Credit Opinion: Banco Sabadell, S.A.

Transcription

1 Credit Opinion: Banco Sabadell, S.A. Global Credit Research - 24 Feb 2016 Sabadell, Spain Ratings Category Moody's Rating Outlook Stable Bank Deposits Baa3/P-3 Baseline Credit Assessment ba3 Adjusted Baseline Credit Assessment ba3 Counterparty Risk Assessment Baa3(cr)/P- 3(cr) Senior Unsecured -Dom Curr Ba1 Senior Subordinate -Dom Curr Pref. Stock Non-cumulative -Dom Curr B1 Caa1 (hyb) TSB Bank plc Outlook Positive Bank Deposits -Dom Curr Baseline Credit Assessment Baa2/P-2 baa2 Adjusted Baseline Credit Assessment Counterparty Risk Assessment baa2 A2(cr)/P-1(cr) Issuer Rating -Dom Curr Baa2 Banco CAM Bkd Senior Unsecured -Dom Curr Baa2 CAM International Issues, SA Sociedad Unipers Bkd Subordinate -Dom Curr B1 Contacts Analyst Phone Maria Jose Mori/Madrid Alberto Postigo/Madrid Carola Schuler/Frankfurt am Main Marija Dubrovskaja/Madrid Key Indicators Banco Sabadell, S.A. (Consolidated Financials)[1] [2]6-15 [2]12-14 [3]12-13 [3]12-12 [3]12-11 Avg. Total Assets (EUR million) 201, , , , ,437.4 [4]19.0 Total Assets (USD million) 224, , , , ,382.3 [4]14.5 Tangible Common Equity (EUR million) 6, , , , ,827.2 [4]13.9 Tangible Common Equity (USD million) 7, , , , ,968.3 [4]9.6 Problem Loans / Gross Loans (%) [5]11.3 Tangible Common Equity / Risk Weighted Assets (%) [6]6.6 Problem Loans / (Tangible Common Equity + Loan Loss [5]118.0 Reserve) (%) Net Interest Margin (%) [5]1.4 PPI / Average RWA (%) [6]3.9 Net Income / Tangible Assets (%) [5]0.2

2 Cost / Income Ratio (%) [5]46.9 Market Funds / Tangible Banking Assets (%) [5]28.3 Liquid Banking Assets / Tangible Banking Assets (%) [5]19.3 Gross loans / Due to customers (%) [5]123.2 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE Banco Sabadell's Baa3/Prime-3 deposit ratings and its Ba1/Not Prime senior debt ratings, with a stable outlook, reflect (1) the bank's ba3 baseline credit assessment (BCA); (2) the uplift from our Advanced loss-given failure (LGF) analysis; and (3) one notch of uplift from our assumptions of moderate government support. Banco Sabadell's Counterparty Risk Assessment (CR Assessment) is established at Baa3(cr)/Prime-3 (cr). Banco Sabadell's standalone ba3 BCA incorporates our view on the credit profile of the combined group after integrating TSB Banking Group plc (TSB; Baa3 stable) on 30 June 2015, which now accounts for about 19% of the group's assets. The BCA reflects the group's (1) the "Strong-" Macro Profile which considers Banco Sabadell's mostly Spanish assets base but also its achieved diversification through the acquisition of TSB;(2) resilient revenue generation capacity aided by its Spanish SME franchise and acquisitive strategy over the past years; and (3) sound liquidity profile. The bank's BCA is constrained by its overall weak, albeit improving, asset-quality metrics and high weight of deferred tax assets (DTAs) on its capital, which results in a modest tangible common equity (TCE) ratio. Under Moody's Advanced LGF analysis, Banco Sabadell's long-term deposit and senior unsecured debt ratings take into account their very low and low loss-given-failure because of the group's high volume of subordinated and senior unsecured debt outstanding, leading to two notches and one notch of uplift, respectively, from the bank's ba3 adjusted BCA. Rating Drivers - Sound brand name recognition and market positioning - Improving, albeit still weak, asset risk - Capital assessment constrained by the high weight of DTAs - Profitability is on an improving trend - Sound liquidity profile Rating Outlook Banco Sabadell's ratings have a stable outlook, reflecting our expectations that the sound recovery of the Spanish economy will support the gradual improvement of the bank's asset risk and profitability. Despite the recent acquisition of TSB which displays a relatively stronger intrinsic credit profile, the group's overall risk profile continues to be dominated by Banco Sabadell's core Spanish operations. On February 22, 2016 Moody's affirmed and changed to stable from positive the outlook on the Baa2 governmentguaranteed debt ratings of Banco CAM (debt of which has been assumed by Banco Sabadell). This rating action followed the affirmation of the Baa2/(P)Prime-2 government bond rating of Spain and the change of the outlook to stable from positive, implemented on February 19, What Could Change the Rating - Up Upward pressure on Banco Sabadell's standalone BCA could be driven by (1) clear evidence that asset risk is

