2015_03_13_SAB bid on TSB

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Banco Sabadell
13 March 2015 Banks Update
Diversifying away from Spain Andrea Filtri
Equity Analyst
SAB to bid for TSB at GBp340 by 9 April
Yesterday SAB disclosed it is in talks with LLOY and TSB over the potential
acquisition of TSB for GBp340 per share, 29% premium on the previous closing
price and €2.4bn consideration. SAB will have to submit a bid by 9 April, which
the two UK banks would both support. The price implies a valuation of 1.04x TE
for 4.5% 2015E RoTE, raising to 6.9% when stripping out c.€0.8bn excess capital.
TSB: a sub-scaled domestic retail franchise positioned for UK rate hikes
TSB derives from an EU-Commission mandated spin-off from LLOY following the
state support received by the UK giant. 631 branches, and 19% CET1 ratio are
oversized compared with the small £19bn loans, implying TSB is a story of
organic balance sheet expansion, i.e. the typical profile of a Challenger Bank.
High exposure to SVR mortgages positions TSB for UK rate hikes.
Cross border M&A: 1st
mover on Banking Union or low confidence on Spain
Over the last few weeks we have seen CABK bidding for Portugal’s BPI, POP in
talks to buy Citi’s Central American units and SAB in talks to buy domestic, sub-
scaled UK retail. More than the M&A move, perhaps attempting to gain a 1st
mover advantage in cross border consolidation for the Banking Union, we are
surprised about timing. Yesterday’s share price performance (-6.6%) reflects the
potential execution risk and the dilution of peripheral pure play premium in a
moment where Southern Europe is in vogue. Also, we believe the market could
interpret the Spanish banks’ M&A and the several stake placements in Italy (MB,
MS, Enel, …) as a sign of rich valuation ahead of visible EPS recovery.
Three scenarios of M&A: CET1 gearing vs EPS accretion
‘SAB expects to finance the transaction on a capital neutral basis’. We run three
simulations of SAB-TSB merger based on cost synergies in line with historical
cross border average (16% of target costs): 1) pure leverage; 2) ALCO sale; 3)
stable CET1, to check the sensitivity of EPS from different ways of funding the
acquisition. We find between -15% and +20% impact to 3-yr EPS from the sale of
ALCO (CET1 gearing limited to 50bp) or a 150bp CET1 gearing. Raising €1.35bn
would keep CET1 stable and +5% to EPS, reflecting the leveraging of TSB’s high
capital ratio.
Short-term political risk, complexity and diversification call for a discount
UK, Spain and Portugal hold elections in 2015. These could provide uncertain
outcomes given the rise of new, challenger parties with anti-EU, anti-Euro and
anti-banks manifestos. Political risk, combined with higher geographical
diversification and higher regulatory complexity mandate for a valuation
discount. As such, we believe the €0.8bn TSB estimated excess capital is unlikely
to be fungible to SAB, given the tough approach to domestic capitalization of
banks showed by the UK regulator in the last 5 years.
Reiterate Underperform on lower quality capital, earnings and business mix
SAB’s capital is highly reliant on DTA/DTC and badwill, while 40-60% of 2015-17E
earnings derive from carry trade. Also, the 4 domestic acquisitions (CAM, LLOY
ES, CP, BG) made in the last 3 years diluted SAB’s traditional SME-focus. We see
SAB on 1x TE for an average 2016E RoTE of 8.6% post-TSB buy. We consider this
unattractive and reiterate our Underperform and cut TP to €2.2 (from €2.4).
+44 203 0369 571
andrea.filtri@mediobanca.com
Andres Williams
Equity Analyst
+44 203 0369 577
andres.williams@mediobanca.com
Adam Terelak
Equity Analyst
+44 203 0369 574
adam.terelak@mediobanca.com
Jean Farah
Equity Analyst
+44 203 0369 665
jean.farah@mediobanca.com
Source: Mediobanca Securities
Price: € 2.32 Target price: € 2.20 Underperform
2014 2015E 2016E 2017E
EPS Adj (€) 0.09 0.18 0.24 0.28
DPS (€) 0.05 0.09 0.12 0.14
TBVPS (€) 2.35 2.40 2.61 2.87
Avg. RoTE Adj (%) 4.2% 8.5% 10.4% 11.0%
P/E Adj (x) 26.0 12.8 9.9 8.4
Div.Yield(%) 2.2% 3.9% 5.1% 5.9%
P/TBV (x) 1.0 1.0 0.9 0.8
Market Data
Market Cap (€m) 9,280
Shares Out (m) 3,998
Main Shareholder Name (%) 10%
Free Float (%) 100%
52 week range (€) 2.66-2.04
Rel Perf vs STOXX EUROPE 600 (%)
-1m -1.4%
-3m -9.2%
-12m -17.7%
21dd Avg. Vol. 28,573,233
Reuters/Bloomberg SABE.MC / SAB SM

