Banco Sabadell, S.A.

Transcription

1 CREDIT OPINION 4 April 8 Banco Sabadell, S.A. Update following sovereign upgrade Update Summary On 7 April 8, we affirmed Banco Sabadell S.A.'s (Banco Sabadell) long-term deposit ratings at Baa and changed the outlook to positive from stable. The short-term deposit ratings were affirmed at Prime-. We also upgraded the bank's long-term Counterparty Risk Assessment (CR) to Baa(cr) from Baa(cr) and affirmed the short-term CR Assessment at Prime-(cr). The rating actions were prompted by the upgrade of Spain s government bond rating to Baa from Baa on April 8. RATINGS Banco Sabadell, S.A. Domicile Spain Long Term Debt Baa Type Senior Unsecured Dom Curr Long Term Deposit Baa Type LT Bank Deposits - Fgn Curr 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. Analyst Contacts Maria Jose Mori VP-Sr Credit Officer mariajose.mori@moodys.com Banco Sabadell s long-term Baa deposit ratings with a positive outlook and its Baa longterm senior debt ratings with a positive outlook, reflect () the bank s 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 Sabadell s standalone BCA reflects the bank s () improving asset risk, albeit the level of non-performing assets remains high; () improved loss absorption capacity during 7; and () modest profitability that should improve over the outlook period as the cost of credit risk in 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 8 months confirms our forward-looking expectations. These expectations are therefore also reflected in the positive outlook on Banco Sabadell's longterm deposit and senior debt ratings. Alberto Postigo VP-Sr Credit Officer Banking alberto.postigoperez@moodys.com Exhibit 4% % Carola Schuler Managing Director Banking carola.schuler@moodys.com % % % 9% 8% 8% 6% 7% 4% 6% Americas Asia Pacific Japan EMEA Solvency Factors Banco Sabadell, S.A. (BCA: ) Median -rated banks % 5% 6.7% 9.5% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets % Solvency Factors (LHS) Source: Moody's Financial Metrics.% Profitability: Net Income/ Tangible Assets.% 6.6% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 4% Liquidity Factors (RHS) Liquidity Factors CLIENT SERVICES Rating Scorecard - Key Financial Ratios

2 Credit Strengths» Sound brand name recognition and market positioning» Sustained decline in problematic assets» 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 long-term deposit and senior debt ratings reflects our expectation that the bank s credit profile will continue to improve over the next to 8 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.7% in 8. 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 long-term deposit and senior debt ratings have very limited downward pressure. However, downward pressure on the bank s BCA could result from: () 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. 4 April 8

3 Key indicators Exhibit Banco Sabadell, S.A. (Consolidated Financials) [] 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 (%) ,48 65,794 8,6 9, ,7,68 7,8 8, ,4 4,6 7,4 8, ,94 94,78 5,5 6, CAGR/Avg.4 6,5 5,5,74, [] 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 EUR billion of total assets at end-december 7, 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 5 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. 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. On 5 October 7, 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. 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 ba. We have made this positive adjustment to reflect our expectation of a further decline in the stock of non-performing assets (NPAs; measured as NPLs + foreclosed real estate assets) 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, especially when compared with other large European peers. According to its strategic plan that was updated in February 8, Banco Sabadell intends to reduce its stock of NPAs to less than EUR9 billion from a reported EUR5. billion at end-december 7. This is expected to be achieved by reducing more than EUR billion of NPAs per year. The group forecasts a NPL ratio of less than % by the end of the plan (from a Moody's calculated 5.4% at end-december 7). Banco Sabadell also expects a coverage of NPAs (excluding TSB) of around 5% by, from the 49.8% reported at end-december 7 that is expected to increase to 54.7% after the implementation of the new accounting rules of IFRS 9. The implementation of IFRS 9 will also increase the group's NPL ratio by 8 basis points. 4 April 8

4 During 7, Banco Sabadell continued to improve its asset risk metrics. At end-december 7 the group's NPA ratio declined to.9% from.% a year earlier. This ratio compares favourably to the average of the Spanish banking system, that we estimated at around 4% at end-june 7 (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 Q4 7 were sold at an average premium of.4%. The bank has disclosed that going forward it expects to continue selling foreclosed real estate assets without a loss. Capital assessment constrained by nominal leverage We assess Banco Sabadell s capital position at ba, one notch below the macro adjusted score. Our capital score incorporates: () the improvement in the bank s tangible common equity (TCE) to risk weighted assets (RWA) ratio, that increased to around % at enddecember 7 from 8.7% at end-december 6; () a one-notch negative adjustment driven by Banco Sabadell s low leverage ratio (measured as TCE over tangible assets) of around 4% at end-december 7. At end-december 7, Banco Sabadell s phased-in Common Equity Tier (CET ) ratio increased to.4% and the fully loaded CET ratio to.8%, from % respectively a year earlier. This improvement is mainly driven by the lower RWAs that followed the sale of Sabadell United Bank, the BanSabadell Vida transaction, the sale of the group s hotel management platform HI Partners to Blackstone and the disposal of its stake in Iberiabank. The bank's CET ratio stands well above the 8 SREP requirement of 8.5% prescribed by the European Central Bank. Banco Sabadell s fully loaded regulatory leverage ratio stood at 5.% at end-december 7. However, this improvement in the bank s capital ratios needs to be balanced against the impact of the new accounting rules of IFRS 9. The bank has estimated the impact at 78 basis points, which is expected to reduce the fully loaded CET capital ratio to %. Our more conservative capital assessment relative to regulators' capital ratios is primarily explained by () 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 8 September ). 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 ba. This positive adjustment incorporates our expectation that the bank will be able to improve its profitability metrics and achieve a net profit over tangible assets of at least.5% over the outlook period. We expect that this performance 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 now that the IT platform has been fully migrated. At end-december 7, Banco Sabadell reported a net profit of EUR85 million or the equivalent to.4% of tangible assets, which corresponds to a profitability score. The bank s pre-provision profit increased by 8.% to EUR.6 billion, or EUR.4 billion excluding TSB (a % 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 remaining broadly stable, while fee and commission income increased by a large.% year-on-year at end-december 7. TSB showed a lower contribution to the group s profit and loss account that was already expected, and explained by a one-off charge of more than GBP million related to information technology outsourcing fees paid to TSB's former owner, Lloyds Bank Plc (Aa/Aa stable, a). 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. 4 4 April 8