3 improving and the stock of problematic assets reduces substantially; (2) a sustainable recovery in the bank's recurring earnings; and (3) stronger capital assessment with higher TCE levels. What Could Change the Rating - Down Downward pressure could be exerted on the bank's standalone BCA if (1) a broad deterioration of its financial fundamentals hinders the bank's ability to preserve its solvency levels; (2) operating conditions worsen beyond Moody's current expectations (i.e. Spain's GDP growth is expected to grow by 3.2% in 2015 and 2.7% in 2016); and/or (3) the bank's liquidity profile deteriorates significantly. 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. Banco Sabadell's senior unsecured debt and deposit ratings could also change due to changes in the loss-given failure faced by these securities. DETAILED RATING CONSIDERATIONS SOUND BRAND NAME RECOGNITION AND MARKET POSITIONING Banco Sabadell has a good franchise value, underpinned by its position as Spain's fifth-largest banking group with EUR205.1 billion of total assets as of end-september 2015 following a multi-year acquisition trail whereby it primarily acted as a consolidator when the Spanish banking market was under distress. The latest acquisition of TSB confirms Banco Sabadell's ambitions of becoming a more diversified, pan-european banking group. Sabadell benefits from sound brand recognition and market positioning in Catalonia, Madrid, Asturias and the Basque Country (after the acquisition of Banco Guipuzcoano in 2010). The acquisition of Banco CAM in 2012 enabled the group to gain exposure to the regions of Valencia, Balearic Islands and Murcia, where Banco CAM had a strong presence. The integration of Banco CAM enabled Banco Sabadell to shift the profile of the group to a more balanced distribution between corporates and individuals. In December 2012, Banco Sabadell announced the acquisition of the retail network of the former Caixa Penedés to Banca Mare Nostrum (unrated), which included EUR9.78 billion in assets and EUR9.63 billion in liabilities. The transaction reinforced Banco Sabadell's market share in the region of Catalonia (with a market share of 14.7% at end-december 2014). During 2013, Banco Sabadell continued its expansion strategy in the domestic market and acquired Banco Gallego (EUR3.2 billion in assets at the time of the transaction), the Spanish operations of Lloyds TSB (EUR1.7 billion in assets) and the private business of Lloyds Bank in Miami (EUR926 million in managed assets). In 2014, Banco Sabadell completed the acquisition of the US based JGB Bank, N.A. for an amount of $49.6 million, which has enabled its Miami-based subsidiary to manage a business volume of $8 billion and 40,000 customers. Banco Sabadell's acquisitive strategy, has enabled the bank to consolidate its market position within the Spanish market by holding a nationwide franchise of 8.8% market share in loans and 7.6% in deposits at end-december 2014 (latest available figures). In addition, the expansionary strategy has not translated into a severe deterioration of the bank's efficiency indicators. The group has demonstrated a strong ability to achieve targeted revenue and cost synergies from its acquisitions, which has enabled it to maintain reasonably good efficiency ratios despite the ongoing pressures in operating revenues. On 20 March 2015, Banco Sabadell announced a cash offer for 100% of the capital of UK based TSB Group plc. Banco Sabadell concluded in April 2015 a rights issue of EUR1.6 billion, which was used to preserve its solvency ratios after the completion of the offer. On 30 June 2015, the takeover bid had received regulatory approval and therefore the group was consolidated into Banco Sabadell. On 8 July 2015, Banco Sabadell acquired 100% of the shares of TSB. TSB displays low asset risk and sound funding position. However, we also note that these strengths are offset by TSB's high cost to income ratio (77% at year-end 2014) as well as the challenges for Banco Sabadell to achieve its plans to generate revenue benefits by developing TSB's franchise within UK's highly competitive market. At year-end 2014, TSB had GBP27.2 billion of total assets, which represents around 20% of Banco Sabadell's. Banco Sabadell expects that it will improve TSB's weak efficiency levels, with the main cost savings deriving from a full migration of the IT services that Lloyd's currently provides onto Banco Sabadell's proprietary technology platform. Banco Sabadell expects to cover the costs of the IT migration through the GBP450 million that were committed by Lloyds at the time of the initial public offering of TSB.

