandatorily at fair value through profit or loss			(6,580)		(19,154)
Financial assets designated at fair value through profit or loss			—		—
Financial assets at fair value through other comprehensive income			(267,735)		185,192
Financial assets at amortised cost			(9,965,982)		(3,231,704)
Other operating assets			398,546		(96,903)
Net increase/decrease in operating liabilities			7,772,532		(9,081,018)
Financial liabilities held for trading			(5,059)		269,533
Financial liabilities designated at fair value through profit or loss					—
Financial liabilities at amortised cost			8,455,462		(9,215,894)
Other operating liabilities			(677,871)		(134,657)
Cash payments or refunds of income taxes			(27,377)		(74,327)
Cash flows used in investing activities			(61,243)		(125,492)
Payments			(244,081)		(236,134)
Tangible assets			(108,729)		(130,591)
Intangible assets			(135,352)		(105,518)
Investments in joint ventures and associates			—		(25)
Subsidiaries and other business units			—		—
Non-current assets and liabilities classified as held for sale			—		—
Other payments related to investing activities			—		—
Collections			182,838		110,642
Tangible assets			57,234		51,407
Intangible assets			—		—
Investments in joint ventures and associates			84,093		13,682
Subsidiaries and other business units			—		—
Non-current assets and liabilities classified as held for sale			41,511		45,553
Other collections related to investing activities			—		—

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated cash flow statement for the six-month period ended 30 June 2024.

A-718

Condensed consolidated cash flow statements of Banco Sabadell Group

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	Note	30/06/2024		*30/06/2023 ()**
Cash flows from financing activities			144,020		353,678

Payments			(388,914)		(686,552)

Dividends	3		(164,310)		(111,645)

Subordinated liabilities			—		(400,000)

Redemption of own equity instruments			—		—

Acquisition of own equity instruments			(111,229)		(60,887)

Other payments related to financing activities			(113,375)		(114,020)

Collections			532,934		1,040,230

Subordinated liabilities	4		500,000		1,000,000

Issuance of own equity instruments			—		—

Disposal of own equity instruments			32,934		40,230

Other collections related to financing activities			—		—
Effect of changes in foreign exchange rates			60,327		63,961

Net increase (decrease) in cash and cash equivalents			(483,923)		(10,504,945)

Cash and cash equivalents at the beginning of the period	7		29,985,853		41,260,395

Cash and cash equivalents at the end of the period	7		29,501,930		30,755,450

Memorandum item
CASH FLOWS CORRESPONDING TO:

Interest received			3,964,650		3,858,766

Interest paid			2,031,265		1,080,859

Dividends received			1,648		7,167

COMPONENTS OF CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

Cash on hand	7		613,621		632,042

Cash equivalents in central banks	7		28,216,210		29,187,973

Other demand deposits	7		672,099		935,435

Other financial assets			—		—

Less: bank overdrafts repayable on demand			—		—
TOTAL CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD			29,501,930		30,755,450

Of which: held by Group entities but not available for the Group			—		—

(*) Shown for comparative purposes only (see Note 1.5).

Notes 1 to 35 and accompanying Schedules I to IV form an integral part of the condensed consolidated cash flow statement for the six-month period ended 30 June 2024.

A-719

Explanatory notes to the condensed consolidated interim financial statements of Banco Sabadell Group for the six-month period ended 30 June 2024

Note 1 – Activity, accounting policies and practices, and other information

1.1 Activity

Banco de Sabadell, S.A. (hereinafter also “Banco Sabadell”, “the Bank”, “the Institution”, or “the Company”), with tax identification number (NIF) A08000143 and with registered office in Alicante, Avenida Óscar Esplá, 37, engages in banking business and is subject to the standards and regulations governing banking institutions operating in Spain. The supervision of Banco Sabadell on a consolidated basis is performed by the European Central Bank (ECB).

The Articles of Association and other public information can be viewed both at the Bank’s registered office and on its website (www.grupbancsabadell.com).

The Bank is the parent company of a group of entities (see Schedule I to the 2023 consolidated annual financial statements and Note 2) whose activity it controls directly or indirectly and which comprise, together with the Bank, Banco Sabadell Group (hereinafter, “the Group”).

1.2 Basis of presentation

The Group’s consolidated annual financial statements for 2023 were prepared in accordance with the International Financial Reporting Standards as adopted by the European Union (EU-IFRS) applicable at the end of 2023, taking into account Bank of Spain (BoS) Circular 4/2017 of 27 November as well as other provisions of the financial reporting regulations applicable to the Group and considering the formatting and mark-up requirements established in Commission Delegated Regulation (EU) 2019/815, in order to fairly present the Group’s equity and consolidated financial situation as at 31 December 2023 and the results of its operations, recognised income and expenses, changes in equity and cash flows (all consolidated) in 2023.

Note 1 to the consolidated annual financial statements for 2023 includes a summary of the principles, accounting policies and measurement criteria applied by the Group. The aforesaid consolidated annual financial statements were signed off by the directors of Banco Sabadell at the Board meeting of 22 February 2024 and approved at the Annual General Meeting of 10 April 2024.

These condensed consolidated interim financial statements for the six-month period ended 30 June 2024 have been prepared and are presented in accordance with IAS 34 “Interim financial reporting”, as set out in the EU IFRS, and they were signed off by the Bank’s directors on 22 July 2024, taking into account Bank of Spain Circular 4/2017 of 27 November and its subsequent amendments.

The condensed consolidated interim financial statements have been prepared applying the same consolidation principles, accounting policies and measurement criteria as those applied by the Group in the consolidated annual financial statements for the financial year 2023, taking into consideration the standards and interpretations that have come into force since 1 January 2024 (see Note 1.3), so that they fairly present the Group’s consolidated equity and consolidated financial situation as at 30 June 2024 and the consolidated results of its operations and consolidated cash flows materialising in the Group over the six-month period from 1 January to 30 June 2024.

In accordance with that set forth in IAS 34, the interim financial information is prepared with the sole purpose of explaining the significant events and changes that occurred in the six-month period, without duplicating the information already published in the most recent consolidated annual financial statements. Therefore, for a proper comprehension of the information included in the condensed consolidated interim financial statements, they should be read together with the Group’s consolidated annual financial statements for 2023.

These condensed consolidated interim financial statements have been prepared based on the accounting records kept by the Bank and each of the other entities in the Group, and include adjustments and reclassifications necessary to ensure the harmonisation of the accounting policies and measurement criteria applied by the Group.

There are no cases in which accounting principles or measurement criteria whose application is mandatory have not been applied because of a significant effect on the condensed consolidated interim financial statements.

A-720

Except as otherwise indicated, these condensed consolidated interim financial statements are expressed in thousands of euros. In order to show the amounts in thousands of euros, the accounting balances have been subject to rounding; for this reason, some of the amounts appearing in certain tables may not be the exact arithmetic sum of the preceding figures.

In accordance with IAS 34, when determining the information to be disclosed concerning the various items in the consolidated financial statements and other matters, the Bank has taken into account their materiality in relation to the condensed consolidated interim financial statements.

1.3 Regulatory amendments in the first half of 2024

Standards and interpretations issued by the International Accounting Standards Board (IASB) that entered into force in 2024

In the first half of 2024, the standards and interpretations adopted by the European Union, together with their amendments, which have been applied by the Group due to their entry into force or their early application, are the following:



Standards and Interpretations		Title

Amendments to IAS 7 and IFRS 7 (*)		Supplier finance arrangements

		Presentation of financial statements:

Amendments to IAS 1 (*)		- Classification of liabilities as current or non-current
		- Non-current liabilities with covenants

Amendments to IFRS 16 (*)		Lease liabilities in sale and leaseback transactions

(*)	The consolidated annual financial statements for the year 2023 include a brief description of these amendments.

The application of the aforesaid standards has not given rise to any significant effects in terms of these condensed consolidated interim financial statements.

Standards and interpretations issued by the IASB not yet in force

As at the sign-off date of these condensed consolidated interim financial statements, the most significant standards and interpretations published by the IASB but which have not yet entered into force, because their effective implementation date is later than the date of these condensed consolidated interim financial statements and they have not yet been adopted by the European Union, are the following:



Standards and Interpretations	Title	Mandatory for years beginning:

Not approved for application in the EU

IFRS 18	Presentation and disclosure in financial statements	1 January 2027

IFRS 19	Subsidiaries without public accountability: disclosures	1 January 2027

Amendments to IAS 21 (*)	Lack of exchangeability	1 January 2025

Amendments to IFRS 9 and IFRS 7	Amendments to the classification and measurement of financial instruments	1 January 2026

Annual improvements to IFRS	Volume 11	1 January 2026

(*)	The consolidated annual financial statements for the year 2023 include a brief description of these amendments.

Except for the potential impact on presentation and disclosure resulting from the adoption of IFRS 18, it is estimated that the adoption of the amendments issued by the IASB not yet in effect will not have a significant impact for the Group.

Not approved for application in the EU

IFRS 18 “Presentation and disclosure in financial statements”

IFRS 18, which will replace IAS 1, aims to improve the quality of financial reporting, as it:

–

introduces defined categories for income and expenses (operating, investing and financing) and requires defined subtotals for each category (i.e. operating profit) in the income statement;

–

requires the disclosure of information on management-defined performance measures (MPMs) in the notes to the financial statements; and

–

adds new principles for the aggregation and disaggregation of financial information.

A-721

In addition, IFRS 18 introduces limited changes, among others, to IAS 7 “Statement of cash flows”, IAS 33 “Earnings per share” and IAS 34 “Interim financial reporting”. These changes should be applied as from the date of entry into force of IFRS 18.

The Bank considers that IFRS 18 will mainly have an impact on the presentation and disclosure of the consolidated income statement as a result of adapting the templates used for the consolidated financial statements to the aforesaid amendments.

The application of IFRS 18 on the date of its entry into force should be carried out retrospectively. Early application will also be permitted.

IFRS 19 “Subsidiaries without public accountability: disclosures”

This standard allows certain subsidiaries to provide reduced disclosures when applying IFRS accounting standards in their financial statements. IFRS 19 is optional for subsidiaries that are eligible, setting out the disclosure requirements for subsidiaries that elect to apply it. For these purposes, eligible subsidiaries are those that do not have public accountability (meaning that their debt or equity instruments are not traded in a public market, they are not in the process of issuing instruments to trade in a public market, and they do not hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses) and whose parent company produces consolidated financial statements available for public use that comply with IFRS accounting standards. Early application of this standard is permitted.

Amendments to IFRS 9 and IFRS 7 “Amendments to the classification and measurement of financial instruments”

These amendments form part of the post-implementation review of the classification and measurement requirements of IFRS 9 “Financial instruments”, as well as the requirements related to IFRS 7 “Financial instruments: disclosures”.

The main changes to the requirements relate to:

–

settling financial liabilities using an electronic payment system; and

–

assessing contractual cash flow characteristics of financial assets, including those with environmental, social and governance (ESG)-linked features.

The amendments also concern the disclosure requirements relating to investments in equity instruments designated at fair value through other comprehensive income and include additional disclosure requirements for financial instruments with contingent features that do not relate directly to the risks and costs of a basic lending arrangement.

The application of the amendments to IFRS 9 should be carried out retrospectively, although it is not mandatory to restate information from previous years. Earlier application of either all the amendments at the same time or only the amendments related to the classification of financial assets is permitted.

Annual improvements to IFRS Accounting Standards - Volume 11

These amendments include clarifications, simplifications, corrections and minor changes aimed at improving the consistency of the following standards: IFRS 1 “First-time adoption of international financial reporting standards”, IFRS 7 “Financial instruments: disclosures” and its accompanying guidance on implementation, IFRS 9 “Financial instruments”, IFRS 10 “Consolidated financial statements” and IAS 7 “Statement of cash flows”.

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1.4 Use of judgements and estimates in preparing the condensed consolidated interim financial statements

The preparation of the condensed consolidated interim financial statements requires certain accounting estimates to be made. It also requires the use of professional judgement in the process of applying the Group’s accounting policies. Such judgements and estimates may affect the value of assets and liabilities and the disclosure of contingent assets and contingent liabilities as at the date of the condensed consolidated interim financial statements, as well as the income and expenses during the period to which they relate.

The main judgements and estimates made in these condensed consolidated interim financial statements relate to the following items:

–

Corporation tax expense, which, in accordance with IAS 34, is recognised in interim periods based on the best estimate of the weighted average tax rate that the Group expects for the full financial year.

–

The accounting classification of financial assets according to their credit risk (see Notes 8 and 10).

–

Impairment losses on certain financial assets (see Notes 8, 10 and 20).

–

The assumptions used in actuarial calculations of liabilities and post-employment obligations (see Note 18).

–

The measurement of consolidated goodwill (see Note 12).

–

The useful life and impairment losses of tangible assets and other intangible assets (see Notes 11 and 12).

–

The provisions and consideration of contingent liabilities (see Note 18).

–

The fair value of certain unquoted financial assets (see Note 6).

–

The fair value of real estate assets held on the balance sheet (see Note 6).

–

The recoverability of non-monetisable deferred tax assets and tax credits (see Note 32).

The estimates are based on the information available regarding current and foreseeable circumstances, however, the final results could differ from these estimates.

The main changes in judgements and estimates occurring during the first half of 2024 are described below:

Macroeconomic scenarios used to determine loan book impairment

The macroeconomic and financial scenarios used to calculate losses on the loan book have been determined by the current restrictive monetary policy environment and the uncertain geopolitical context.

In the three main scenarios considered, the probabilities of occurrence in the baseline scenario, alternative scenario 1 and alternative scenario 2 are 65%, 15% and 20%, respectively (in the case of the subsidiary TSB, the probability of the baseline scenario is 60%, for alternative scenario 1 it is 10% and for alternative scenario 2 it is 20%. A more severe scenario is also included for this subsidiary, with a probability of 10%, featuring an interest rate hike). A 5-year time horizon has been used to carry out the forecasts of these scenarios. The main variables considered are changes in GDP, the unemployment rate and house prices. In 2023, the Group also considered three macroeconomic scenarios, weighted at 60% for the baseline scenario, 10% for alternative scenario 1 and at 30% for alternative scenario 2. The improved weighting of the scenarios is the result of updating the quantitative model with the new GDP forecasts for Spain.

The scenarios consider the consequences of the significant cycle of interest rate hikes in an environment where geopolitical uncertainty remains high. Thus, the main driver setting the scenarios apart lies in the impacts of monetary tightening and global geopolitical developments, in particular the conflict in Ukraine and the hostilities between Israel and Hamas.

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The baseline scenario presents a fragile economic situation, constrained by the impacts of monetary policy tightening and a turbulent geopolitical context on a global scale. In the Eurozone, the German economy remains weak, contrasting with the good performance of the European periphery countries. In particular, Spain continues to stand out in a positive light in the Eurozone. Following the recent inflationary period, the scenario considers a progressive return to normality, with inflation gradually easing towards central bank targets during 2024 and with gradual cuts bringing official interest rates down from their present levels. Financial conditions remain restrictive, although they begin to ease as interest rates are lowered by central banks. Long-term government bond yields remain stable, while the risk premiums of the European periphery countries remain contained and in line with their respective ratings.

Alternative scenario 1 is more optimistic than the baseline scenario and is based on improved global supply-side conditions (geopolitics, energy, etc.) and productivity improvements. Recent developments in artificial intelligence may be a future catalyst of this scenario, due to its potential positive impact on productivity. In this scenario, economic growth is vigorous, inflation falls back faster than in the baseline scenario and is maintained at levels close to the monetary policy targets. As a result, central banks are less aggressive than in the baseline scenario and rates quickly return to levels in line with monetary neutrality. Global financing conditions remain lax, with no episodes of risk aversion. The economic and financial environment allows risk premiums to remain contained.

Alternative scenario 2 is more pessimistic than the baseline scenario and considers additional monetary and financial tightening in the short term, stemming from an incomplete disinflation process. This gives rise to financial instability, with impacts on the real economy. Inflation, which initially remains excessively high, ends up falling due the damage caused to the credit channel, dislocation in financial markets and the economic recession. Central banks eventually address the financial instability with an expansionary monetary policy and introduce interest rate cuts when inflation falls. In relation to financial markets, the yields on core government bonds fall and the risk premiums on European periphery bonds rebound.

As at 30 June 2024 and 31 December 2023, the main forecast variables considered for Spain and the United Kingdom are those shown below:


%
	30/06/2024
	Spain										United Kingdom
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 1		Year 2		Year 3		Year 4		Year 5

GDP growth
Baseline scenario		2.2		2.0		1.8		1.6		1.6		0.5		1.2		1.3		1.4		1.4
Alternative scenario 1		3.6		4.1		2.4		2.0		2.0		0.8		2.7		1.7		1.6		1.6
Alternative scenario 2		0.9		-1.4		0.7		1.2		1.2		0.0		-1.7		0.3		1.5		1.2

Unemployment rate
Baseline scenario		11.4		11.2		10.9		10.7		10.5		4.4		4.5		4.5		4.5		4.5
Alternative scenario 1		10.9		9.2		8.4		8.1		8.0		4.1		3.6		3.5		3.5		3.5
Alternative scenario 2		14.1		16.3		14.8		13.4		11.8		4.6		6.2		6.4		5.9		5.3

*House price growth ()**
Baseline scenario		2.7		1.7		1.8		1.9		1.9		0.4		1.1		2.4		3.0		3.0
Alternative scenario 1		5.4		4.9		3.6		3.5		3.5		3.0		5.1		5.0		5.0		5.0
Alternative scenario 2		-0.8		-3.1		-0.8		1.5		1.9		-3.2		-13.6		-1.4		0.0		4.6

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

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%
	31/12/2023
	Spain										United Kingdom
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 1		Year 2		Year 3		Year 4		Year 5

GDP growth
Baseline scenario		1.6		1.9		1.8		1.6		1.6		0.6		1.2		1.3		1.4		1.4
Alternative scenario 1		4.1		3.5		2.2		2.0		2.0		1.3		2.7		1.7		1.6		1.6
Alternative scenario 2		-0.2		-1.0		1.0		1.2		1.2		-0.6		-1.1		1.2		1.4		1.2

Unemployment rate
Baseline scenario		11.4		11.2		10.9		10.7		10.5		4.5		4.7		4.6		4.3		4.3
Alternative scenario 1		10.3		9.0		8.4		8.1		8.0		4.0		3.6		3.5		3.5		3.5
Alternative scenario 2		15.3		16.0		14.5		13.0		11.5		5.2		6.6		6.2		5.6		5.0

*House price growth ()**
Baseline scenario		0.5		1.7		1.8		1.9		1.9		-6.5		-2.4		1.9		2.5		2.5
Alternative scenario 1		5.6		4.6		3.5		3.5		3.5		-2.5		0.5		1.0		1.6		3.4
Alternative scenario 2		-3.6		-2.1		0.0		1.9		1.9		-7.8		-9.5		-0.4		0.0		1.6

(*) For Spain, the price variation at year-end is calculated and, for the UK, the average price variation over the year is calculated.

The Group applies a series of additional adjustments to the results of its credit risk models, referred to as post model adjustments (PMAs) or overlays, in order to address situations in which the results of the models are not sufficiently sensitive to the uncertainty of the macroeconomic environment. These adjustments are temporary and remain in place until the reasons for which they were originally applied cease to exist. The application of these adjustments is subject to the governance principles established by the Group. Specifically, as at 31 December 2023, the impairment losses of the loan portfolio included a series of additional provisions that incorporated specific features of the macroeconomic environment, in the amount of 80 million euros, the remaining balance sheet adjustment being 70 million euros as at 30 June 2024. The balance variation during the year is mainly due to the specific way in which those adjustments were made, after having completed the recurring updates of internal provisioning models and their parameters.

1.5 Comparability

The information contained in the condensed consolidated interim financial statements and explanatory notes corresponding to 31 December 2023 and 30 June 2023 is shown solely and exclusively for purposes of comparison against the information relating to the six-month period ended 30 June 2024.

1.6 Seasonality of the Group’s transactions

Given the activities engaged in by the Group’s companies, their transactions are neither cyclical nor seasonal. Consequently, these explanatory notes to the condensed consolidated interim financial statements for the six-month period ended 30 June 2024 do not contain specific disclosures in that regard.

1.7 Other information

Merger proposal and voluntary tender offer for the acquisition of shares of Banco de Sabadell put forward by Banco Bilbao Vizcaya Argentaria, S.A.

In an Inside Information disclosure dated 30 April 2024, entered in the register of the Spanish National Securities Market Commission (CNMV) under number 2,227, Banco Sabadell confirmed that it had received, on that same day, an indicative written proposal from Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) for a merger (the “Proposal”). It also advised that the Board of Directors of Banco Sabadell would properly analyse all aspects of the Proposal.

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Further to the aforementioned Inside Information disclosure, on 6 May 2024, through a separate Inside Information disclosure entered in the CNMV’s register under number 2,234, Banco Sabadell submitted a press release on the decisions taken by its Board of Directors on that date, informing that Banco Sabadell, in fulfilment of its duties and with the assistance of financial advisors and a legal advisor, had carefully considered the Proposal and believed that it significantly undervalued the potential of Banco Sabadell and its standalone growth prospects. The press release also stated that the Board of Directors was highly confident in Banco Sabadell’s growth strategy and its financial targets and was of the view that Banco Sabadell’s standalone strategy would create superior value for its shareholders. Therefore, based on the detailed assessment of the Proposal, the Board of Directors had concluded that it was not in the best interest of Banco Sabadell and its shareholders and had therefore rejected BBVA’s Proposal; this decision was, moreover, thought to be aligned with the interest of Banco Sabadell’s customers and employees.

Furthermore, as part of its strong commitment to shareholder value creation and supported by the company’s business plan and solid capital generation, the Board of Directors reiterated its commitment to distribute, on an ongoing basis, any excess capital above the 13% CET1 ratio pro forma Basel 4 to its shareholders. The overall excess capital amount to be generated over 2024 and 2025, together with recurrent dividends during this period according to a successful completion of the current business plan, was projected to be 2.4 billion euros, with part of the distribution to shareholders potentially subject to supervisory approval.

In addition, on 8 May 2024, through an Inside Information disclosure entered in the CNMV’s register under number 2,240, with regard to the news published in the press on that same day, and to ensure that the market had complete and transparent information in respect thereto, the Bank published the verbatim text of the communication which, without any prior contact or exchange between the parties, was received by the Chairman of the Board of Directors of Banco Sabadell from the Chairman of the Board of Directors of BBVA on 5 May 2024. In that communication, the Chairman of BBVA’s Board of Directors stated that, in connection with the terms of the proposed merger, BBVA had no room to improve its economic terms.

On 9 May 2024, BBVA sent the CNMV the prior announcement of a tender offer for the acquisition of all shares issued by Banco Sabadell, conditional upon its acceptance by 50.01% of the share capital of Banco Sabadell, further conditional upon approval by the General Shareholders’ Meeting of BBVA of the increase of its share capital through the issuance of new ordinary shares with non-cash contributions in an amount sufficient to fully cover the consideration offered, and further conditional upon obtaining authorisation by the National Markets and Competition Commission (CNMC) in Spain and by the Prudential Regulation Authority (PRA) in the United Kingdom. The transaction also requires approval by the CNMV and a statement of non-opposition from the European Central Bank.