Banco Sabadell
13 March 2015 ◆ 2
Valuation Matrix
Profit & Loss Acc(€ m) 2014 2015E 2016E 2017E Multiples 2014 2015E 2016E 2017E
Net Interest Income 2,260 2,708 2,871 2,890 P/E 26.0 12.8 9.9 8.4
Growth (%) 24.5% 19.9% 6.0% 0.6% P/E Adj. 26.0 12.8 9.9 8.4
Non-Interest Income 2,541 1,237 1,298 1,371 P/Net Op.Income 3.5 5.1 4.6 4.4
Growth (%) 17.5% -51.3% 5.0% 5.6% P/Revenues 2.0 2.4 2.3 2.2
of which Fee Income 861 913 958 1,006 P/TBV 1.0 1.0 0.9 0.8
of which Financial Income 1,764 406 422 447 P/Total Deposits (%) 9.7% 9.5% 9.2% 9.0%
Total Income 4,801 3,946 4,170 4,261 Yield (%) 2.2% 3.9% 5.1% 5.9%
Growth (%) 20.7% -17.8% 5.7% 2.2%
Total Costs -2,051 -2,071 -2,091 -2,112
Growth (%) 7.2% 1.0% 1.0% 1.0%
of which Personnel Costs -1,203 -1,206 -1,208 -1,220
Net Operating Income 2,749 1,874 2,078 2,148
Growth (%) 33.3% -31.8% 10.9% 3.4%
Provisions&Write-downs -2,500 -900 -801 -642 Per Share Data (€) 2014 2015E 2016E 2017E
Extraordinary Items 237 32 24 18 EPS 0.09 0.18 0.24 0.28
Pre-tax profit 250 974 1,277 1,506 EPS growth (%) 44.9% 103.2% 29.5% 17.2%
Tax -110 -239 -313 -369 EPS Adj. 0.09 0.18 0.24 0.28
Tax rate(%) 44.0% 24.5% 24.5% 24.5% EPS Adj. growth (%) 44.9% 103.2% 29.5% 17.2%
Minorities and others -5 -22 -23 -25 TBVPS 2.35 2.40 2.61 2.87
Net profit 372 745 965 1,130 DPS Ord 0.05 0.09 0.12 0.14
Growth (%) 50.4% 100.4% 29.5% 17.2%
Adjusted net profit 367 745 965 1,130
Growth (%) 48.3% 103.2% 29.5% 17.2%
Balance Sheet (€ m) 2014 2015E 2016E 2017E Key Figures & Ratios 2014 2015E 2016E 2017E
Customer Loans 110,836 113,828 118,609 123,828 Avg. N° of Shares (m) 4,104 4,104 4,104 4,104
Growth(%) -1.9% 2.7% 4.2% 4.4% EoP N° of Shares (m) na na na na
Customer Deposits 98,208 100,664 103,180 105,760 Avg. Market Cap. (m) 9,522 9,525 9,525 9,525
Growth(%) -1.2% 2.5% 2.5% 2.5%
Shareholders' Funds 10,224 10,596 11,561 12,691 NII/Total Income (%) 47.1% 68.6% 68.9% 67.8%
Minorities 55 110 112 114 Fees/Total Income (%) 17.9% 23.1% 23.0% 23.6%
Total Assets 139,856 140,937 142,876 145,236 Trading/Total Income (%) 36.7% 10.3% 10.1% 10.5%
Cost Income ratio 42.7% 52.5% 50.2% 49.6%
Personnel costs/Total costs 58.6% 58.2% 57.8% 57.8%
Impairment/Average Loans 2.2% 0.8% 0.7% 0.5%
NPLs ratio 12.8% 11.2% 10.2% 9.6%
Provisions/Loans 6.2% 5.7% 5.2% 4.8%
Avg. RoTE Adj. (%) 4.2% 8.5% 10.4% 11.0%
ROA (%) 0.27% 0.53% 0.68% 0.78%
Tier 1 ratio 10.6% 10.5% 10.4% 10.7%
Basel III Core Tier 1 ratio 11.1% 9.7% 9.6% 9.8%
2.00
2.10
2.20
2.30
2.40
2.50
2.60
2.70
2.80
2.90
M A M J J A S O N D J F M
Banco Sabadell STOXX EUROPE 600
12/03/15