4 On 1 October 2015, Banco Sabadell acquired a 4.99% stake in the capital of the Colombia based Banco GNB Sudameris (Ba1 Deposits; ba3 BCA; stable outlook) for an amount of USD50 million. At the same time, Banco Sabadell entered into an agreement with the main shareholder of the Colombian bank granting each other options to purchase and sale on the acquired shares. BANCO SABADELL'S RATING IS SUPPORTED BY ITS MACRO PROFILE OF `STRONG -' The integration of TSB in June 2015, has enabled the bank to have a broader geographical diversification, which gives an overall Macro Profile of Strong - based on its asset distribution on a weighted average basis. In particular, Spain, which we assess as a Moderate + accounted for 81% of total assets as at end-june 2015 and UK (Very Strong -) for 19%. IMPROVING, ALBEIT STILL WEAK, ASSET RISK One of the main factors constraining Banco Sabadell's rating is the Asset Risk score of b2, which reflects the bank's high volume of problematic assets, which nevertheless is on an ongoing declining trend. Banco Sabadell's non-performing loan ratio (NPL; excluding 80% of the portfolio hedged by the asset protection scheme (see note 1)) stood at 8.9% at end-september 2015, which stands below the 13.3% reported at year-end 2014, and below the banking system's average of 11% end-august 2015 (latest data available). This positive trend is driven by the impact of the integration of TSB, which has a significantly lower NPL ratio, but also by the continued reduction in the stock of NPLs of the Spanish portfolio. The coverage ratio (i.e., loan loss reserves [LLR] as a proportion of NPLs) stood at 53.1% at end-june 2015 compared to the system's average of 58%, and above the 49.1% reported at end-december However, in addition to NPLs, Banco Sabadell has other problematic exposures related to real estate assets that the bank acquired over the past few years. If these exposures are included (whilst excluding 80% of the APS portfolio), the non-performing asset ratio rises to 14.7%, which is high in absolute terms despite comparing favorably to the system's average (20.5% as at year-end 2014, latest data available). We note positively that this ratio is also showing an improving trend, even when excluding the impact of the integration of TSB. For the remainder of 2015 and 2016, we expect Banco Sabadell's domestic asset risk to continue improving (3Q 2015 financial results confirm this trend) aided by the sound recovery of the Spanish economy. CAPITAL ASSESMENT CONSTRAINED BY THE HIGH WEIGHT OF DTAs We have assessed Banco Sabadell's Capital score at b2, one notch above the macro adjusted score of b3. This upward adjustment derives from the inclusion of the mandatory convertible bonds maturing in 2015, which raises Moody's adjusted TCE-to-risk weighted assets (RWA) ratio to 7.6% at end-june This level is modest compared to European peers, and reflects the burden of DTAs on the bank's capital that mainly stem from the large provisioning requirements faced by the bank in recent years. At end-june 2015, Banco Sabadell had EUR6.6 billion of DTAs (representing 65% of its CET1 capital), out of which EUR5.4 billion were convertible DTAs. The bank successfully completed in April 2015 the EUR1.6 billion capital increase that was approved at the time of the announcement of the offer for acquiring 100% of TSB's capital. As at end-september 2015, Banco Sabadell reported a phased-in CET1 ratio of 11.6% and a fully loaded CET 1 ratio of 11.4%. PROFITABILITY IS ON AN IMPROVING TREND We assess Banco Sabadell's Profitability score at a ba2, three notches above the macro adjusted score of b2. This upward adjustment reflects the bank most recent performance and our expectations that the bank will report higher-than-average profitability ratios as the sound recovery of the domestic economy consolidates, thanks to its focus on the inherently more profitable SME segment. However, we note that the bank's profitability ratios in recent years are not fully comparable because of its intense expansion strategy. At end-september 2015, Banco Sabadell reported a net profit of EUR579.8 million, which excluding the impact of TSB it reached EUR540.2 million or the equivalent to a 48.5% increase year-on-year. The acquisition of TSB resulted in a negative goodwill that of EUR207.4 million that was offset by additional impairments. During the first nine months of 2015, Banco Sabadell's net interest income increased by 19.6% year-on-year (excluding TSB), mainly supported by the continued reduction in funding costs. Pre-provision income was also enhanced by the bank's high level of extraordinary trading income stemming from the sale of securities and sovereign bonds.