On 24 May 2024, BBVA filed an application for authorisation of the tender offer with the CNMV, which was admitted for processing by the latter on 11 June 2024. The aforesaid offer consists of one newly issued BBVA share for every 4.83 shares of Banco Sabadell.

On 5 July 2024, during the BBVA Extraordinary General Shareholders’ Meeting, shareholders approved an increase of its share capital through the issuance of ordinary shares, up to a maximum nominal amount of 551,906,524.05 euros, with non-cash contributions in order to cover the consideration in kind of the voluntary tender offer put forward by BBVA for the acquisition of up to 100% of Banco Sabadell’s shares.

As at the sign-off date of these condensed consolidated interim financial statements, the tender offer remains pending receipt of regulatory authorisations from the CNMV, the CNMC and the PRA, of evidence of BBVA’s receipt of a statement of non-opposition from the ECB, and of the offer’s acceptance, in a sufficient percentage, by Banco Sabadell shareholders.

For as long as the tender offer remains pending, it will generate uncertainty for the Group, which is inherent in the very nature of the offer put forward. At the present time, there can be no certainty as to the duration of the regulatory review process or of how long it will take for the tender offer to be authorised, nor of the ultimate outcome of the tender offer, if approved.

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Note 2 – Banco Sabadell Group

Schedule I to the consolidated annual financial statements for the year ended 31 December 2023 contains material disclosures about the Group companies that were consolidated as at that date and those accounted for using the equity method.

Schedule I to these condensed consolidated interim financial statements gives details of the business combinations, acquisitions and sales of equity holdings in other institutions (subsidiaries and/or associates) carried out by the Group during the six-month period ended 30 June 2024.

Changes in the scope of consolidation during the first half of 2024

No material changes in the scope of consolidation have taken place during the first half of 2024.

Other corporate transactions

On 27 February 2023, Banco Sabadell signed a strategic deal to provide merchant acquiring services with Nexi S.p.A. (hereinafter, “Nexi”), a leading European paytech company, for a renewable ten-year period, under which Nexi is to acquire 80% of Banco Sabadell’s payments subsidiary Paycomet, S.L.U. for 280 million euros. Banco Sabadell will retain a 20% stake for at least three years, whilst aligning interests with its new industrial partner. Following this period, Banco Sabadell will have the option to sell that 20%.

The total transaction amount was fixed at 350 million euros (280 million euros due to the 80% subject to sale), which may be increased depending on the achievement of targets.

As at the sign-off date of these condensed consolidated interim financial statements, the necessary regulatory authorisations to close this transaction have been obtained. The transaction is expected to be completed in 2025, once the outcome of the tender offer for the acquisition of shares representing the total share capital of the Bank, described in Note 1.7, is known.

Note 3 – Shareholder remuneration and earnings per share

Details are provided here below about the dividends paid out by the Bank during the six-month period ended 30 June 2024:


			30/06/2024
	% of par		Euro per share		Amount (thousand euro) (*)

Ordinary shares		24 %		0.03		164,310

Other shares (non-voting, redeemable, etc.)		—		—		—

Total dividends paid		24 %		0.03		164,310

a) Dividends charged to results		24 %		0.03		164,310

b) Dividends charged to reserves or share premium		—		—		—

c) Dividends in kind		—		—		—

(*)

Includes the treasury stock dividend.

On 31 January 2024, the Board of Directors submitted a proposal to the Annual General Meeting concerning the distribution of a final gross cash dividend of 0.03 euros per share to be paid out of 2023 earnings, which was approved at the Annual General Meeting on 10 April 2024 and paid out in the same month.

Previously, the Board of Directors of Banco Sabadell had agreed, on 25 October 2023, to distribute an interim dividend in cash, to be paid out of its earnings in 2023, of 0.03 euros (gross) per share, which was paid on 29 December 2023. Consequently, the cash dividend reached 0.06 euros per share, paid out of 2023 earnings.

At the aforesaid meeting of 31 January 2024, the Board of Directors of Banco Sabadell, having obtained the prior permission of the competent authority, agreed to establish a treasury share buyback programme for the subsequent redemption of those shares through a share capital reduction, which was also approved by the Annual General Meeting of 10 April 2024, of up to a maximum amount of 340 million euros, whose terms, once set by the Board of Directors, were communicated in an Inside Information disclosure dated 25 April 2024, prior to initiating its execution.

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In accordance with the foregoing, the total shareholder remuneration corresponding to 2023, which combines the cash dividend and the share buyback programme, would therefore reach an amount equivalent to 50% of the profit attributable to the owners of the parent company, in line with the Bank’s shareholder remuneration policy.

Share buyback programme

On 10 April 2024, the Ordinary Annual General Meeting of Banco Sabadell approved a resolution to reduce share capital by the par value of the treasury shares that may be acquired by Banco Sabadell under the share buyback programme, against earnings for 2023, for a maximum amount of 340 million euros.

Thereafter, on 25 April 2024, Banco Sabadell disclosed, through an Inside Information disclosure entered in the CNMV’s register under number 2,203, the terms and the start date of the treasury share buyback programme approved by the Board of Directors on 24 April 2024, in accordance with the provisions of Article 5 of Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016.

On 13 May 2024, pursuant to the request received from the CNMV on that same date, the Bank released an Other Relevant Information disclosure, entered in the CNMV’s register under number 28,561, giving notice of the interim suspension of the aforementioned share buyback programme in light of the publication of the prior announcement of the voluntary tender offer put forward by Banco Bilbao Vizcaya Argentaria, S.A. for the acquisition of Banco Sabadell shares representing its total share capital (see Note 1.7).

The operation of the buyback programme was discontinued before the opening of the session of 9 May 2024, the amount paid for the shares purchased under the buyback programme up to (and including) 8 May 2024 being 92,864,152.55 euros, representing approximately 27.31% of the maximum pecuniary amount of the buyback programme, with approximately 72.69% of the said maximum amount therefore remaining to be executed.

Interim dividend

At its meeting held on 22 July 2024, the Board of Directors of Banco Sabadell agreed to distribute an interim dividend in cash, to be paid out of its earnings in 2024, of 0.08 euros (gross) per share, which will be paid on 1 October 2024.

In fulfilment of the mandatory requirement indicated in Article 277 of Spain’s Capital Companies Act (Ley de Sociedades de Capital), the provisional statement of accounts provided below was created by the Bank to confirm the existence of sufficient liquidity and profit at the time of its approval of the aforesaid interim dividend:


Thousand euro
Available for the payment of dividends according to the provisional statement as at:	30/06/2024

Banco Sabadell profit as at the date indicated, after provisions for taxes		788,703

Estimated statutory reserve		—

Estimated Canary Island investment reserve		36

Maximum amount available for distribution		788,667

Interim dividend proposed (*)		428,915

Cash balance available at Banco de Sabadell, S.A. (**)		22,669,798

(*) This amount may vary slightly depending on the available treasury stock balance at the time this dividend is paid.

(**) Includes the balance of the heading “Cash, cash balances at central banks and other demand deposits”.

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In addition to the interim cash dividend, during the aforesaid meeting, the Board of Directors of Banco Sabadell agreed to set the Group’s payout ratio (that is, the percentage of profit to be distributed to shareholders) at 60% of the net profit attributable to the Group for 2024. This payout ratio is at the highest end of the range established by the Group’s Shareholder Remuneration Policy.

Earnings per share

The Group’s earnings per share calculations are shown below:


	30/06/2024		30/06/2023

Profit or loss attributable to owners of the parent (thousand euro)		791,168		563,719
Adjustment: Remuneration of other equity instruments (thousand euro)		(56,445)		(58,711)
Profit or (-) loss after tax from discontinued operations (thousand euro)		—		—
Profit or loss attributable to owners of the parent, adjusted (thousand euro)		734,723		505,008

Weighted average number of ordinary shares outstanding (*)		5,391,687,023		5,589,218,277
Assumed conversion of convertible debt and other equity instruments		—		—
Weighted average number of ordinary shares outstanding, adjusted		5,391,687,023		5,589,218,277

Earnings per share (euro)		0.14		0.09
Basic earnings per share adjusted for the effect of mandatory convertible bonds (euro)		0.14		0.09
Diluted earnings per share (euro)		0.14		0.09

(*) Average number of shares outstanding, excluding the average number of own shares held in treasury stock during the period.

As at 30 June 2024 and 2023, there were no other financial instruments or share-based commitments with employees with a significant impact on the calculation of diluted earnings per share for the periods presented. For this reason, basic earnings per share coincide with diluted earnings per share.

Note 4 – Risk management

Note 4 “Risk management” in the consolidated annual financial statements for 2023 gives information about the corporate risk culture, the Global Risk Framework and the overall organisation of the risk function, as well as the management and monitoring of the main financial and non-financial risks.

Material disclosures updated as at 30 June 2024 in relation to risk management are provided here below.

4.1 Macroeconomic, political and regulatory environment

Macroeconomic environment

–

Global economic growth displayed good momentum in the first half of the year, with an improved economic outlook in most of the developed economies.

–

Spain continued to outperform other Eurozone countries, supported by the good performance of private consumption, investment and the foreign sector. Job creation continued to steadily increase and new record highs were reached in job occupancy numbers.

–

In the United Kingdom, after a largely stagnant economy in 2023, things started to improve this year. In the political arena, the Labour party won a comfortable majority in the latest UK parliamentary elections, enabling them to return to power after fourteen years in opposition.

–

Inflation in the major economies has gradually been returning to normal, although this process remains uneven, with continuing upward pressure from some parts of the services sector.

–

The military conflicts that are still ongoing today, together with the large number of countries that have held or will hold elections this year, all resulted in geopolitics remaining one of the main sources of uncertainty for the economy and the markets. The recent elections in the United Kingdom, France and Mexico, and the poor market performance stemming from these, are a clear example of this.

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–

In terms of monetary policy, the first six months of the year were dominated by the debate regarding when exactly central banks would introduce their first interest rate cuts and how interest rates would change going forward. Towards the end of the first half-year, progress with the disinflation process allowed some central banks to begin making cuts to interest rates. In particular, the European Central Bank cut official rates by 25 basis points, placing the deposit facility rate at 3.75%.

–

During the first half of the year, the markets made a significant upward adjustment to the expected path of official rate cuts for 2024, on the back of solid economic activity data and some upside surprises in prices. This explains the upswing in yields on core long-term government bonds of around 40-60 basis points.

–

The risk premiums on European periphery bonds remained relatively stable and at contained levels.

–

Risk assets ended the first half of 2024 with gains. Various stock market indices reached new record highs (driven by the good performance of tech stocks), while corporate bond spreads remained contained. The euro depreciated by around 3% against the dollar.

4.2 Credit risk

Credit risk exposure

The table below shows the distribution, by headings of the condensed consolidated balance sheet and off-balance sheet exposures, of the Group’s maximum gross credit risk exposure as at 30 June 2024 and 31

December 2023, without deducting collateral or credit enhancements obtained in order to ensure the fulfilment of payment obligations, broken down by portfolios and in accordance with the nature of the financial instruments:


Thousand euro
Maximum gross credit risk exposure	Note		30/06/2024		31/12/2023

Financial assets held for trading				655,002		142,495
Equity instruments				—		—
Debt securities		8		655,002		142,495

Non-trading financial assets mandatorily at fair value through profit or loss				159,758		153,178
Equity instruments		9		62,791		52,336
Debt securities		8		71,397		65,744
Loans and advances		10		25,570		35,098

Financial assets at fair value through other comprehensive income				6,648,632		6,387,869
Equity instruments		9		321,540		302,510
Debt securities		8		6,327,092		6,085,359

Financial assets at amortised cost				193,598,416		184,116,175
Debt securities		8		22,638,912		21,501,203
Loans and advances		10		170,959,504		162,614,972

Derivatives				4,895,642		4,988,592
Total risk due to financial assets				205,957,450		195,788,309

Loan commitments given		20		27,631,400		27,035,812
Financial guarantees given		20		1,903,075		2,064,396
Other commitments given		20		8,327,242		7,942,724
Total off-balance sheet exposures				37,861,717		37,042,932

Total maximum gross credit risk exposure				243,819,167		232,831,241

Schedule IV to these condensed consolidated interim financial statements shows quantitative data relating to credit risk exposures, broken down by geographical area and by activity sector.

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The values of the guarantees received to ensure collection, as at 30 June 2024 and 31 December 2023, are as follows:


Thousand euro
	30/06/2024		31/12/2023

Value of collateral		96,516,868		94,323,862
Of which: securing stage 2 loans		7,540,063		7,180,750
Of which: securing stage 3 loans		1,743,987		1,873,003

Value of other guarantees		15,473,082		14,975,715
Of which: securing stage 2 loans		1,897,011		1,881,539
Of which: securing stage 3 loans		1,070,379		1,054,019
Total value of guarantees received		111,989,950		109,299,577

Credit quality of financial assets

The breakdown of total exposures rated according to the various internal rating levels, as at 30 June 2024 and 31 December 2023, is set out here below:


Million euro
		Exposures assigned rating/score
		30/06/2024
Breakdown of exposure by rating	Note	*Stage 1*		*Stage 2*		*Stage 3*		Of which: purchased credit-impaired		Total

AAA/AA			26,494		154		—		1		26,647
A			15,054		25		13		—		15,092
BBB			91,214		239		—		—		91,454
BB			29,286		328		3		1		29,617
B			16,506		2,297		6		39		18,809
Other			3,445		8,534		5,167		65		17,146
No rating/score assigned			2,592		24		—		—		2,616
Total gross amount	10		184,591		11,601		5,189		106		201,381


Impairment allowances	10		(346)		(440)		(2,324)		*(1)*		(3,109)

Total net amount			184,245		11,161		2,866		*106*		198,272

Million euro
		Exposures assigned rating/score
		31/12/2023
Breakdown of exposure by rating	Note	*Stage 1*		*Stage 2*		*Stage 3*		Of which: purchased credit-impaired		Total

AAA/AA			25,486		57		—		—		25,543
A			11,644		171		13		—		11,829
BBB			83,179		252		—		1		83,431
BB			31,376		522		3		2		31,902
B			17,102		3,105		6		61		20,212
Other			3,577		7,546		5,450		45		16,574
No rating/score assigned			1,675		19		—		—		1,694
Total gross amount	10		174,039		11,672		5,473		*109*		191,185


Impairment allowances	10		(373)		(471)		(2,359)		*(1)*		(3,202)

Total net amount			173,666		11,202		3,114		*108*		187,982

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The breakdown of total off-balance sheet exposures rated based on the various internal rating levels as at 30 June 2024 and 31 December 2023 is as follows:


Million euro
		Exposures assigned rating/score
		30/06/2024
Breakdown of exposure by rating	Note	*Stage 1*		*Stage 2*		*Stage 3*		Of which: purchased credit-impaired		Total

AAA/AA			1,822		32		—		—		1,855
A			3,882		—		—		—		3,883
BBB			14,869		32		2		—		14,902
BB			8,205		46		3		1		8,254
B			7,256		422		7		24		7,686
Other			107		753		287		128		1,147
No rating/score assigned			134		1		—		—		135
Total gross amount	20		36,276		1,288		298		*153*		37,862

Provisions recognised on liabilities side of the balance sheet	20		(39)		(24)		(75)		—		(138)

Total net amount			36,237		1,264		223		*153*		37,724

Million euro
		Exposures assigned rating/score
		31/12/2023
Breakdown of exposure by rating	Note	*Stage 1*		*Stage 2*		*Stage 3*		Of which: purchased credit-impaired		Total

AAA/AA			1,442		44		—		—		1,485
A			3,034		—		—		—		3,035
BBB			13,533		34		2		—		13,568
BB			8,611		101		3		1		8,716
B			8,246		724		6		23		8,977
Other			159		620		355		153		1,133
No rating/score assigned			128		1		—		—		129
Total gross amount	20		35,154		1,524		365		178		37,043

Provisions recognised on liabilities side of the balance sheet	20		(48)		(30)		(86)		—		(165)

Total net amount			35,105		1,494		279		178		36,878

Further details on the credit rating and credit scoring models are included in section 4.4.2.2 of the consolidated annual financial statements for 2023.

Exposures classified as stage 3 decreased by 339 million euros in the first half of 2024. Consequently, the

Group’s NPL ratio fell during this period, as shown in the table below:


%
	30/06/2024		Proforma 30/06/2024 (*)		31/12/2023		Proforma 31/12/2023 (*)

NPL ratio		3.21		3.80		3.52		4.22
Stage 3 coverage ratio		44.11		48.31		42.33		45.55
Stage 3 coverage ratio, with total provisions		59.71		62.86		58.29		60.25

(*) Corresponds to the ratio excluding TSB.

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The NPL ratio, broken down by lending segment, is set out below:


%

	30/06/2024		Proforma 30/06/2024 (*)		31/12/2023		Proforma 31/12/2023 (*)

Real estate development and construction		6.27		6.31		6.44		6.48
Non-real estate construction		4.51		4.51		5.25		5.25
Corporates		1.90		1.90		2.47		2.47
SMEs and self-employed		8.74		8.80		8.52		8.58
Individuals with 1st mortgage guarantee		1.96		2.42		2.29		3.12
Group NPL ratio		3.21		3.80		3.52		4.22

(*) Corresponds to the NPL ratio excluding TSB.

A more detailed quantitative breakdown of allowances and assets classified as stage 3 can be found in Note 10, and a more detailed breakdown of refinancing and restructuring transactions is included in Schedule IV to these condensed consolidated interim financial statements.

4.3 Financial risks

4.3.1 Liquidity risk

Assessment of liquidity needs and funding policy

In the first half of 2024, Banco Sabadell’s medium- and long-term maturities of wholesale debt amounted to 2.73 billion euros (not including partial and total redemptions of securitisations placed in the market) and it carried out four wholesale market issues amounting to a value of 2.75 billion euros. In particular, on 15 January 2024, an issue of senior preferred bonds was carried out for 750 million euros with a 6-year maturity and an early call option in the fifth year; on 13 March 2024 a senior non-preferred issue was carried out in green format for 500 million euros with a 6.5-year maturity and an early call option at 5.5 years; on 27 March 2024 an issue of subordinated bonds was executed for 500 million euros with a maturity of 10 years and 3 months and with an early call option after 5 years; and on 5 June 2024 an issue of mortgage covered bonds was carried out for 1 billion euros with a 10-year maturity.

In the second half of 2024, the Bank has scheduled maturities of medium- and long-term wholesale debt amounting to 250 million euros (not including partial and total redemptions of securitisations placed in the market).

With regard to asset securitisation transactions, Banco Sabadell did not proceed to early liquidation of any fund in the first half of 2024. In May 2024, TSB issued the fund RMBS Duncan Funding 2024-1 PLC, for 561.8 million pounds sterling. The senior tranche was fully placed in the market, and TSB retained the junior tranche. The fund was registered as an STS transaction under UK securitisation regulations.

TSB’s medium- and long-term debt maturities in the wholesale market amounted to 500 million pounds in the half-year, and on 5 March 2024 it carried out an issue of covered bonds for 500 million euros with a 5-year maturity. No maturities are anticipated in the second half of the year.

As at 30 June 2024, there was no balance drawn down from monetary policy operations with the European Central Bank.

On the other hand, as at 30 June 2024, the total amount drawn from the Bank of England stood at 2,740 million pounds (4,005 million pounds as at 31 December 2023), of which 2,735 million pounds correspond to the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) and 5 million pounds correspond to the Indexed Long Term Repo (ILTR) facility.

Capital markets

The Group has a number of funding programmes in operation in capital markets, with a view to diversifying its different funding sources. Specifically with regard to short-term funding, it has a corporate commercial paper programme registered with the Spanish National Securities Market Commission (CNMV), and with regard to medium- and long-term funding, the Institution has a Euro Medium Term Notes (EMTN) programme registered with the Irish Stock Exchange and a Base Prospectus of Non-Equity Securities registered with the CNMV.

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The level of funding in capital markets has remained stable. The Institution maintains a comfortable MREL (Minimum Requirement for own funds and Eligible Liabilities) level above the regulatory requirements. As indicated previously, in the first half of the year, Banco Sabadell carried out four issues in the wholesale market for 2.75 billion euros and TSB carried out an additional issue for 500 million euros, managing the respective maturities in the capital markets.

The outstanding nominal balance of the Group’s funding in capital markets, by type of product, as at 30 June 2024 and 31 December 2023 is shown below:


Million euro
	30/06/2024		31/12/2023
Outstanding nominal balance		24,935		24,596

Covered bonds		10,369		10,975
Of which: TSB		3,158		3,164
Commercial paper and ECP		1		6
Senior debt		4,230		4,215
Senior non-preferred debt		4,530		4,425
Subordinated debt and preferred securities		4,065		3,565
Asset-backed securities		1,740		1,410
Of which: Sabadell Consumer Finance		371		494
Of which: TSB		591		–

Maturities of the Group’s issues in capital markets, by type of product (excluding securitisations and commercial paper), and considering their legal maturity, as at 30 June 2024 and 31 December 2023, are analysed below:


Million euro
	3Q24		4Q24		2025		2026		2027		2028		2029		>2029		Balance outstanding
Mortgage bonds and covered bonds (*)		–		250		835		1,390		2,282		2,462		1,450		1,700		10,369
Senior debt		–		–		1,480		–		500		750		750		750		4,230
Senior non-preferred debt		–		–		500		1,317		18		500		1,500		695		4,530
Subordinated debt and preferred securities		–		–		–		500		–		–		–		3,565		4,065
Total		–		250		2,815		3,207		2,800		3,712		3,700		6,710		23,194
(*) Collateralised issues.
Million euro
			2024		2025		2026		2027		2028		2029		>2029		Balance outstanding
Mortgage bonds and covered bonds (*)				2,425		836		1,390		2,251		2,423		950		700		10,975
Senior debt				735		1,480		–		500		750		750		–		4,215
Senior non-preferred debt				395		500		1,317		18		500		1,500		195		4,425
Subordinated debt and preferred securities				–		–		500		–		–		–		3,065		3,565
TOTAL				3,555		2,816		3,207		2,769		3,673		3,200		3,960		23,180
(*) Collateralised issues.

As at 30 June 2024, the Bank had outstanding issues of mortgage covered bonds amounting to 15,276 million euros (15,876 million euros as at 31 December 2023), which are secured by eligible mortgage loans and credit in the amount of 24,383 million euros (24,677 million euros at 31 December 2023). The mortgage covered bonds therefore have an overcollateralisation ratio of 160% (161% as at 31 December 2023), with all their collateral denominated in euros. More information can be found on the corporate website at www.grupbancsabadell.com (see section “Shareholders and Investors - Fixed income investors”).

