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 long-term ratings has been revised to Stable from Negative, and the trend on the Bank’s short-term ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment (IA) of the Bank at A (low) and the Support Assessment at SA3. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The change of the trend to Stable from Negative reflects DBRS Morningstar’s view that the impact of COVID-19 on the Bank has been less than anticipated in both Spain and the United Kingdom (UK), Sabadell’s key operating markets. Asset quality deterioration has been contained, although asset quality risks do remain, following the full removal of Government support measures. In addition, new risks have materialised following the Russian invasion of Ukraine. DBRS Morningstar does not expect the current conflict to have any immediate impact for Sabadell given the Bank does not have material exposures to Russia and Ukraine. Nevertheless, the indirect macroeconomic implications are likely to negatively affect the operating environment of Sabadell. The rating action also considers the progress the Bank is making in successfully executing its May 2021 strategic plan, and some of its financial goals have been achieved earlier than expected. As a result, the Bank’s profitability levels have recovered quickly and are now back to pre-COVID levels.
The confirmation of Sabadell’s ratings reflect the resiliency of the Group’s franchises in Spain and UK, which despite some recent challenges, continue to provide the Group with a sound funding and liquidity position. The rating action also considers the Group’s satisfactory capitalisation with capital ratios increasing in recent quarters.
An upgrade of the Bank’s ratings is unlikely in the short- to medium-term. However, an upgrade would occur if the Bank further strengthens its profitability and capital ratios while maintaining its solid asset quality profile.
A downgrade to the Long-Term Issuer Rating would likely be driven by a significant weakening in profitability, asset quality or capital or if there is evidence of a material deterioration of Sabadell’s franchise in Spain or the United Kingdom.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Sabadell’s ratings are underpinned by its strong commercial banking franchise in Spain where it has a focus on SMEs, corporates and affluent individuals. The Group also operates in the UK through TSB, which, at end-March 2022, represented around 21% of the Group’s total assets. During the first months of 2021 the Bank changed its top management including the appointment of a new CEO and a new CFO and presented a new strategic plan.
Earnings Combined Building Block (BB) Assessment: Moderate/Week
Sabadell’s profitability was significantly affected in 2020 due to COVID-19, as the Bank had to record significant Loan Loss Provisions (LLPs) and one-off restructuring charges. However, in 2021 and 1Q 2022, the Bank’s earnings have recovered back to pre-COVID levels, recording in the first quarter of 2022 a RoE of around 6.5%. This meant the Bank achieved its profitability goal set in its strategic plan earlier than initially expected. Sabadell’s Q1 2022 core income grew YoY, with both NII and fees increasing. The annual growth in NII was largely attributable to solid performance in TSB, as a result of strong mortgage lending volume growth. Loan loss provisions have continued to trend lower, and were down 38% YoY. The Cost of Risk (as reported by the Bank) in Q1 2022 stood at 41bps compared to 49 bps in 2021. DBRS Morningstar expects that in coming quarters the Bank will benefit from higher NII due to the impact of higher interest rates.
Risk Combined Building Block (BB) Assessment: Good/Moderate
Despite the COVID-19 outbreak, Sabadell’s asset quality profile has remained sound. The NPA ratio improved to 4.3% at end-March 2022 from 4.9% at end-March 2020. The improvement in the NPA ratio was largely driven by a modest impact from COVID-19 and an institutional sale of around EUR 1.1 billion of NPAs during 2020. However, DBRS Morningstar expects a moderate asset quality deterioration when government support measures end in the coming months. Nevertheless, as of end-March 2022, all of Sabadell’s loans under moratoria had expired and the performance of the loans under moratoria has been better than expected (with around 16% of them already amortised). Under the state guarantee schemes Sabadell has originated EUR 8.5 billion of new lending, representing around 6% of the Bank’s total gross loans. However, given the guarantees provided by the Kingdom of Spain (which covers up to 80% of the credit losses), DBRS Morningstar does not expect any deterioration of this portfolio to have a major impact on Sabadell’s asset quality profile. Sabadell also has a relatively high exposure to SMEs (21% on a consolidated basis at end-2021), which could also be negatively impacted by the effects of the deteriorating macroeconomic environment.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Sabadell’s liquidity and funding position as solid. Sabadell’s customer deposits grew by 4% YoY in Q1 2022, and the Liquidity Coverage Ratio (LCR) stood at 235% at end-Q1 2022 with a Loan-to Deposit ratio of 98.7% (as calculated by DBRS Morningstar) at the same period.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar considers Sabadell’s capital position as satisfactory. The Bank maintains sound cushions over regulatory minimum requirements. At end-March 2022 the fully loaded common equity tier 1 (CET1) ratio was 12.45%, up 49bps YoY, and the fully loaded Total Capital ratio was 16.99%, up 44bps YoY. The improvement in the capital ratios was driven by lower RWAs and retained earnings. Sabadell is required by the European authorities to meet for 2022 a minimum CET1 ratio of 8.46% according to the Supervisory Review and Evaluation Process (SREP). The phased-in CET1 ratio was 12.59% leaving the Bank with a capital cushion over 413 bps above regulatory requirements at end-March 2022, up by more than 47bps YoY.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/396987
DBRS Morningstar views that the Data Privacy & Security ESG subfactor was relevant to the credit rating. This is included in the Social category. In 2021 we considered this subfactor as significant for the credit rating. 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 Bank’s Franchise grid grades.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, Sabadell - Annual Reports (2015-2021), Sabadell - Quarterly Reports (2015-2021), Sabadell - Presentations (2015-2021), European Banking Authority (EBA) Transparency Exercise 2021, and Bank of Spain Statistical Bulletin. 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/396986
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
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: May 20, 2021
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