5 Going forward we expect Banco Sabadell to benefit from Spain's sound growth prospects, which should enable it to gradually improve business volumes from current subdued levels and to face lower provisioning requirements as asset risk continues to improve. We also expect some efficiency gains, namely related to TSB operations as the integration plan is accomplished and targeted cost synergies materialized. SOUND LIQUIDITY PROFILE We assess Banco Sabadell's Liquidity as ba1, based on is 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. According to our liquidity stress test, Banco Sabadell displays a net positive funding gap (as of end-june 2015) with excess liquidity of around EUR7.7 billion (accounting for 4.8% of total assets) in the event that capital markets remain closed for a period of one year. If we take into account the issuance capacity plus the undrawn committed liquidity line, the stress test results in a EUR12.3 billion surplus, which diminishes to a EUR0.3 billion surplus after applying deposit stresses. The entity has EUR14.4 billion of liquid assets (equivalent to 8.8% of total assets as of end-june 2015) that could be pledged with the ECB in case of need. Banco Sabadell reported a loan to deposit ratio of 103% at end-september 2015 (109% excluding TSB) and broadly stable relative to recent years. Wholesale funding, which represented 30% of total funding at end- September 2015, is mainly composed of mortgage covered bonds, and to a lesser extent securitizations, commercial paper and senior debt. The bank has tapped the wholesale funding markets during 2015 by issuing senior debt and covered bonds. ECB funding stood at EUR11.5 billion at end-september 2015, representing 6.4% of the bank's total funding. The bank reported a Liquidity Coverage Ratio (LCR) above 100% at end-september Note 1: At the time of the acquisition of Banco CAM by Banco Sabadell, an APS funded by the Deposit Guarantee Fund (FGD) was set up to cover 80% of the bank's exposure to toxic assets (a EUR 24.6 billion portfolio predominantly of real-estate). Notching Considerations LOSS GIVEN FAILURE Banco Sabadell is subject to the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt. These 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-given-failure respectively for deposits and senior unsecured debt, 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 The implementation of the BRRD has caused us to reconsider the potential for government support to benefit certain creditors of Banco Sabadell. We now assign a moderate probability of government support for this fifthlargest 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 (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 (2) 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.

6 The CR Assessment is positioned at Baa3(cr). The CR Assessment, prior to government support,is positioned three notches above the Adjusted BCA of ba3, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 20% 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 also benefits from one notch of systemic support, in line with our support assumptions on deposits and senior unsecured debt. This 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 going-concern in order to reduce contagion and preserve a bank's critical functions. 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. Rating Factors Banco Sabadell, S.A. Macro Factors Weighted Macro Profile Strong - Financial Profile Factor Historic Ratio Macro Adjusted Score Solvency Asset Risk Problem Loans / Gross Loans Credit Trend Assigned Score Key driver #1 12.6% b2 b2 Non lending credit risk Capital TCE / RWA 6.8% b3 b2 Expected trend Profitability Net Income / Tangible Assets 0.2% b2 ba2 Expected trend Combined Solvency Score b2 b1 Liquidity Funding Structure Market Funds / Tangible Banking Assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets 25.2% ba1 ba1 Market funding quality 19.2% ba1 ba1 Stock of liquid assets Combined Liquidity Score ba1 ba1 Key driver #2

7 Financial Profile ba3 Qualitative Adjustments Adjustment Business Diversification 0 Opacity and Complexity 0 Corporate Behavior 0 Total Qualitative Adjustments 0 Sovereign or Affiliate constraint Scorecard Calculated BCA range Baa2 ba2 - b1 Assigned BCA ba3 Affiliate Support notching 0 Adjusted BCA ba3 Instrument Class Loss Given Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Foreign Currency rating Deposits 2 0 ba1 1 Baa3 Baa3 Senior unsecured bank debt 1 0 ba2 1 Ba1 Dated subordinated bank -1 0 b1 0 B1 debt Non-cumulative bank preference shares -1-3 caa1 0 Caa1(hyb) 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 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR

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