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Liquid assets

In addition to these sources of funding, Banco Sabadell maintains a liquidity buffer in the form of liquid assets to meet potential liquidity needs:


Million euro
	30/06/2024		31/12/2023
Cash(*) + Net interbank position		24,716		25,036
Funds available in Bank of Spain facility		17,567		15,363
ECB eligible assets not pledged in facility		7,543		11,419
Other non-ECB eligible marketable assets (**)		6,931		6,740

Memorandum item:

Balance drawn from Bank of Spain facility (*)		–		5,000
Balance drawn from Bank of England Term Funding Scheme (**)		3,237		4,608
Total Liquid Assets Available		56,757		58,558

(*) Excess reserves and Marginal Deposit Facility in Central Banks.

(**) Market value, and after applying the Liquidity Coverage Ratio (LCR) haircut. Includes fixed income qualifying as a high quality liquid asset according to LCR (HQLA) and other marketable assets from different Group entities.

(***) Correspond to TLTRO-III facility.

(****) As at 30 June 2024, includes 2,735 million pounds borrowed from the TFSME and 5 million pounds borrowed from the ILTR (4,000 million pounds from the TFSME and 5 million from the ILTR as at 31 December 2023).

Compared to 2023 year-end, the Group’s first line of liquidity decreased in the first half of 2024 by 1,801 million euros. The balance of reserves and of the marginal deposit facility in central banks and the net interbank position showed a decline of 320 million euros in the first half of 2024, while ECB-eligible liquid assets decreased by 1,672 million euros, and the available non-ECB eligible assets increased by 191 million euros, the main reasons for these variations being a negative funding gap due to a greater increase in lending than in funds as a result of customers’ increased financing needs.

It should be noted that the Group follows a decentralised liquidity management model. This model tends to restrict the transfer of liquidity between the different subsidiaries involved in liquidity management, thereby limiting intragroup exposures, beyond any restrictions imposed by the local regulators of each subsidiary. Thus, the subsidiaries involved in liquidity management determine their liquidity position by considering only those assets in their possession that meet the eligibility, availability and liquidity criteria set forth both internally and in regulations in order to comply with regulatory minima.

In addition to the first line of liquidity, each Liquidity Management Unit (LMU) monitors its liquidity buffer with an internal conservative criterion, referred to as the counterbalancing capacity. In the case of the BSab LMU (includes Banco de Sabadell S.A., which in turn includes activity in foreign branches as well as the businesses of Banco de Sabadell S.A. in Mexico), this liquidity buffer comprises the first and second lines of liquidity. As at 30 June 2024, the second line of liquidity added a volume of 13,513 million euros to the liquidity buffer (12,155 million euros as at 31 December 2023), including the covered bond issuing capacity, considering the average valuation applied by the central bank to own-use covered bonds to obtain funding, as well as the deposits held in other financial institutions and immediately available for the business in Mexico not included in the first line of liquidity.

For the TSB LMU, this metric is calculated as the sum of the first line of liquidity plus assets pre-positioned with the Bank of England to obtain funding. As at 30 June 2024, the second line of liquidity, considering the amount of loans pre-positioned with the Bank of England, amounted to 5,779 million euros (4,936 million euros as at 31 December 2023).

There are no significant amounts of cash or cash equivalents that are unavailable for use by the Group.

Compliance with regulatory ratios

As part of its liquidity management, the Group monitors the short-term Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), reporting the necessary information to the regulator on a monthly and quarterly basis, respectively. The measurement of liquidity based on these metrics forms part of liquidity risk control arrangements in all LMUs.

In terms of the LCR, since 1 January 2018, the regulatory required minimum LCR has been 100%, a level amply surpassed by all of the Group’s LMUs. At the Group level, the LCR has consistently been well above 100%, remaining stable over time. As at 30 June 2024, the LCR stood at 180% in the TSB LMU, 234% in Banco Sabadell Spain and 198% at the Group level (203%, 274% and 228%, respectively, as at 31 December 2023).

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In terms of the NSFR, the regulatory minimum requirement, effective from June 2021, is 100%, a level amply surpassed by all LMUs of the Institution given their funding structure, in which customer deposits are predominant and where the majority of market funding is in the medium/long term. As at 30 June 2024, the NSFR stood at 152% in the TSB LMU, 142% in Banco Sabadell Spain and 146% at the Group level (152%, 134% and 140%, respectively, as at 31 December 2023).

4.3.2 Market risk

Trading activity

Market risk incurred in trading activity is measured using the Value at Risk (VaR) and stressed VaR methodologies, which allow risks to be standardised across different types of financial market transactions.

The market risk incurred in trading activity in terms of 1-day VaR with a 99% confidence interval for the first half of 2024 and the full year 2023 was as follows:

Million euro

30/06/2024

31/12/2023

Average

Maximum

Minimum

Average

Maximum

Minimum

Interest rate risk

2.19

5.29

0.99

1.98

3.96

1.00

Foreign exchange risk (trading)

1.66

2.04

–

2.26

2.52

1.81

Equity

–

Credit spread

0.34

0.79

0.10

0.27

0.72

0.09

Aggregate VaR

4.19

7.51

1.25

4.51

5.94

3.25

The VaR figures for trading activity saw a slight decline in the first half of 2024, mainly in foreign exchange trading, due to the trading desks’ reduced exposure to this risk factor.

Structural interest rate risk

In Banco Sabadell, as part of the continuous improvement process, structural interest rate risk management and monitoring activities are implemented and regularly updated, aligning the Institution with best market practices and current regulations. In particular, throughout the first half of 2024, the Institution has continued to implement and monitor management actions to keep metrics within their target risk thresholds; this applies to both net interest income and economic value of equity. In addition, work has continued on the review and continuous improvement of systems and behavioural models in accordance with the guidelines established by the European Banking Authority (hereinafter, “EBA”).

With regard to the evolution of interest rates, the first half of 2024 was characterised by the stability of benchmark rates in the short term (up to 2 years) and by the 40-60 basis point increase, depending on the currency, in the medium and long term. In the specific case of the euro, the 12-month Euribor stood at 3.58% as at the end of June 2024 (vs. 3.51% as at year-end 2023). The deposit facility rate of the European Central Bank ended the six-month period to 30 June 2024 at 3.75% (-25 basis points over the year), while the base rate of the Bank of England ended at 5.25% (stable over the year).

In 2024, the Bank’s gross performing loans to customers continued to trend towards a higher proportion of fixed-rate transactions (mainly mortgages and business loans), while on the liabilities side, the shift of balances from non-interest-bearing demand deposits to other interest-bearing products, such as term deposits, continued. In addition, ECB funding obtained through the TLTRO III facility matured in full (5 billion euros) in March 2024.

Furthermore, the Group continues to monitor customer behaviour in response to interest rate movements and variations of other economic variables (unemployment rates, gross domestic product, etc.), in order to anticipate possible changes and impacts on the behavioural assumptions used to measure and manage IRRBB. In particular, it analyses customer behaviour related to non-maturing items (changes in the stability of demand deposits and possible migration to other products that earn higher interest) and related to items with an expected maturity that may be different to the contractually established maturity (due to early repayment of loans, early termination of term deposits or recovery time and balance of non-performing exposures).

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4.3.3 Structural foreign exchange risk

The purpose of managing structural foreign exchange risk is to minimise the impact on the value of the Institution’s portfolio/equity in the event of any adverse movements in currency markets. The foregoing takes into account the potential impacts on the capital (CET1) ratio and on the net interest margin, subject to the risk appetite set out in the Risk Appetite Statement (RAS). Furthermore, the levels set for the established risk metrics must be complied with at all times.

Compliance with, and the effectiveness of, the Group’s targets and policies are monitored and reported on a monthly basis to the Board Risk Committee.

The most prominent permanent investments in non-local currencies are made in US dollars, pounds sterling and Mexican pesos.

As regards permanent investments in US dollars, the overall position in this currency has gone from 1,413 million as at 31 December 2023 to 1,489 million as at 30 June 2024. In relation to this position, as at 30 June 2024, a buffer of 40% of total investment is maintained.

In terms of permanent investments in Mexican pesos, the capital buffer has gone from 8,553 million Mexican pesos as at 31 December 2023 (of a total exposure of 16,340 million Mexican pesos) to 9,153 million Mexican pesos as at 30 June 2024 (of a total exposure of 16,863 million Mexican pesos), representing 54% of the total investment made.

As regards permanent investments in pounds sterling, the capital buffer has decreased from 393 million pounds sterling as at 31 December 2023 to 283 million pounds sterling as at 30 June 2024 (total exposure has gone from 2,105 million pounds sterling as at 31 December 2023 to 2,073 million pounds sterling as at 30 June 2024), representing 14% of the total investment made (excluding intangibles).

Currency hedges are continuously reviewed in light of market movements.

The net position of foreign currency assets and liabilities includes the structural position of the Institution, valued as at 30 June 2024, which amounted to 3,399 million euros, of which 2,114 million euros corresponded to permanent equity holdings in pounds sterling, 840 million euros corresponded to permanent equity holdings in US dollars and 394 million euros to permanent equity holdings in Mexican pesos. Net assets and liabilities valued at historical exchange rates are hedged with currency forwards and currency options in line with the Group’s risk management policy.

As at 30 June 2024, the sensitivity of the equity exposure to a 2.5% exchange rate depreciation against the euro of the main currencies to which exposure exists, calculated based on quarterly exchange rate volatility over the past three years, amounted to 85 million euros, of which 62% corresponds to the pound sterling, 25% to the US dollar and 12% to the Mexican peso.

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Note 5 – Minimum own funds and capital management

Capital ratios

The Group calculates minimum capital requirements based on Directive 2013/36/EU, amended by Directive 2019/878/EU (hereinafter, “CRD-V”), and Regulation (EU) 575/2013, amended by Regulation (EU) 2019/876 (hereinafter, “CRR-II”).

The Covid-19 health crisis prompted competent institutions in Europe to temporarily lower liquidity, capital and operational requirements applicable to banks, to ensure that they could continue carrying out their role of providing funding to the real economy. These transitional provisions will end in December 2024, as established in Regulation (EU) 2020/873, although currently these have no impact on the Institution as phase-in ratios coincide with fully-loaded ratios.

On 30 November 2023, Banco Sabadell received the decision of the European Central Bank concerning the minimum prudential requirements applicable as from 1 January 2024, as a result of the Supervisory Review and Evaluation Process (SREP). The requirement, on a consolidated basis, is that Banco Sabadell should keep a phase-in Common Equity Tier 1 (CET1) ratio of at least 8.93% and a phase-in Total Capital ratio of at least 13.42%. These ratios include the minimum required by Pillar 1 (8%, of which 4.50% corresponds to CET1), the Pillar 2 requirement, or Pillar 2R (2.25%, of which 1.27% must be met with CET1), the capital conservation buffer (2.50%), the requirement applicable due to the Bank’s status as an ‘other systemically important institution’ (0.25%), and the countercyclical buffer (0.42%).

As at 30 June 2024, the Group’s phase-in CET1 ratio stood at 13.48%, comfortably exceeding the aforementioned requirements.

On 19 June 2024, the new regulation that updates the Capital Requirements Regulation (CRR-III) and the Capital Requirements Directive (CRD-VI) was published in the Official Journal of the European Union, thus completing the incorporation of the Basel III accord into EU law. The implementation of this regulation will be phased in. Generally speaking, the Capital Requirements Regulation will enter into force on 1 January 2025. The Capital Requirements Directive must be transposed by Member States by 10 January 2026 at the latest and will generally apply from 11 January 2026.

At the macroprudential level, on 16 May 2024 the Bank of Spain announced the start of a procedure to review the framework for setting the countercyclical capital buffer and to establish its corresponding percentage from the fourth quarter of 2024 onwards. Specifically, it envisages establishing a level of 0.5%, to be applied as from 1 October 2025. Thereafter, if cyclical systemic risks remain at a standard level, the Bank of Spain will likely increase that level to 1% as from the fourth quarter of 2025, applicable from 1 October 2026.

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The following table shows the phase-in capital ratios and eligible own funds of the Group as at 30 June 2024 and 31 December 2023:


Thousand euro

	30/06/2024		31/12/2023		Change (%)

Capital		680,028		680,028		—
Reserves		13,536,114		13,198,328		2.56
Valuation adjustments		(417,516)		(471,695)		(11.49)
Deductions		(3,001,209)		(3,059,900)		(1.92)
CET1 capital		10,797,417		10,346,761		4.36

CET1 (%)		13.48		13.19		2.20

Preference shares, convertible bonds and deductions		1,750,000		1,750,000		—
AT1 capital		1,750,000		1,750,000		—

AT1 (%)		2.19		2.23		(1.79)
Tier 1 capital		12,547,417		12,096,761		3.73

Tier 1 (%)		15.67		15.42		1.62
Tier 2 capital		2,294,112		1,829,460		25.40

Tier 2 (%)		2.87		2.33		23.18
Capital base		14,841,529		13,926,221		6.57

Minimum capital requirement		10,664,694		10,445,833		2.10
Capital surplus		4,176,835		3,480,388		20.01

Total capital ratio (%)		18.54		17.76		4.39

Risk-weighted assets (RWAs)		80,070,833		78,427,616		2.10

Common Equity Tier 1 (CET1) capital accounts for 72.75% of eligible capital. Deductions are mainly comprised of intangible assets, goodwill and deferred tax assets.

Tier 1 comprises, in addition to CET1 funds, items that largely make up Additional Tier 1 capital (11.79% of own funds), which are capital items comprised of preferred securities.

Tier 2 capital provides 15.46% of the solvency ratio and is essentially made up of subordinated debt. With regard to subordinated debt, the new issue of Subordinated Debt 1/2024 for 500 million euros carried out on 27 March 2024 is worthy of note.

As for risk-weighted assets (RWAs), these increased by 1,643 million euros in the period. At Banco Sabadell ex-TSB, the increase in RWAs was mainly due to the growth of lending and to the front-loading of impacts related mainly to changes in the parameters of models used for SMEs, corporates and groups. These impacts were partially offset by a synthetic securitisation carried out in June 2024 on a 1.1 billion euro project finance portfolio. The reduction of RWAs as a result of the natural improvement of the portfolio’s risk profile over time is also worth mentioning. In TSB, it is worth noting the increases in RWAs as a result of lending growth and the appreciation of the pound against the euro.

Leverage ratio

The leverage ratio as at 30 June 2024 and 31 December 2023 is shown below:


Thousand euro

	30/06/2024		31/12/2023

Tier 1 capital		12,547,417		12,096,761
Exposure		239,930,290		233,254,941
Leverage ratio		5.23 %		5.19 %

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During the first half of 2024, the leverage ratio increased by 4 basis points compared to the leverage ratio as at 31 December 2023, mainly due to the positive evolution of Common Equity Tier 1 (CET1) capital thanks to the profit earned during the period, the evolution of tax assets that must be deducted from CET1 and the evolution of valuation adjustments. The improvement in CET1 was partially offset by increased exposure, mainly due to the growth of lending and of deposits in central banks.

For more information on capital ratios and the leverage ratio, their composition, parameters and their management, see the Pillar III Disclosures report, which is published every quarter and is available on the Bank’s website (www.grupbancsabadell.com) in the section “Shareholders and Investors / Economic and financial information”.

MREL

The requirements that must be met from 1 January 2024 are as follows:

–

The MREL is 22.52% of the total risk exposure amount (TREA) and 6.35% of the leverage ratio exposure (LRE).

–

The subordination requirement is 17.31% of the TREA and 6.35% of the LRE.

The own funds used by the Institution to meet the combined buffer requirement (CBR) will not be eligible to meet the MREL and subordination requirements expressed in terms of the TREA.

As at 30 June 2024, Banco Sabadell was compliant with the MREL requirements established by the Single Resolution Board (SRB) and in force as from 1 January 2024.

The table shown below sets out details of the Group’s MREL as a percentage of the TREA, as at 30 June 2024 and 31 December 2023:



	30/06/2024		31/12/2023

CET1, phase-in		13.48 %		13.19 %

AT1, phase-in		2.19 %		2.23 %

Tier 2, phase-in and subordinated liabilities		3.26 %		2.68 %

Senior non-preferred debt		5.03 %		5.14 %
Senior preferred debt		5.40 %		4.60 %
Total MREL		29.36 %		27.84 %

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Note 6 – Fair value of assets and liabilities

Financial assets and financial liabilities

The methodology and classification of the fair value by hierarchy is explained in Note 6 to the Group’s 2023 consolidated annual financial statements.

Determination of the fair value of financial instruments

A comparison between the value at which the Group’s financial assets and financial liabilities are recognised on the condensed consolidated balance sheets, as at 30 June 2024 and 31 December 2023, and their corresponding fair values is shown below:


Thousand euro
			30/06/2024				31/12/2023

	Note		Carrying amount		Fair value		Carrying amount		Fair value

Assets:

Cash, cash balances at central banks and other demand deposits		7		29,501,930		29,501,930		29,985,853		29,985,853

Financial assets held for trading				2,949,768		2,949,768		2,706,489		2,706,489

Non-trading financial assets mandatorily at fair value through profit or loss		8, 9, 10		159,758		159,758		153,178		153,178

Financial assets at fair value through other comprehensive income		8, 9		6,527,876		6,527,876		6,269,297		6,269,297

Financial assets at amortised cost		8, 10		190,489,286		185,695,439		180,913,793		175,310,626

Derivatives – Hedge accounting				2,600,876		2,600,876		2,424,598		2,424,598
Total assets				232,229,494		227,435,647		222,453,208		216,850,041

Thousand euro
			30/06/2024				31/12/2023

	Note		Carrying amount		Fair value		Carrying amount		Fair value

Liabilities:

Financial liabilities held for trading				2,862,400		2,862,400		2,867,459		2,867,459

Financial liabilities at amortised cost		15, 16, 17		225,027,229		224,868,895		216,071,766		215,366,894

Derivatives – Hedge accounting				981,110		981,110		1,171,957		1,171,957
Total liabilities				228,870,739		228,712,405		220,111,182		219,406,310

As shown in the first table of this Note, as at 30 June 2024 the fair value of financial assets at amortised cost is approximately 4.8 billion euros below their carrying amount. This difference is explained for the most part by the impact of interest rates on the fair value of fixed-rate mortgages granted by the Group to its customers in Spain and the United Kingdom in previous years.

A-741

Financial instruments at fair value

The following tables show the main financial instruments recognised at fair value in the accompanying condensed consolidated balance sheets, broken down by the IFRS 13 level to which they have been assigned:


Thousand euro
			30/06/2024
	Note		Level 1		Level 2		Level 3		Total

Assets:
Financial assets held for trading				556,141		2,393,627		—		2,949,768
Derivatives				—		2,294,766		—		2,294,766
Equity instruments				—		—		—		—
Debt securities		8		556,141		98,861		—		655,002
Loans and advances – Customers				—		—		—		—

Non-trading financial assets mandatorily at fair value through profit or loss				34,653		22,155		102,950		159,758
Equity instruments		9		21,442		21,187		20,162		62,791
Debt securities		8		13,211		968		57,218		71,397
Loans and advances				—		—		25,570		25,570
Financial assets at fair value through other comprehensive income				4,854,019		1,587,266		86,591		6,527,876
Equity instruments		9		470		145,814		54,500		200,784
Debt securities		8		4,853,549		1,441,452		32,091		6,327,092
Loans and advances				—		—		—		—
Derivatives – Hedge accounting				—		2,600,876		—		2,600,876
Total assets				5,444,813		6,603,924		189,541		12,238,278


Thousand euro
		30/06/2024
	Note	Level 1		Level 2		Level 3		Total

Liabilities:
Financial liabilities held for trading			400,701		2,461,699		—		2,862,400
Derivatives			—		2,461,699		—		2,461,699
Short positions			400,701		—		—		400,701
Deposits with credit institutions			—		—		—		—
Derivatives – Hedge accounting			—		981,110		—		981,110
Total liabilities			400,701		3,442,809		—		3,843,510


Thousand euro
			31/12/2023
	Note		Level 1		Level 2		Level 3		Total

Assets:
Financial assets held for trading				142,495		2,563,994		—		2,706,489
Derivatives				—		2,563,994		—		2,563,994
Equity instruments				—		—		—		—
Debt securities		8		142,495		—		—		142,495
Loans and advances – Customers				—		—		—		—
Non-trading financial assets mandatorily at fair value through profit or loss				31,255		15,974		105,949		153,178
Equity instruments		9		18,398		14,840		19,098		52,336
Debt securities		8		12,857		1,134		51,753		65,744
Loans and advances				—		—		35,098		35,098
Financial assets at fair value through other comprehensive income				4,656,989		1,522,988		89,320		6,269,297
Equity instruments		9		582		130,441		52,915		183,938
Debt securities		8		4,656,407		1,392,547		36,405		6,085,359
Loans and advances				—		—		—		—
Derivatives – Hedge accounting				—		2,424,598		—		2,424,598
Total assets				4,830,739		6,527,554		195,269		11,553,562

A-742


Thousand euro
		31/12/2023
	Note	Level 1		Level 2		Level 3		Total

Liabilities:
Financial liabilities held for trading			337,373		2,530,086		—		2,867,459
Derivatives			—		2,530,086		—		2,530,086
Short positions			337,373		—		—		337,373
Deposits with credit institutions			—		—		—		—
Derivatives – Hedge accounting			—		1,171,957		—		1,171,957
Total liabilities			337,373		3,702,043		—		4,039,416

Movements in the balances of financial assets and financial liabilities classified as Level 3 that are disclosed in the accompanying condensed consolidated balance sheets are shown below:


Thousand euro
	Assets		Liabilities
Balance as at 31 December 2023		195,269		—

Valuation adjustments recognised in profit or loss (*)		8,423		—
Valuation adjustments not recognised in profit or loss		1,030		—
Purchases, sales and write-offs		(9,065)		—
Net additions/(removals) in Level 3		(432)		—
Exchange differences and other		(5,684)		—
Balance as at 30 June 2024		189,541		—

(*) Relates to securities retained on the balance sheet.

Income from sales of financial instruments classified as Level 3, recognised in the condensed consolidated income statement for the six-month period ended 30 June 2024, was not significant.

Details of financial instruments that were transferred to different valuation levels in the first half of 2024 are as follows:


Thousand euro
	30/06/2024
	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			—		—		—		—		—		—
Non-trading financial assets mandatorily at fair value through profit or loss			—		—		—		—		—		—
Financial assets designated at fair value through profit or loss			—		—		—		—		—		—
Financial assets at fair value through other comprehensive income			—		—		—		—		—		432
Derivatives			—		—		—		—		—		—

Liabilities:
Financial liabilities held for trading			—		—		—		—		—		—
Derivatives – Hedge accounting			—		—		—		—		—		—
Total			—		—		—		—		—		432

A-743

Details of financial instruments that were transferred to different valuation levels in 2023 are as follows:


Thousand euro
	31/12/2023
	From:	Level 1				Level 2				Level 3
	To:	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2

Assets:
Financial assets held for trading			—		—		—		—		—		—
Non-trading financial assets mandatorily at fair value through profit or loss			—		—		—		—		—		—
Financial assets designated at fair value through profit or loss			—		—		—		—		5,500		—
Financial assets at fair value through other comprehensive income			687,365		4,520		—		—		—		—
Derivatives			—		—		—		—		—		—

Liabilities:
Financial liabilities held for trading			—		—		—		—		—		—
Derivatives – Hedge accounting			—		—		—		—		—		—
Total			687,365		4,520		—		—		5,500		—

Transfers from Level 1 to Level 2 in 2023 corresponded mainly to bonds issued by US government agencies for which, given their characteristics, it was determined that their market value should be obtained primarily using directly or indirectly observable market data.

