Banco Sabadell, S.A.

Transcription

1 CREDIT OPINION November 17 Banco Sabadell, S.A. Update to credit analysis Update Summary Banco Sabadell s long-term Baa deposit rating with a stable outlook and its long-term senior debt rating with a positive outlook, reflect (1) the bank s ba BCA; () the uplift from our Advanced Loss Given Failure (LGF) analysis; and () one notch of uplift for the deposit and senior debt ratings from our assumptions of moderate government support. Banco Sabadells is established at Baa(cr)/Prime- (cr). RATINGS Banco Sabadell, S.A. Domicile Spain Long Term Debt Type Senior Unsecured Dom Curr Positive Long Term Deposit Baa Type LT Bank Deposits - Fgn Curr Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Banco Sabadell s ba standalone BCA reflects the bank s (1) improving asset risk, albeit the level of non-performing assets remains high; () improved loss absorption capacity during 17; and () modest profitability that should improve over the outlook period as the cost of credit risk is Spain declines and synergies at TSB Bank plc (TSB, Baa stable, baa) materialize. Liquidity is adequate and remains resilient after uncertainties derived from the political situation in Catalunya. Banco Sabadell's BCA is positioned at the lower end of our BCA scorecard range, indicating that upward pressure may develop provided the bank's performance over the next 18 months confirms our forward-looking expectations. These expectations are therefore also reflected in the positive outlook on Banco Sabadell's senior debt ratings. Exhibit 1 Rating Scorecard - Key Financial Ratios Analyst Contacts Banco Sabadell (BCA: ba) Carola Schuler Managing Director Banking carola.schuler@moodys.com 5% 1%.1% 8.8% 8.5% % 8% 15% 6% 1% 4% % 5%.4% % % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Solvency Factors (LHS) Source: Moody's Financial Metrics CLIENT SERVICES Americas Asia Pacific Japan EMEA % 5.4% 1% Solvency Factors Alberto Postigo VP-Sr Credit Officer Banking alberto.postigoperez@moodys.com Median ba-rated banks 14% Credit Strengths» Sound brand name recognition and market positioning» Sustained decline in problematic assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets Liquidity Factors (RHS) Liquidity Factors Maria Jose Mori VP-Sr Credit Officer mariajose.mori@moodys.com

2 » Improved loss absorbing buffers» Improving bottom line profitability, underpinned by the recovery of the Spanish operations» Adequate liquidity position Credit Challenges» Capital assessment constrained by nominal leverage» Volume of problematic assets remains high compared with European peers The positive outlook of Banco Sabadell s senior debt rating reflects our expectation that the bank s credit profile will continue to improve over the next 1 to 18 months. We expect Banco Sabadell to continue reducing its stock of problematic assets, while the bank s loss absorption capacity and profitability are expected to show some further improvement. The positive outlook is underpinned by our economic forecasts for Spain, which forecast a GDP growth of.9% in 17 and a.% in 18. The stable outlook on Banco Sabadell s deposit ratings reflects our view that any upward pressure on the bank s standalone BCA will not translate into an improvement in the bank s Baa deposit rating. At this level, Banco Sabadell s deposit rating will benefit from the uplift from Moody s LGF analysis but no uplift from the moderate government support assumptions, because the bank s deposit rating is aligned with Spain s Baa sovereign rating. Factors that Could Lead to an Upgrade Banco Sabadell s BCA could be upgraded as a consequence of a sustained recovery in profitability levels, while asset risk continues to improve. The bank s BCA could also be upgraded on the back of stronger TCE levels. Banco Sabadell s deposit and senior debt ratings could experience upward pressure from movements in the loss-given-failure faced by these securities. Factors that Could Lead to a Downgrade Given the positive outlook, Banco Sabadell s senior debt ratings are under limited downward pressure. However, downward pressure on the bank s BCA could result from: (1) a reversal in current asset risk trends with an increase in the stock of nonperforming loans (NPLs) and/or other problematic exposures; () a weakening in Banco Sabadell s internal capital-generation and risk-absorption capacity as a result of subdued profitability levels; and/or () a deterioration in the bank s liquidity position. As the bank s debt and deposit ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. November 17

