Sabadell Income Slips, Signals Bank Will Miss Profit Target

Updated on
  • Bank attributes miss to low interest rates and provisions
  • Net interest income surges while bank gained from asset sales

Banco de Sabadell SA lowered its expectations for profit this year after net income slipped in the second quarter, missing analyst estimates. The stock fell.

Net income dropped to 173 million euros ($190 million) from 178 million euros a year ago, Spain’s fifth-largest bank by market capitalization said in a filing to regulators Friday. That compares with the 240 million-euro average of nine estimates compiled by Bloomberg.

The bank expects to post a 2016 profit of “slightly under” 800 million euros, short of the 1 billion euros previously targeted, Chief Executive Officer Jaime Guardiola said. He attributed the miss to low interest rates and provisions for losses.

"We are in a scenario of pressure on our profitability because of the interest rate environment,” he told analysts in a conference call. Sometimes it seems low rates will last forever, he said.

Shares Plunge

Banco Sabadell’s shares dropped more than 7 percent in Madrid trading and were down 7.2 percent to 1.19 euros at 11:54 a.m., leading losses in the Spanish Ibex 35 Index.

By contrast, Bankia SA, the nationalized lender that the government plans to sell back to investors, beat analyst estimates with a second-quarter profit of 245 million euros. The stock climbed as much as 3 percent.

Sabadell booked 99 million euros in charges in the six months through June including a 48 million-euro contribution to the European Resolution Fund, set up after the 2008 financial crisis to prevent state-funded bailouts. Profit was also dented by a 92 million-euro impairment on the bank’s 5 percent stake in Portuguese lender Banco Comercial Portugues SA, whose shares have lost 59 percent this year.

“The miss was mainly due to a one-off impairment and the ongoing trend of core revenues was better than expected,” Fabio Mostacci, an analyst at Mirabaud Securities, said in a note to clients. “We think the results are good despite the miss on net income.”

A change in Spanish accounting rules for bad loans also squeezed profit, Guardiola said. The lender has 350 million euros in provisions to cover the new regulation and doesn’t expect a further impact in the second half, Chief Financial Officer Tomas Varela said.

The second quarter ended in market turmoil over the surprise U.K. vote to leave the European Union. Sabadell Chairman Josep Oliu has said the decision has no bearing on the bank’s retail-based strategy in the U.K. Still, it prompted a sell-off in the pound that eroded the value of TSB Banking Group Plc, the British bank that Sabadell acquired last year, and shaved 0.3 percent from the group’s earnings.

Net interest income, a measure of what the bank earns from lending after deducting what it pays on deposits and other liabilities, surged to 969 million euros from 656 million euros a year earlier. It dropped 0.5 percent from the first quarter.

The sale of a stake in Visa Europe Ltd. to Visa Inc., completed last month, lifted Sabadell’s profit by 109 million euros, while the disposal of a stake in Dexia Sabadell SA to Dexia Credit Local SA contributed 53 million euros.

Bad loans as a share of total lending fell to 6.83 percent from 7.5 percent in the first quarter. The bank’s common equity Tier 1 ratio, a measure of financial strength, stood at 11.8 percent, same as in the first quarter.

(Updates with Sabadell shares, Bankia profit in fifth and sixth paragraphs.)
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