As at 30 June 2024 and 31 December 2023, there were no derivatives using equity instruments as underlying assets or discretionary profit-sharing arrangements of significant amount in any companies.

Financial instruments at amortised cost

The following tables show the fair value of the main financial instruments recognised at amortised cost in the accompanying consolidated balance sheets:

Thousand euro

30/06/2024

Level 1

Level 2

Level 3

Total

Assets:

Financial assets at amortised cost:

Debt securities

18,775,970

1,809,204

749,645

21,334,819

Loans and advances

—

22,746,926

141,613,694

164,360,620

Total assets

18,775,970

24,556,130

142,363,339

185,695,439

Thousand euro

30/06/2024

Level 1

Level 2

Level 3

Total

Liabilities:

Financial liabilities at amortised cost (*):

Deposits

—

192,636,190

—

192,636,190

Debt securities issued

22,982,154

2,257,692

—

25,239,846

Total liabilities

22,982,154

194,893,882

—

217,876,036

(*) As at 30 June 2024, the Group had other financial liabilities amounting to 6,992,859 thousand euros.

Thousand euro

31/12/2023

Level 1

Level 2

Level 3

Total

Assets:

Financial assets at amortised cost:

Debt securities

18,563,516

1,575,850

303,590

20,442,956

Loans and advances

—

20,952,925

133,914,744

154,867,669

Total assets

18,563,516

22,528,775

134,218,334

175,310,625

A-744

Thousand euro

31/12/2023

Level 1

Level 2

Level 3

Total

Liabilities:

Financial liabilities at amortised cost (*):

Deposits

—

183,661,142

—

183,661,142

Debt securities issued

20,405,507

4,966,959

—

25,372,466

Total liabilities

20,405,507

188,628,101

—

209,033,608

(*) As at 31 December 2023, the Group had other financial liabilities amounting to 6,333,286 thousand euros.

In general, the fair value of “Financial assets at amortised cost” and “Financial liabilities at amortised cost” has been estimated using the discounted cash flow method, applying market interest rates as at the end of each period adjusted for the credit spread and incorporating any behavioural assumptions deemed relevant, with the exception of debt securities with active markets, for which it has been estimated using period-end quoted prices.

The fair value of the heading “Cash, cash balances at central banks and other demand deposits” has been likened to its carrying amount, as these are mainly short-term balances.

Financial instruments at cost

As at 30 June 2024 and 31 December 2023, there were no equity instruments valued at their cost of acquisition that could be considered significant.

Non-financial assets

Real estate assets

The methodology used by the Group to determine the fair value of real estate assets is explained in Note 6 to the 2023 consolidated annual financial statements.

In the first half of 2024, there were no significant changes in the methods used to value the Group’s real estate assets.

Note 7 – Cash, cash balances at central banks and other demand deposits

The composition of this heading in the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

By nature:
Cash		613,621		726,122
Cash balances at central banks		28,216,210		28,566,694
Other demand deposits		672,099		693,037
Total		29,501,930		29,985,853

A-745

Note 8 – Debt securities

Debt securities reported in the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 are analysed below:


Thousand euro
	30/06/2024	31/12/2023
By heading:
Financial assets held for trading	655,002	142,495
Non-trading financial assets mandatorily at fair value through profit or loss	71,397	65,744
Financial assets at fair value through other comprehensive income	6,327,092	6,085,359
Financial assets at amortised cost	22,638,784	21,500,927
Total	29,692,275	27,794,525
By nature:
General governments	27,079,374	26,250,576
Credit institutions	2,954,371	2,072,205
Other sectors	584,802	424,261
Stage 3 assets	899	899
Impairment allowances	(128)	(276)
Other valuation adjustments (interest, fees and commissions, other)	(927,043)	(953,140)
Total	29,692,275	27,794,525

The breakdown of debt securities classified according to their credit risk and the movement of impairment allowances associated with these instruments are included, together with those of other financial assets, in Note 10 to these condensed consolidated interim financial statements.

Note 9 – Equity instruments

Equity instruments reported in the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 are analysed below:


Thousand euro
	30/06/2024	31/12/2023
By heading:

Non-trading financial assets mandatorily at fair value through profit or loss	62,791	52,336

Financial assets at fair value through other comprehensive income	200,784	183,938
Total	263,575	236,274

By nature:

Resident sector	223,683	200,584

Credit institutions	12,078	9,408

Other	211,605	191,176

Non-resident sector	18,036	18,007

Credit institutions	—	—

Other	18,036	18,007

Participations in investment vehicles	21,856	17,683
Total	263,575	236,274

A-746

Note 10 – Loans and advances

Central banks and Credit institutions

The breakdown of the headings “Loans and advances – Central banks” and “Loans and advances – Credit institutions” of the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024	31/12/2023

By heading:
Financial assets at amortised cost	10,424,983	7,152,467
Total	10,424,983	7,152,467

By nature:
Deposits with agreed maturity	739,022	974,533
Reverse repos	9,177,467	5,601,564
Other	466,952	537,709
Stage 3 assets	2	—
Impairment allowances	(2,334)	(3,135)
Other valuation adjustments (interest, fees and commissions, other)	43,874	41,796
Total	10,424,983	7,152,467

Customers

The breakdown of the heading “Loans and advances – Customers” (General governments and Other sectors) of the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024	31/12/2023

By heading:

Non-trading financial assets mandatorily at fair value through profit or loss	25,570	35,098

Financial assets at amortised cost	157,425,519	152,260,399
Total	157,451,089	152,295,497

By nature:

Bank overdrafts and other short-term borrowings	3,594,802	2,769,073

Trade credit	8,030,855	7,465,119

Finance leases	2,385,720	2,236,140

Secured loans	93,291,060	91,226,348

Reverse repos	—	17,413

Other term loans	47,887,516	46,136,443

Stage 3 assets	5,188,218	5,472,296

Impairment allowances	(3,106,668)	(3,198,969)

Other valuation adjustments (interest, fees and commissions, other)(*)	179,586	171,634
Total	157,451,089	152,295,497

By sector:

General governments	9,470,218	8,957,524

Other sectors	145,719,735	140,893,012

Stage 3 assets	5,188,218	5,472,296

Impairment allowances	(3,106,668)	(3,198,969)

Other valuation adjustments (interest, fees and commissions, other)(*)	179,586	171,634
Total	157,451,089	152,295,497

(*) Other valuation adjustments related to transactions classified as stage 3 amounted to 39,714 thousand euros as at 30 June 2024 and 37,236 thousand euros as at 31 December 2023.

A-747

Financial assets classified according to their credit risk

The breakdown of financial assets, not considering valuation adjustments, classified according to their credit risk as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
Stage 1	30/06/2024	31/12/2023

Debt securities	30,618,547	28,747,042
Loans and advances	153,972,389	145,291,906
Customers	143,589,227	138,178,496
Central banks and Credit institutions	10,383,162	7,113,410
Total stage 1	184,590,936	174,038,948

By sector:
General governments	36,535,724	35,196,900
Central banks and Credit institutions	13,337,533	9,185,616
Other private sectors	134,717,679	129,656,433
Total stage 1	184,590,936	174,038,948

Stage 2	30/06/2024	31/12/2023

Debt securities	—	—
Loans and advances	11,601,005	11,672,436
Customers	11,600,726	11,672,041
Central banks and Credit institutions	279	396
Total stage 2	11,601,005	11,672,436

By sector:
General governments	13,865	11,200
Central banks and Credit institutions	279	396
Other private sectors	11,586,861	11,660,840
Total stage 2	11,601,005	11,672,436

Stage 3	30/06/2024	31/12/2023

Debt securities	899	899
Loans and advances	5,188,220	5,472,297
Customers	5,188,218	5,472,296
Central banks and Credit institutions	2	—
Total stage 3	5,189,119	5,473,196

By sector:
General governments	345	802
Central banks and Credit institutions	2	—
Other private sectors	5,188,772	5,472,394
Total stage 3	5,189,119	5,473,196

Total stages	201,381,060	191,184,580

A-748

Movements of gross values, excluding valuation adjustments, of assets subject to impairment by the Group during the six-month period ended 30 June 2024 were as follows:


Thousand euro

	Stage 1		Stage 2		Stage 3		Of which: purchased credit- impaired		Total
Balance as at 31 December 2023		174,038,948		11,672,436		5,473,196		109,133		191,184,580

Transfers between stages		(1,303,428)		640,050		663,378		—		—
Stage 1		2,399,816		(2,322,226)		(77,590)		—		—
Stage 2		(3,546,618)		3,753,630		(207,012)		—		—
Stage 3		(156,626)		(791,354)		947,980		—		—
Increases		31,656,346		771,112		318,560		2,986		32,746,019
Decreases		(20,922,971)		(1,610,496)		(1,089,266)		(8,570)		(23,622,733)
Transfers to write-offs		—		—		(195,986)		—		(195,986)
Adjustments for exchange differences		1,122,040		127,903		19,237		2,955		1,269,180
Balance as at 30 June 2024		184,590,936		11,601,005		5,189,119		106,504		201,381,060

Movements of impaired financial assets derecognised from the asset side of the balance sheet as the likelihood of them being recovered during the six-month period ended 30 June 2024 was deemed to be remote were as follows:


Thousand euro
Balance as at 31 December 2023			6,220,318

Additions			261,007
Use of accumulated impairment balance			182,578
Directly recognised on income statement			13,408
Contractually payable interest			65,021
Other items			—

Disposals			(171,435)
Collections of principal in cash from counterparties			(25,684)
Collections of interest in cash from counterparties			(870)
Debt forgiveness			(10,858)
Expiry of statute-of-limitations period			—
Forbearance			—
Sales			(121,388)
Foreclosure of tangible assets			—
Other items			(12,635)

Exchange differences			9,580
Balance as at 30 June 2024			6,319,470

A-749

Allowances

Financial asset impairment allowances broken down by condensed consolidated balance sheet heading as at 30 June 2024 and 31 December 2023 were as follows:


Thousand euro
*Stage 1*	30/06/2024	31/12/2023

Debt securities	128	276
Loans and advances	345,639	372,373
Central banks and Credit institutions	2,333	2,752
Customers	343,306	369,621
Total stage 1	345,767	372,649

*Stage 2*

Debt securities	—	—
Loans and advances	439,759	470,529
Central banks and Credit institutions	—	383
Customers	439,759	470,146
Total stage 2	439,759	470,529

*Stage 3*

Debt securities	—	—
Loans and advances	2,323,604	2,359,203
Central banks and Credit institutions	1	—
Customers	2,323,603	2,359,202
Total stage 3	2,323,604	2,359,203

Total stages	3,109,130	3,202,381

The movement of impairment allowances allocated by the Group to cover credit risk during the six-month period ended 30 June 2024 was as follows:

Thousand euro

Individually measured

Collectively measured

Total

Stage 2

Stage 3

Stage 1

Stage 2

Stage 3

Balance as at 31 December 2023

11,786

500,083

372,650

458,743

1,859,119

3,202,381

Movements reflected in impairment gains/(losses) (*)

(2,083)

(24,428)

3,123

46,810

264,995

288,417

Increases due to origination

—

153,824

—

153,824

Changes due to credit risk variance

(611)

11,687

(55,531)

54,361

261,951

271,857

Other movements

(1,472)

(36,115)

(95,170)

(7,551)

3,044

(137,264)

Movements not reflected in impairment gains/(losses)

(6,010)

(37,643)

(30,499)

(69,930)

(238,619)

(382,700)

Transfers between stages

(6,010)

(11,364)

(30,499)

(62,694)

110,567

—

Stage 1

236

32,535

(30,498)

(2,299)

—

Stage 2

(3,694)

(2,935)

(58,052)

97,223

(32,542)

—

Stage 3

(2,342)

(8,665)

(4,982)

(129,419)

145,408

—

Utilisation of allocated provisions

—

(26,279)

—

(7,236)

(346,113)

(379,628)

Other movements (**)

—

(3,072)

Adjustments for exchange differences

(3)

(777)

493

445

874

1,032

Balance as at 30 June 2024

3,690

437,235

345,767

436,069

1,886,369

3,109,130

(*) This figure, corresponding to the amortisation charged to results on impaired financial assets derecognised from the asset side of the balance sheet and the recovery of write-offs, has been recognised with a balancing entry under the heading “Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains” (see Note 27).

(**) Corresponds to credit loss allowances transferred to non-current assets held for sale and investment properties.

A-750

Sensitivity analysis of the key variables of macroeconomic scenarios

An analysis of the sensitivity of the expected loss of the Group and the main geographies and of its impact, by segment, on impairment allowances should any of the key variables show deviations, ceteris paribus, in the actual macroeconomic environment with respect to the most probable baseline macroeconomic scenario envisaged in the Group’s business plan, is set out below.


	Group
	Change in the variable (*)		Impact on expected loss
	Change in the variable (*)		Corporates			Individuals
GDP growth deviation		-100 bp		5.2	%		2.0	%
GDP growth deviation		+100 bp		-4.5	%		-1.8	%

Unemployment rate deviation		+100 bp		1.9	%		2.5	%
Unemployment rate deviation		-100 bp		-1.7	%		-1.9	%

House price growth deviation		-100 bp		0.7	%		1.1	%
House price growth deviation		+100 bp		-0.7	%		-1.0	%

	Spain
	*Change in the variable ()**		Impact on expected loss
	*Change in the variable ()**		Corporates			Individuals
GDP growth deviation		-100 bp		5.2	%		2.6	%
GDP growth deviation		+100 bp		-4.5	%		-2.4	%

Unemployment rate deviation		+100 bp		1.9	%		0.9	%
Unemployment rate deviation		-100 bp		-1.7	%		-0.9	%

House price growth deviation		-100 bp		0.7	%		1.3	%
House price growth deviation		+100 bp		-0.7	%		-1.2	%

	United Kingdom
	Change in the *variable ()**		Impact on expected loss
	Change in the *variable ()**		Individuals
Unemployment rate deviation ()**		+100 bp		8.2%
Unemployment rate deviation ()**		-100 bp		-5.5%

House price growth deviation		-100 bp		0.4%
House price growth deviation		+100 bp		-0.4%

(*) Changes to macroeconomic variables are applied in absolute terms.

A-751

Note 11 – Tangible assets

The composition of this heading in the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024								31/12/2023
	Cost		Depreciation		Impairment		Net amount		Cost		Depreciation		Impairment		Net amount

Property, plant and equipment		3,954,198		(1,908,203)		(44,411)		2,001,584		3,930,317		(1,818,023)		(45,188)		2,067,106

For own use:		3,930,896		(1,893,391)		(44,411)		1,993,094		3,907,505		(1,804,259)		(45,188)		2,058,058
Computer equipment and related facilities		605,891		(444,024)		—		161,867		587,570		(415,704)		—		171,866
Furniture, vehicles and other facilities		926,591		(597,951)		—		328,640		935,347		(590,146)		—		345,201
Buildings		2,314,226		(840,345)		(44,411)		1,429,470		2,329,727		(789,168)		(45,188)		1,495,371
Works in progress		45,734		—		—		45,734		19,011		—		—		19,011
Other		38,454		(11,071)		—		27,383		35,850		(9,241)		—		26,609

Leased out under operating leases		23,302		(14,812)		—		8,490		22,812		(13,764)		—		9,048

Investment properties		350,239		(63,345)		(72,683)		214,211		369,376		(62,302)		(77,476)		229,598

Buildings		350,239		(63,345)		(72,683)		214,211		369,376		(62,302)		(77,476)		229,598
Rural property, plots and sites		—		—		—		—		—		—		—		—
Total		4,304,437		(1,971,548)		(117,094)		2,215,795		4,299,693		(1,880,325)		(122,664)		2,296,704

As at 30 June 2024, the cost of property, plant and equipment for own use includes right-of-use assets corresponding to leased tangible assets in which the Group acts as lessee, in the amount of 1,388,761 thousand euros, depreciated by 536,909 thousand euros and impaired in the amount of 39,394 thousand euros as at the aforesaid date (1,359,188 thousand euros as at 31 December 2023, depreciated by 486,883 thousand euros and impaired in the amount of 40,026 thousand euros as at that date).

A-752

Note 12 – Intangible assets

The composition of this heading as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

Goodwill:		1,018,311		1,018,311
Banco Urquijo		473,837		473,837
Grupo Banco Guipuzcoano		285,345		285,345
From acquisition of Banco BMN Penedés assets		245,364		245,364
Other		13,765		13,765

Other intangible assets:		1,475,427		1,464,763
With a finite useful life:		1,475,427		1,464,763
Private Banking Business, Miami		1,561		1,825
Contractual relations with TSB customers and brand		15,408		17,509
Computer software		1,457,474		1,444,408
Other		984		1,021
Total		2,493,738		2,483,074

In the first half of 2024, Banco Sabadell carried out an analysis to evaluate the existence of any potential impairment of its goodwill.

The Group monitors total goodwill across the ensemble of Cash-Generating Units (CGUs) that make up the Banking Business Spain operating segment.

The value in use of the Banking Business Spain operating segment is used to determine its recoverable amount. The valuation method used in this analysis was that of discounting future distributable net profit associated with the activity carried out by the Banking Business Spain operating segment until 2028, plus an estimated terminal value.

The approach used to determine the values of the assumptions is based both on the projections and on past experience. Those values are compared against external information sources, where available.

In June 2024, to calculate the terminal value, 2028 was taken as the reference year, using a growth rate in perpetuity of 1.8% (same percentage as in 2023), which does not exceed the long-term average growth rate of the market in which the operating segment is active. The discount rate used was 10.1% (11.2% in 2023), determined using the Capital Asset Pricing Model (CAPM); it therefore comprises a risk-free rate plus a premium that reflects the inherent risk of the operating segment being evaluated.

The recoverable amount obtained is higher than the carrying amount; therefore, no impairment has been recognised.

In addition, the Group carried out a sensitivity analysis, making reasonable adjustments to the main assumptions used to calculate the recoverable amount.

A-753

This analysis consisted of adjusting the following:

–

Discount rate +/- 0.5%.

–

Growth rate in perpetuity +/- 0.5%.

–

Minimum capital requirement +/-0.75%.

–

Net interest margin (NIM) / Average Total Assets (ATAs) in perpetuity +/- 5 basis points.

–

Cost of risk in perpetuity +/- 10 basis points.

The sensitivity analysis does not alter the conclusions drawn from the impairment test. In all scenarios defined in that analysis, the recoverable amount obtained is greater than the carrying amount.

The impairment of the Group’s computer software, which mainly provides services to the Bank and to TSB, is evaluated by reviewing the recoverable amounts of Banking Business Spain and Banking Business United Kingdom.

In the case of Banking Business United Kingdom, the valuation method used in the analysis was that of discounting future distributable net profit associated with the activity carried out up to 2028. To calculate the terminal value, 2028 was taken as the reference year, using a growth rate in perpetuity of 1.7% (1.7% in 2023), which does not exceed the long-term average growth rate of the market in which the operating segment is active. The discount rate used was 11.8% (12.4% in 2023), determined using the CAPM method; it therefore comprises a risk-free rate plus a premium that reflects the inherent risk of the operating segment being evaluated. The evaluation did not reveal the need to recognise any impairment in the value of these assets.

Note 13 – Other assets and liabilities

The composition of the “Other assets” heading as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

Insurance contracts linked to pensions		78,747		80,693
Inventories		54,235		62,344
Rest of other assets		329,269		293,086

Total		462,251		436,123

The “Rest of other assets” item includes mainly prepaid expenses, the accrual of customer fees and commissions, and transactions in progress pending settlement.

The composition of the “Other liabilities” heading as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

Other accruals/deferrals		409,498		574,997
Rest of other liabilities		268,160		147,527

Total		677,658		722,524

The “Rest of other liabilities” item mainly includes transactions in progress pending settlement.

A-754

Note 14 – Non-current assets and disposal groups classified as held for sale

The breakdown of the headings “Non-current assets and disposal groups classified as held for sale” and “Liabilities included in disposal groups classified as held for sale” of the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

Assets		1,072,898		991,045
Loans and advances		117,631		6,328
Customers		117,631		6,328
Equity instruments		159,748		159,748
Real estate exposure		675,875		708,051
Properties for own use		50,902		49,432
Foreclosed assets		624,973		658,619
Other tangible assets		105,995		103,864
Rest of other assets		13,649		13,054

Impairment allowances		(215,213)		(220,167)

Non-current assets and disposal groups classified as held for sale		857,685		770,878

Liabilities		59,010		13,347
Financial liabilities at amortised cost		47,680		12,682
Tax liabilities		11,330		665

Liabilities included in disposal groups classified as held for sale		59,010		13,347

The increase in the amount of loans and advances recognised as non-current assets held for sale as at 30 June 2024 was due to the sale of a portfolio of non-performing loans signed during the second quarter of 2024. These loans and advances have been reclassified as “Non-current assets and disposal groups classified as held for sale” until this transaction is fully closed.

Note 15 – Deposits in central banks and credit institutions

The breakdown of the balance of deposits in central banks and credit institutions in the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

By heading:
Financial liabilities at amortised cost		17,090,348		23,616,543

Total		17,090,348		23,616,543

By nature:
Demand deposits		263,126		222,195
Deposits with agreed maturity		5,807,525		12,274,576
Repurchase agreements		10,802,969		10,821,129
Other accounts		122,181		74,163
Valuation adjustments		94,547		224,480

Total		17,090,348		23,616,543

A-755

Note 16 – Customer deposits

The balance of customer deposits on the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 breaks down as follows:


Thousand euro
	30/06/2024		31/12/2023

By heading:
Financial liabilities at amortised cost		175,548,034		160,330,653
Total		175,548,034		160,330,653

By nature:
Demand deposits		135,069,985		134,242,908
Deposits with agreed maturity		22,175,910		21,081,166
Hybrid financial liabilities		5,618,942		4,507,056
Repurchase agreements		12,309,382		200,336
Other valuation adjustments (interest, fees and commissions, other)		373,815		299,187
Total		175,548,034		160,330,653

By sector:
General governments		19,169,343		7,869,390
Other sectors		156,004,876		152,162,076
Other valuation adjustments (interest, fees and commissions, other)		373,815		299,187
Total		175,548,034		160,330,653

In the first half of 2024, the “Repurchase agreements” heading increased mainly as a result of the Public Treasury’s cash management operations through reverse repos, in particular those known as simultaneous reverse repos or repurchase transactions. The outstanding balance of these transactions amounted to 12,249,145 thousand euros. These transactions led to interest expenses of 122,590 thousand euros, which were recognised in the condensed consolidated income statement for the six-month period ended 30 June 2024.