3 Key indicators Exhibit Banco Sabadell, S.A. (Consolidated Financials) [1] Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,98 46,54 8,96 9, ,71,68 7,81 8, ,4 4,6 7,411 8, ,94 194,78 5,5 6, CAGR/Avg.4 16,5 5,5 1,74, [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Profile Banco Sabadell has a sound franchise, underpinned by its position as Spain s fourth-largest banking group with EUR11 billion of total assets at end-september 17, following a multiyear acquisition trail where it acted primarily as a consolidator when the Spanish banking market was in distress. The acquisition of TSB in the United Kingdom in 15 confirmed Banco Sabadell s ambition of becoming a more diversified banking group. Banco Sabadell s acquisition strategy, has enabled the bank to consolidate its market position in Spain, where it held a nationwide franchise of around 9% market share in loans and 8% in deposits as of the end of December 16. Furthermore, the expansion strategy has not translated into a severe deterioration in the bank s efficiency indicators. The group has demonstrated a strong ability to achieve targeted revenue and cost synergies from its acquisitions, enabling it to maintain reasonably good efficiency ratios despite pressures on operating revenues Banco Sabadell s weighted average Macro Profile stands at Strong-, which considers the group's mostly Spanish assets base (around 8% of total assets) but also its diversification through TSB. Recent developments On 5 October 17, Banco Sabadell approved the relocation of its headquarter from Catalunya (Ba negative) to neighbouring Valencia following Catalunya's referendum vote in favour of independence from Spain (Baa stable) on October 1. The referendum had been declared illegal by the Spanish government. We regard the bank s change of domicile as credit positive as it is designed to ensure that it, its customers and creditors remain within the legal and regulatory system of Spain and the European Union (EU) should Catalunya gain independence. Redomiciling from Catalunya guarantees that Banco Sabadell remains an euro area-based bank, that its depositors remain protected by Spain s deposit guarantee scheme, and that the bank retains access to European Central Bank (ECB) funding facilities. We believe the probability of Catalan secession is low, and we foresee no imminent material impact for Banco Sabadell. However, we regard the political tension in the region as credit negative for the bank, as it could if prolonged lead to volatility in its funding and business activity. November 17

4 Detailed Credit Considerations Sustained decline in problematic assets has significantly improved asset risk profile We assign a baa score to Banco Sabadell s asset risk, which stands three notches above its macro adjusted score of. We have made this positive adjustment to reflect our expectation of a further decline in the stock of non-performing assets (NPAs) on the bank s domestic balance sheet underpinned by Spain s sound growth prospects and improved provisioning coverage. In assessing Banco Sabadell s asset risk, we also take into consideration the bank s declining, but still high, level of NPAs (measured as NPLs + foreclosed real estate assets), especially when compared with other large European peers. According to its strategic plan, Banco Sabadell intends to reduce its stock of NPAs to less than EUR1 billion from a reported EUR17.1 billion at end-september 17. This will be achieved by reducing EUR billion of NPAs per year (EUR1.7 billion already achieved at end-september 17). The group forecasts a NPL ratio of less than % by the end of the plan (from 5.4% at end-september 17), a coverage of NPAs above 55% (from a reported 51.5% at end-september 17) and a Texas ratio below 55% (compared to 86% at endjune 17 latest data available). During 17, Banco Sabadell has continued to improve its asset risk metrics. At end-june 17 (latest data available) the group's NPA ratio1 declined to 1.% from 1.% a year earlier. This ratio compares favourably to the average of the Spanish banking system, that stood at around 15% at end-december 16 (latest data available). This improvement has been namely driven both by the reduction in the stock of NPLs as well as sales of foreclosed real estate assets, which in Q 17 were sold at average premium of.6%. The bank has disclosed that going forward it expects to continue selling foreclosed real estate assets without a loss. Coverage of NPAs has substantially improved over Q 17, increasing to a reported 51.5% at end-september 17 from a Moody's adjusted 45.7% at end-june 17. This positive performance is driven by the allocation to provisions of the extraordinary gains obtained through the sale of Banco Sabadell s US subsidiary (Sabadell United Bank, that was closed on 1 July 17) and the execution of the reinsurance contract related to the life insurance portfolio of Bansabadell Vida (closed on 4 July 17). Capital assessment constrained by nominal leverage We assess Banco Sabadell s capital position at, which is in line with the macro adjusted score. Our capital score incorporates: (1) the improvement in the bank s tangible common equity (TCE) to risk weighted assets (RWA) ratio, that increased to 9.% at end-june 17 (latest data available) from 8.7% at end-december 16; () a one-notch negative adjustment driven by Banco Sabadell s low leverage ratio (measured as TCE over tangible assets) of 4.1% at end-june 17. At end-september 17, Banco Sabadell s phased-in Common Equity Tier 1 (CET 1) ratio increased to 1.% and the fully loaded CET1 ratio to 1.7%, from the 1.7% and 1.1% respectively at end-june 17. This improvement is mainly driven by the lower RWAs that followed the sale of Sabadell United Bank and the additional provisions made in Q 17. The bank's CET 1 ratio stands well above the 17 SREP requirement of 7.8% prescribed by the European Central Bank. Banco Sabadell s phased-in regulatory leverage ratio stood at 5.% at end-september 17. Our more conservative capital assessment relative to regulators' capital ratios is primarily explained by (1) regulators not deducting convertible DTAs from the capital base while we give benefit, as a capital component, to only a share of them; and () a more conservative risk weighting that we apply to the sovereign exposures compared with regulators' risk weighting of % (see Moody s Adjustment to Increase the Risk Weightings of Sovereign Debt Securities in the Analysis of Banks: Frequently Asked Questions, published 18 September 1). In our capital assessment we have also taken into consideration the expected improvement on Banco Sabadell s capital ratios by yearend 17. The bank expects to increase its FL CET 1 ratio by around basis points to reach 1% at end-december 17, following the completion of the sale of the group s hotel management platform HI Partners to Blackstone (announced on 17 October 17) and the sale of its stake in Iberiabank. However, this improvement in the bank s capital ratios needs to be balanced against the impact that the new accounting rules of IFRS 9 will have on Banco Sabadell s capital, that it has estimated will stand in the range of 5 to 6 basis points for the FL CET 1 ratio in Q November 17