Banco Sabadell
13 March 2015 ◆ 3
Re-Armada
Cross border M&A: 1st mover on Banking Union or low confidence on Spain
Over the last month the market has been hit with a string of acquisition news from Spanish
domestic banks:
 CABK has bid Portugal’s BPI;
 POP has been in negotiations to acquire the Central American businesses of Citi and
subsequently walked away;
 SAB has disclosed it is in negotiations with LLOY and TSB for the acquisition of the latter.
Within the context of European QE and in the wake of Spanish economic recovery, domestic players
are clearly looking outside.
SAB bid on TSB: 340pp per share or 1.04x TE for 4.5% RoTE...
Table 1 summarises the main financials of the SAB offer for TSB shares reported in the regulatory
filing made by the banks involved, this morning. The GBp340 offer price is 29% above the closing
price of the previous day and implies c.£1.7bn (€2.4bn) total consideration or a valuation of 1.04x
TE. This compares with a 2015E RoTE of 4.5%.
...but €0.8bn excess capital is the real target. Not fungible though, in our view.
TSB is running on an overcapitalised balance sheet, with CET1 FL ratio of 19.7%. Realigning this
ratio to SAB’s 11.5% implies €0.8bn excess capital. Excluding this would lift RoTE to 6.9%. Even post
adjustment, the 1.04x TE valuation looks rich to us.
Table 1: summary of SAB’s offer on TSB

TSB shares, m 500
Share price, GBp 264
Offer price, GBp 340
Premium, % 29%
Outflow GBP, m 1,700
Outflow Euro 2,429
TSB TE, GBP m 1,634
Implied P/TE 1.04
RoTE 2015 4.5%
2014 CET1 FL ratio 19.7%
RWAs 2014 6,930
Excess capital vs SAB CET1, € m 812
ROTE excl. excess capital 6.9%
Source: Mediobanca Securities, company data

Banco Sabadell
13 March 2015 ◆ 4
TSB: subscaled franchise exposed to rate hikes
The profile of a ‘Challenger bank’
The TSB franchise consists of the original 631 included earmarked by the European Commission for
divestment in Lloyd’s project Verde. As of FY2014 franchise lending was £18.8bn which
management intends to grow by c. 50% over the next 4-5 years. Customer deposits were £24.6bn
resulting in a 76.4% loan to deposit ratio. On listing last year the franchise held 4% of the UK’s
personal current account market, an area in which management retain serious ambitions to grow,
targeting 6% of gross ‘current account flow’ each year.
FY2014 performance reflects that the franchise is yet to expand fully into the capabilities that 631
branches provides with the loan book someway short of the cost base. Franchise income was £855m
against £696m of costs resulting in a cost-income ratio of 81.4%, some way ahead UK peer group
average which is trending to c. 50%. Furthermore management expect further increases in costs
into FY2015 with a maximum £720m targeted as the full platform is rolled out. FY2014 also
demonstrated TSB’s desire to grow market share as they managed to capture 8.4% of the gross
current account flow, ahead of the 6.0% target.
TSB: a tough route to market
Lloyds Banking group was asked to divest 632 branches from its network as part of the agreement
with the European Commission for the £20bn state bail-out Lloyds received in 2008 within a 5 year
deadline through to November 2013. The process of disposing these branches, subsequently referred
to as project Verde, came at some cost to Lloyds who had to carve out a fully operational and
independent bank. In 2012, Lloyds confirmed that a £1.25bn deal had been agreed to sell the
branch network to the Co-operative banking group, however this deal fell through after a £1.5bn
capital hole was discovered in the Co-op’s balance sheet in April 2013. Lloyds has since applied to
the EC and has been approved for a 2 year extension to the agreement, with disposal now required
Table 2: TSB

FY2014
Balance sheet (£bn)
Franchise lending 18.8
Targeted growth 50%
Deposits 24.6
Loan-deposit ratio 76%
Personal current accounts
PCA market share (1H14) 4%
Targeted gross flows 6%
Gross flows captured 2014 8.40%
2014 performance (£m)
Franchise income 855
Expenses 696
Maximum 2015 expenses target 720
Cost - income ratio 81%
Other
Branches 631

Banco Sabadell
13 March 2015 ◆ 5
by the end of this year. In June last year the EC also approved Lloyds’ plans to list the branch
network as a stand-alone challenger bank, which would revive the TSB franchise, paving a way for
an immediate IPO of the business.
Listed at a premium reflecting strong capitalisation and absence of legacy
On 20th June, Lloyds listed 35% of its stake in TSB at 260p per share (it had initially planned to only
list 25%) valuing the bank at 0.8x book value although the shares jumped to 290p on the first day’s
trading, equivalent to a 0.9x valuation. Since then shares have traded between this level and 0.75x,
despite producing only a 4% return on equity for FY2014 and an a subdued outlook for earnings in
the short-term with analysts forecasting a 10% return by FY2018. On this basis the shares have thus
traded at a premium to UK peers reflecting the strong capitalisation of the bank, which had a 19.7%
FLB3 CET1 ratio in FY2014, and an absence of the legacy issues affecting other UK banks, including
soaring costs for PPI & interest rate hedging products mis-selling and other litigation issues.
The bull case on TSB
TSB is UK’s most geared bank to changes in the Base Rate…
We see TSB as a geared play to UK interest rate recovery. This is owed to its large exposure to a
variable-rate mortgage book combined with its sizeable more sticky-current account deposits. At
19%, the share of non-interest bearing deposits is larger than that of other UK banks. As at FY14A,
82% of TSB’s GBP 19bn mortgage book was on variable rates, with 53% on the Standard Variable
Rate, capped at 2% above the Base Rate. Mortgages make up 90% of TSB’s loan book, and hence,
variable rate products (broadly mimicking base rate moves) account for a hefty 73% of its loans.
... a 50bp increase leads to +20% EPS
Table 3: TSB split of mortgage book (GBP m)