Note 17 – Debt securities in issue

The breakdown of the balance of debt securities issued by the Group by type of issuance and recognised on the condensed consolidated balance sheets as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
	30/06/2024		31/12/2023

Straight bonds/debentures		8,781,800		8,671,400
Straight bonds		8,750,500		8,630,100
Structured bonds		31,300		41,300
Commercial paper		652,348		1,382,828
Mortgage covered bonds		6,875,000		7,475,000
TSB covered bonds		3,750,044		3,164,376
Asset-backed securities		1,112,635		1,370,573
Subordinated marketable debt securities		4,050,000		3,550,000
Subordinated bonds		2,300,000		1,800,000
Preferred securities		1,750,000		1,750,000

Valuation and other adjustments		174,161		177,107
Total		25,395,988		25,791,284

Schedule III shows details of the issues carried out by the Group in the first half of 2024.

A-756

Note 18 – Provisions

Movements in the six-month period ended 30 June 2024 in the “Provisions” heading of the condensed consolidated balance sheet are shown below:


Thousand euro

	Pensions and other post employment defined benefit obligations			Other long term employee benefits			Pending legal issues and tax litigation			Commitments and guarantees given			Other provisions			Total

Balance as at 31 December 2023		58,308			69			60,550			165,376			251,789			536,092

Scope additions / exclusions		—			—			—			—			—			—

Interest and similar expenses - pension commitments		894			1			—			—			—			895

*Allowances charged to income statement - staff expenses ()**		742			2			—			—			—			744

Allowances not charged to income		—			—			—			—			—			—

Allowances charged to income statement - provisions		337			—			27,226			(28,085	)		25			(497	)
Allocation of provisions		337			—			29,005			79,206			6,342			114,890
Reversal of provisions		—			—			(1,779	)		(107,291	)		(6,317	)		(115,387	)
Actuarial losses / (gains)		—			—			—			—			—			—

Exchange differences		(210	)		—			—			(646	)		1,853			997

Amounts used		(5,512	)		(35	)		(18,489	)		—			(41,724	)		(65,760	)
Net contributions by the sponsor		(1,831	)		—			—			—			—			(1,831	)
Pension payments		(3,681	)		(35	)		—			—			—			(3,716	)
Other		—			—			(18,489	)		—			(41,724	)		(60,213	)

Other movements		109			—			—			1,701			4,465			6,275
Balance as at 30 June 2024		54,668			37			69,287			138,346			216,408			478,746

(*) See Note 26.

The reduction in the balance of “Other provisions” in the first half of 2024 was mainly due to disbursements made to compensate certain customers for legal contingencies arising from claims in connection with certain general terms and conditions of contracts, as well as disbursements made in connection with TSB’s restructuring process announced and provisioned for prior to the start of the six-month period ended 30 June 2024.

The Group’s main provisions and contingent liabilities are described in Note 22 to the 2023 consolidated annual financial statements.

Note 19 – Capital

Share capital as at the end of the first half of 2024

The Bank’s share capital as at 30 June 2024 stood at 680,027,680.875 euros, represented by 5,440,221,447 registered shares with a par value of 0.125 euros each. All shares are fully paid up and numbered in sequential order from 1 to 5,440,221,447, inclusive.

Changes in share capital in the first half of 2024

No changes in share capital have taken place in the first half of 2024.

A-757

Note 20 – Off-balance sheet exposures

The composition of off-balance sheet exposures as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
Commitments and guarantees given	Note	30/06/2024	31/12/2023

Loan commitments given		27,631,400	27,035,812
Of which, amount classified as stage 2		769,517	986,368
Of which, amount classified as stage 3		87,705	97,219
Drawable by third parties		27,631,400	27,035,812
By credit institutions		14,066	54
By general governments		1,052,272	910,744
By other resident sectors		16,212,473	15,565,366
By non-residents		10,352,589	10,559,648

Provisions recognised on liabilities side of the balance sheet	18	59,029	72,888
*Financial guarantees given ()**		1,903,075	2,064,396
Of which, amount classified as stage 2		141,957	165,222
Of which, amount classified as stage 3		43,789	44,828

Provisions recognised on liabilities side of the balance sheet (**)	18	18,260	23,814
Other commitments given		8,327,242	7,942,724
Of which, amount classified as stage 2		375,574	372,597
Of which, amount classified as stage 3		166,928	222,999
Other guarantees given		6,860,026	6,832,086
Assets earmarked for third-party obligations		—	—
Irrevocable letters of credit		719,254	729,299
Additional settlement guarantee		25,000	25,000
Other guarantees and sureties given		6,115,772	6,077,787
Other contingent risks		—	—
Other commitments given		1,467,216	1,110,638
Financial asset forward purchase commitments		1,347,360	1,007,047
Conventional financial asset purchase contracts		31,947	8,249
Capital subscribed but not paid up		19	19
Underwriting and subscription commitments		—	—
Other loan commitments given		87,890	95,323

Provisions recognised on liabilities side of the balance sheet	18	61,057	68,674
Total		37,861,717	37,042,932

(*) Includes 96,079 thousand euros and 99,631 thousand euros as at 30 June 2024 and 31 December 2023, respectively, corresponding to financial guarantees given in relation to construction and real estate development.

(**) Includes 3,193 and 3,402 thousand euros as at 30 June 2024 and 31 December 2023, respectively, in relation to construction and real estate development.

Financial guarantees and other commitments given classified as stage 3

The balance of financial guarantees and other commitments given classified as stage 3 as at 30 June 2024 amounted to 210,717 thousand euros (267,827 thousand euros as at 31 December 2023).

Credit risk allowances corresponding to financial guarantees and other commitments given as at 30 June 2024 and 31 December 2023, broken down by the method used to determine such allowances and the credit risk of off-balance sheet exposures, are as follows:


Thousand euro
	30/06/2024		31/12/2023

Specific individually measured allowances:		59,203		67,247
Stage 2		4,269		7,454
Stage 3		54,934		59,793

Specific collectively measured allowances:		20,114		25,241
Stage 1		2,961		3,930
Stage 2		4,421		6,325
Stage 3		12,511		14,672
Others		221		314
Total		79,317		92,488

Movements in these allowances, together with movements in allowances for loan commitments given, are shown in Note 18.

A-758

Note 21 – Interest income and expenses

The breakdown of net interest income for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro
	30/06/2024			30/06/2023

Interest income
Loans and advances		4,086,494			3,346,708
Central banks		614,163			573,886
Credit institutions		175,821			120,737
Customers		3,296,510			2,652,085
Debt securities (*)		316,195			229,922
Stage 3 assets		8,707			13,947
Correction of income from hedging operations		389,028			325,297
Other interest		44,158			34,796
Total		4,844,582			3,950,670

Interest expenses
Deposits		(1,545,347	)		(1,065,563	)
Central banks		(148,973	)		(312,719	)
Credit institutions		(292,818	)		(218,259	)
Customers		(1,103,556	)		(534,585	)
Debt securities issued		(404,215	)		(300,483	)
Correction of expenses on hedging operations		(287,440	)		(238,448	)
Other interest		(114,224	)		(76,181	)
Total		(2,351,226	)		(1,680,675	)

Net interest income		2,493,356			2,269,995

(*) Includes 38,364 thousand euros in 2024 and 31,010 thousand euros in 2023 corresponding to interest on financial assets recognised at fair value through profit or loss (trading portfolio).

Note 22 – Fee and commission income and expenses

Fee and commission income and expenses on financial operations and the provision of services for the six-month periods ended 30 June 2024 and 2023 are as follows:


Thousand euro
	30/06/2024			30/06/2023

Fees from risk transactions		142,491			142,554
Asset-side transactions		90,904			90,595
Sureties and other guarantees		51,587			51,959

Service fees		380,982			396,903
Payment cards		107,061			120,641
Payment orders		40,618			42,072
Securities		33,315			27,909
Demand deposits		127,910			139,024
Other		72,078			67,257

Asset management and marketing fees		150,850			157,657
Mutual funds		59,902			58,736
Sale of pension funds and insurance products		79,981			88,339
Assets under management		10,967			10,582
Total		674,323			697,114

Memorandum item

Fee and commission income		839,860			831,956
Fee and commission expenses		(165,537	)		(134,842	)
Fees and commissions, net		674,323			697,114

A-759

Note 23 – Net profit or net loss on financial operations and net exchange differences

The composition of the “Net profit or net loss on financial operations” heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro
	30/06/2024			30/06/2023

By heading:
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		6,932			1,229
Financial assets at fair value through other comprehensive income		6,683			5,101
Financial assets at amortised cost		565			(3,923	)
Financial liabilities at amortised cost		(316	)		51
Gains or (-) losses on financial assets and liabilities held for trading, net		(134,151	)		26,627
Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net		6,902			12,891
Gains or (-) losses from hedge accounting, net		(16,335	)		(5,910	)

Total		(136,652	)		34,837

By type of financial instrument:
Net gain/(loss) on debt securities		3,507			9,197
Net gain/(loss) on other equity instruments		5,988			8,952
Net gain/(loss) on derivatives		(146,367	)		20,560
Net gain/(loss) on other items (*)		220			(3,872	)

Total		(136,652	)		34,837

(*) Mainly includes gains/(losses) on the sale of various loan portfolios disposed of during the first half of the year.

The breakdown of the heading “Exchange differences [gain or (-) loss], net” of the consolidated income statement for the years ended 30 June 2024 and 2023 is shown below:


Thousand euro
	30/06/2024		30/06/2023

Exchange differences [gain or (-) loss], net		173,849		(3,409	)

The “Net gain/(loss) on derivatives” heading in the table above includes, among other things, the change in the fair value of derivatives used to hedge against the foreign exchange risk of debit and credit balances denominated in foreign currencies. The losses generated by these derivatives amounted to 137,746 thousand euros, which are recognised under the heading “Gains or (-) losses on financial assets and liabilities held for trading, net” of the condensed consolidated income statement, while the exchange differences generated by debit and credit balances denominated in foreign currencies hedged with these derivatives are recognised under the heading “Exchange differences [gain or (-) loss], net” of the condensed consolidated income statement.

During the first half of 2024, the Group carried out sales of certain debt securities which it held in its portfolio of financial assets at fair value through other comprehensive income, generating profits of 6,683 thousand euros (5,101 thousand euros in 2023). Of those profits, 4,724 thousand euros (4,897 thousand euros in 2023) came from the sale of debt securities held with general governments.

Note 24 – Other operating income

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro
	30/06/2024		30/06/2023

Income from use of investment properties		11,135		11,866
Sales and other income from the provision of non-financial services		2,056		6,541
Other operating income		29,951		20,161

Total		43,142		38,568

A-760

Note 25 – Other operating expenses

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro
	30/06/2024			30/06/2023

Contribution to deposit guarantee schemes		(9,501	)		(9,311	)
Banco Sabadell		(40	)		(36	)
TSB		(104	)		(251	)
Sabadell IBM Mexico		(9,357	)		(9,024	)

Contribution to resolution fund		—			(76,485	)

Other items		(263,889	)		(214,040	)

Of which: temporary levy of credit institutions and financial credit establishments		(191,882	)		(156,648	)

TOTAL		(273,390	)		(299,836	)

As at 31 December 2023, the financial means available in the Single Resolution Fund had reached the target level of at least 1% of covered deposits held in the Member States participating in the Single Resolution Mechanism. Therefore, the Bank estimates that it will not need to make further contributions to the Single Resolution Fund in 2024.

Note 26 – Administrative expenses

Staff expenses

Staff expenses recognised in the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 were as follows:


Thousand euro
	Note		30/06/2024			30/06/2023

Payrolls and bonuses for active staff				(563,036	)		(536,608	)
Social Security payments				(119,502	)		(113,782	)
Contributions to defined benefit pension plans		18		(744	)		(996	)
Contributions to defined contribution pension plans				(34,849	)		(32,565	)
Other staff expenses				(25,758	)		(33,032	)

Total				(743,889	)		(716,983	)

The average workforce of the Bank and the Group in the six-month periods ended 30 June 2024 and 2023 is detailed below:

Number of employees

Bank

Group

30/06/2024

30/06/2023

30/06/2024

30/06/2023

Average workforce

13,070

12,729

19,193

19,241

Men

6,026

5,849

8,629

8,557

Women

7,044

6,880

10,564

10,684

As at 30 June 2024 and 2023, the breakdown of the Group’s workforce by category and sex is as follows:


Number of employees
	30/06/2024						30/06/2023
	Men		Women		Total		Men		Women		Total

Senior management		574		304		878		534		254		788
Middle management		1,910		1,409		3,319		1,983		1,404		3,387
Specialist staff		5,501		7,285		12,786		5,414		7,339		12,753
Administrative staff		592		1,440		2,032		722		1,755		2,477

Total		8,577		10,438		19,015		8,653		10,752		19,405

The change in the Group’s workforce is due to a staff reduction in the subsidiary TSB to bring it in line with the needs of the business. The staff reduction is partially offset by new hires in Spain arising from the need for specific profiles to carry out the current business.

A-761

Other administrative expenses

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro

	30/06/2024		30/06/2023

Property, plant and equipment		(33,951)		(34,019)
Information technology		(212,381)		(205,966)
Communication		(13,212)		(13,172)
Publicity		(54,444)		(40,792)
Subcontracted administrative services		(75,051)		(64,210)
Contributions and taxes		(51,576)		(51,837)
Technical reports		(22,024)		(12,668)
Security services and fund transfers		(8,829)		(9,035)
Entertainment expenses and staff travel expenses		(8,032)		(5,847)
Membership fees		(2,629)		(3,107)
Other expenses		(40,194)		(46,393)

Total		(522,323)		(487,046)

The cost-to-income ratio stood at 40.33% as at 30 June 2024 (42.39% as at 30 June 2023). The cost-to-income ratio, including depreciation and amortisation, stood at 48.27% (52.03% as at 30 June 2023).

Information about the Group’s branches and offices is given below:


Number of branches and offices
	30/06/2024		30/06/2023

Branches and offices		1,382		1,447

Spain		1,143		1,205
Outside Spain		239		242

Note 27 – Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro
	Note	30/06/2024		30/06/2023

Financial assets at fair value through other comprehensive income			182		852
Debt securities			182		412
Other equity instruments			—		440
Financial assets at amortised cost	10		(360,859)		(437,790)
Debt securities			253		52
Loans and advances			(361,112)		(437,842)
Total			(360,677)		(436,938)

Note 28 – Impairment or (-) reversal of impairment on non-financial assets

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro
	30/06/2024		30/06/2023

Property, plant and equipment		(3,469)		588
Investment properties		332		(1,726)
Goodwill and other intangible assets		—		—
Inventories		(3,280)		(6,401)
Total		(6,417)		(7,539)

A-762

Note 29 – Gains or (-) losses on derecognition of non-financial assets, net

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro

	30/06/2024		30/06/2023

Property, plant and equipment		206		(381)
Investment properties		1,179		2,318
Intangible assets		(3,053)		(13,011)
Ownership interests		1,142		(2)
Other capital instruments		—		—
Other items		—		(2)
Total		(526)		(11,078)

Note 30 – Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

The composition of this heading of the condensed consolidated income statements for the six-month periods ended 30 June 2024 and 2023 is as follows:


Thousand euro

	30/06/2024		30/06/2023

Property, plant and equipment for own use and foreclosed		(24,080)		(23,745)
Gains/losses on sales		(6,383)		(3,039)
Impairment/reversal		(17,697)		(20,706)
Other items		(652)		(75)
Total		(24,732)		(23,820)

The impairment of non-current assets held for sale excludes income from the increase in fair value less selling costs.

Note 31 – Segment reporting

Segmentation criteria

This section gives information regarding earnings and other indicators of the Group’s business units.

The criteria that Banco Sabadell Group uses for its segment reporting are the following:

–

Three geographical areas: Banking Business in Spain, United Kingdom and Mexico. Banking Business Spain includes foreign branches and representative offices.

–

Each business unit is allocated own funds equivalent to 13% of its risk-weighted assets in 2024 (12% in 2023), assigning all of the corresponding deductions to each business unit and allocating the surplus of own funds to Banking Business Spain.

In terms of the other criteria applied, segment information is first structured with a breakdown by geographical area and then broken down according to the customers at which each segment is aimed.

The information presented herein is based on the standalone accounting records of each Group company, after all consolidation disposals and adjustments have been made.

Each business unit bears its own direct costs, calculated based on the general accounting records.

A-763

Key information relating to the segmentation of the Group’s activity is given here below:


Million euro
	*30/06/2024 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Net interest income		1,826		562		106		2,493

Fees and commissions, net		610		54		10		674
Core revenue		2,436		615		116		3,168

Profit or loss on financial operations and exchange differences		8		24		5		37
Equity-accounted income and dividends		87		—		—		87
Other operating income and expenses		(191)		(29)		(10)		(230)
Gross income		2,339		611		111		3,061

Operating expenses, depreciation and amortisation		(1,000)		(449)		(67)		(1,515)
Pre-provisions income		1,339		162		44		1,546

Provisions and impairments		(348)		(28)		(13)		(389)

Capital gains on asset sales and other revenue		—		1		(3)		(2)
Profit or loss before tax		991		135		28		1,154

Corporation tax		(320)		(40)		(2)		(362)

Profit or loss attributed to minority interests		1		—		—		1
Profit attributable to the Group		670		95		26		791

ROTE (net profit attributable to Group / average shareholders’ equity excluding intangible assets)		14.1%		9.4%		8.9%		13.1%
Cost-to-income (general administrative expenses / gross income)		33.8%		63.9%		52.5%		40.3%
NPL ratio		3.9%		1.5%		2.2%		3.2%

Stage 3 coverage ratio, with total provisions		62.7%		37.1%		71.7%		59.7%

Employees		13,545		4,990		480		19,015
Domestic and foreign branches and offices		1,159		211		12		1,382

(*) Exchange rates used in the income statement: GBP 0.8546 (average), MXN 18.5225 (average), USD 1.0815 (average) and MAD 10.7274 (average).


Million euro
	*30/06/2024 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Assets		182,140		55,423		6,765		244,328

Gross performing loans to customers		107,606		42,907		4,651		155,164
Non-performing real estate assets, net		546		—		—		546
Liabilities and equity		182,140		55,423		6,765		244,328

On-balance sheet customer funds		118,786		41,182		3,201		163,169
Wholesale funding in capital markets		19,751		5,168		—		24,919
Allocated own funds		11,588		2,539		693		14,820
Off-balance sheet customer funds		43,574		—		—		43,574

(*) Exchange rates used in the balance sheet: GBP 0.8464, MXN 19.5654, USD 1.0705 and MAD 10.6591.

A-764


Million euro
	*30/06/2023 ()**
	Banking Business Spain			Banking Business UK			Banking Business Mexico			Total Group
Net interest income		1,573			603			94			2,270

Fees and commissions, net		635			58			4			697
Core revenue		2,208			661			98			2,967

Profit or loss on financial operations and		26			5			—			31
exchange differences
Equity-accounted income and dividends		72			—			—			72
Other operating income and expenses		(232)			(20)			(10)			(261)
Gross income		2,074			646			89			2,809

Operating expenses, depreciation and amortisation		(965	)		(464	)		(49	)		(1,478	)
Pre-provisions income		1,109			183			40			1,331

Provisions and impairments		(430	)		(23	)		(15	)		(468	)

Capital gains on asset sales and other revenue		(12	)		—			(1	)		(13	)
Profit or loss before tax		666			160			23			849

Corporation tax		(228	)		(55	)		(2	)		(285	)
Profit or loss attributed to minority interests		1			—			—			1
Profit attributable to the Group		437			106			21			564

ROTE (net profit attributable to Group / average shareholders’ equity excluding intangible assets)		9.9 %			6.7 %			7.4 %			9.3 %
Cost-to-income (general administrative expenses/ gross income)		37.1 %			59.9%			41.2%			42.4%
NPL ratio		4.3 %			1.4 %			3.1 %			3.5 %
Stage 3 coverage ratio, with total provisions		57.2%			40.4%			65.8%			55.7%
Employees		13,369			5,618			418			19,405
Domestic and foreign branches and offices		1,221			211			15			1,447

(*) Exchange rates used in the income statement: GBP 0.88 (average), MXN 19.58 (average), USD 1.08 (average) and MAD 10.80 (average).


Million euro
	*31/12/2023 ()**
	Banking Business Spain		Banking Business UK		Banking Business Mexico		Total Group
Assets		173,648		54,855		6,670		235,173

Gross performing loans to customers		103,830		41,381		4,587		149,798
Non-performing real estate assets, net		586		—		—		586
Liabilities and equity		173,648		54,855		6,670		235,173

On-balance sheet customer funds		117,820		39,864		3,205		160,888
Wholesale funding in capital markets		19,949		4,545		—		24,494
Allocated own funds		11,345		2,368		631		14,344
Off-balance sheet customer funds		40,561		—		—		40,561

(*) Exchange rates used in the balance sheet: GBP 0.8691, MXN 18.7231, USD 1.1050 and MAD 10.9116.

A-765

The revenue generated by each business unit as at 30 June 2024 and 2023 is as follows:


Thousand euro
	Consolidated
	*Income from ordinary activities ()**			Profit/(loss) before tax


SEGMENTS		30/06/2024	30/06/2023		30/06/2024	30/06/2023

Banking Business Spain		3,844,460	3,401,132		991,052	666,046
Banking Business UK		1,366,654	1,125,992		134,545	160,068
Banking Business Mexico		381,467	336,073		28,478	23,196
Total		5,592,581	4,863,197		1,154,075	849,310

(*) Includes the following headings from the condensed consolidated income statements: “Interest income”, “Dividend income”, “Fee and commission income”, “Profit or loss on financial operations” and “Other operating income”.

The consolidated interim Directors’ Report gives a more detailed assessment of each of these business units.

The distribution of interest income by geographical area for the period between 1 January and 30 June 2024, and the comparison with the same period of the preceding year, is as follows:


Thousand euro
	Breakdown of interest income by geographical area
	Standalone				Consolidated
	30/06/2024		30/06/2023		30/06/2024		30/06/2023

Domestic market		3,107,444		2,357,762		2,985,109		2,283,112
International market		217,834		289,825		1,859,473		1,667,558
European Union		30,148		38,840		30,148		38,840
Eurozone		30,148		38,840		30,148		38,840
Non-Eurozone		—		—		—		—
Other		187,686		250,985		1,829,325		1,628,718
Total		3,325,278		2,647,587		4,844,582		3,950,670

Note 32 – Deferred tax assets and liabilities

The sources of the deferred tax assets and liabilities recognised in the condensed consolidated balance sheets as at 30 June 2024 and at 31 December 2023 are as follows:


Thousand euro
Deferred tax assets	30/06/2024		31/12/2023

Monetisable		4,435,371		4,743,343
Due to credit impairment		3,369,993		3,369,993
Due to real estate asset impairment		940,461		1,248,285
Due to pension funds		124,917		125,065

Non-monetisable		1,195,547		1,316,680

Tax credits for losses carried forward		319,010		325,482

Deductions not applied		26		26
Total		5,949,954		6,385,531

Deferred tax liabilities		30/06/2024		31/12/2023

Property restatements		52,698		53,092
Adjustments to value of wholesale debt issuances arising in business combinations		2,665		4,020
Other financial asset value adjustments		1,657		1,657
Other		54,057		56,201
Total		111,077		114,970

A-766

According to the information available as at the sign-off date of these condensed consolidated interim financial statements and the projections taken from the Group’s business plan for the coming years, it is estimated that the taxable income generated will be sufficient to offset tax loss carry-forwards within a period of four years and non-monetisable tax assets, where these can be deducted according to current tax regulations, within a maximum period of ten years.

