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) Senior Unsecured Long-Term Debt & Deposit rating at BBB (high) and its Short-Term Debt & Deposits rating at R-1 (low) both with Stable trend. DBRS has also confirmed the Long Term Critical Obligations Rating at A with Stable trend and the Short Term Critical Obligations Rating at R-1 (low) with Stable trend. Concurrently, DBRS maintained Sabadell’s Intrinsic Assessment (IA) at BBB (high) and the Support Assessment at SA3.

The confirmation of the ratings reflects Sabadell’s resilient core profitability amid the low interest rate environment, largely supported by the Bank’s capacity to continue strengthening core revenues and significantly reduce asset provisions. Moreover, Sabadell has demonstrated its capacity to reduce non-performing assets (NPAs), to a higher degree than its comparable domestic peers. Whilst this improvement in asset quality partly reflects the improved economic environment in Spain it also reflects the Group’s proactive management to sell foreclosed assets (FAs) and dispose of some lending portfolios, which is also supported by the Group’s strong coverage levels of NPAs. The ratings also reflect the Group’s sound liquidity position, reduced risk profile and good capitalisation, further reinforced by improved internal capital generation. The Group acquired TSB Banking Group in June 2015 and the confirmation of the ratings also reflects that the integration of TSB is going smoothly. In addition, DBRS considers the Group to be well positioned to face regulatory and operating challenges both in Spain and the United Kingdom.

Sabadell’s ratings are underpinned by the Bank’s franchise strength in Spain, particularly in the trade finance segment to SMEs and corporates. The ratings also consider the Group’s high level of NPAs, albeit much reduced in 1H16, as well as the Bank’s still significant, albeit reducing, exposure to real estate developers

In 1H16, the Group reported net attributable income of EUR 425.3 million, up 20.7% year-on-year (YoY) as results benefited from the integration of TSB from 1H15 but also reflecting good progress on core revenue generation. TSB’s net attributable profit was EUR 145.7 million, 34% of the Group’s net attributable profit. Cost control and significantly lower loan loss and other financial asset provisions also supported the Group’s profits YoY. Nevertheless, Sabadell’s 1H16 results benefitted by some one-offs such as the sale of TSB and Sabadell’s stake in Visa Europe and the sale of the last tranche of Dexia Sabadell. These capital gains helped to offset one-off impairments in 1H16 largely associated with the new provisioning requirements, and the write down of the Group’s stake in Banco Comercial Portugues, S.A. Excluding TSB, net interest income (NII), the Bank’s main source of revenue, grew 7% YoY in 1H16, mostly helped by the continued reduction of funding costs in Spain, both from retail and wholesale funds. DBRS sees Sabadell’s NII as performing better than most domestic peers, partly supported by continuing growth in its strong franchise in trade finance businesses with Small and medium sized enterprises (SMEs) in Spain as well as TSB’s mortgage lending growth.

During 2015 and 1H16 the Group accelerated the reduction of NPAs significantly, helped by lower new non-performing loans (NPL) entries, higher recoveries and increased sales of FAs. Total NPAs have been reducing quarter-on-quarter (QoQ) since 4Q13, with a total reduction of EUR 1.7 billion in 1H16 and around EUR 2.9 billion in 2015 (EUR 3.2 billion in 2015 excluding TSB and as calculated by DBRS). The reduction in NPAs was assisted by improved economic conditions and real estate market in Spain but was also accelerated through active management. Nevertheless, DBRS considers Sabadell’s stock of remaining NPAs as significant, totalling EUR 20 billion. Sabadell’s exposure to sovereign debt of Spain and peripheral countries, represented a high 1.2x of the Bank’s equity at end-1H16. The Bank reported a fully loaded CET1 ratio of 11.8% at end-June 2016, which DBRS views as strong considering the Bank’s improved risk profile following the acquisition of TSB. However, DBRS notes that Sabadell still retains high levels of Deferred Tax Assets (DTAs) that represented 53% of the Bank’s CET1 at end-June 2016.

DBRS views Sabadell’s funding and liquidity position as sound, supported by a sound net loan to deposit ratio, good levels of liquid assets and regular access to wholesale markets for funding. TSB reinforced the Group’s retail deposit base as TSB reported deposits of EUR 34 billion at end-June 2016. The Group has a sound net loan to deposit (LTD, excluding repos and covered bonds accounted for as deposits) ratio of 111% (as calculated by DBRS) at end-June 2016. During 1H16 the Group issued senior, subordinated debt and covered bonds, which further diversified its funding sources.

In DBRS’ view, Sabadell’s capital position is adequate, supported by an improved risk profile after the TSB acquisition, its proven track record of regular access to capital markets and much improved internal capital generation through retained earnings. Sabadell’s fully-loaded CET1 capital ratio stood at 11.8% at end-June 2016, above the Group’s Supervisory Review and Evaluation Process (SREP) of 9.25% for 2016. Sabadell’s adequate capital position was evidenced in recent European Banking Authority (EBA) stress test results, where Sabadell reported a 8% CET1 ratio (fully loaded) under the 2018 adverse scenario.

RATING DRIVERS

Positive rating pressure on the ratings could arise from a continued sharp reduction of NPAs to more normalised levels together with a longer track record of sustained improved core profitability.

Negative rating pressure on the ratings could occur from weaker underlying earnings generation negatively affecting the Group’s internal capital generation. A significant increase of the Group’s risk profile together with a substantial increase in non-performing assets would also put downward pressure on the ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Critical Obligations Rating (February 2016) and DBRS criteria: Guarantees and Other Forms of Support (February 2016). 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, company presentations 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.

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

For further information on DBRS historic 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 regulations only.

Lead Analyst: Maria Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: 19 November 2012
Most Recent Rating Update: 29 September 2015

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