2014A Share of book
Franchise book
Fixed rates 3,199
SVR 10,186
HVR 1,348
Tracker 1,848
Enhancement book
Fixed rates 360
SVR 0
HVR 1,631
Tracker 812
Total
Variable rates 15,825 82%
SVR 10,186 53%
HVR 2,979 15%
Tracker 2,660 14%
Fixed rates 3,559 18%
Total mortgage book 19,384 100%

Banco Sabadell
13 March 2015 ◆ 6
As such, we estimate that a 50bps increase in the UK base rate could lead to a NII uplift of GBP
45m. This is equivalent to c20% on normalised earnings (ex hedges).
Potential restructuring story from matching the share of branches to that of deposits
Since the publication of the prospectus mid last year, the market is well aware of TSB’s bloated
cost base relative to its size. Indeed, this stems from a disconnect between its share of branches to
that of deposits. As at FY13A, the group held a 1.3% share of UK deposits, while its market share of
branches is 4x higher at 5.5%.
Even if TSB manages to grow its Franchise book by a not-so conservative 40-50% until 2018, as
guided by management (implying loans of GBP 28-30bn), its branch network relative to its deposit
base will remain deficient relative to peers. In other words, the ratio of deposits per branch will
remain well below the industry standard in the UK of GBP 150m/branch. We estimate TSB’s deposit
per branch today at c. GBP40m. Any strategy to move to industry standard, via branch shrinkage
would be a notable positive for profitability of the bank.
Table 4: TSB rate sensitivity to +50bps in BoE rate

Lending yields 2013A Post rate hike Delta
Mortgages 2.9% 3.3% 0.4%
TSB Franchise 4.4% 4.8% 0.4%
Mortgage Enhancement 3.9% 4.4% 0.5%
TSB total 4.4% 4.7% 0.4%
Deposit yields
Non-interest bearing 0.0% 0% 0.0%
Personal current accounts 1.4% 1.6% 0.2%
Savings 1.4% 1.7% 0.3%
TSB Total 1.2% 1.4% 0.2%
Net NII impact (GBP m) 45
Post-tax impact (GBP m) 35

Banco Sabadell
13 March 2015 ◆ 7
Balance sheet gearing vs EPS dilution
£85m cost synergies…
Table 5 shows the estimated cost synergies SAB could target from the TSB integration. We see £85m
cost cuts over three years, representing 16% reduction of TSB cost base. This would imply a 1 p.p.
deterioration in the combined C/I ratio 2017. We estimate restructuring costs at 1/3 of TSB costs.
...in line with historical average of cross border mergers
Table 6 shows the history of cross border M&A deals in Europe and the targeted cost and revenues
synergies as a percentage of the target bank. We adopted the benchmark to estimate TSB cost
synergies and have prudently excluded revenue synergies.
Table 5: SAB-TSB ‘pure leverage scenario’

Revenues and Cost Synergies,£ mn 2013 2014 2015 2016 2017
TSB revenues 587 927 949 1,018 1,088
TSB Costs (376) (696) (731) (746) (760)
Growth y/y 5.0% 2.0% 2.0%
Cost synergies, net of taxes 43 64 85
- % TSB costs 16.0% 16.0% 16.0%
- % total SAB + TSB costs -1.5% -2.3% -3.0%
C/I (pre-synergies) -57% -55% -54%
C/I (post-synergies) -58% -56% -55%
Restructuring costs
Net restructuring costs, tax @ 0% -241

Banco Sabadell
13 March 2015 ◆ 8
Table 6: summary revenue and cost synergies, May-04 to Sept-14

