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. Although unlikely at this stage, we could further lower our ratings if management fails in its restructuring efforts or does not execute strategic deleveraging for some of its international operations, leading to a sharp deterioration of capitalization, with our RAC ratio falling below 7%. We consider an upgrade unlikely while Sabadell works through its restructuring. However, we could consider it once we see clear evidence that Sabadell's efficiency and profitability has improved materially, reducing the gap

...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 extract 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 (ROE about 4.1%-4.5%). 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 (see charts 1 and 2). 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 4.4% of gross loans at...

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