5 Bottom line profits should improve as domestic operations recover We assess Banco Sabadell s profitability at, which stands two notches above its macro adjusted score of. This positive adjustment incorporates our expectation that the bank will be able to deliver on its net profit target of EUR8 million for 17, as well as our view that, over the outlook period, Banco Sabadell will continue to improve its profitability metrics. This will be underpinned by the continued reduction in the cost of credit risk and improved recurring earnings as the domestic operations continue to gain momentum and TSB will start benefitting from relevant cost savings once its IT platform will be fully operational (scheduled for Q1 18). At end-september 17, Banco Sabadell reported a net profit of EUR655 million or the equivalent to.4% of tangible assets on annualized terms and equivalent to a ba profitability score. The bank s pre-provision profit increased by 1% to EUR. billion, or EUR billion excluding TSB (a 18% increase year-on-year). This more positive performance of the domestic operations is largely explained by the extraordinary gains that were obtained after the sale of Sabadell United Bank and the insurance deal, which in any case were fully allocated to increase NPA coverage. Banco Sabadell s domestic recurring revenues are also showing signs of improvement with net interest income growing by 1% and fee and commission income up by 9% year-on-year at end-september 17. TSB showed a lower contribution to the group s profit and loss account that was expected, and explained a one-off charge of more than GBP1 million related to information technology outsourcing fees paid to TSB's former owner, Lloyds Bank Plc (Aa/Aa stable, a), before TSB s IT migration is completed in Q1 18. Banco Sabadell s strategic plan will focus as mentioned above in reducing the stock of NPAs further, but also in achieving growing business volumes and market shares in its core markets, while improving efficiency levels by optimizing resources and new IT capabilities. Adequate liquidity profile We assess Banco Sabadell s combined liquidity profile as, based on its wholesale funding structure and stock of liquid assets. These ratios are calculated for Banco Sabadell excluding TSB based on our assessment that liquidity between the group and its subsidiary is not fungible and that the group intends to keep TSB's funding totally independent of its parent. We also make a negative adjustment to Banco Sabadell s liquid asset ratio of one notch due to asset encumbrance. The adjusted market funds-to-tangible banking assets ratio stood at 8% at end-december 16, which is equivalent to a score. Banco Sabadell said it experienced a limited deposit outflow in early October 17 following political tensions in Catalunya, that stopped once the bank redomiciled outside the region. Deposit flows have since turned positive, according to the bank. Banco Sabadell reported a loan to deposit ratio of 14.5% at end-september 17, broadly stable relative to recent years. Customer deposits represented on a consolidated basis 67.5% of total funding. Wholesale debt (i.e. excluding ECB, REPOs and interbank funds), is mainly composed of mortgage covered bonds (6% of the total), securitizations (1%), subordinated debt and AT1 securities (1.9%), commercial paper (9.7%) and senior debt (.4%). The bank tapped the wholesale funding markets during 17 by issuing EUR1.6 billion of covered bonds and EUR1.15 billion of AT1 bonds and displays modest redemptions of EUR. billion in 18. Reliance on ECB funding stood increased to EUR.5 billion at end-september 17 from EUR1 billion at end-december 16 (the bulk of it being TLTRO II), representing 9.7% of the bank s total assets and standing above the Spanish system average of around 6.4%. As mentioned, we have adjusted the liquid assets to tangible banking assets ratio to exclude TSB and also to exclude encumbered assets, which results in a liquid resources score of one notch below the macro adjusted score of baa. Banco Sabadell also has good liquidity, underpinned by a buffer of EUR.6 billion at end-june 17 ( 8.4 billion of total liquid assets available and 5. billion of other assets eligible as ECB collateral). This accounted for 15.4% of total consolidated assets, up from 15.% at end-december 16. The bank's LCR is currently around 14%, compared with 141% at end-september 17. According to our liquidity stress test, Banco Sabadell displays a net positive funding gap (as of end-june 17, latest data available) with excess liquidity of around EUR16.4 billion (accounting for 7.6% of total assets) in the event capital markets remain closed for a period of one year. The entity had EUR14. billion of liquid assets (equivalent to 6.6% of total assets as of end-june 17) that could be pledged with the ECB in case of need. 5 November 17

