Morningstar DBRS Confirms Banco de Sabadell's Long-Term Issuer Rating at A (low) With a Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Banco de Sabadell, S.A. (Sabadell or the Bank), including the Long-Term Issuer Rating of A (low) and the Short-Term Issuer Rating of R-1 (low). All credit ratings have Stable trends. The Bank's Intrinsic Assessment (IA) is A (low) and the Support Assessment is SA3. For the full list of credit ratings, see the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
Sabadell's credit ratings reflect the Bank's strong franchise in Spain, with a focus on the small and medium-size enterprise (SME) sector, as well as its smaller but meaningful presence in the UK through its wholly owned subsidiary, TSB Bank plc (TSB). Morningstar DBRS' credit ratings also consider the Bank's good capital position and solid funding and liquidity profile on the back of its large customer deposit base and recurrent access to wholesale markets.

The credit ratings incorporate Sabadell's improved profitability over recent years. Morningstar DBRS expects that the Bank will continue to report solid profitability despite the lower interest rate environment, largely supported by the structural hedges in place in TSB and Spanish balance sheets, lending volume growth, and the materialisation of all the cost savings implemented in TSB. The credit ratings also consider the Bank's resilient risk profile over the recent years as well as the Bank's significant reduction of nonperforming loans (NPLs) and increased coverage levels at YE2024.

The Bank's Intrinsic Assessment of A (low) has been assigned at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views Sabadell's credit fundamentals and performance as commensurate with those of similarly rated peers.

Morningstar DBRS notes that Banco Bilbao Vizcaya Argentaria S.A.'s (BBVA) (rated A (high), Stable trend) bid to acquire Sabadell in May 2024 is still ongoing. If the transaction materialises, this would likely have positive implications for Sabadell's credit rating.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade Sabadell's credit ratings if the Bank demonstrated a further sustained track record of solid profitability and continued asset quality improvement whilst maintaining solid capital levels.

Morningstar DBRS would downgrade the Bank's credit ratings in the case of a prolonged and material deterioration in profitability, risk profile, and/or capital position.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
Sabadell is the fourth-largest banking group in Spain with total consolidated assets of EUR 240 billion at the end of 2024. It provides retail and commercial banking services to individuals, SMEs, and corporates in Spain; retail banking in the UK through its subsidiary TSB; and, to a lesser extent, commercial banking in Mexico and Miami. In May 2024, BBVA launched a bid offer to acquire Sabadell. The transaction is pending final regulatory approvals. We expect final outcomes to arrive by mid-2025.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Sabadell reported a net profit of EUR 1.8 billion in F2024, up 37.1% year over year (YOY) driven by the continuous positive momentum in net interest income, lower regulatory levies, a well-controlled cost base, and lower loan loss provisions (LLPs). Morningstar DBRS calculated the Bank's return on equity to be 12.6% in F2024, up from 9.9% in F2023. Total operating costs remained under control and were only up 2.3% YOY. The Bank reported a recurrent efficiency ratio, excluding restructuring costs, of 48% in F2024, down from 51% in F2023. LLPs declined by 23.5% YOY, partly driven by the reversal of a EUR 54 million provision associated with the recovery of a specific NPL that was in dispute and some provisions related to the Valencia floods. Consequently, net cost of risk improved by 13 basis points (bps) YOY to 41 bps in F2024.

Risk Combined Building Block (BB) Assessment: Good/Moderate
The Bank's asset quality significantly improved YOY in 2024. Sabadell's NPLs declined by 12.8% YOY to represent 2.8% of total gross exposures at the end of 2024, improved from 3.5% at YE2023, reflecting the positive evolution of the domestic economy and organic NPL recoveries. The Bank's total coverage ratio increased YOY, which led to a net NPL ratio of 1.1% at YE2024, broadly in line with the average net NPL ratio for Spanish banks of 1.0% at the end of September 2024, according to the European Central Bank (ECB). Sabadell also holds a portfolio of legacy foreclosed assets (FAs) that have steadily decreased over recent years, with a net exposure of approximately EUR 498 million at the end of 2024. Including FAs, the Bank's net nonperforming assets ratio was 1.4% at YE2024, down from 1.7% at YE2023.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
Sabadell's funding and liquidity position is solid, underpinned by its large customer deposit base, recurrent access to wholesale markets, and a sound liquidity profile. Customer deposits are Sabadell's largest source of funding, accounting for 80% of total nonequity funding at the end of 2024 followed by issued debt. The Bank's customer deposits kept growing in 2024 (5.9% YOY), which resulted in a net loan-to-deposit ratio (as calculated by Morningstar DBRS and excluding repos) of 94% at the end of 2024. In addition, Sabadell manages a large portfolio of off-balance sheet customer funds that totalled EUR 46.2 billion at the end of 2024, representing 21% of total customer funds. Sabadell reported a very strong liquidity coverage ratio of 210% and a net stable funding ratio of 142% at the end of 2024.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
Sabadell's capital position is solid, supported by its large capital buffers over minimum regulatory requirements, its improved ability to generate internal capital, and its access to capital markets. The Bank reported a regulatory CET1 capital ratio of 14.04% at YE2024, 85 bps higher than at YE2023. However, when including the share-buyback programme to distribute excess capital, the CET1 capital ratio reduced to 13.02%. Nevertheless, the Bank's capital buffer over minimum CET1 capital requirement remained comfortable at 406 bps. Sabadell reported a total Minimum Requirement for Own Funds and Eligible Liabilities (MREL) ratio of 27.8% of its RWAs at the end of 2024, above its MREL requirement for 2025 of 25.3% of its RWAs.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/448161.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents, Sabadell's 2024 and 2023 quarterly reports and presentations, Sabadell's annual reports (2018-23), Sabadell's semiannual reports (H1 2023 and H1 2024), and European Banking Authority and ECB data. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/448160.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: María Jesús Parra Chiclano, Vice President, European Financial Institution Ratings
Rating Committee Chair: María Rivas, Senior Vice President, Sector Lead, European Financial Institution Ratings
Initial Rating Date: 19 November 2012
Last Rating Date: 10 May 2024

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