Monetisable tax assets are guaranteed by the State; therefore, their recoverability does not depend on the generation of future tax benefits.

International tax reform – Pillar Two Model Rules

Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union establishes a top-up tax through a system of two interlocked rules, together referred to as the GloBE or Pillar Two rules, promoted by the OECD and designed to ensure that where the effective tax rate of a multinational enterprise in a given jurisdiction is below 15%, an additional top-up tax will be collected. Member States should enact the laws, regulations and administrative provisions necessary to comply with this Directive.

As at the sign-off date of these condensed consolidated interim financial statements, the transposition of this Directive into Spanish law is still in the parliamentary process. However, as per the indications of the draft bill, once approved, it is expected to apply to the tax periods beginning on or after 31 December 2023 and, therefore, with regard to Banco Sabadell, as from the current year started on 1 January 2024.

Pillar Two legislation has also been passed or is in the process of being passed in the United Kingdom and other foreign jurisdictions in which the Group operates. As a result, the Group has applied the mandatory temporary exception provided in IAS 12 in relation to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules to ensure consistency in the financial statements while easing into the implementation of the rules.

A preliminary analysis was carried out based on the information available and it is estimated that the impact of Pillar Two on the Group will not be significant. However, as at the sign-off date of these condensed consolidated interim financial statements, the Group is keeping track of legislative developments in those countries in which it is present, to assess the potential impacts on the consolidated financial statements.

A-767

Note 33 – Related party transactions

In accordance with the provisions of Chapter VII bis. Related Party Transactions of the Capital Companies Act, introduced by Law 5/2021 of 12 April, amending the restated text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010 of 2 July, and other financial regulations, with regard to the promotion of long-term shareholder involvement in listed companies, there are no transactions with officers and directors of the company that could be considered material, other than those considered to be “related party transactions” in accordance with Article 529 vicies of the Capital Companies Act, carried out following the corresponding approval procedure and, where applicable, reported in accordance with Articles 529 unvicies et seq. of the aforesaid Capital Companies Act. Those that did take place were performed in the normal course of the company’s business or were performed on an arm’s-length basis or under the terms generally applicable to any employee. There is no record of any transactions being performed other than on an arm’s-length basis with persons or entities related to directors or senior managers.

On 24 April 2024, the Board of Directors of Banco Sabadell approved, following a favourable report from the Board Audit and Control Committee, a related-party transaction with Acerinox, S.A. involving a bilateral loan of 150 million euros, granted to Acerinox, S.A., with a 3.75% interest rate, a two-year grace period and semi-annual straight-line amortisation over 5 years, which was formally arranged on 27 June 2024. It is deemed a related-party transaction since Banco Sabadell directors Laura González Molero and George Donald Johnston III are independent external directors of Acerinox, S.A. Ms Molero is also member of its Audit Committee and Chairwoman of its Appointments, Remuneration and Corporate Governance Committee, while Mr Johnston is member of its Executive Committee.

As the amount of this transaction, together with three other transactions carried out in the last twelve months, was more than 2.5% of the turnover amount recorded in Banco Sabadell’s consolidated annual financial statements for 2023, an ‘Other Relevant Information’ notice, alongside the corresponding report from the Board Audit and Control Committee, was published on the CNMV’s website on 27 June 2024 and 12 July 2024, with register numbers 29,404 and 29,678, and on Banco Sabadell’s corporate website (www.grupbancsabadell.com), in accordance with that set forth in Article 529 unvicies of the Capital Companies Act. Furthermore, information was provided in the Other Relevant Information notice referred to above and on Banco Sabadell’s website (www.grupbancsabadell.com) regarding the three abovementioned transactions, two of which were approved by the Board of Directors on 24 April 2024, following a favourable report from the Board Audit and Control Committee (also attached to that same Other Relevant Information notice), while the third was approved by Compliance in its decision of 28 September 2023 as a related-party transaction, as per the powers conferred by the Board of Directors of Banco Sabadell on 1 July 2021. These three transactions consisted, respectively, of the renewal of a multi-company credit policy (co-shared by Acerinox, S.A.) for 80 million euros, at 3-month Euribor + 0.90% and maturing after 3 years, the renewal of a multi-company credit policy (co-shared by Acerinox, S.A.) for 15 million US dollars, at 3-month SOFR + 1% and maturing after 3 years, and the renewal of a multi-company credit policy (available equally to Acerinox, S.A. and Acerinox Europa, S.A.U.) for 20 million US dollars, at 3-month SOFR + 1.10% and maturing after 1 year.

A-768

Details of the balances held with related parties as at 30 June 2024 and 31 December 2023, as well as the impact of related-party transactions on the income statements for the six-month periods ended 30 June 2024 and 2023, are shown below:


Thousand euro
	30/06/2024
	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related *parties ()**		Total
Assets
Customer loans and other financial assets		—		84,739		4,812		970,573		1,060,124

Liabilities
Customer deposits and other financial liabilities		—		495,258		7,243		318,300		820,801

Off-balance sheet exposures
Financial guarantees given		—		319		—		35,318		35,637
Loan commitments given		—		80		395		329,540		330,015
Other commitments given		—		6,491		—		85,208		91,699
										30/06/2024


Income statement
Interest and similar income		—		1,300		33		11,462		12,795
Interest and similar expenses		—		(7,715)		(66)		(2,365)		(10,146)
Fees and commissions, net		—		106,255		8		3,969		110,232
Other operating income and expenses		—		2,762		—		3		2,765
(*) Includes, among others, employee pension plans.

Thousand euro
	31/12/2023
	Joint control or signif. influence (in B.Sab)		Associates		Key personnel		Other related *parties ()**		Total
Assets
Customer loans and other financial assets		—		99,652		3,757		829,620		933,029

Liabilities
Customer deposits and other financial liabilities		—		463,292		5,452		218,477		687,221

Off-balance sheet exposures
Financial guarantees given		—		294		—		29,136		29,430
Loan commitments given		—		54		378		261,702		262,134
Other commitments given		—		6,491		—		84,726		91,217
		30/06/2023
Income statement

Interest and similar income		—		907		23		7,311		8,241
Interest and similar expenses		—		(902)		(36)		(251)		(1,189)
Fees and commissions, net		—		59,089		6		689		59,784
Other operating income and expenses		—		2,766		3		1		2,770

(*) Includes, among others, employee pension plans.

A-769

Total risk transactions granted by the Bank and consolidated companies to directors of the parent company amounted to 864 thousand euros as at 30 June 2024, of which 724 thousand euros corresponded to loans and advances and 140 thousand euros to loan commitments given (875 thousand euros as at 31 December 2023, consisting of 738 thousand euros in loans and advances and 137 thousand euros in loan commitments given). With regard to Senior Management, risk transactions granted by the Bank and consolidated companies amounted to 4,343 thousand euros as at 30 June 2024, of which 4,088 thousand euros corresponded to loans and advances and 255 thousand euros to loan commitments given (3,019 thousand euros as at 31 December 2023 in loans and advances and 241 thousand euros in loan commitments given).

With regard to liabilities, these amounted to 3,998 thousand euros for directors of the parent company (3,751 thousand euros as at 31 December 2023) and 3,245 thousand euros for Senior Management as at 30 June 2024 (1,700 thousand euros as at 31 December 2023).

Note 34 – Remuneration of members of the Board of Directors and Senior Management and their respective balances

Note 41 to the Group’s consolidated annual financial statements for 2023 gives details of remuneration and other benefits awarded to members of the Board of Directors and Senior Management for the 2023 financial year.

Board of Directors

Remuneration and other benefits awarded to members of the Board of Directors corresponding to the first half of 2024 and 2023 are shown below:


Thousand euro
	30/06/2024		30/06/2023
Type of remuneration
Remuneration for membership of the Board and/or Board Committees		2,245		1,961
Wages		1,124		977
Variable remuneration in cash		225		198
Share-based remuneration schemes		253		224
Severance pay		—		—
Contributions to workplace retirement planning systems		63		202
Other items		34		35
Total remuneration		3,944		3,597

The amounts include the remuneration of members of the Board of Directors during the period they have held this status.

Based on the revised remuneration scheme and remuneration amounts of the Board and its Board Committees, and in accordance with the powers conferred by the Banco Sabadell Director Remuneration Policy to the Board of Directors, on 31 January 2024 the Board approved an update to the remuneration amounts envisaged for 2024. That update is described in detail in the 2023 Annual Report on Director Remuneration.

The aforesaid report also states that the Chief Executive Officer, as per the Director Remuneration Policy for 2024, 2025 and 2026 (in force since its approval on 23 March 2023), made an initial one-off contribution to the workplace retirement plan in 2023 in the amount of 600 thousand euros, with the subsequent reduction of an equal amount of fixed remuneration in cash for that same year, as reflected in the table of total remuneration (the amount accrued from April to June 2023 totalled 200 thousand euros).

Variable remuneration for the first half of 2024 corresponds to 50% of the theoretical short-term variable remuneration for the 2024 financial year, without giving rise to any accrued or enforceable rights in this respect, given that such remuneration may not materialise.

The amount of funds accumulated in workplace retirement planning systems for directors as at 30 June 2024 was 10,220 thousand euros (8,976 thousand euros as at 31 December 2023).

A-770

Senior Management

The remuneration of members of Senior Management (excluding members of the Board of Directors) and of the Internal Audit Officer for the first half of 2024 and 2023 is set out below. The amounts include the remuneration of members of Senior Management during the period they have held this status (10.5 members in the first half of 2024 and 10 members in the first half of 2023, both measured in terms of full-time equivalents):


Thousand euro
	30/06/2024		30/06/2023
*Total remuneration ()**		3,913		3,597

(*) Total remuneration in the first half of 2024 includes contributions to workplace retirement planning systems amounting to 145 thousand euros (123 thousand euros in the first half of 2023).

The remuneration for the first half of 2024 includes variable remuneration amounts as at 30 June 2024 corresponding to 50% of the theoretical short-term variable remuneration for the year, without giving rise to any accrued or enforceable rights in this respect, given that such remuneration may not materialise.

During the first half of 2024 and 2023, no early contract termination payments were made to any member of Senior Management.

The amount of funds accumulated in workplace retirement planning systems for Senior Management members and for the Internal Audit Officer as at 30 June 2024 was 4,776 thousand euros (4,363 thousand euros as at 31 December 2023).

Note 35 – Subsequent events

No events meriting disclosure have occurred since 30 June 2024.

A-771

Schedule I – Changes in the scope of consolidation

Additions to the scope of consolidation during the first half of 2024:

Thousand euro

Name of entity (or line of business) acquired or merged

Category

Effective date of
the transaction

Cost of the combination

% Voting rights
acquired

% Total voting
rights

Type of
shareholding

Method

Reason

Acquisition
cost

Fair value of equity

instruments issued

for the acquisition

BanSabadell Reassurance, S.A.

Group

15/04/2024

3,600

—

100

Direct

Full consolidation

Duncan Holdings 2024-1 Limited

Group

07/02/2024

—

100

Indirect

Full consolidation

Total newly consolidated subsidiaries

3,600

Total newly consolidated associates

—

(a) Incorporation of subsidiaries.

Exclusions from the scope of consolidation during the first half of 2024:

Thousand euro

Name of entity (or line of business) sold, spun off or otherwise
disposed of

Category

Effective date of the
transaction

% Voting rights
disposed of

% Total voting rights
following disposal

Profit/(loss)
generated

Type of shareholding

Method

Reason

Plaxic Estelar, S.L.

Associate

14/03/2024

45.01

—

Indirect

Equity method

(a) Removed from the scope due to dissolution and/or liquidation.

A-772

Schedule II – Interim financial statements of Banco Sabadell

Interim financial statements of Banco de Sabadell, S.A.

The Bank’s balance sheets as at 30 June 2024 and 31 December 2023 are shown below, together with the Bank’s income statements, statements of recognised income and expenses, statements of total changes in equity and cash flow statements corresponding to the six-month periods ended 30 June 2024 and 2023:

A-773

Balance sheets of Banco de Sabadell, S.A.

As at 30 June 2024 and 31 December 2023


Thousand euro
Assets	30/06/2024		31/12/2023

Cash, cash balances at central banks and other demand deposits		22,669,798		22,301,225
Financial assets held for trading		2,008,871		1,731,823

Derivatives		1,353,869		1,589,328

Equity instruments		—		—

Debt securities		655,002		142,495

Loans and advances		—		—

Central banks		—		—

Credit institutions		—		—

Customers		—		—

Memorandum item: loaned or pledged as security with sale or pledging rights		180,828		1,915

Non-trading financial assets mandatorily at fair value through profit or loss		139,132		149,792

Equity instruments		3,660		4,335

Debt securities		40,249		39,038

Loans and advances		95,223		106,419

Central banks		—		—

Credit institutions		—		—

Customers		95,223		106,419

Memorandum item: loaned or pledged as security with sale or pledging rights		—		—
Financial assets designated at fair value through profit or loss		—		—

Debt securities		—		—

Loans and advances		—		—

Central banks		—		—

Credit institutions		—		—

Customers		—		—

Memorandum item: loaned or pledged as security with sale or pledging rights		—		—
Financial assets at fair value through other comprehensive income		6,441,070		6,329,974

Equity instruments		84,957		74,402

Debt securities		6,356,113		6,255,572

Loans and advances		—		—

Central banks		—		—

Credit institutions		—		—

Customers		—		—

Memorandum item: loaned or pledged as security with sale or pledging rights		1,950,900		557,303
Financial assets at amortised cost		142,993,254		134,693,403

Debt securities		19,492,335		18,264,771

Loans and advances		123,500,919		116,428,632

Central banks		—		—

Credit institutions		11,964,187		8,138,573

Customers		111,536,732		108,290,059

Memorandum item: loaned or pledged as security with sale or pledging rights		16,508,749		5,996,602
Derivatives – Hedge accounting		995,696		896,227

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(614,713)		(389,403	)

Investments in subsidiaries, joint ventures and associates		5,973,856		5,944,643

Subsidiaries		5,867,992		5,839,491

Joint ventures		—		—

Associates		105,864		105,152

Tangible assets		1,558,273		1,622,189

Property, plant and equipment		1,529,803		1,591,499

For own use		1,529,803		1,591,499

Leased out under operating leases		—		—

Investment properties		28,470		30,690

Of which: leased out under operating leases		28,470		30,690

Memorandum item: acquired through leases		707,364		736,918

Intangible assets		19,375		20,284

Goodwill		11,515		12,199

Other intangible assets		7,860		8,085

Tax assets		5,367,931		5,633,120

Current tax assets		327,932		354,794

Deferred tax assets		5,039,999		5,278,326

Other assets		247,211		210,571

Insurance contracts linked to pensions		78,747		80,693

Inventories		—		—

Rest of other assets		168,464		129,878

Non-current assets and disposal groups classified as held for sale		855,895		802,065

TOTAL ASSETS		188,655,649		179,945,913

A-774

Balance sheets of Banco de Sabadell, S.A.

As at 30 June 2024 and 31 December 2023


Thousand euro
Liabilities	30/06/2024		31/12/2023

Financial liabilities held for trading		1,735,321		1,718,159

Derivatives		1,334,620		1,380,786

Short positions		400,701		337,373

Deposits		—		—

Central banks		—		—

Credit institutions		—		—

Customers		—		—

Debt securities issued		—		—

Other financial liabilities		—		—

Financial liabilities designated at fair value through profit or loss		—		—

Deposits		—		—

Central banks		—		—

Credit institutions		—		—

Customers		—		—

Debt securities issued		—		—

Other financial liabilities		—		—

Memorandum item: subordinated liabilities		—		—

Financial liabilities at amortised cost		172,851,078		164,594,328

Deposits		146,594,370		137,853,646

Central banks		—		5,106,963

Credit institutions		12,886,713		12,955,735

Customers		133,707,657		119,790,948

Debt securities issued		21,125,596		22,029,313

Other financial liabilities		5,131,112		4,711,369

Memorandum item: subordinated liabilities		4,097,993		3,607,886

Derivatives – Hedge accounting		739,429		835,204

Fair value changes of the hedged items in portfolio hedge of interest rate risk		(341,520)		(323,973)

Provisions		393,965		435,748

Pensions and other post employment defined benefit obligations		47,401		51,345

Other long term employee benefits		37		69

Pending legal issues and tax litigation		69,287		60,550

Commitments and guarantees given		127,981		153,646

Other provisions		149,259		170,138

Tax liabilities		299,633		156,717

Current tax liabilities		236,820		91,950

Deferred tax liabilities		62,813		64,767

Share capital repayable on demand		—		—

Other liabilities		471,259		514,469

Liabilities included in disposal groups classified as held for sale		—		—
TOTAL LIABILITIES		176,149,165		167,930,652

A-775

Balance sheets of Banco de Sabadell, S.A.

As at 30 June 2024 and 31 December 2023


Thousand euro
Equity	30/06/2024		31/12/2023
Shareholders’ equity		12,685,286		12,211,566

Capital		680,028		680,028

Paid up capital		680,028		680,028

Unpaid capital called up		—		—

Memorandum item: capital not called up		—		—

Share premium		7,695,227		7,695,227

Equity instruments issued other than capital		—		—

Equity component of compound financial instruments		—		—

Other equity instruments issued		—		—

Other equity		13,447		12,625

Retained earnings		5,916,623		5,165,689

Revaluation reserves		—		—

Other reserves		(2,289,502)		(2,228,293)

(-) Treasury shares		(119,240)		(39,621)

Profit or loss for the period		788,703		1,088,014

(-) Interim dividends		—		(162,103)

Accumulated other comprehensive income		(178,802)		(196,305)

Items that will not be reclassified to profit or loss		(56,496)		(64,140)

Actuarial gains or (-) losses on defined benefit pension plans		(4,898)		(4,898)

Non-current assets and disposal groups classified as held for sale		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income		(51,598)		(59,242)

Hedge ineffectiveness of fair value hedges for equity instruments measured at fair value through other comprehensive income		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—

Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—

Items that may be reclassified to profit or loss		(122,306)		(132,165)

Hedge of net investments in foreign operations [effective portion]		(7,334)		7,220

Foreign currency translation		102,305		60,767

Hedging derivatives. Cash flow hedges reserve [effective portion]		(82,009)		(64,982)

Fair value changes of debt instruments measured at fair value through other comprehensive income		(135,268)		(135,170)

Hedging instruments [not designated elements]		—		—

Non-current assets and disposal groups classified as held for sale		—		—

TOTAL EQUITY		12,506,484		12,015,261

TOTAL EQUITY AND TOTAL LIABILITIES		188,655,649		179,945,913

Memorandum item: off-balance sheet exposures

Loan commitments given		21,605,374		20,500,850

Financial guarantees given		5,544,942		7,052,638
Other commitments given		8,367,230		7,988,420

A-776

Income statements of Banco de Sabadell, S.A.

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	30/06/2024		30/06/2023

Interest income		3,325,278		2,647,587

Financial assets at fair value through other comprehensive income		97,805		56,274

Financial assets at amortised cost		3,029,471		2,414,560

Other interest income		198,002		176,753

(Interest expenses)		(1,490,439)		(1,095,047)

(Expenses on share capital repayable on demand)		—		—

Net interest income		1,834,839		1,552,540

Dividend income		229,941		107,420

Fee and commission income		612,869		739,415

(Fee and commission expenses)		(43,911)		(115,687)

Net profit or net loss on financial operations		(181,455)		(12,700)

Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		7,822		(3,668)

Financial assets at amortised cost		1,702		(3,848)

Other financial assets and liabilities		6,120		180

Gains or (-) losses on financial assets and liabilities held for trading, net		(183,145)		(12,749)

Reclassification of financial assets from fair value through other comprehensive income		—		—

Reclassification of financial assets from amortised cost		—		—

Other gains or (-) losses		(183,145)		(12,749)

Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net		1,016		4,235

Reclassification of financial assets from fair value through other comprehensive income		—		—

Reclassification of financial assets from amortised cost		—		—

Other gains or (-) losses		1,016		4,235

Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net		—		—

Gains or (-) losses from hedge accounting, net		(7,148)		(518)

Exchange differences [gain or (-) loss], net		169,642		(4,839)

Other operating income		28,202		22,391

(Other operating expenses)		(211,840)		(253,957)

Gross income		2,438,287		2,034,583

A-777


Thousand euro
	30/06/2024		30/06/2023

(Administrative expenses)		(942,746)		(858,826)

(Staff expenses)		(519,082)		(493,036)

(Other administrative expenses)		(423,664)		(365,790)

(Depreciation and amortisation)		(74,288)		(92,859)

(Provisions or (-) reversal of provisions)		3,976		(12,955)

(Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss and net modification losses or (-) gains)		(314,147)		(373,397)

(Financial assets at fair value through other comprehensive income)		182		412

(Financial assets at amortised cost)		(314,329)		(373,809)

Profit/(loss) on operating activities		1,111,082		696,546

(Impairment or (-) reversal of impairment on investments in joint ventures and associates)		12,661		36,103

(Impairment or (-) reversal of impairment on non-financial assets)		(1,104)		1,037

(Tangible assets)		(1,104)		1,037

(Intangible assets)		—		—

(Other)		—		—

Gains or (-) losses on derecognition of non-financial assets, net		(129)		(726)

Negative goodwill recognised in profit or loss		—		—

Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations		(13,202)		(23,729)

Profit or (-) loss before tax from continuing operations		1,109,308		709,231

(Tax expense or (-) income related to profit or loss from continuing operations)		(320,605)		(221,185)

Profit or (-) loss after tax from continuing operations		788,703		488,046

Profit or (-) loss after tax from discontinued operations		—		—

PROFIT OR LOSS FOR THE PERIOD		788,703		488,046

Earnings per share (euros)		0.14		0.08

Basic (euros)		0.14		0.08

Diluted (euros)		0.14		0.08

A-778

Statements of recognised income and expenses of Banco de Sabadell, S.A.

