Press Release

DBRS Morningstar Confirms Banco de Sabadell at A (low), Trend Revised to Negative from Stable

Banking Organizations
April 15, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of 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). The trend on the Group’s long-term ratings has been revised to Negative from Stable whilst the trend on the Group’s short-term ratings remains Stable.. DBRS Morningstar has also maintained the Intrinsic Assessment (IA) of the Bank is A (low) and the Support Assessment is SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The change of the Trend to Negative reflects our view that the wide and evolving scale of economic and market disruption resulting from the coronavirus (Covid-19) pandemic will have a negative effect on the operating environment for Sabadell in both Spain and the United Kingdom (UK). As a result, some of the progress made by the Bank in recent years is likely to be reversed, and we expect the banks’ revenues, asset quality and cost of risk to be negatively affected. The impact will likely emerge in the coming quarters, whilst the implications for the medium to long-term will depend on the evolution of the outbreak. Downward rating pressure would intensify should the crisis be prolonged.

In particular, the change in the Trend to Negative reflects DBRS Morningstar’s view that Sabadell’s credit fundamentals are more sensitive to economic shocks than other A (low) peers. This is reflected in Sabadell’s procyclical exposures to export-oriented business and to small and medium-sized businesses (SMEs). The Bank’s relatively high exposure to SMEs (26% of its Spanish lending book at end-2019) could mean the Bank is more vulnerable to deterioration given that SMEs are likely to be severely affected in this environment. Additionally, its subsidiary in the UK, TSB Bank plc (TSB), is in the middle of an ambitious restructuring plan, and this is now likely to take longer and to face other issues given the challenging environment.

RATING DRIVERS
Any upgrade is unlikely in the short-term given the recent change of trend. However, the trend on the Long-Term ratings could revert to Stable if the Bank is able to restrict the likely deterioration in asset quality and TSB’s restructuring plan is successfully completed.

The ratings could be downgraded due to a material deterioration of Sabadell’s franchise in Spain or the United Kingdom. A downgrade could also occur if much of the progress in asset quality made by the bank so far were to be reversed. A significant weakening of its capital position as a result of the stressed economic environment could also lead to downgrade.

RATING RATIONALE
Sabadell’s ratings continue to incorporate the Bank’s strong national position in Spain and the Group’s sound funding and liquidity position. The ratings also takes into account that Sabadell´s asset quality has significantly improved and is now closer to European peers. The ratings also reflect Sabadell’s current adequate capital position, which has been supported by its strengthening ability to reinforce capital levels through retained earnings and issuance of capital instruments. We also take into consideration the mitigating impact of the unprecedented support measures announced by the Spanish government, as well as several other international authorities and central banks.

ESG CONSIDERATIONS
DBRS Morningstar views that the Data Privacy & Security ESG subfactor was significant to the credit rating. This is included in the Social category. In April 2018, Sabadell completed the migration of the Lloyds IT systems to TSB but some customers faced significant disruption to service over an extended period, particularly in accessing internet banking. DBRS Morningstar recognises that even though these issues have been fully settled, an investigation is still being conducted by the Financial Conduct Authority (FCA). DBRS Morningstar expects any potential fine to be manageable but reputational risks are still present. As a result, these risks are incorporated in the Banks’s Franchise and Risk Profile grid grades.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

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 EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Sabadell - Annual Reports (2015-2019), Sabadell - Quarterly Reports (2015-2019), Sabadell - Presentations (2015-2019), European Banking Authority (EBA) Transparency Exercise 2019, 2018 EBA-wide stress test, Bank of Spain Statistical Bulletin and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359655

Ratings assigned by DBRS Ratings GmbH, Sucursal en España are subject to EU and U.S. regulations only.

Lead Analyst: Pablo Manzano, CFA, Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director- Global FIG
Initial Rating Date: November 19, 2012
Last Rating Date: June 4, 2019

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com

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