5 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 % at end-december 7, which is equivalent to a score. The bank suffered some limited deposit outflow in early October 7 following political tensions in Catalunya, but that stopped once the bank redomiciled outside the region. The bank has been working in reinforcing its liquidity position by increasing the stock of available liquid assets. Banco Sabadell reported a loan to deposit ratio of 4.% at end-december 7, broadly stable relative to recent years. Customer deposits represented on a consolidated basis 64.% of total funding. Wholesale debt (i.e. excluding ECB, Bank of England, REPOs and interbank funds), is mainly composed of mortgage covered bonds (6.4% of the total), securitizations (.5%), subordinated debt and AT securities (.%), commercial paper (9.%) and senior debt (7.6%). The bank tapped the wholesale funding markets during 7 by issuing EUR.6 billion of covered bonds, EUR.5 billion of AT bonds and EUR billion of senior bonds; and displays modest redemptions of EUR. billion in 8 and EUR. billion in 9. Reliance on ECB funding stood at EUR.5 billion at end-december 7 from EUR billion at end-december 6 (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 two notches below the macro adjusted score of baa. Banco Sabadell displays good liquidity position, underpinned by a buffer of EUR5.8 billion at end-december 7 (. billion of total liquid assets available and.7 billion of other assets eligible as ECB collateral). This accounted for 6.% of total consolidated assets, up from 5.% at end-december 6. The bank's LCR excluding TSB stood at 68% at end-december 7 compared to % a year earlier. According to our liquidity stress test, Banco Sabadell displays a net positive funding gap (as of end-december 7, latest data available) with excess liquidity of around EUR billion (accounting for 9.5% of total assets) in the event capital markets remain closed for a period of one year. The entity had EUR9. billion of liquid assets (equivalent to 4.% of total assets as of end-december 7) that could be pledged with the ECB in case of need. 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. Counterparty Risk Assessment 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 () 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 5 4 April 8

6 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)/Prime-(cr). The CR Assessment, prior to government support, is positioned three notches above the Adjusted BCA of, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 8% 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. The CR Assessment benefits from one notch of government support uplift, in line with our support assumptions on deposits and senior unsecured debt. Our moderate probability of government support reflects our view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our belief that governments are likely to maintain such operations as a goingconcern in order to reduce contagion and preserve a bank's critical functions. 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 4 April 8

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 # Solvency Asset Risk Problem Loans / Gross Loans 6.7% baa Non lending credit risk Capital TCE / RWA 9.5% ba Nominal leverage Profitability Net Income / Tangible Assets.% ba Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets.% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 6.6% baa Balance Sheet in-scope (EUR million) 6,8,99 76,67 6,8 4, ,5 5,6 77, 4 April 8 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 % Market funding quality Asset encumbrance Baa baa- % in-scope 4.9% 58.% 4.% 5.%.7%.5%.6%.% % at-failure (EUR million) 7,9 9,67 7,549,4 4, ,5 5,6 77, % at-failure 4.8% 5.% 4.9%.4%.7%.5%.6%.% %

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 Counterparty Risk Assessment baa (cr) Deposits 4.% 6.9% baa Senior unsecured bank debt 4.% 6.9% 4.% Dated subordinated bank debt 4.%.6% 4.%.6% ba Non-cumulative bank preference shares.6%.%.6%.% - b (hyb) Instrument class Counterparty Risk Assessment Deposits Senior unsecured bank debt Dated subordinated bank debt Non-cumulative bank preference shares Loss Given Failure notching Additional Preliminary Rating Assessment Notching - Government Support notching Local Currency Rating Baa (cr) Baa Baa Ba B (hyb) 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 Senior Unsecured -Dom Curr Moody's Rating Baa/-Baa TSB BANK PLC Bank Deposits -Dom Curr Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk 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 Baa Baa BANCO SABADELL S.A., LONDON BRANCH Bank Deposits -Dom Curr Counterparty Risk Assessment Commercial Paper Baa/P- Baa(cr)/P-(cr) P- CAM GLOBAL FINANCE, S.A. SOCIEDAD UNIPERSONAL Bkd Senior Unsecured -Dom Curr Baa CAM GLOBAL FINANCE Bkd Senior Unsecured Baa Source: Moody's Investors Service Endnotes Excludes EUR.5 billion carved out into the group's new business line Solvia Desarrollos Inmobiliarios As per Moody's definition As defined by Banco Sabadell in its financial statements. 8 4 April 8

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10 CLIENT SERVICES Americas Asia Pacific Japan EMEA April 8