Banco de Sabadell S.A.

Our stable outlook on Sabadell balances the challenges posed to the new management team from the need to restructure the business, and sustainably improve its competitive position and profitability, with our expectation that its capitalization should prove sufficient to weather the expected asset-quality deterioration. The anchor for Sabadell is 'bbb', reflecting our economic risk assessment of '4' and our industry risk assessment of '4' (on a scale of 1-10, with '10' signifying the highest risk). Sabadell's anchor reflects our view of the weighted-average economic risk of the countries where it operates, and the industry risk in Spain, where the bank is incorporated and primarily regulated. We consider the level of economic risk that Sabadell faces to be in line with

...The recently announced business plan seems realistic, but significant improvements will come only after 2023. We view positively the fact that Sabadell will re-orient its efforts to extracting more value from its domestic franchise through a more digitalized retail offering, while deleveraging some highly capital-consuming international businesses. We also think that the 6% return on tangible equity (ROTE)/5% return on equity (ROE) targets set for 2023 could be achievable, although our bottom line profitability forecasts stand slightly below (4.8%-5.3%/3.8%-4.2%, respectively). However, at those levels Sabadell's returns and efficiency would still be sub-optimal relative to higher rated peers and to the bank's relevant scale and SME franchise in Spain. Sabadell's good progress in the clean-up of nonperforming assets (NPAs) from the previous downturn provides some room to absorb additional asset quality deterioration yet to come from the pandemic. NPAs stood at 4.5% of gross loans at end-March...

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