DBRS Confirms Sabadell’s Senior Ratings at BBB (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Banco de Sabadell, S.A.’s (Sabadell or the Bank) ratings, including its BBB (high) Long-Term Issuer Rating, Long-Term Senior Debt Rating and Long-Term Deposits Rating and its R-1 (low) Short-Term ratings. DBRS also confirmed the Bank’s Critical Obligations Ratings at A / R-1 (low). The Trend on all ratings remains Stable. The Bank’s Intrinsic Assessment (IA) is BBB (high) and the Support Assessment remains at SA3. See the full list of ratings is the table at the end of this press release.

The confirmation of the ratings follows DBRS’s annual review of the Bank’s credit profile. It also considers the continued improvements made by Sabadell in terms of profitability, asset quality, and capital in the last twelve months. Sabadell has achieved a sizeable reduction in its large stock of non-performing assets (NPAs), and both overall results and core profitability have demonstrated resiliency and supported capital levels, despite the low interest rate environment. The confirmation of the ratings also reflects the Bank’s good capital position, recently reinforced by the issuance of AT1 instruments in May 2017 and DBRS’s expectations that the Bank’s capital position should continue to benefit from further improvements in asset quality and profitability, particularly in Spain, helped by the good economic conditions. The ratings also consider Sabadell’s franchise strength in Spain and in the United Kingdom (U.K.) through TSB Bank Plc (TSB), and this franchise continues to underpin the Bank’s good funding and liquidity position.

DBRS views Sabadell’s profitability as demonstrating resiliency in the low interest environment with core revenues (net interest income (NII) and commissions) having remained resilient quarter-on-quarter (QoQ) since 4Q15. Recent results have been supported by good commission income generation and resilient net interest income. Sabadell reported EUR 710 million of net attributable income in 2016, a similar level to 2015, and EUR 216 million in 1Q17. The net attributable income of TSB was EUR 179 million in 2016, up from EUR 122 million in 2015. In 1Q17 TSB reported net attributable income of EUR 12.2 million, down from EUR 61.7 million in 1Q16, largely affected by higher costs associated with the IT integration, which DBRS expects to be completed by end-2017.

DBRS notes that the Bank’s results continued to be supported by sizeable trading gains in 1Q17 and 2016, which were used to increase provision levels, and reinforce coverage levels on problematic assets. Operating costs have generally been contained, although they increased by 3.5% in 1Q17 year-on-year (YoY), affected by the additional IT costs at TSB. Whilst this will continue to affect overall costs for the rest of the year, DBRS expects these costs to be fully offset by Sabadell’s improving core profitability in Spain.

Sabadell continues to address its asset quality challenges and the Bank achieved a good level of reductions in NPAs in the period to end-1Q17 from end-2015. The NPA reduction was assisted by lower gross entries of NPLs, benefiting from improving economic conditions, and good pace of recoveries, as well as the continued sale of foreclosed assets (FAs), both through its real estate servicer Solvia, and to institutional investors. In 2016, NPAs (as calculated by DBRS) reduced by EUR 3 billion and this continued in 1Q17 with a further reduction of around EUR 450 million, higher than the reduction achieved by similar domestic peers. Whilst reducing strongly YoY, Sabadell does retain a high stock of NPAs, which totalled around EUR 18.2 billion at end-March 2017, equating to an NPA ratio of 11.4% (as calculated by DBRS). The NPL ratio (as calculated by DBRS) improved to 6.2% at end-March 2017 (8.0% ex-TSB) down from 7.8% at end-March 2016 (10.0% ex-TSB). NPAs were adequately covered by provisions at 48% (excluding EUR 410 million of mortgage floors provisions) at end-March 2017.

DBRS considers Sabadell’s funding and liquidity position as good, supported by a sound net loan to deposit ratio, good levels of liquid assets and regular access to wholesale funding markets. At end-2016, Sabadell had a net loan to deposit ratio (as calculated by DBRS and excluding repos) of 112%. The Bank continued to demonstrate good access to the wholesale markets for funding and issued covered bonds in 1Q17. Sabadell also took advantage of the last auction of the Targeted Long Term Refinancing Operation II (TLTRO II) in March 2017 to increase funding from the European Central Bank to EUR 20.5 billion. DBRS considers Sabadell’s use of TLTRO II 2017 as a means to take advantage of its cheap cost and to help partly offset the pressure on NII, which remains negatively affected by the persistently low interest rate environment.

DBRS views Sabadell’s capital position as good, supported by the Bank’s strengthening ability to reinforce capital levels through retained earnings and more recently through issuance of capital instruments. Sabadell reported a fully loaded CET1 capital ratio of 11.9% at end-March 2017 (1Q16: 11.8%). Sabadell is required by the European authorities to meet a minimum Overall Capital Requirement (OCR) for CET1 (phased-in) ratio of 7.375% according to the Supervisory Review and Evaluation Process (SREP) and a minimum Overall Capital Requirement (OCR) for total capital (phased-in) of 10.875%. The Bank exceeds the minimum requirements with, at end-March 2017, a phased-in CET1 (phased-in) ratio of 11.94% and a total capital ratio of 13.73%. Including the EUR 750 million of AT1 issued in May 2017, DBRS estimates the pro-forma total capital (phased-in) ratio would be 14.59% at end-March 2017, which is 3.72% above the minimum Total capital requirement set under the SREP.

The Grid Summary Grades for Sabadell are as follows: Franchise Strength – Strong/Good; Earnings Power – Good; Risk Profile – Good/Moderate; Funding & Liquidity – Good; Capitalisation – Good.

RATING DRIVERS:

Positive rating pressure on the ratings could arise if Sabadell continues to demonstrate its ability to reduce NPAs, as well as further improvements in core profitability, particularly through core revenue growth and lower provisions in Spain whilst focusing on cost containment.

Negative rating pressure on the ratings could occur from a significant increase in the risk profile together with a substantial increase in non-performing assets, as well as weakening earnings generation.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company disclosures, Bank of Spain and the European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Maria Rivas – Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 19 November 2012
Most Recent Rating Update: July 14, 2017

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