Risks

95 Strategic risk management and control

processes
95 Main 2021 milestones in risk management
and control
Strategic risk
Credit risk
Financial risk
Operational risk
Compliance risk
 In 2021, Banco Sabadell Group continued
to strengthen its Global Risk Framework by
making improvements in line with best
practices in the financial sector.
The Group maintains a medium-low risk profile, in articulated through the Risk Appetite Statement (RAS),
accordance with the risk appetite defined by the Board of under which all material risks are monitored, tracked
Directors. and reported, and the necessary control and adaptation
The Group’s risk strategy is fully implemented and systems are established to ensure compliance:
linked to the Strategic Plan and the Group’s risk capacity,

Strategic risk management

and control processes

1
Risk strategy
linked to the
Strategic planning Strategic Plan
ICAAP and risk
ILAAP capacity
Recovery Plan
Remuneration

Implementation

4 Control and
adequacy
Communication of the Risk Appetite
Statement 2
(RAS)

Monitoring
and reporting

Main 2021 milestones in risk

management and control
Below are the most noteworthy aspects in terms of their
management and actions of the first-tier risks identified
in Banco Sabadell Group’s risk taxonomy in 2021:

Main 2021 milestones in risk management and control 95

Strategic risk Credit risk
Definition: Definition:
Risk of losses (or negative impacts in general) as a result Credit risk refers to the risk of incurring losses as a result
of the adoption or subsequent implementation of stra- of borrowers’ failure to comply with payment obligations,
tegic decisions. It also includes the inability to adapt the as well as experiencing a loss of value due to the impair-
Group’s business model to the evolution of the environ- ment of borrowers’ creditworthiness.
ment in which it operates.
Main milestones in 2021:
Main milestones in 2021:
(i) Non-performing assets
(i) Strategy and reputation
— Slight increase in the NPL ratio from 3.6% to 3.7%,
—A
 n outstanding position supporting customers during mainly due to higher inflows from the regulatory
the health crisis and in the transition towards a more changes in TSB and the repurchase of non-performing
digital model. Spain portfolios.

(ii) TSB (ii) Concentration

— Throughout 2021, TSB has been completing the — From a sectoral point of view, diversified loan book
actions of its Master Plan to improve profitability and with limited exposure to sectors with higher sensitivity
efficiency. to COVID-19 and with a downward trend.
— A lso, in terms of individual concentration, the down-
(iii) Improvement of the capital position ward trend in the concentration risk metrics of large
exposures continues, due to both a lower exposure (nu-
— The CET1 ratio improved to 12.22% in fully-loaded merator) and an increase in capital (denominator). The
terms at 2021 year-end, driven significantly by organic credit rating of the largest exposures is affected, albeit
capital creation. Generalised capital compliance with not significantly, by a deterioration of balance sheets,
regulatory requirements. resulting from the health crisis.
— Total Capital also improved, ending 2021 at 17.65%, — In geographical terms, the portfolio is positioned in the
and the Leverage ratio increased from 5.04% to 5.81% most dynamic regions, both nationally and interna-
year-on-year (in fully-loaded terms). tionally. International lending continues to account for
around a third of the loan book
(iv) Profitability
(iii) Lending performance
— Group net profit amounted to 530 million euros in
2021. The Group’s banking revenues remain strong and — Gross performing loans continued to grow year-on-
are close to pre-crisis levels. year in all geographies with growth of +2.3% in Spain,
— During 2021, a series of efficiency initiatives have been +19.1% at TSB and +5.6% in Mexico per annum.
launched in Spain, which will help reduce recurrent — In Spain, year-on-year growth was mainly support-
costs and which include further digitalisation of cus- ed by commercial loan to companies, SMEs and the
tomer services and process re-engineering. self-employed as well as by the increase in individual
mortgages. The project finance portfolio was also dy-
namic, with particular traction in sustainable projects.

(iv) TSB loan performance

— At TSB, all loan categories showed solid growth, es-
pecially in mortgages. Growth in mortgages benefited
from increased mortgage market activity, as well as
TSB’s operational resilience to absorb the increase in
demand. Consumer loans and personal loans increased
once the lockdown was lifted.

96 Risks
Financial risk Operational risk
Definition: Definition:
Possibility of obtaining insufficient profitability or having Operational risk is defined as the risk of loss resulting
insufficient liquidity such as to prevent compliance with from failures or inadequacies in people, processes, and
requirements and future expectations. systems or from unforeseen external events.

