DBRS: Sabadell reports strong 4Q13 NI Growth; deteriorating asset quality, pressured margins concern

Summary:

• Net income increased significantly to EUR 247 million in 4Q mainly due to the reduction in provisions and extraordinary capital gains from financial operations.
• Full consolidation of the group in 2013 contributed to the increase in loans and customer deposits.
• Asset quality continued to deteriorate, partly due to the reclassification of refinanced loans.
• DBRS rates Banco de Sabadell’s Senior Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend.

Banco de Sabadell (Sabadell or the Group) reported Net Income of EUR 247.8 million for 2013, which was three times the level of Net Income in 2012. This recovery in earnings is explained in part by the significant reduction in loan loss provisions when compared with 2012. Supporting this increase was the profit from financial operations of EUR 1.48 billion in 2013 (compared to the EUR 270.3 million in 2012), originated from the disposals in the Available for Sale portfolio, Held To Maturity Investments, delinquent loans and trading gains. The good performance in net fees and commissions also contributed to the bottom-line profitability.

The strong increase in Net Income contrasts with the reduction of Net Interest Income (NII), down 2.9% year-over-year (YoY), mainly due to the unfavourable evolution of interest rates in Europe throughout 2013 and to the reduction of the Net Interest Margin in 1H13. There have been some encouraging signs in 2H13 with the steady improvement in the cost of funding, but margins remain below 4Q12 levels. Gross operating income has increased mainly driven by the results from financial operations (up 170%) and net fees and commissions (up 20.8%).

Deteriorating asset quality is still a concern with the Non-Performing Loan (NPL) ratio, up to 13.6% at end-2013 from 9.3% from 2012 (excluding the assets covered by the Asset Protection Scheme), partly reflecting the reclassification of refinanced loans as recommended by the Bank of Spain. The Group has, however, shown some signs of reversing the trend of net new entries to NPLs in 4Q13.

DBRS Ratings Limited (DBRS) notes that YoY comparisons of the Sabadell results are challenging since the Group’s consolidated basis changed in 2013. After merging Banco CAM in 2012, Banco de Sabadell absorbed BMN-Penedés, Lloyds Bank International and Lloyds Investment España, and Banco Gallego during 2013. Taking this into account, DBRS notes that the loan book has grown by 3.3% while funding related to retail clients has grown by 17.9%.

The steady increase in deposits has helped Sabadell to improve its funding profile by reducing its wholesale funding. Additionally, the Group does not have a major concentration in wholesale funding maturities over the next few years. While Sabadell has reduced its European Central Bank dependency significantly, its net holdings of Spanish Government Debt have increased slightly YoY, despite disposals in 2H13 that contributed to bottom-line profitability. These holdings have provided a boost to revenues, representing around 15% of NII in 2013. The current holdings of Spanish Government Debt at EUR 15.6 billion, or 150% of the Group’s equity, are still high, in the DBRS’s view.

DBRS considers the capitalisation level of the Group as adequate given its risk profile. The Core Tier 1 ratio stood at 12% according to Bank of Spain criteria and 10.1% on a Basel III fully loaded perspective.

DBRS rates Banco de Sabadell’s Senior Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]