For the six-month periods ended 30 June 2024 and 2023


Thousand euro
	30/06/2024		30/06/2023
Profit or loss for the period		788,703		488,046
Other comprehensive income		17,503		(46,324)

Items that will not be reclassified to profit or loss		7,644		2,451

Actuarial gains or (-) losses on defined benefit pension plans		—		—

Non-current assets and disposal groups held for sale		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income		9,737		2,790

Gains or (-) losses from hedge accounting of equity instruments at fair value through other comprehensive income, net		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income [hedged item]		—		—

Fair value changes of equity instruments measured at fair value through other comprehensive income [hedging instrument]		—		—

Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk		—		—

Income tax relating to items that will not be reclassified		(2,093)		(339)

Items that may be reclassified to profit or loss		9,859		(48,774)

Hedge of net investments in foreign operations [effective portion]		(14,553)		6,972

Valuation gains or (-) losses taken to equity		(14,553)		6,972

Transferred to profit or loss		—		—

Other reclassifications		—		—

Foreign currency translation		41,538		(19,675)

Translation gains or (-) losses taken to equity		41,538		(19,675)

Transferred to profit or loss		—		—

Other reclassifications		—		—

Cash flow hedges [effective portion]		(24,326)		(42,582)

Valuation gains or (-) losses taken to equity		(18,893)		(42,407)

Transferred to profit or loss		(5,433)		(1,908)

Transferred to initial carrying amount of hedged items		—		1,733

Other reclassifications		—		—

Hedging instruments [not designated elements]		—		—

Valuation gains or (-) losses taken to equity		—		—

Transferred to profit or loss		—		—

Other reclassifications		—		—

Debt instruments at fair value through other comprehensive income		881		(7,957)

Valuation gains or (-) losses taken to equity		7,317		(7,828)

Transferred to profit or loss		(6,436)		(129)

Other reclassifications		—		—

Non-current assets and disposal groups held for sale		—		—

Valuation gains or (-) losses taken to equity		—		—

Transferred to profit or loss		—		—

Other reclassifications		—		—
Income tax relating to items that may be reclassified to profit or (-) loss		6,319		14,467

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		806,206		441,722

A-779

Statements of total changes in equity of Banco de Sabadell, S.A.

For the six-month periods ended 30 June 2024 and 2023


Thousand euro

Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss for the period		(-) Interim dividends		Accumulated other comprehensive income		Total
Closing balance 31/12/2023		680,028		7,695,227		—		12,625		5,165,689		—		(2,228,293)		(39,621)		1,088,014		(162,103)		(196,305)		12,015,261

Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—

Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—
Opening balance 01/01/2024		680,028		7,695,227		—		12,625		5,165,689		—		(2,228,293)		(39,621)		1,088,014		(162,103)		(196,305)		12,015,261

Total comprehensive income for the period		—		—		—		—		—		—		—		—		788,703		—		17,503		806,206

Other equity changes		—		—		—		822		750,934		—		(61,209)		(79,619)		(1,088,014)		162,103		—		(314,983)

Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—

Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—

Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—

Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—

Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—

Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—

Dividends (or shareholder remuneration)		—		—		—		—		(164,310)		—		—		—		—		—		—		(164,310)

Purchase of treasury shares		—		—		—		—		—		—		—		(111,203)		—		—		—		(111,203)

Sale or cancellation of treasury shares		—		—		—		—		—		—		1,309		31,584		—		—		—		32,893

Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—

Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—

Transfers among components of equity		—		—		—		—		925,911		—		—		—		(1,088,014)		162,103		—		—

Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—

Share based payments		—		—		—		822		—		—		—		—		—		—		—		822

Other increase or (-) decrease in equity		—		—		—		—		(10,667)		—		(62,518)		—		—		—		—		(73,185)
Closing balance 30/06/2024		680,028		7,695,227		—		13,447		5,916,623		—		(2,289,502)		(119,240)		788,703		—		(178,802)		12,506,484

A-780

Statements of total changes in equity of Banco de Sabadell, S.A.

For the six-month periods ended 30 June 2024 and 2023


Thousand euro

Sources of equity changes	Capital		Share premium		Equity instruments issued other than capital		Other equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury shares		Profit or loss for the period		(-) Interim dividends		Accumulated other comprehensive income		Total

Closing balance 31/12/2022		703,371		7,899,227		—		11,606		4,630,414		—		(2,115,524)		(23,721)		740,551		(112,040)		(280,882)		11,453,002

Effects of corrections of errors		—		—		—		—		—		—		—		—		—		—		—		—

Effects of changes in accounting policies		—		—		—		—		—		—		—		—		—		—		—		—

Opening balance 01/01/2023		703,371		7,899,227		—		11,606		4,630,414		—		(2,115,524)		(23,721)		740,551		(112,040)		(280,882)		11,453,002

Total comprehensive income for the period		—		—		—		—		—		—		—		—		488,046		—		(46,324)		441,722

Other equity changes		—		—		—		(90)		516,923		—		(73,791)		(22,047)		(740,551)		112,040		—		(207,516)

Issuance of ordinary shares		—		—		—		—		—		—		—		—		—		—		—		—

Issuance of preference shares		—		—		—		—		—		—		—		—		—		—		—		—

Issuance of other equity instruments		—		—		—		—		—		—		—		—		—		—		—		—

Exercise or expiration of other equity instruments issued		—		—		—		—		—		—		—		—		—		—		—		—

Conversion of debt to equity		—		—		—		—		—		—		—		—		—		—		—		—

Capital reduction		—		—		—		—		—		—		—		—		—		—		—		—

Dividends (or shareholder remuneration)		—		—		—		—		(111,645)		—		—		—		—		—		—		(111,645)

Purchase of treasury shares		—		—		—		—		—		—		—		(58,801)		—		—		—		(58,801)

Sale or cancellation of treasury shares		—		—		—		—		—		—		1,865		36,754		—		—		—		38,619

Reclassification of financial instruments from equity to liability		—		—		—		—		—		—		—		—		—		—		—		—

Reclassification of financial instruments from liability to equity		—		—		—		—		—		—		—		—		—		—		—		—

Transfers among components of equity		—		—		—		—		628,511		—		—		—		(740,551)		112,040		—		—

Equity increase or (-) decrease resulting from business combinations		—		—		—		—		—		—		—		—		—		—		—		—

Share based payments		—		—		—		(90)		—		—		—		—		—		—		—		(90)

Other increase or (-) decrease in equity		—		—		—		—		57		—		(75,656)		—		—		—		—		(75,599)

Closing balance 30/06/2023		703,371		7,899,227		—		11,516		5,147,337		—		(2,189,315)		(45,768)		488,046		—		(327,206)		11,687,208

A-781

Cash flow statements of Banco de Sabadell, S.A.

For the six-month periods ended 30 June 2024 and 2023


Thousand euro

	30/06/2024		30/06/2023
Cash flows used in operating activities		(47,589)		(11,223,464)
Profit or loss for the period		788,703		488,046
Adjustments to obtain cash flows from operating activities		706,839		687,712
Depreciation and amortisation		74,288		92,859
Other adjustments		632,551		594,853
Net increase/decrease in operating assets		(8,912,105)		(2,662,416)
Financial assets held for trading		(277,048)		225,293
Non-trading financial assets mandatorily at fair value through profit or loss		10,660		(81,491)
Financial assets designated at fair value through profit or loss		—		—
Financial assets at fair value through other comprehensive income		(103,368)		480,887
Financial assets at amortised cost		(8,626,680)		(3,232,211)
Other operating assets		84,331		(54,894)
Net increase/decrease in operating liabilities		7,343,303		(9,688,757)
Financial liabilities held for trading		17,161		(15,403)
Financial liabilities designated at fair value through profit or loss		—		—
Financial liabilities at amortised cost		7,756,749		(9,592,514)
Other operating liabilities		(430,607)		(80,840)
Cash payments or refunds of income taxes		25,671		(48,049)
Cash flows from/used in investing activities		218,599		(106,201)
Payments		(68,918)		(271,108)
Tangible assets		(37,898)		(95,049)
Intangible assets		(5,420)		(877)
Investments in subsidiaries, joint ventures and associates		(25,600)		—
Other business units		—		(175,182)
Non-current assets and liabilities classified as held for sale		—		—
Other payments related to investing activities		—		—
Collections		287,517		164,907
Tangible assets		15,428		11,215
Intangible assets		—		—
Investments in subsidiaries, joint ventures and associates		228,326		13,682
Other business units		43,763		94,625
Non-current assets and liabilities classified as held for sale		—		45,385
Other collections related to investing activities		—		—
Cash flows from financing activities		156,868		365,504
Payments		(375,990)		(673,115)
Dividends		(164,310)		(111,645)
Subordinated liabilities		—		(400,000)
Redemption of own equity instruments		—		—
Acquisition of own equity instruments		(111,203)		(58,802)
Other payments related to financing activities		(100,477)		(102,668)
Collections		532,858		1,038,619
Subordinated liabilities		500,000		1,000,000
Issuance of own equity instruments		—		—
Disposal of own equity instruments		32,858		38,619
Other collections related to financing activities		—		—
Effect of changes in foreign exchange rates		40,695		(77,670)
Net increase (decrease) in cash and cash equivalents		368,573		(11,041,831)
Cash and cash equivalents at the beginning of the period		22,301,225		34,063,579
Cash and cash equivalents at the end of the period		22,669,798		23,021,748

COMPONENTS OF CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
Cash on hand		532,598		553,667
Cash equivalents in central banks		21,813,413		22,019,267
Other demand deposits		323,787		448,814
Other financial assets		—		—
Less: bank overdrafts repayable on demand		—		—

A-782

Schedule III – Information on issues during the six-month period

Details of public issues carried out by the Group during the first half of 2024 are as follows:

Million euro

Amount

Issuer

Type of issue

Issue date

30/06/2024

Interest rate ruling
as at 30/06/2024

Maturity date

Issue

currency

Target of
offering

Banco de Sabadell, S.A.

Senior preferred debt

15/01/2024

750

4.00%

15/01/2030

Euro

Institutional

TSB Banking Group

Covered bonds

05/03/2024

500

3.32%

05/03/2029

Euro

Institutional

Banco de Sabadell, S.A.

Senior non-preferred debt (green)

13/03/2024

500

4.25%

13/09/2030

Euro

Institutional

Banco de Sabadell, S.A.

Subordinated bonds

27/03/2024

500

5.13%

27/06/2034

Euro

Institutional

Banco de Sabadell, S.A.

Mortgage covered bonds

05/06/2024

1,000

3.25%

05/06/2034

Euro

Institutional

A-783

Schedule IV – Other risk information

Credit risk exposure

Loans to customers, broken down by activity and type of guarantee

The breakdown of the balance of the heading “Loans and advances – Customers” by activity and type of guarantee, excluding advances not classed as loans, as at 30 June 2024 and 31 December 2023, respectively, is as follows:


Thousand euro
							30/06/2024
							Secured loans. Carrying amount based on last available
							valuation. Loan to value
	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Less than or equal to 40%		Over 40% and less than or equal to 60%		Over 60% and less than or equal to 80%		Over 80% and less than or equal to 100%		Over 100%


General governments		9,468,647		22,348		394,485		17,243		6,276		—		6,022		387,292

Other financial corporations and individual entrepreneurs (financial business activity)		1,447,604		212,201		432,317		433,767		127,643		30,000		9,517		43,591

Non-financial corporations and individual entrepreneurs (non-financial business activity)		59,484,248		11,725,724		6,318,957		6,730,297		4,304,985		1,715,389		1,473,963		3,820,047

Construction and real estate development (including land)		2,296,964		1,333,440		260,674		555,480		467,716		145,576		150,607		274,735

Civil engineering		1,052,913		29,129		128,938		126,954		10,559		5,897		3,323		11,334

Other purposes		56,134,371		10,363,155		5,929,345		6,047,863		3,826,710		1,563,916		1,320,033		3,533,978

Large enterprises		31,226,029		2,977,089		2,661,762		2,180,128		846,403		294,793		574,142		1,743,385

SMEs and individual entrepreneurs		24,908,342		7,386,066		3,267,583		3,867,735		2,980,307		1,269,123		745,891		1,790,593

Other households		86,625,439		77,509,747		1,338,469		17,426,470		24,217,524		27,462,459		7,811,327		1,930,436

Home loans		76,676,284		76,367,543		219,257		16,397,768		23,577,762		27,127,829		7,683,652		1,799,789

Consumer loans		6,188,263		36,251		778,165		250,060		304,695		127,606		63,515		68,540

Other purposes		3,760,892		1,105,953		341,047		778,642		335,067		207,024		64,160		62,107
TOTAL		157,025,938		89,470,020		8,484,228		24,607,777		28,656,428		29,207,848		9,300,829		6,181,366

MEMORANDUM ITEM

Refinancing, refinanced and restructured transactions		3,423,458		1,937,873		46,581		606,244		542,742		375,564		193,813		266,091

A-784


Thousand euro
							31/12/2023
	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Secured loans. Carrying amount based on last available valuation. Loan to value
	TOTAL		Of which: secured with real estate		Of which: secured with other collateral		Less than or equal to 40%		Over 40% and less than or equal to 60%		Over 60% and less than or equal to 80%		Over 80% and less than or equal to 100%		Over 100%


General governments		8,980,558		23,776		393,229		18,369		6,621		42		857		391,116

Other financial corporations and individual entrepreneurs (financial business activity)		1,315,339		206,658		238,726		233,252		161,757		5,918		9,410		35,047

Non-financial corporations and individual entrepreneurs (non-financial business activity)		57,417,407		11,029,211		5,800,333		5,758,968		4,352,419		1,840,235		1,384,038		3,493,884

Construction and real estate development (including land)		2,253,778		1,262,384		257,299		520,929		516,954		174,633		121,393		185,774

Civil engineering construction		1,007,464		26,668		45,518		39,612		8,729		2,981		7,501		13,363

Other purposes		54,156,165		9,740,159		5,497,516		5,198,427		3,826,736		1,662,621		1,255,144		3,294,747

Large enterprises		29,971,252		2,574,879		2,095,603		1,216,378		914,663		385,915		395,883		1,757,643

SMEs and individual entrepreneurs		24,184,913		7,165,280		3,401,913		3,982,049		2,912,073		1,276,706		859,261		1,537,104

Other households		84,202,656		76,182,679		1,200,701		17,259,349		23,402,095		26,631,313		7,886,433		2,204,190

Home loans		75,264,075		74,941,780		250,150		16,421,911		22,741,620		26,263,113		7,729,403		2,035,883

Consumer loans		5,774,897		40,182		749,578		204,415		294,636		137,011		68,708		84,990

Other purposes		3,163,684		1,200,717		200,973		633,023		365,839		231,189		88,322		83,317
TOTAL		151,915,960		87,442,324		7,632,989		23,269,938		27,922,892		28,477,508		9,280,738		6,124,237

MEMORANDUM ITEM Refinancing, refinanced and restructured transactions		3,866,784		2,217,794		159,301		807,197		623,992		486,425		204,765		254,716

A-785

Refinancing and restructuring transactions

Information on refinancing and restructuring transactions as at 30 June 2024 and 31 December 2023 is shown below. The Group’s refinancing policy and strategy is described in Note 4 on “Risk management” to the 2023 consolidated annual financial statements.


Thousand euro

							30/06/2024

	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		*Of which:* lending for construction and real estate development (including land)		Other households		Total

Total

Not secured with collateral

Number of transactions		6		2,516		125		29,027		822		57,428		89,102

Gross carrying amount		5		11,812		17,401		1,719,312		98,783		239,424		1,987,954

Secured with collateral

Number of transactions		—		10		7		4,907		245		12,058		16,982

Gross carrying amount		—		98		78		1,401,161		95,526		1,014,675		2,416,012

Impairment allowances		—		58		14,883		679,596		66,321		285,971		980,508

*Of which, non-performing loans*

*Not secured with collateral*

Number of transactions		6		2		25		19,665		573		44,721		*64,419*

Gross carrying amount		5		252		16,086		1,018,282		59,639		174,508		*1,209,133*

*Secured with collateral*

Number of transactions		—		—		3		2,980		177		6,555		*9,538*

Gross carrying amount		—		—		53		623,878		61,387		629,902		*1,253,833*

*Impairment allowances*		—		58		14,854		628,048		64,607		266,546		*909,506*


Total

Number of transactions		6		2,526		132		33,934		1,067		69,486		106,084

Gross value		5		11,910		17,479		3,120,473		194,309		1,254,099		4,403,966

Impairment allowances		—		58		14,883		679,596		66,321		285,971		980,508
Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		10,773		—		86,576		97,348

A-786


Thousand euro

					31/12/2023

	Credit institutions		General governments		Other financial corporations and individual entrepreneurs (financial business activity)		Non-financial corporations and individual entrepreneurs (non-financial business activity)		*Of which:* *lending for* *construction and* *real estate* *development* *(including land)*		Other households		Total

Total

Not secured with collateral

Number of transactions		—		12		66		28,834		798		59,191		88,103

Gross carrying amount		—		6,338		17,563		1,913,078		131,181		254,385		2,191,364

Secured with collateral

Number of transactions		—		1		8		5,522		276		15,644		21,175

Gross carrying amount		—		75		179		1,464,647		108,041		1,310,756		2,775,657

Impairment allowances		—		429		15,006		726,639		71,333		358,162		1,100,236

*Of which, non-performing loans*

*Not secured with collateral*

Number of transactions		—		2		32		18,946		554		45,576		*64,556*

Gross carrying amount		—		630		16,250		1,030,015		75,717		175,898		*1,222,793*

*Secured with collateral*

Number of transactions				1		4		3,210		197		8,232		*11,447*

Gross carrying amount		—		75		150		621,211		67,899		845,735		*1,467,171*

*Impairment allowances*		—		429		14,970		660,589		69,559		332,799		*1,008,787*


Total

Number of transactions		—		13		74		34,356		1,074		74,835		109,278

Gross value		—		6,413		17,742		3,377,725		239,222		1,565,141		4,967,021

Impairment allowances		—		429		15,006		726,639		71,333		358,162		1,100,236
Additional information: lending included under non-current assets and disposal groups classified as held for sale		—		—		—		3,627		352		3,222		6,849


Thousand euro

Guarantees received	30/06/2024		31/12/2023

Value of collateral		2,079,194		2,374,930
Of which: securing stage 3 loans		989,088		1,151,958

Value of other guarantees		923,644		942,367
Of which: securing stage 3 loans		444,037		427,369
Total value of guarantees received		3,002,838		3,317,297

Movements in the balance of refinancing and restructuring transactions during the first half of 2024 are as follows:


Thousand euro

Balance as at 31 December 2023	4,967,021

(+) Forbearance (refinancing and restructuring) in the period		527,949

Memorandum item: impact recognised on the income statement for the period		61,955
(-) Debt repayments		(470,697)

(-) Foreclosures		(2,258)

(-) Derecognised from the balance sheet (reclassified as write-offs)		(52,121)

(+)/(-) Other changes (*)		(565,928)
Balance as at 30 June 2024		4,403,966

(*) Includes transactions no longer classified as refinancing, refinanced or restructured, as they meet the requirements for reclassification as stage 1, having completed the cure period.

A-787

The table below shows the value of transactions which, after refinancing or restructuring, were classified as stage 3 exposures during the period:


Thousand euro

	30/06/2024		31/12/2023

General governments		—		—

Other legal entities and individual entrepreneurs		167,432		249,593
Of which: lending for construction and real estate development		16,832		25,064

Other natural persons		48,292		153,883

Total		215,724		403,476

The average probability of default (PD) on current refinancing and restructuring transactions broken down by activity as at 30 June 2024 and 31 December 2023 is as follows:


%

	30/06/2024		31/12/2023

*General governments ()**		—		—

Other legal entities and individual entrepreneurs		12		17
Of which: lending for construction and real estate development		16		17

Other natural persons		18		19

(*) Authorisation has not been granted for the use of internal models in the calculation of capital requirements.

Average probability of default calculated as at the end of the quarter immediately preceding the publication of results.

