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 and 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 confirmation reflects DBRS Morningstar’s view that the Group has a strong franchise position in Spain as the fourth largest Spanish banking group while also having a significant presence in the UK through its wholly owned subsidiary, TSB. DBRS Morningstar views Sabadell’s profitability as improving primarily from the rising interest rate environment as well as the restructuring measures of the last few years. The ratings also consider that Sabadell has sound asset quality despite having a relatively high exposure to SMEs which tend to be more sensitive to economic shocks. Sabadell’s ratings continue to reflect the Group’s strong funding and liquidity position, with a largely retail and granular deposit base with good access to debt and capital markets. Lastly, the ratings also considers the Group’s satisfactory capitalisation with capital ratios that have showed improvement in recent quarters driven by retained earnings.
An upgrade of the Bank’s ratings in the long-term would occur if the Bank maintains a credible track record of good profitability coupled with improved capital metrics, 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 in Sabadell’s franchise.
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, a bank specialised in mortgage lending which, at end-March 2023, represented around 22% of the Group’s total assets. The Group had approximately EUR 248 billion of assets and EUR 158 billion in total gross loans at end-March 2023 with mortgage market shares of above 6% in Spain and of 2.1% in the UK at end-February 2023. During the first months of 2021, the Bank presented its Strategic Plan 2021-2023, which according to DBRS Morningstar is being executed successfully.
Earnings Combined Building Block (BB) Assessment: Moderate
DBRS Morningstar views Sabadell’s profitability as improving. The Bank recorded a Return on Tangible Equity of around 9.9% in Q1 2023, well above the 6.5% reported in Q1 2022. This increase was attributable to a significant growth in net interest income (NII) year-on-year (YOY), driven by increases in the Bank’s customer spread, despite a negative extraordinary impact related to the new temporary financial tax in Spain. Fee income declined 2.4% YOY following reduced asset under management fees as well as lower commercial activity following lower new lending volumes. Credit Cost of Risk (as reported by the Bank) in Q1 2023 stood at similar levels as in 2022 at around 45 bps. DBRS Morningstar expects the Bank to continue to benefit from higher NII in coming quarters as the loan book fully reprices at higher interest rates although it sees the benefit as being partially offset by an expected increase in deposit costs.
Risk Combined Building Block (BB) Assessment: Good/Moderate
Sabadell’s asset quality profile has remained sound despite the recent economic shocks, including the COVID-19 pandemic and an inflationary environment resulting in a rapid increase in interest rates. The non-performing asset (NPA) ratio stood at 4.2% at end-March 2023, similar to end-March 2022 levels. The positive evolution of the problematic exposures, was largely driven by a modest impact from current economic shocks combined by institutional sale of NPAs. DBRS Morningstar expects moderate asset quality deterioration in 2023, as household and corporate debt repayment affordability metrics are weakening after the rapid increase on interest rates with a large proportion of Sabadell’s loan book linked to variable interest rates. In addition, Stage 2 loans, which are performing exposures whose credit risk has increased significantly, represented around 8.4% of total gross loans at end-March 2023, up from 7.6% at end-March 2022.
In the current economic environment characterised by rapidly increasing interest rates, DBRS Morningstar is monitoring key exposures vulnerable in this context, including bank exposures to Commercial Real Estate (CRE) as well as banks’ debt securities portfolios. We view Sabadell´s risks amid these exposures as moderate. In particular, at Q1 2023 the Bank had a EUR 2.5 billion exposure to CRE, which represents about 1.5% of total loans and foreclosed assets. Furthermore, at end-March 2023, Sabadell’s unrealised losses in its Held to Collect (HTC) bond portfolio amounted to around 70 bps of capital (CET1 ratio after tax). DBRS Morningstar considers Sabadell interest rate risk management as sound. In this regard, whilst its customer deposits increased by EUR 21 billion since Q1 2019, its ALCO portfolio increased by EUR 1 billion in the same period, totaling EUR 27 billion at end-March 2023 or around 11% of its total assets.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Sabadell’s liquidity and funding position as solid, with the Bank reporting a Liquidity Coverage Ratio (LCR) at 220% at end-Q1 2023 and a Loan-to Deposit ratio of 96% (as calculated by DBRS Morningstar) for the same period. Sabadell’s main source of funding is retail deposits, largely underpinned by its domestic franchise. At end-March 2023, customer deposits accounted for 69% of total funding (as calculated by DBRS Morningstar). DBRS Morningstar views Sabadell’s deposit base as granular and stable. Since Q1 19 Sabadell’s deposits has increased by EUR 21 billion. However, in Q1 2023, deposits were down 1.5% QoQ. DBRS Morningstar sees the deposit decline as due to the transfer to off-balance sheet products and as not being related to clients transferring deposits to other banks in search of higher deposit yields.
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 2023, the fully loaded common equity tier 1 (CET1) ratio was 12.78%, up 33 bps YoY, and the fully loaded Total Capital ratio was 18.09%, up 110 bps YoY. The improvement in the capital ratios was driven by lower RWAs, retained earnings as well as new capital instrument issuance. Sabadell is required by the European authorities to meet a minimum CET1 ratio of 8.64% for 2023 according to the Supervisory Review and Evaluation Process (SREP). The phased-in CET1 ratio was 12.78% leaving the Bank with a capital cushion of over 413 bps above regulatory requirements at end-March 2023.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/413901
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 these issues have been fully settled, including an investigation conducted by the Financial Conduct Authority (FCA). However, reputational risks are still present. As a result, these risks are incorporated in the Bank’s Franchise grid grades.
There were no Environmental/Governance factors that had a significant or relevant effect on the credit analysis.
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 (17 May 2022) – https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations -https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations – (23 May 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
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 this rating include Morningstar Inc. and Company Documents, Sabadell - Annual Reports (2015-2022), Sabadell - Quarterly Reports (2015-2022), Sabadell - Presentations (2015-2022), European Banking Authority (EBA) Transparency Exercise 2022, 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar 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 rating assumptions can be found at: https://www.dbrsmorningstar.com/research/413902
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: William Schwartz, Senior Vice President - Credit Practices Group
Initial Rating Date: November 19, 2012
Last Rating Date: May 18, 2022
DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500
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