Banco de Sabadell Delivers Resilient Q1 2025 Results Amid Rate Challenges

Banco de Sabadell, Spain’s fifth-largest bank by assets, reported its Q1 2025 earnings on May 8, 2025, underscoring a mix of solid execution and cautious optimism. While the bank faced headwinds in core revenue and net interest income (NII), its robust capital position, disciplined cost management, and aggressive capital return initiatives provided a clear roadmap for sustained shareholder value creation.

Key Financial Highlights

The quarter highlighted both resilience and areas of mild underperformance:

1. Net Interest Income (NII):
   NII fell to €1.222 billion, 1% below consensus estimates and a 5% sequential decline. The drop was attributed to a slowdown in loan growth and margin pressures. However, excluding a one-off adjustment from Q4 2024, the net interest margin (NIM) improved by 2 basis points (bps) to 2.02%.

2. Core Revenues and Gross Operating Income:
   Core revenues dipped 0.4% below expectations to €1.566 billion, while gross operating income surged 2% above forecasts, driven by a €35 million one-off gain in the TSB segment (a UK subsidiary) from a third-party indemnity recovery. This underscores the bank’s ability to generate unexpected upside through strategic asset management.

3. Cost Discipline:
   Operating expenses were 1% below consensus, with no extraordinary costs reported. The absence of Spain’s banking tax (suspended in 2025) helped widen operating jaws (revenue minus cost growth) by 13% year-on-year, signaling improved efficiency.

Asset Quality and Capital Strength

Banco de Sabadell’s balance sheet remained a standout performer:
- The non-performing loan (NPL) ratio dropped to 2.67%, a near-decade low, reflecting strong credit underwriting.
- Provisions and impairments fell 17% below consensus, reinforcing the robustness of its loan portfolio.
- The fully-loaded CET1 ratio rose to 13.31%, exceeding management’s target and consensus estimates (13.13%), providing ample buffer for future stress scenarios.

Capital Returns: Aggressive Buybacks and Dividends

The bank’s shareholder-friendly policies took center stage:
- Resumed its suspended FY2023 share buyback program, with €247 million executed (86% completed) by May 2, 2025.
- Announced a new €755 million FY2024 buyback program, approved by the ECB and shareholders, signaling confidence in its capital position.
- Paid a €0.1244 per share dividend in Q1, maintaining its progressive payout policy.

These actions, coupled with a 2.2% stock price pop post-earnings, reflect investor approval of the bank’s capital allocation strategy.

Analyst and Market Perspective

RBC analyst commentary highlighted the bank’s ability to navigate a challenging environment of falling European interest rates, with expectations for resilient earnings growth in 2025–2026. The bank’s CET1 ratio, now at 13.31%, provides a 30 bps sequential improvement, giving it flexibility to invest in growth or return more capital to shareholders.

Conclusion: A Solid Foundation for Long-Term Growth

Banco de Sabadell’s Q1 results demonstrate its capacity to balance prudent risk management with shareholder-friendly policies. Key positives include:
- A CET1 ratio above 13.3%, well above regulatory requirements and peers.
- Asset quality improvements, with NPLs near multi-year lows.
- Aggressive capital returns, including a €755 million buyback program and consistent dividends.

While NII and core revenues faced modest headwinds, the bank’s ability to generate one-off gains (e.g., TSB indemnity) and maintain cost discipline suggests it can navigate macro challenges. With Spain’s economy expected to grow 1.3% in 2025 (IMF forecast), Banco de Sabadell is positioned to capitalize on domestic lending opportunities.

Investors seeking exposure to a well-capitalized, defensively positioned Spanish bank with strong capital returns should view these results as a positive signal. The stock’s 2.2% post-earnings rally reflects this sentiment, but further upside hinges on NII stabilization and loan growth in subsequent quarters. For now, the fundamentals remain solid, and the path forward is clear.

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