DBRS Upgrades Sabadell’s Senior Ratings to A (low), Stable Trend

DBRS Ratings GmbH (DBRS) upgraded the ratings of Banco de Sabadell S.A. (Sabadell or the Bank), including the Long-Term Issuer Rating to A (low). The Short-Term Issuer rating remains at R-1 (low). All ratings have now a Stable Trend. The Bank’s Intrinsic Assessment (IA) is now at A (low) and the Support Assessment remains at SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
In upgrading Sabadell’s senior ratings to A (low), DBRS recognises three positive developments in Sabadell’s financial performance over the past year: (1) The Bank has significantly reduced its non-performing assets (NPAs) ratio, after the institutional sale of NPAs that took place in July 2018. (2) The TSB’s IT migration issues are on track to be fully settled, with all the complaints related to the migration resolved and TSB´s performance in 1Q19 returning to more normalised levels. (3) DBRS views Sabadell’s core revenues as improving, helped by strong growth in commissions and resilient net interest income in Spain, despite extraordinary one-offs affecting 2018 results.

The ratings also reflect the resiliency of the Group’s franchises in Spain and UK, which despite the recent IT issue, supports the Group’s sound funding and liquidity position. Sabadell´s IA also takes into account that Sabadell´s asset quality, albeit significantly improved in recent years, remains weaker than comparable European peers. Sabadell´s ratings also incorporate DBRS’s expectation that the Bank’s capital position will strengthen, supported by retained earnings and the positive effect of already announced corporate transactions.

RATING DRIVERS
Upward pressure on the ratings is unlikely considering the recent upgrade. Positive rating pressure on the Long-term Issuer rating could arise if Sabadell substantially improved its capital position and demonstrated a long track record of sound profitability, particularly in its UK subsidiary.

Negative rating pressure on the Long-term Issuer rating could occur from a material deterioration of Sabadell’s franchise in Spain or the United Kingdom. It would also arise from a weakening of the Group’s capital position.

RATING RATIONALE
Sabadell’s ratings are underpinned by its well-established franchise as the fourth largest Spanish banking group by assets with total assets of EUR 226 billion at end-March 2019. The Group also operates in the UK through TSB which represented around 21% of the Group’s total assets at end-2018. Since the last annual review of the ratings, the TSB’s IT migration issues appear to be on track to be fully settled. The Bank has resolved all complaints related to the IT migration and TSB´s performance is returning to more normalised levels with positive lending growth and new client account numbers close to the figures reported before the IT issue. An investigation is still being conducted by the UK’s Financial Conduct Authority (FCA), however, DBRS expects any potential fine to be manageable.

DBRS views Sabadell’s core profitability as improving in recent years, helped by strong growth in commissions, resilient net interest income in Spain and lower loan provisions. However, 2018 results (EUR 328 million of Net Attributable Net Income) were impacted by extraordinary items related to the IT migration in its UK subsidiary (EUR 460 million) and the sale of most of its foreclosed assets exposures (EUR 177 million). Sabadell´s 1Q19 results continued with the positive underlying dynamics and there were no negative one-off items. As a result, the Bank posted a Return on Average Equity (ROAE) in 1Q19 of 8.5% (as calculated by DBRS) up from 2.7% in FY2018.

DBRS considers Sabadell has demonstrated its ability to achieve a significant reduction in its stock of Non-Performing Assets (NPAs) which have been consistently declining since 2Q14. The NPA reduction was assisted by institutional sales. The most significant institutional sale took place in July 2018, when the Group announced a deal between Sabadell and Cerberus to sell most of Sabadell’s foreclosed assets (FAS). In addition, the Bank closed the sale of a further two portfolios of non-performing loans (NPLs) and write-offs in the summer of 2018. Including these transactions, at end-1Q19, Sabadell’s pro-forma NPA ratio will be around 6.3% compared to 10.6% at end-2017. The transactions are expected to be completed in 2019. In addition, the Group also announced in February 2019 that the Bank has started the process for the sale of Solvia Desarrollos Inmobiliarios (SDIn) together with other FAS.

Sabadell’s funding and liquidity position is sound with a strong net loan to deposit ratio, good levels of liquid assets and regular access to wholesale markets for funding. Sabadell’s main source of funding is retail deposits, underpinned by its solid domestic franchise. At end-March 2019, customer deposits accounted for around 68% of total funding. DBRS notes that Sabadell’s funding profile, as well as customer and investor confidence remained comparatively stable despite the increased political tensions in Catalonia in October 2017. Indeed, Sabadell’s customer deposits (excluding TSB) grew by 7% year-on-year (YoY) and continued to grow in 1Q19. Sabadell’s refinancing risk is manageable with wholesale funding maturities totaling EUR 18.6 billion at end-March 2019. The Bank´s funding plan is focused on enabling Sabadell to comply with its MREL requirement (22.7% over RWAs by January 2020). DBRS expects that Sabadell will comfortably meet its MREL requirement based on Sabadell´s solid MREL ratio of 19% as of end-March 2019. Sabadell´s MREL ratio target for end-2019 is around 23% (including Senior debt).

DBRS considers Sabadell’s capital position as satisfactory, supported by its strengthening ability to reinforce capital levels through retained earnings and issuance of capital instruments. The Common Equity Tier 1 (CET1) (fully loaded) ratio was 10.96% and the Total capital ratio (fully loaded) ratio was 14.24% at end-March 2019. DBRS expects Sabadell capital position to improve in the medium term, helped by corporate transactions. Including the sale of Solvia and the institutional NPA sale, the Pro-Forma CET1 (fully-loaded) ratio was 11.29% at end-March 2019. However, DBRS considers that Sabadell capital ratios are still below other domestic and European peers. Sabadell´s results in the 2018 EBA-wide stress were satisfactory, although Sabadell’s results were weaker than a number of domestic and European peers. This was illustrated in a fully loaded CET1 ratio of 7.58% at end-2020 in the adverse scenario. Sabadell reported 446 bps capital depletion (on a fully-loaded CET1 ratio) under the adverse scenario, compared to an average of 405 bps for the sample of banks included in the EBA-wide stress.

Concurrently, DBRS has discontinued the ratings on Sabadell’s Obligaciones. Simples III/2006 - ES0213860044, Sabadell´s Bono Estructurado Tesorería 6/2012 - ES0313860423, Sabadell´s Bono Estructurado Tesorería 7/2012 - ES0313860431due to repayment by Sabadell and CAM Global Finance´s EMTN 2000 EUR 25 mill XS0122331910. In addition DBRS has assigned a Subordinated Debt Rating, in line with our nomenclature at other banks. This complements the existing rating of Subordinated Debt Tier 2 Notes under the EMTN Programme.

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

Notes:

All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company documents, SNL Financial, European Banking Authority (EBA) and Bank of Spain. 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Pablo Manzano, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG, Global FIG
Initial Rating Date: November 19, 2012
Last Rating Date: May 1, 2019

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