Fitch Ratings has upgraded
At the same time, Fitch has upgraded Sabadell's Short-Term IDR to 'F2' from 'F3'. The Outlook on the Long-Term IDR is Stable.
The upgrade reflects structural improvements in Sabadell's profitability, and in turn capitalisation, which has benefitted from business restructurings, higher interest rates, an improved performance of its
The bid by
Key Rating Drivers
Improved Profitability Supports Ratings: Sabadell's ratings are underpinned by its established domestic franchise, particularly in the SME segment. The ratings are also supported by strengthened profitability and adequate funding and capitalisation. Asset quality remains a rating weakness, but we expect credit losses to continue to shrink.
Improving Operating Environment Prospects: The operating environment for Spanish banks is improving due to resilient economic growth prospects and structurally higher interest rates, which should underpin strong profitability. Rapid reduction in private sector debt in recent years also provides banks with scope to grow business volumes, particularly as interest rates start to fall.
Regulatory intervention risks, such as the introduction of the bank levy, could however weigh on profitability prospects. Sustained improvements in the operating environment would benefit the bank's asset quality, but could also improve our risk profile and earnings and profitability assessments should the bank effectively mitigate execution risks from BBVA's bid.
Strong Franchise; SME Focus: Sabadell's good domestic franchise, particularly in SMEs, is complemented by geographic diversification from its
Moderate Risk Profile: Sabadell has diversified loan book and securities portfolio, mostly invested in Spanish government debt. Its loan book in
Adequate Asset-Quality Metrics: Sabadell's asset quality is broadly in line with large domestic peers', with a problem asset ratio (including impaired loans and net foreclosed assets) of 3.9% at end-2023, but weaker than European peers'. Fitch expects this ratio to remain broadly stable in 2024 and to start improving in 2025, supported by the resilient economy in
Structural Profitability Improvements: Sabadell's profitability has structurally improved, supported by higher interest rates, efficiency gains from business restructurings, and reduced loan impairment charges. We expect operating profit to improve to about 3% of risk-weighted assets (RWAs) in 2024 (2.6% in 2023) and to only marginally decline to about 2.5% in 2025 as higher RWAs from the Basel III end-game, and lower rates are partly offset by a recovery in loan volumes, increased contribution from TSB, and lower loan impairment charges.
Adequate Capitalisation: Sabadell's common equity Tier 1 (CET1) ratio of 13.3% at end-1Q24 was below the European peers' average but represents adequate buffers above regulatory requirements, and is supported by the bank's improved internal capital generation capacity. Our assessment also factors in the bank's updated, and more conservative, guidance to distribute capital over a 13% CET1 ratio pro-forma for post-Basel III end-game impact.
Good Funding and Liquidity: Sabadell fully funds its loans with customer deposits and benefits from a reasonably diversified funding profile, with frequent access to secured and unsecured wholesale markets, in particular to meet its minimum requirement for own funds and eligible liabilities (MREL). The bank's liquidity position is strong and supported by large buffers of high-quality liquid assets.
Its Short-Term IDR of 'F2' is the higher of the two options for a Long-Term IDR of 'BBB' due to the bank's 'bbb+' funding and liquidity.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The bank has moderate rating headroom from improving operating environment prospects. Although not our base case, negative rating pressure could arise from heightened risks resulting from the takeover bid by BBVA. In particular, the ratings would come under pressure if the takeover weighs on the bank's strategic execution and financial performance for a prolonged period.
In addition, Sabadell's ratings could be downgraded on a severe setback to the Spanish operating environment and a prolonged deterioration of its financial metrics.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating action could result from sustained improvements in the Spanish operating environment while Sabadell maintains similar financial metrics. It would also require a reduction in execution risks surrounding the BBVA bid, by mitigating management or business disruption brought about by a lengthy period of uncertainty.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Derivative Counterparty Rating (DCR), Senior Debt and Deposit Ratings
Sabadell's DCR and long-term deposit and senior preferred debt ratings are rated one notch above the bank's Long-Term IDR, reflecting the protection offered by junior resolution debt and equity buffers, and have been upgraded in line with the action on the Long-Term IDR.
In light of the bank's MREL strategy, Fitch expects the bank's junior and senior non-preferred debt buffers (10.5% at end-1Q24) to remain above 10% of RWAs on a sustained basis. The short-term deposit and senior preferred debt ratings of 'F2' are the lower of the two options corresponding to the long-term deposit and senior preferred debt ratings of 'BBB+', in line with the bank's funding and liquidity score at 'bbb+'.
Senior non-preferred notes are rated at the same level as the bank's Long-Term IDR, reflecting Fitch's view that the default risk of the notes is equivalent to that of the IDR and their average recovery prospects.
Subordinated Debt
Tier 2 subordinated debt is rated two notches below the bank's VR to reflect the notes' poor recovery prospects arising from subordination if the bank becomes non-viable.
Government Support Rating (GSR)
Sabadell's GSR of 'no support' reflects our view that although external extraordinary sovereign support is possible it cannot be relied on. This is because senior creditors can no longer expect to receive full extraordinary support from the sovereign if the bank becomes non-viable.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
DCR, Senior Debt and Deposit Ratings
Sabadell's DCR, senior debt and deposit ratings are primarily sensitive to the bank's IDRs. We would downgrade the DCR, long-term senior preferred and non-preferred debt and deposit ratings by one notch if the bank changes its strategy to meet MREL over the medium term and no longer plans to operate with a combined buffer of qualifying junior debt and senior non-preferred debt at above 10% of RWAs.
Subordinated Debt
Subordinated debt is primarily sensitive to Sabadell's VR.
GSR
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The operating environment score of 'bbb+' is below the 'a' category implied score because of the following adjustment reason: economic performance (negative).
The earnings & profitability score of 'bbb' is above the 'bb' category implied score because of the following adjustment reason: historical and future metrics (positive).
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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