DBRS Confirms Banco Sabadell Ratings at A (low), Negative Trend

DBRS Ratings Limited (DBRS) has today confirmed the A (low) Senior Unsecured Long-Term Debt & Deposit rating of Banco Sabadell, S.A. (Sabadell or the Group), and its R-1 (low) Short-Term Debt & Deposit rating. The trend on the long-term rating remains Negative; the trend on the short-term rating is Stable.

Banco Sabadell’s ratings reflect an intrinsic assessment (IA) of BBB (high) combined with a support assessment of SA-2. The SA-2 considers Banco Sabadell’s role as a systemically important entity to the financial system in Spain and DBRS’s expectation of timely systemic support in a stressed scenario. For Sabadell, this SA-2 designation results in a one-notch uplift from the IA.

DBRS views the Group’s BBB (high) intrinsic assessment as underpinned by Banco Sabadell franchise strength, its good underlying earnings generation ability, good funding mix, ample liquidity and strengthened capital position. On the other hand, the IA incorporates the group’s high level of non-performing assets, some of which are driven by Banco CAM’s legacy portfolio, which continue to result in elevated provisions that weigh on profitability and constrain the group’s internal capital generation.

The Negative trend reflects DBRS’ view that Banco Sabadell continues to be challenged to improve banking operating revenues and manage down asset quality problems under the still fragile operating economic and property market environment in Spain. Volumes remain subdued and asset quality deterioration continues to weigh on profits via provisions. Banco Sabadell’s recurrent operating profitability is modest partly influenced by the low interest rate environment and low demand for credit in Spain. While DBRS notes that the Group has generated sizeable capital gains from the sale of some equity stakes and debt portfolios, which have been used to build up provisions, in some cases ahead of time, modest banking revenues could ultimately limit the gradual build-up of capital for a longer than desirable period of time.

Ratings could come under pressure if Banco Sabadell is not able to improve recurrent operating profitability through higher banking revenues, lower costs and most importantly reduction of credit provisions. Downward rating pressure would also come from slower than expected reduction of non-performing assets (including non-performing loans and foreclosed assets). Upward rating pressure, although unlikely in the near-term, could arise from a sharp reduction of non-performing assets.

Banco Sabadell has grown its franchise mostly through acquisitions since 1997 which have enabled it to reinforce its domestic position as the 5th banking group by total assets in Spain. In DBRS’s view, the Group has a long track record of integration, the latest being the integration of Banco CAM completed in 2012, the business of Banco Mare Nostrum (BMN) in Catalonia and Aragon in October 2013 and Banco Gallego and the Spanish banking business of Lloyd’s Group in March 2014. The acquisition of Banco CAM in 2012 was assisted by capital support from the Spanish Authorities, including a 10-year asset protection scheme (APS) provided by the Deposit Guarantee Fund (DGF) covering up to 80% of losses generated in an specific portfolio totalling EUR 24.6 billion of CAM’s exposure.

The Group has continued to report resilient underlying profitability helped by its strong domestic franchise which has enabled the group to remain profitable on an annual basis throughout the crisis. While the Group has generated sizeable capital gains from the sale of some equity stakes and debt portfolios, which reflects the group’s financial flexibility and earnings capacity, DBRS view that have also helped sustain operating profitability at good levels.

Overall credit problems remain elevated at Banco Sabadell with the non –performing loans (NPL) ratio at 18.8% at end-September 2014. Excluding the APS portfolio, the NPL ratio would have been a lower 12.9%. DBRS sees that there have been some signs of asset quality improvement in the first nine months of 2014, with the stock of NPLs declining quarter on quarter. Moreover, Banco Sabadell has been actively managing down its concentration in real estate sector loans throughout the crisis partly helped by foreclosing assets. The group’s exposure to real estate and construction assets remains significant at 21% of total loans and foreclosures at end-2013 although DBRS considers that the risks are adequately covered by provisions. Moreover, DBRS expects the level and pace of new provisions required to reduce as economic conditions and unemployment figures improve further.

DBRS views Banco Sabadell’s funding and liquidity profile as sound. Banco Sabadell has greatly improved its funding mix since the acquisition of Banco CAM, mostly helped by increasing retail funds and loan deleveraging. This helped to reduce wholesale and ECB funding reliance, and DBRS considers total remaining maturities for the next four years are manageable. ECB funding accounts for 2.5% of the group’s total assets at EUR4 billion at end-September 2014, a much lower figure than the EUR23.6 billion borrowed at end-2012.

In DBRS’s view, Banco Sabadell’s capital position is adequate for its risk profile and the bank has taken the appropriate steps to bolster its capitalisation, as evidenced in the EUR1.4 billion capital increase completed in 2013. However, internal capital generation remains modest and constrained by still elevated level of credit impairments. The Group reported a Basel III Common Equity Tier 1 (CET1), phased-in ratio of 11.8% at end-September 2014 and a fully-loaded ratio of 11.3%.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, the European Central Bank, European Banking Authority, Bank of Spain and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was 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.

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 historic default rates published by the European Securities and Markets Administration (“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 regulations only.

Lead Analyst: María Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: November 19, 2012
Most Recent Rating Update: December 14, 2012

For additional information on this rating, please refer to the linking document under Related Research.