Date Revenue Costs
RBS/Charter One May-04 12% 24%
Santander/Abbey Nov-04 5% 17%
Danske/Irish NAB Dec-04 0% 19%
ABN AMRO/Antonveneta Mar-05 5% 15%
UCG/HVB Jul-05 1% 15%
Commerzbank/Eurohypo Oct-05 5% 15%
BNP/BNL Feb-06 7% 14%
Natixis Mar-06 9% 9%
BCP/BPI Apr-06 0% 40%
BIN-SPI Aug-06 3% 19%
BIN-SPI (realised) Aug-06 3% 27%
BPVN-BPI Oct-06 17% 22%
Credit Agricole / Cariparma Oct-06 5% 9%
Danske/Sampo Bank Nov-06 0% 18%
BPU/ BL Nov-06 0% 21%
UCG/CAP May-07 6% 24%
RBS/ABN Amro Jul-07 2% 8%
MPS/Antonveneta Nov-07 6% 25%
ISP/Carifirenze Jun-08 9% 29%
DBK/DPB Sep-08 6% 25%
Lloyds/HBOS Sep-08 0% 15%
BNP/Fortis Oct-08 3% 20%
Bankia May-11 0% 17%
POP/Pastor Oct-11 0% 40%
SAB/CAM Dec-11 4% 32%
BBVA/Unnim Mar-12 3% 40%
CABK/BdV Nov-12 0% 38%
SAN/Banesto Dec-12 4% 51%
BBVA/CX Jul-14 0% 40%
POP/Citi Jun-14 0% 20%
CABK/BARC Sep-14 0% 42%
Average (Mean) 4% 24%
Average in-market (Mean) 4% 31%
Average in Spain (Mean) 1% 36%
Average cross border (Mean) 4% 16%

Banco Sabadell
13 March 2015 ◆ 9
Interpreting the ‘capital neutral’ indication: 3 simulations from MB
The press release by the company provides the following indication on the potential transaction:
‘Sabadell expects to finance the transaction on a capital neutral basis for the Sabadell group and
that the transaction will be broadly neutral to Sabadell earnings in the short term and enhancing to
earnings in the medium term’. It is yet unclear whether this refers to capital ratios at SAB
remaining the same or if the company is contemplating capital options to fund the deal. Given this
uncertainty, we produce three different scenarios:
1. The pure leverage scenario
2. The sale of ALCO scenario
3. The stable CET1 ratio scenario.
Scenario 1 - Pure leverage scenario: 150bp CET1 gearing for 20% 3-yr EPS upgrade
Table 7 shows the simulation of the SAB-TSB merger under the ‘pure leverage scenario’ assuming:
1. Restructuring costs to be taken over 2 years;
2. Cost synergies to emerge over three years;
3. No revenue synergies;
4. No capital increase;
5. No disposals to fund the acquisition;
6. 100% TSB acquisition.
The conclusion is:
 20% EPS accretion on the 3-yr EPS;
 9.5% 3-yr ROI;
 160bp CET1 gearing taking the regulatory ratio to 9.9%.

Banco Sabadell
13 March 2015 ◆ 10
Table 7: SAB-TSB ‘pure leverage scenario’

Impact on Earnings, € Mn 2013 2014 2015 2016 2017
SAB standalone adj. net profit 247 372 745 965 1,130
SAB diluted shares before, m 4,298 4,104 4,104 4,104 4,104
SAB diluted EPS before, €sh 0.06 0.09 0.18 0.24 0.28
TSB net profit 264 141 105 157 110
Restructuring cost, net -258 -86
Cost synergy, net 61 91 122
Revenue synergy, net 0 0 0
TSB Net profit contribution -93 162 232
Earnings loss from ALCO unwind, € m
SAB+TSB adj. net profit, € m 652 1,127 1,362
SAB diluted shares after deal, m 4,104 4,104 4,104
SAB new EPS, €/sh 0.16 0.27 0.33
EPS impact, % -12% 17% 20%
ROI and Implicit PE 2015 2016 2017
ROI, % 6.7% 9.5%
SAB P/E pre-merger, x 13.7 10.6 9.0
Implied PE post-synergies, x 14.2 8.2 6.8
Impact in capital ratios, €Mn 2013 2014 2015 2016 2017
SAB old RWAs, € m 72,876 74,418 77,403 80,654
SAB old Core tier 1 capital, € m 8,566 8,553 8,773 9,103
CET1 FL ratio pre, % 11.8% 11.5% 11.3% 11.3%
TSB RWAs, € 9,900 10,098 10,401 10,817
SAB new RWAs, € 82,776 84,516 87,804 91,471
SAB tier 1 capital, pre 8,566 8,553 8,773 9,103
-Total goodwill / badwill -93 -93 -93 -93
+TSB net profit contribution -93 162 232
+gains from sales of ALCO
+capital raising
SAB core tier 1 capital, post 8,367 8,842 9,241
CET1 ratio 9.9% 10.1% 10.1%

Banco Sabadell
13 March 2015 ◆ 11
Scenario 2 - Sale of ALCO: 50bp CET1 gearing for 15% 3-yr EPS dilution
Table 8 shows the simulation of the SAB-TSB merger under the ‘sale of ALCO scenario’ assuming:
4. No capital increase;
5. Entire sale of the ALCO portfolio to realize the €0.9bn net capital gains deriving from it;
The conclusion is:
 15% EPS dilution on the 3-yr EPS;
 9.5% 3-yr ROI;
 50bp CET1 gearing taking the regulatory ratio to 11%.