6 Support and structural considerations Loss Given Failure Banco Sabadell is subject to the EU Bank Recovery and Resolution Directive, which we consider to be an Operational Resolution Regime. We assume a residual TCE ratio of % and losses post-failure of 8% of tangible banking assets, a 5% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, assign a 5% probability to deposits being preferred to senior unsecured debt and a 6% proportion of junior deposits. These metrics are in line with our standard assumptions. For Banco Sabadell's deposits and senior unsecured debt, our Loss-Given Failure (LGF) analysis indicates a very low and low loss-givenfailure for deposits and senior unsecured debt, respectively, which leads us to position Banco Sabadell's Preliminary Rating Assessment (PRA) two notches above the Adjusted BCA for deposits and one notch above the adjusted BCA for senior debt. Please refer to the Loss Given Failure and Government Support table at the bottom of the scorecard. Government Support We assign a moderate probability of government support for the fourth-largest bank in Spain, resulting in one notch of uplift for the deposit and senior debt ratings. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default, and () apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. The CR Assessment is positioned at Baa(cr). The CR Assessment is positioned three notches above the Adjusted BCA of ba, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 19% of Tangible Banking Assets. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. Methodology and scorecard About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 6 November 17

7 Rating methodology and scorecard factors Exhibit Banco Sabadell, S.A. Macro Factors Weighted Macro Profile Strong - Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Solvency Asset Risk Problem Loans / Gross Loans 8.5% baa Non lending credit risk Capital TCE / RWA 8.8% Nominal leverage Profitability Net Income / Tangible Assets.4% Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 5.4% Market funding quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets.1% baa Asset encumbrance Balance Sheet in-scope (EUR million) 47,41 16,51 78,819 7,69 4, ,94 164,7 November 17 Key driver # Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Preference shares (bank) Equity Total Tangible Banking Assets 7 1% Baa baa-ba ba ba % in-scope 8.8% 64.7% 47.8% 16.8%.5%.6%.5%.% 1% at-failure (EUR million) 58,74 95,648 74,878,77 4, ,94 164,7 % at-failure 5.4% 58.1% 45.5% 1.6%.5%.6%.5%.% 1%

8 Debt class De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA baa (cr) Deposits 4.% 6.6% baa Senior unsecured bank debt 4.% 6.6% 4.% 1 1 Dated subordinated bank debt 4.%.5% 4.%.5% Non-cumulative bank preference shares.5%.%.5%.% - b (hyb) Instrument class Deposits Senior unsecured bank debt Dated subordinated bank debt Non-cumulative bank preference shares Loss Given Failure notching 1 Additional Preliminary Rating Assessment Notching - baa (cr) baa b (hyb) Government Support notching Local Currency Rating 1 1 Baa (cr) Baa Ba B (hyb) Foreign Currency Rating -Baa ---- Source: Moody's Financial Metrics Ratings Exhibit 4 Category BANCO SABADELL, S.A. Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Senior Unsecured -Dom Curr Senior Subordinate -Dom Curr Pref. Stock Non-cumulative -Dom Curr Moody's Rating Stable(m) Baa/P- ba ba Baa(cr)/P-(cr) (P)Ba B (hyb) TSB BANK PLC Bank Deposits -Dom Curr Baseline Credit Assessment Adjusted Baseline Credit Assessment Issuer Rating -Dom Curr Stable Baa/P- baa baa A(cr)/P-(cr) Baa TSB BANKING GROUP PLC Issuer Rating -Dom Curr Subordinate -Dom Curr Stable BANCO SABADELL S.A., LONDON BRANCH Bank Deposits -Dom Curr Commercial Paper Stable Baa/P- Baa(cr)/P-(cr) P- CAM GLOBAL FINANCE, S.A. SOCIEDAD UNIPERSONAL Bkd Senior Unsecured -Dom Curr Positive CAM GLOBAL FINANCE Bkd Senior Unsecured Positive Source: Moody's Investors Service 8 November 17

9 Endnotes 1 As per Moody's definition As defined by Banco Sabadell in its financial statements. Moody's also Rates Banco Sabadell's Additional Tier 1 Capital Securities at B (hyb) 9 November 17

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11 CLIENT SERVICES 11 Americas Asia Pacific Japan EMEA November 17