By Jesús Aguado
Sabadell bought TSB for £1.7 billion in 2015 to expand into Britain and challenge incumbent retail banks. But economic uncertainty linked to Brexit and low interest rates have made life tough for the bank.
TSB has also been hit by an IT glitch forcing the bank to hire 2,100 staff to help fix the problems which left customers locked out of their online accounts for weeks. This contributed to an increase in costs and last year the bank reported losses of 240 million euros (£204 million).
"TSB is a retail bank with a costly structure, it has to be turned around, for that it needs 3 years, an adequate return (on equity), then it can be a candidate to enter into a consolidation process," Chairman Josep Oliu said a day before Sabadell's annual shareholder meeting. "A merger or a sale are options," he said.
Oliu said TSB was not expected to contribute positively to group's earnings until 2020. Sabadell's CEO Jaime Guardiola said TSB's woes had obliged Sabadell to postpone its profitability target by one year to 2021. Sabadell had originally set itself a return of tangible equity target -- a measure of profitability -- of 13 percent by 2020.
Oliu also said TSB's new chief executive Debbie Crosbie would work on a plan to cut costs at British bank, including a potential cut in branch numbers.
A source told Reuters that a small reduction in TSB's branches in Britain would be part of Crosbie's plans.
MERGER WITH BANKIA AN OPTION?
Oliu also tried to put to rest doubts about the Spanish bank's capital saying the lender would finish 2019 with a core tier 1-fully loaded ratio of 11.7 percent by its own means before eventually moving towards a 12 percent threshold.
"We won't undertake a capital increase because there is no need for that," Oliu said.
Sabadell's shares fell 40 percent last year, in part because of the TSB crisis, while its fully-loaded core tier-1 capital ratio, the strictest measure of solvency, dropped to 11.1 percent from 12.8 percent at end-2017.
Investment bankers say even if Sabadell sells parts of its non-core banking businesses, such as car leasing, asset management or real estate assets, this might not be enough to address capital concerns. They say the real game changer would be a merger in Spain.
Oliu said a merger with state-owned Bankia was not on the table but did not rule such a scenario in the future.
"It is not on the table right now, but what is off the table now could be again on the table" in the future, Oliu said.
Any potential deal involving Bankia would need the backing of Spain's government, which holds 61.4 percent of Bankia.
(Editing by Jane Merriman and Andres Gonzalez)
By JesÃºs Aguado