Banco Sabadell
13 March 2015 ◆ 12
Table 8: SAB-TSB ‘sale of ALCO’ scenario

TSB net profit 264 141 105 157 110
Earnings loss from ALCO unwind, € m -470 -430 -401
SAB+TSB adj. net profit, € m 181 697 961
SAB new EPS, €/sh 0.04 0.17 0.23
EPS impact, % -76% -28% -15%
ROI, % 6.7% 9.5%
SAB old RWAs, € m 72,876 74,418 77,403 80,654
CET1 FL ratio pre, % 11.8% 11.5% 11.3% 11.3%
TSB RWAs, € 9,900 10,098 10,401 10,817
SAB new RWAs, € 82,776 84,516 87,804 91,471
+gains from sales of ALCO 900 900 900
+capital raising
CET1 ratio 11.0% 11.1% 11.1%

Banco Sabadell
13 March 2015 ◆ 13
Scenario 3 - Stable CET1 ratio scenario: no CET1 gearing, 5% 3-yr EPS upgrade
Table 9 shows the simulation of the SAB-TSB merger under the ‘stable CET1 ratio scenario’
assuming:
4. Capital increase to keep a stable CET1 ratio;
5. Entire sale of the ALCO portfolio to realize the €0.9bn net capital gains deriving from it;
The conclusion is:
 5% EPS dilution on the 3-yr EPS;
 9.5% 3-yr ROI;
 No CET1 gearing.

Banco Sabadell
13 March 2015 ◆ 14
Table 9: SAB-TSB ‘stable CET1 ratio’ scenario

TSB net profit 264 141 105 157 110
Earnings loss from ALCO unwind, € m
SAB+TSB adj. net profit, € m 652 1,127 1,362
SAB new EPS, €/sh 0.14 0.24 0.29
EPS impact, % -24% 2% 5%
ROI, % 6.7% 9.5%
SAB old RWAs, € m 72,876 74,418 77,403 80,654
CET1 FL ratio pre, % 11.8% 11.5% 11.3% 11.3%
TSB RWAs, € 9,900 10,098 10,401 10,817
SAB new RWAs, € 82,776 84,516 87,804 91,471
+gains from sales of ALCO
+capital raising 1,350 1,350 1,350
CET1 ratio 11.5% 11.6% 11.6%

Banco Sabadell
13 March 2015 ◆ 15
High RoTE volatility depending on M&A funding source
Table 10 shows the summary of the pre-deal P/TE vs RoTE for SAB. This is also replicated for all the
merger scenarios we have simulated. We see SAB at 1x 2015E TE for a range of 2015E RoTE of 1.7-
6.6%, comparing with the 7.6% stand alone RoTE. Looking forward to 2016 and 2017, we see the
capital hike and the pure leverage scenarios as RoTE accretive to the standalone option. The sale of
the ALCO portfolio would instead be the most dilutive option, given the gigantic contribution of this
investment to SAB’s earnings.
Reiterating Underperform and cutting TP to €2.2
Table 11 is our valuation table on SAB. We cut our Target Price to €2.2 from €2.4 following the TSB
news. Our three scenarios indicate an average 2016E RoTE of 8.6%, below our previous stand alone
through the cycle level. Adjusting for this explains the cut in valuation. We believe SAB suffers
from:
 Lower quality capital as a consequence of the high incidence of DTA/DTC and of the
badwill generated from CAM;
 Lower quality earnings deriving from the high contribution from carry trade which
represents an unsustainable short term boost;
 The string of acquisitions made has diluted the pure SME-profile of SAB, exposing it to the
deleverage of the Spanish consumer and reducing the focus on the higher growth prospects
of Spanish SMEs.
Also, we would see a successful bid on TSB diluting the Spanish recovery angle of SAB, increase
short term political risk and reduce the exposure to the potential positives deriving from European
QE and Regulatory harmonization within Banking Union. In turn, these factors could trigger a
multiple de-rating on SAB.
We believe Spanish domestic players should focus on grasping the benefits that the ongoing QE
program should bring to NPL recovery, loan and GDP growth (see Click Here, Click Here).
Table 10: P/TE vs RoTE under the different MB scenarios

2014 2015 2016 2017
RoTE SAB standalone 3.8% 7.6% 9.0% 9.6%
RoTE SAB-TSB - k hike 5.8% 9.3% 10.4%
RoTE SAB-TSB - pure leverage 6.6% 10.5% 11.6%
RoTE SAB-TSB - ALCO sale 1.7% 6.0% 7.6%
P/TE SAB standalone, pre-deal 1.0 1.0 0.9
P/TE SAB-TSB, k hike 1.0 0.9 0.8
P/TE SAB-TSB, k pure leverage 1.0 0.9 0.8
P/TE SAB-TSB, ALCO sale 1.0 0.9 0.8