Main milestones in 2021: Main milestones in 2021:

(i) Robust liquidity position (i) Digital transformation
— Solid liquidity position, where the LCR (Liquidity — Sustained increase in the use of digital/assisted chan-
Coverage Ratio) stands at 221% at the end of 2021 at nels both in terms of volume and type of transactions,
Group level (194% at MLU TSB and 254% at Banco mainly due to the effects of the COVID-19 pandemic
Sabadell Spain) and the NSFR (Net Stable Funding and the change in the business model, mainly at the
Ratio) at 141% at Group level (149% at MLU TSB and retail level. In general, this increase in transactions was
137% at Banco Sabadell Spain) both at the end of 2021, not matched by a proportional increase in the losses
after having optimised funding sources with access to associated with this type of channel; accordingly, the
new long-term financing from the ECB (TLTRO III) control environment is considered to have performed
for a total amount of 32,000 million euros and with the appropriately.
Bank of England (TFSME) for an amount of 6,545 mil- — The implementation and adoption of telework, also
lion euros, as well as maintaining a growing generation derived from COVID-19, also caused a change in the
of commercial gap in 2021. risk profile associated with the execution of internal
— The loan to deposits ratio at the closure of September processes and it was necessary to implement specific
2021 is 96.3% with a balanced retail funding structure. controls aimed at protecting employees and informa-
— Moreover, as regards capital markets, in 2021, Banco tion, incorporating the massive adoption of secure
Sabadell fulfilled its issuance plan, and its strong inves- corporate laptops which have proven to be effective, as
tor appetite enabled it to optimise the associated costs. no events or incidents related to this new situation and
way of working have been detected.
(ii) Structural interest rate risk
(ii) Business model transformation
— The Bank continued to adapt the balance sheet struc-
ture to the current and expected environment of neg- — A s a result of the changes and adaptations made on the
ative rates in the Eurozone, showing great resilience occasion of COVID-19 and within the new Strategic
to possible future declines. The mortgage portfolio in Plan, the process of change and transformation to-
Spain is exhibiting an increasing preference for fixed wards a digital business model has been accelerated, in
rates. On the liabilities side, the customer deposit base which customer relations have evolved towards greater
makes it possible to pass negative rates on to the whole- use of non-face-to-face channels and, consequently, a
sale segments. reduction in the branch network.
— The Bank maintained its programme of adaptation to — This process of change has driven the adaptation of the
the new benchmark indices following the entry into entity’s systems, processes and activities, ensuring the
force of the European Benchmark Regulation (BMR) robustness of the existing control environment, min-
and it has successfully achieved the milestones set for imising exposure to risks and developing and imple-
the EUR and other affected currencies (mainly USD menting new opportunities arising from the transfor-
and GBP). mation associated with the new business model.

Main 2021 milestones in risk management and control 97

Compliance risk (iv) Incorporation of the Customer Ser-
vice Department into the Compliance
Definition:
Compliance risk, which is part of operational risk, is de-
Division
fined as the possibility of incurring legal or administrative — In May 2021, as a result of the new structure designed
sanctions, significant financial losses or reputational loss- and aligned with the new Bank of Spain Banking
es due to non-compliance with laws, regulations, internal Guidelines published in July 2021, the Customer Ser-
rules and codes of conduct applicable to the banking vice Department will be incorporated into the Compli-
business, minimising the possibility of non-compliance ance Division, initiating a process of adaptation to its
and ensuring that any non-compliance that may occur is organisation and functioning.
identified, reported and dealt with diligently.
For more details of the corporate risk culture, the global
Main milestones in 2021: risk framework and the overall organisation of the risk
function as well as the main financial and non-financial
(i) Promoting a culture of ethics and risks, see note 4 “Risk management” in the consolidated
compliance among employees Annual Accounts for 2021.

— Designing and approving the new Code of Conduct.

— Strengthening of the Regulatory School to cover the
training needs of employees in a user-friendly way in
each of its classrooms: Regulators and Supervisors
Classroom, Ethics and Conduct Classroom, Sale and
Contracting of Products and Services Classroom, Pre-
vention of Money Laundering and Counter-Terrorist
Financing Classroom, Data Protection Classroom and
Customer Service Space.

(ii) Planning and monitoring

— The Compliance establishes, applying the principle
of proportionality in accordance with the nature,
volume and complexity of its activities, a Compliance
Programme which includes a detailed planning of its
activities. This programme covers all services provided
and activities carried out by the entity and defines its
priorities based on the assessment of compliance risk
and in coordination with the Risk Control function.
— In order to guarantee the effectiveness of the Pro-
gramme, two half-yearly Monitoring Plans have been
drawn up, which include two types of information:
those that illustrate the activities developed from a
quantitative perspective, with KPIs linked to the op-
erational execution of the programme, and those that
deal with qualitative variables.
— The action plan required to implement in the Bank
the new obligations of Royal Decree-Law 7/21, which
transposes the 5th EU directive on the prevention of
money laundering and terrorist financing, has been
carried out.

(iii) Relationship with supervisors

— Management maintains constant interaction with the
main authorities supervising the Bank’s activities.
— A ll requests received from the different supervisors
have been dealt with within the established deadlines.

98 Risks