Concentration risk

Geographical exposure

Global

The breakdown of risk concentration, by activity and at a global level, as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
					30/06/2024

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and credit institutions		44,736,418		25,069,497		9,598,338		2,665,792		7,402,791

General governments		35,499,665		25,848,128		5,235,456		2,439,045		1,977,036

Central government		23,844,879		15,927,434		4,930,847		1,009,574		1,977,024

Other		11,654,786		9,920,694		304,609		1,429,471		12

Other financial corporations and individual entrepreneurs		5,069,482		1,501,883		263,772		597,836		2,705,991

Non-financial corporations and individual entrepreneurs		61,945,107		45,151,124		4,014,139		10,720,877		2,058,967

Construction and real estate development		2,406,001		1,958,547		50,640		336,339		60,475

Civil engineering construction		1,123,849		771,461		72,079		192,772		87,537

Other purposes		58,415,257		42,421,116		3,891,420		10,191,766		1,910,955

Large enterprises		32,936,718		19,937,938		3,173,741		8,581,604		1,243,435

SMEs and individual entrepreneurs		25,478,539		22,483,178		717,679		1,610,162		667,520

Other households		86,730,150		40,373,452		1,398,797		650,692		44,307,209

Home loans		76,676,284		32,817,594		1,380,116		362,611		42,115,963

Consumer loans		6,188,263		4,169,505		7,867		6,075		2,004,816

Other purposes		3,865,603		3,386,353		10,814		282,006		186,430
TOTAL		233,980,822		137,944,084		20,510,502		17,074,242		58,451,994

A-788


Thousand euro
					31/12/2023

	TOTAL		Spain		Rest of European Union		Americas		Rest of the world

Central banks and credit institutions		40,818,131		24,396,259		5,901,206		2,413,890		8,106,776

General governments		34,319,129		25,077,209		4,812,170		2,377,517		2,052,233

Central government		23,338,073		15,730,694		4,563,364		991,796		2,052,219

Other		10,981,056		9,346,515		248,806		1,385,721		14

Other financial corporations and individual entrepreneurs		4,514,495		1,051,126		201,741		647,539		2,614,089

Non-financial corporations and individual entrepreneurs		60,294,112		44,591,755		3,639,175		9,830,688		2,232,494

Construction and real estate development		2,364,448		1,873,580		74,974		325,046		90,848

Civil engineering construction		1,098,655		766,428		14,205		240,774		77,248

Other purposes		56,831,009		41,951,747		3,549,996		9,264,868		2,064,398

Large enterprises		32,091,522		19,952,554		2,871,965		7,856,577		1,410,426

SMEs and individual entrepreneurs		24,739,487		21,999,193		678,031		1,408,291		653,972

Other households		84,308,370		39,585,977		1,324,896		623,225		42,774,272

Home loans		75,264,075		32,888,290		1,306,620		337,152		40,732,013

Consumer loans		5,774,897		3,907,018		7,319		6,024		1,854,536

Other purposes		3,269,398		2,790,669		10,957		280,049		187,723
TOTAL		224,254,237		134,702,326		15,879,188		15,892,859		57,779,864

By autonomous community

The breakdown of risk concentration, by activity and by Spanish autonomous community as at 30 June 2024 and 31 December 2023, is as follows:


Thousand euro

											30/06/2024

	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragon		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla-a Mancha		Castilla y Leon		Catalonia

Central banks and credit institutions		25,069,497		34,635		—		1		1		—		796,687		4		1		309,142

General governments		25,848,128		798,724		240,483		491,887		355,130		662,682		3,954		123,425		1,163,114		879,829

Central government		15,927,434		—		—		—		—		—		—		—		—		—

Other		9,920,694		798,724		240,483		491,887		355,130		662,682		3,954		123,425		1,163,114		879,829

Other financial corporations and individual entrepreneurs		1,501,883		3,830		1,408		1,695		1,170		881		192		591		31,278		459,381

Non-financial corporations and individual entrepreneurs		45,151,124		2,431,410		960,154		1,251,218		2,258,412		1,140,691		170,381		743,188		1,090,307		11,905,548

Construction and real estate development		1,958,547		104,282		30,506		34,990		71,197		17,041		8,786		21,651		23,400		474,030

Civil engineering construction		771,461		23,225		12,201		18,398		7,424		3,664		2,781		11,026		12,098		140,612

Other purposes		42,421,116		2,303,903		917,447		1,197,830		2,179,791		1,119,986		158,814		710,511		1,054,809		11,290,906

Large enterprises		19,937,938		821,455		416,665		469,164		1,357,184		330,496		55,404		267,305		271,876		4,530,318

SMEs and individual entrepreneurs		22,483,178		1,482,448		500,782		728,666		822,607		789,490		103,410		443,206		782,933		6,760,588

Other households		40,373,452		2,890,709		583,672		1,172,571		1,502,906		645,972		123,179		533,373		773,102		15,387,447

Home loans		32,817,594		2,256,970		478,085		875,258		1,306,171		438,417		97,900		405,401		595,733		13,010,932

Consumer loans		4,169,505		473,251		48,984		105,887		110,740		176,343		16,083		94,561		102,244		1,157,818

Other purposes		3,386,353		160,488		56,603		191,426		85,995		31,212		9,196		33,411		75,125		1,218,697

TOTAL		137,944,084		6,159,308		1,785,717		2,917,372		4,117,619		2,450,226		1,094,393		1,400,581		3,057,802		28,941,347

A-789


Thousand euro

									30/06/2024

	AUTONOMOUS COMMUNITIES

	Extremadura		Galicia		Madrid		Murcia		Navarra		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and credit institutions		—		6,724		22,704,590		6		2,347		94,914		1,120,445		—		—

General governments		33,868		879,674		2,872,115		60,466		240,529		338,364		735,725		24,547		16,178

Central government		—		—		—		—		—		—		—		—		—

Other		33,868		879,674		2,872,115		60,466		240,529		338,364		735,725		24,547		16,178

Other financial corporations and individual entrepreneurs		20,042		2,838		436,624		3,513		3,436		483,784		33,402		17,809		9

Non-financial corporations and individual entrepreneurs		121,522		2,010,174		13,108,655		1,093,627		462,470		4,219,476		2,009,935		156,111		17,845

Construction and real estate development		2,049		81,499		849,892		24,100		6,916		144,173		54,430		8,452		1,153

Civil engineering construction		2,989		34,492		374,535		12,928		2,788		71,389		38,990		820		1,101

Other purposes		116,484		1,894,183		11,884,228		1,056,599		452,766		4,003,914		1,916,515		146,839		15,591

Large enterprises		20,485		609,707		7,510,520		307,833		226,687		1,683,751		1,010,760		48,164		164

SMEs and individual entrepreneurs		95,999		1,284,476		4,373,708		748,766		226,079		2,320,163		905,755		98,675		15,427

Other households		150,435		1,062,137		5,519,767		2,143,197		159,762		6,242,695		1,324,314		70,925		87,289

Home loans		111,893		762,275		4,435,097		1,692,505		130,741		4,915,747		1,165,775		57,674		81,020

Consumer loans		29,284		191,161		681,938		222,801		8,953		666,070		74,016		5,907		3,464

Other purposes		9,258		108,701		402,732		227,891		20,068		660,878		84,523		7,344		2,805

TOTAL		325,867		3,961,547		44,641,751		3,300,809		868,544		11,379,233		5,223,821		269,392		121,321


Thousand euro

											31/12/2023

	TOTAL		AUTONOMOUS COMMUNITIES
	TOTAL		Andalusia		Aragon		Asturias		Balearic Islands		Canary Islands		Cantabria		Castilla-La Mancha		Castilla y Leon		Catalonia

Central banks and credit institutions		24,396,259		5,410		—		—		—		—		698,942		—		—		430,307

General governments		25,077,209		578,710		241,671		431,346		343,768		664,383		3,215		135,071		1,043,140		760,577

Central government		15,730,694		—		—		—		—		—		—		—		—		—

Other		9,346,515		578,710		241,671		431,346		343,768		664,383		3,215		135,071		1,043,140		760,577

Other financial corporations and individual entrepreneurs		1,051,126		3,681		1,772		1,996		1,312		850		156		627		32,962		108,516

Non-financial corporations and individual entrepreneurs		44,591,755		2,343,177		963,467		1,178,938		2,121,692		1,076,886		187,623		654,351		1,066,855		12,397,422

Construction and real estate development		1,873,580		84,243		32,392		34,190		70,540		25,438		5,298		17,468		24,539		447,318

Civil engineering construction		766,428		24,615		12,107		18,725		5,653		4,146		2,883		8,684		12,627		136,796

Other purposes		41,951,747		2,234,319		918,968		1,126,023		2,045,499		1,047,302		179,442		628,199		1,029,689		11,813,308

Large enterprises		19,952,554		737,726		414,435		376,522		1,250,346		396,396		79,599		210,930		255,722		4,981,149

SMEs and individual entrepreneurs		21,999,193		1,496,593		504,533		749,501		795,153		650,906		99,843		417,269		773,967		6,832,159

Other households		39,585,977		2,846,721		563,894		1,131,953		1,478,250		625,737		116,920		519,921		752,937		15,228,142

Home loans		32,888,290		2,260,819		480,061		890,596		1,302,328		433,508		96,987		403,927		594,361		13,078,263

Consumer loans		3,907,018		445,359		46,353		100,552		100,212		164,035		13,001		87,486		97,486		1,135,004

Other purposes		2,790,669		140,543		37,480		140,805		75,710		28,194		6,932		28,508		61,090		1,014,875

TOTAL		134,702,326		5,777,699		1,770,804		2,744,233		3,945,022		2,367,856		1,006,856		1,309,970		2,895,894		28,924,964

A-790


Thousand euro

									31/12/2023

	AUTONOMOUS COMMUNITIES

	Extremadura		Galicia		Madrid		Murcia		Navarra		Valencia		Basque Country		La Rioja		Ceuta and Melilla

Central banks and credit institutions		—		4,984		22,079,828		1		—		85,085		1,091,702		—		—

General governments		39,126		760,893		2,676,261		60,696		266,743		586,724		682,970		52,617		18,604

Central government		—		—		—		—		—		—		—		—		—

Other		39,126		760,893		2,676,261		60,696		266,743		586,724		682,970		52,617		18,604

Other financial corporations and individual entrepreneurs		21,180		2,603		282,444		2,130		2,738		537,554		32,564		18,031		10

Non-financial corporations and individual entrepreneurs		121,904		2,007,256		12,716,367		993,898		493,121		4,113,260		1,985,073		153,674		16,791

Construction and real estate development		2,139		89,728		813,387		26,778		9,548		139,160		42,655		7,811		948

Civil engineering construction		1,719		34,342		378,929		14,495		2,295		59,305		46,768		1,044		1,295

Other purposes		118,046		1,883,186		11,524,051		952,625		481,278		3,914,795		1,895,650		144,819		14,548

Large enterprises		21,484		613,494		7,409,234		287,277		249,810		1,624,341		990,456		53,476		157

SMEs and individual entrepreneurs		96,562		1,269,692		4,114,817		665,348		231,468		2,290,454		905,194		91,343		14,391

Other households		149,504		1,002,659		5,347,812		2,089,573		161,017		6,110,308		1,307,172		68,368		85,089

Home loans		113,058		739,180		4,330,340		1,715,650		132,805		5,012,629		1,167,233		57,450		79,095

Consumer loans		28,303		174,860		625,842		201,006		8,536		600,720		69,838		5,371		3,054

Other purposes		8,143		88,619		391,630		172,917		19,676		496,959		70,101		5,547		2,940

TOTAL		331,714		3,778,395		43,102,712		3,146,298		923,619		11,432,931		5,099,481		292,690		120,494

Sovereign risk exposure

Sovereign risk exposure, broken down by type of financial instrument, as at 30 June 2024 and 31 December 2023 is as follows:


Thousand euro
										30/06/2024

	Sovereign debt securities											*Of which:*	Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss	Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		*Financial* *assets FVOCI* or non- derivative and non-trading financial assets measured at fair value through equity	With positive fair value		With negative fair value		Total		Other off- balance sheet exposures (***)	%

Spain		68,448		(137,882)	—		2,888,025		13,454,101		10,528,123	—		1,438		(8,015)		26,794,238	—		74.0 %

Italy		230,123		(1,004)	—		99,913		3,792,964		—	—		—		—		4,121,996	—		11.4 %

United States		—		—	12,390		1,120,557		348,591		264	—		—		—		1,481,802	—		4.1 %

United Kingdom		—		—	—		402,175		1,565,804		6,828	—		—		—		1,974,807	—		5.5 %

Portugal		—		(73,591)	—		—		659,758		3	—		—		—		586,170	—		1.6 %

Mexico		—		—	—		782,749		99,903		67,828	—		—		—		950,480	—		2.6 %

Rest of the world		84,488		(151,242)	—		70,752		298,167		8,279	—		—		—		310,444	—		0.9 %

Total		383,059		(363,719)	12,390		5,364,171		20,219,288		10,611,325	—		1,438		(8,015)		36,219,937	—		100.1 %

(*) Sovereign risk positions shown in accordance with EBA criteria.

(**) Includes undrawn balances of credit transactions and other contingent risks (1,111 million euros at 30 June 2024).

(***) Relates to commitments for cash purchases and sales of financial assets.

A-791


Thousand euro
										31/12/2023

	Sovereign debt securities											*Of which:*	Derivatives
Sovereign risk exposure by *country ()**	Financial assets held for trading		Financial liabilities held for trading - Short positions		Mandatorily at fair value through profit or loss	Measured at fair value through other comprehensive income		Financial assets at amortised cost		Loans and advances to customers (**)		Financial assets FVOCI or non- derivative and non-trading financial assets measured at fair value through equity	With positive fair value		With negative fair value		Total		Other off- balance sheet exposures (***)	%

Spain		16,760		(158,175)	—		2,846,230		13,305,462		9,837,310	—		2,860		(6,040)		25,844,407	—		74.0%

Italy		62,269		(9,798)	—		95,074		3,399,329		—	—		—		—		3,546,874	—		10.2%

United States		—		—	12,191		1,105,010		338,484		161	—		—		—		1,455,845	—		4.2%

United Kingdom		—		—	—		411,132		1,628,549		9,053	—		—		—		2,048,734	—		5.9%

Portugal		—		(27,347)	—		—		734,133		—	—		—		—		706,786	—		2.0%

Mexico		—		—	—		713,467		100,411		101,362	—		—		—		915,240	—		2.6%

Rest of the world		6,891		(134,321)	—		72,081		443,811		8,511	—		—		—		396,974	—		1.1%

Total		85,920		(329,641)	12,191		5,242,994		19,950,179		9,956,397	—		2,860		(6,040)		34,914,860	—		100%

(*) Sovereign risk positions shown in accordance with EBA criteria.

(**) Includes undrawn balances of credit transactions and other contingent risks (947 million euros at 31 December 2023).

(***) Relates to commitments for cash purchases and sales of financial assets.

Exposure to construction and real estate development sector

Details of lending for construction and real estate development and the relevant impairment allowances as at 30 June 2024 and 31 December 2023 are set out below:

Million euro

30/06/2024

Gross carrying
amount

Surplus above value
of collateral

Impairment
allowances

Lending for construction and real estate development
(including land) (business in Spain)

2,078

597

107

Of which: stage 3 exposures

167

Million euro

31/12/2023

Gross carrying
amount

Surplus above value
of collateral

Impairment
allowances

Lending for construction and real estate development

(including land) (business in Spain)

2,208

562

111

Of which: stage 3 exposures

169


Million euro
	Gross carrying amount

Memorandum item	30/06/2024		31/12/2023
Write-offs (*)		7		12

Million euro

	Amount		Amount

Memorandum item		30/06/2024		31/12/2023

Loans to customers, excluding general governments (business in Spain) (carrying amount)		89,413		87,451

Total assets (total business) (carrying amount)		244,328		235,173

Allowances and provisions for exposures classified as stage 2 or stage 1 (total operations)		849		922

(*) Refers to lending for construction and real estate development reclassified as write-offs during the year.

A-792

The breakdown of lending for construction and real estate development for transactions registered by credit institutions (business in Spain) as at 30 June 2024 and 31 December 2023 is as follows:


Million euro

	Gross carrying amount	Gross carrying amount
	30/06/2024	31/12/2023

Not secured with real estate	700	910

Secured with real estate	1,378	1,298

Buildings and other completed works	699	627

Housing	489	466

Other	210	161

Buildings and other works in progress	578	615

Housing	551	590

Other	28	25

Land	101	56

Consolidated urban land	100	55

Other land	1	1
Total	2,078	2,208

The figures presented do not show the total value of guarantees received, but rather the gross carrying amount of the associated exposure.

Guarantees received associated with lending for construction and real estate development are shown below, for both periods:


Million euro
Guarantees received	30/06/2024		31/12/2023

Value of collateral		1,319		1,285

Of which: securing stage 3 loans		37		44

Value of other guarantees		248		315

Of which: securing stage 3 loans		25		25
Total value of guarantees received		1,567		1,600

The breakdown of loans to households for home purchase for transactions recorded by credit institutions (business in Spain) as at 30 June 2024 and 31 December 2023 is as follows:


Million euro

	30/06/2024

	Gross carrying amount		*Of which: stage 3 exposures*

Loans for home purchase		35,253		681

Not secured with real estate		519		17

Secured with real estate		34,734		664


Million euro

	31/12/2023

	Gross carrying amount		*Of which: stage 3 exposures*

Loans for home purchase		35,271		*872*
Not secured with real estate		603		20

Secured with real estate		34,668		852

A-793

The tables below show home equity loans granted to households for home purchase, broken down by the loan-to-value ratio (ratio of total risk to gross carrying amount of last available property appraisal) of transactions recorded by credit institutions (business in Spain) as at 30 June 2024 and 31 December 2023:


Million euro

	30/06/2024

	Gross amount		*Of which: stage 3 exposures*

LTV ranges		34,734		*664*

LTV <= 40%		6,916		101

40% < LTV <= 60%		10,011		135

60% < LTV <= 80%		13,526		174

80% < LTV <= 100%		2,616		118

LTV > 100%		1,665		136


Million euro

	31/12/2023

	Gross amount		*Of which: stage 3 exposures*

LTV ranges		34,668		*852*

LTV <= 40%		6,942		130

40% < LTV <= 60%		9,884		182

60% < LTV <= 80%		12,923		220

80% < LTV <= 100%		3,039		149

LTV > 100%		1,880		171


Million euro
	30/06/2024
	Gross carrying amount		Allowances		Gross amount (*)		**Allowances ()***

Real estate assets acquired through lending for construction and real estate development		312		107		*358*		*154*

Completed buildings		281		92		319		132

Housing		158		41		179		63

Other		123		51		140		69

Buildings under construction		2		1		2		1

Housing		1		1		1		1

Other		—		—		—		—

Land		29		14		37		21

Developed land		15		7		20		11

Other land		14		7		17		11

Real estate assets acquired through mortgage lending to households for home purchase		451		119		*522*		*192*

Other real estate assets foreclosed or received in lieu of debt		17		4		23		10

Capital instruments foreclosed or received in lieu of debt		—		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Total		779		230		*902*		*356*

(*) Non-performing real estate assets including real estate located outside the national territory and the provision allocated in the original loan, and excluding the credit risk transferred in portfolio sales (see reconciliation between assets foreclosed or received in payment of debt and non-performing assets, below).

A-794


Million euro
	31/12/2023
	Gross carrying amount		Allowances		*Gross* **amount ()***		*Allowances* **()***

Real estate assets acquired through lending for construction and real estate development		358		122		*407*		*176*

Completed buildings		325		107		366		152

Housing		182		47		201		69

Other		144		60		165		83

Buildings under construction		2		1		2		1

Housing		2		1		2		1

Other		—		—		—		—

Land		30		14		38		23

Developed land		16		7		20		11

Other land		14		7		18		11

Real estate assets acquired through mortgage lending to households for home purchase		467		123		*540*		*198*

Other real estate assets foreclosed or received in lieu of debt		18		5		25		11

Capital instruments foreclosed or received in lieu of debt		—		—		—		—

Capital instruments of institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Financing to institutions holding assets foreclosed or received in lieu of debt		—		—		—		—

Total		843		249		971		385

The reconciliation of the real estate assets shown in the two previous tables of this Schedule as at 30 June 2024 and 31 December 2023 is shown below:

Million euro

30/06/2024

Gross value

Allowances

Net book value

Total real estate portfolio in the national territory (in books)

779

230

549

Total operations outside the national territory and others

Provision allocated in original loan

132

—

Risk transferred in portfolio sales

(10)

(7)

(3)

Total non-performing real estate

902

356

546

Million euro

31/12/2023

Gross value

Allowances

Net book value

Total real estate portfolio in the national territory (in books)

843

249

594

Total operations outside the national territory and others

Provision allocated in original loan

147

—

Risk transferred in portfolio sales

(21)

(13)

(8)

Total non-performing real estate

971

385

586

A-795

Offer to Exchange/Prospectus

Offer to Exchange

100% of the shares of

BANCO DE SABADELL, S.A.

for shares of

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

and cash

The date of this offer to exchange/prospectus is , 2024

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.

Indemnification of Directors and Officers.

Indemnification under BBVA’s Bylaws (estatutos) and Spanish Law. Under Spanish law, BBVA’s directors shall be liable to BBVA, the shareholders and the creditors of BBVA for any damage they cause through acts contrary to the law or the bylaws of BBVA, or acts carried out in breach of the duties inherent to the discharge of their office. All directors shall be jointly liable for those acts, except those that evidence that they did not intervene in the approval and execution of the act and did not know about the act or, if they knew, did everything that they deemed reasonable to avoid the damage or, at least, expressly opposed the act. The fact that the act has been approved, ratified or authorized by the shareholders meeting shall not relieve the directors from their liability. No provision of BBVA’s bylaws provides for the indemnification of the directors with respect to such liabilities.

BBVA Directors and Officers Insurance. BBVA maintains an insurance policy that protects its officers and directors from liabilities incurred as a result of actions taken in their official capacity associated with any civil, criminal or administrative process.

Item 21. Exhibits and Financial Statement Schedules.

(a) The following is a list of exhibits filed as part of this Registration Statement, including those incorporated herein by reference.


Exhibit No.		Description

3.1		Amended and restated bylaws (estatutos) of Banco Bilbao Vizcaya Argentaria, S.A. (English translation)*

5.1		Opinion of J&A Garrigues, S.L.P. as to the validity of Banco Bilbao Vizcaya Argentaria, S.A.’s shares*

21.1		Subsidiaries of BBVA, incorporated herein by reference to Exhibit 8.1 to the Form 20-F for the fiscal year ended December 31, 2023, filed on March 1, 2024

23.1		Consent of Ernst & Young, S.L., auditors of Banco Bilbao Vizcaya Argentaria, S.A. for the fiscal years ended December 31, 2023 and 2022

23.2		Consent of KPMG Auditores, S.L., auditors of Banco Bilbao Vizcaya Argentaria, S.A. for the fiscal year ended December 31, 2021

23.3		Consent of J&A Garrigues, S.L.P. (included in Exhibit 5.1)*

24.1		Powers of attorney (included in the signature pages of this Registration Statement)*

107.1		Filing Fee Table*

*	Previously filed

Item 22. Undertakings.

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

(i) To include any offer to exchange/prospectus required by Section 10(a)(3) of the Securities Act;

(ii) To reflect in the offer to exchange/prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which,

II-1

individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of offer to exchange/prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 per cent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; and

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement;

(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;

(4) To file a post-effective amendment to the Registration Statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering;

(5) That, for purposes of determining any liability under the Securities Act, each filing of BBVA’s annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan’s annual report to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;

(6)(i) To respond to requests for information that is incorporated by reference into the offer to exchange/prospectus pursuant to Items 4, 10(b), 11 or 13 of Form F-4, within one U.S. business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means; and (ii) to arrange or provide for a facility in the United States for the purpose of responding to such requests. The undertaking in subparagraph (i) above includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request; and

(7) To supply by means of a post-effective amendment all information concerning a transaction and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective.

(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-2

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Form F-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in Madrid, Spain, on October 15, 2024.


BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

By:	/s/ Luisa Gómez Bravo
	Name:	Luisa Gómez Bravo
	Title:	Authorized Representative

II-3

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.


SIGNATURE/NAME	TITLE	DATE

* Carlos Torres Vila	Chair	October 15, 2024

* Onur Genç	Chief Executive Officer	October 15, 2024

* Luisa Gómez Bravo	Chief Financial Officer Principal Accounting Officer	October 15, 2024

* José Miguel Andrés Torrecillas	Deputy Chair, Director	October 15, 2024

* Jaime Félix Caruana Lacorte	Director	October 15, 2024

* Sonia Lilia Dulá	Director	October 15, 2024

* Raúl Catarino Galamba de Oliveira	Director	October 15, 2024

* Belén Garijo López	Director	October 15, 2024

* Connie Hedegaard Koksbang	Director	October 15, 2024

* Lourdes Máiz Carro	Director	October 15, 2024

* Enrique Casanueva Nárdiz	Director	October 15, 2024

* Ana Cristina Peralta Moreno	Director	October 15, 2024

* Cristina de Parias Halcón	Director	October 15, 2024

* Ana Leonor Revenga Shanklin	Director	October 15, 2024

II-4


SIGNATURE/NAME	TITLE	DATE

* Carlos Vicente Salazar Lomelín	Director	October 15, 2024

* Jan Paul Marie Francis Verplancke	Director	October 15, 2024

* Diego Crasny Zyman	Authorized Representative of Banco Bilbao Vizcaya Argentaria, S.A. in the United States	October 15, 2024

*	Luisa Gómez Bravo, by signing her name hereto, does hereby sign this registration statement on behalf of the directors and officers of the registrant above in front of whose name asterisks appear, pursuant to powers of attorney duly executed by such directors and officers and filed with the SEC.


/s/ Luisa Gómez Bravo
Name:		Luisa Gómez Bravo
Title:		Attorney-in-Fact

II-5

Banco Bilbao Vizcaya Argentaria (BBVA) F-4/ARegistration of securities (foreign) (amended)