Banco Sabadell
13 March 2015 ◆ 16
Double up on political risk: good and bad
UK, Spain and Portugal will hold elections in 2015. Through the TSB bid and the BCP stake, SAB
could be exposed on all fronts. We see two relevant aspects:
1) The risk of political instability
2) The banking debate in the UK
Following Greek elections earlier this year and domestic corruption scandals and disillusionment
from the electorate, new challenger parties are taking ground across Europe. Syriza in Greece, M5S
in Italy, Front Nationale in France, Podemos in Spain, UKIP in UK. In the case of the latter two, we
summarise the main points of their manifestos:
UKIP:
 Leave the European Free Trade Area (EFTA) or European Economic Area (EEA) and
negotiate a bespoke trade agreement with the EU to enable businesses to continue trading
to mutual advantage.
 Lower taxes: Abolish inheritance tax, decrease income tax (introduce a 35% income tax
rate between £42,285 and £55,000, whereupon the 40% rate becomes payable, abolish 50%
tax).
 Remove tuition fees for students taking approved degrees in science, medicine,
technology, engineering, maths on the condition that they live, work and pay tax in the UK
for five years after the completion of their degrees. Scrap the target of 50% of school
leavers going to university. EU students will pay the same student fee rates as International
students.
 Protect the Green Belt. Planning rules will be changed to make it easier to build on
brownfield sites instead of greenfield sites.
 UKIP would like to leave the EU, and take back control of UK borders. Work permits will be
permitted to fill skills gaps in the UK jobs market. Migrants will only be eligible for benefits
(in work or out of work) when they have been paying tax and NI for five years and will only
be eligible for permanent residence after ten years.
There is a risk that a large vote for UKIP in the upcoming elections (May 2015) would bring a
referendum on the UK staying in the EU and therefore exiting the common economic area that has
benefited the UK so far.
Nevertheless, in a more traditional struggle of Labour vs Tories, the structure of the UK banking
sector will remain high on the agenda and will come under further scrutiny in the run-up to May’s
general election. Within this context, TSB, as a new challenger bank focused on retail, should not
feel the ramifications of the political agenda, which is more likely to target the larger, wholesale
Table 11: SAB 2015E valuation

2015E PBT Taxes
Minority
interests
Other
adj.
Net
income
adj.
Risk
weighted
assets
(RWA)
MB
capital
/RWA
Weight
range
ROAC
Over
the
cycle
ROAC
Cost of
capital
P/TBV Value
Banco Sabadell 974 -239 -22 32 745 77,403 10.0% 6-9% 9.6% 8.6% 8.3% 1.x 8,069
Capital deficit/excess 976
Per share 2.2

Banco Sabadell
13 March 2015 ◆ 17
banks with market concentration, ring-fencing of investment banking and banker’s conduct
remaining under discussion.
PODEMOS:
 Public Banking: Credit and finance is an essential public service. Public banks will be
subject to strict conditions to ensure their submission to the above principle.
 Financial Transaction Tax: Transaction Tax on all financial transactions, progressive so as
to weigh on shorter transactions.
 Minimum Wage Rules: Minimum wage increase coupled with rules stipulating the maximum
difference between the highest wages and the average wage in companies.
 Labor Reform: Repeal recent labor reform.
 Pension Reform: A minimum and maximum contribution base to ensure that the system is
progressive and trading for real income in the case of autonomous and self-employed.
 Higher Business Taxes: Extraordinary increase of corporate social contributions via higher
taxes on businesses.
 Work Rules: 35 hour work-week, retirement at 65, with flexibility in case someone wants
to keep working longer.
 Mortgage Reform: Restructuring household debt to provide the greatest possible stability
to the system and repair the damage received by families in previous years.
 Flat Tax on Everything: Improve income tax collection by having an extensive single rate
tax on all types of income, but elimination of joint taxation of marriages.
 Wealth Tax: Central government taxation of wealth.
 Budget Rules: Delete Article 135 of the Constitution, the newly inscribed constitutional
obligation limiting public deficit.
 Work Sharing to Protect Women: change the pattern of distribution of working time paid
by imposing shorter hours but also by regulating the distribution of housework and unpaid
care. Unequal distribution is the main source of discrimination against women and one of
the major impediments to advancing equality.
 Cooperative Business Models: democratize business by introducing co-management by
employees.
 Restructure Debt: Europe must adopt debt restructuring, especially in the peripheral
countries to achieve sustainable debt levels.
 Minimum Income: A guaranteed minimum income system as a subjective right of all
people, to eradicate child poverty.
 Universal Right to Nourishment: Recognition in the Constitution of the right to food as a
universal human right.
Podemos's mostly far left stance risks higher taxes in order to support their social agenda. Mortgage
and labor reform would also impact the banks profitability negatively.

Banco Sabadell
13 March 2015 ◆ 18
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Disclaimer

Banco Sabadell
13 March 2015 ◆ 19
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Not Rated.
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coverage universe, on a risk-adjusted basis, over the next 6-12 months.
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coverage universe, on a risk-adjusted basis, over the next 6-12 months.
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Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can
only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios
selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.
Proportion of all recommendations relating to the last quarter
Outperform Neutral Underperform Not Rated
51.47% 43.99% 3.63% 0.91%
Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the last quarter:
Outperform Neutral Underperform Not Rated
12.50% 12.86% 14.29% 33.33%
The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the
following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please
access research reports dated before 1 July 2013 from the restricted part of the “MB Securities” section of the Mediobanca S.p.A. website
at www.mediobanca.com.
Disclaimer

Banco Sabadell
13 March 2015 ◆ 20
COMPANY SPECIFIC REGULATORY DISCLOSURES
MARKET MAKER
Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are
materially represented by equity instruments, issued by Banco Sabadell.
CORPORATE FINANCE SERVICE CONTRACTS
Mediobanca S.p.A. or one or more of the companies belonging to its group are currently providing corporate finance services to Banco
Sabadell or one or more of the companies belonging to its group.
RATING
The present rating in regard to Banco Sabadell has not been changed since 10/03/2011.
INITIAL COVERAGE
Banco Sabadell initial coverage as of 10/03/2011.
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END NOTES
The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian
law.
Additional information is available upon request.
DisclaimerDisclaimerDisclaimerDisclaimerDisclaimer

Banco Sabadell
13 March 2015 ◆ 21
Mediobanca S.p.A.
Antonio Guglielmi
Head of European Equity Research
+44 203 0369 570
antonio.guglielmi@mediobanca.com
ANALYSTS
European Banks
Alain Tchibozo France/IBK +44 203 0369 573 alain.tchibozo@mediobanca.com
Adam Terelak France/IBK +44 203 0369 574 adam.terelak@mediobanca.com
Andrea Filtri Spain/Italy +44 203 0369 571 andrea.filtri@mediobanca.com
Andreas Williams Spain +44 203 0369 577 andres.williams@mediobanca.com
Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 riccardo.rovere@mediobanca.com
European Insurance
Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 gianluca.ferrari@mediobanca.com
Simonetta Chiriotti Nordics +39 02 8829 933 simonetta.chiriotti@mediobanca.com
Italian Research
Alessandro Tortora Building Materials/Industrials/Capital Goods +39 02 8829 673 alessandro.tortora@mediobanca.com
Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 andrea.scauri@mediobanca.com
Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 chiara.rotelli@mediobanca.com
Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 fabio.pavan@mediobanca.com
Javier Suárez Utilities +39 028829 036 javier.suarez@mediobanca.com
Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 massimo.vecchio@mediobanca.com
Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 niccolo.storer@mediobanca.com
Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 nicolo.pessina@mediobanca.com
Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 simonetta.chiriotti@mediobanca.com
FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:
Mediobanca S.p.A.
Charlotte Roden
Head of Equity Sales
+44 203 0369 537
charlotte.roden@mediobanca.com
SALES
Angelo Vietri +39 02 8829 989 angelo.vietri@mediobanca.com
Christopher Seidenfaden +44 203 0369 610 christopher.seidenfaden@mediobanca.com
Lorenzo Angeloni +39 02 8829 507 lorenzo.angeloni@mediobanca.com
Timothy Pedroni +44 203 0369 635 timothy.pedroni@mediobanca.com
Stephane Langlois +44 203 0369 582 stephane.langlois@mediobanca.com
European Spec Sales
Gaelle Jarrousse Banks +44 203 0369 530 gaelle.jarrousse@mediobanca.com
Carlo Pirri Banks +44 203 0369 531 carlo.pirri@mediobanca.com
Gert-Jaap Kraan Insurance +44 203 0369 510 gert-jaap.kraan@mediobanca.com
Mediobanca S.p.A.
Dominic Bidwell
Head of Equity Trading and Sales Trading
+44 203 0369 627
dominic.bidwell@mediobanca.com
SALES/TRADERS
Alessandro Gobbi +39 02 8829 263 alessandro.gobbi@mediobanca.com
Matteo Agrati +44 203 0369 629 matteo.agrati@mediobanca.com
Michael Sherry +44 203 0369 605 michael.sherry@mediobanca.com
Roberto Riboldi +39 02 8829 639 roberto.riboldi@mediobanca.com
FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:
Mediobanca Securities USA LLC
Pierluigi Gastone
Head of Mediobanca Securities USA LLC
+1 212 991 4745
pierluigi.gastone@mediobanca.com
Massimiliano Pula +1 646 839 4911 massimiliano.pula@mediobanca.com
Robert Perez +1 646 839 4910 robert.perez@mediobanca.com
MEDIOBANCA – Banca di Credito Finanziario S.p.A.
Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1
33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530

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