Banco de Sabadell S.A.

The positive outlook on Sabadell indicates that we could raise our ratings over the next 12-24 months. The positive outlook also assumes that Sabadell will continue delivering on its restructuring plan to sustainably improve its competitive position and profitability, while maintaining adequate capitalization over the next 12-24 months, with its RAC ratio at 8.0%-8.5%. In addition, while Sabadell is structurally more exposed to corporate lenders, and therefore more vulnerable to the emergence of problematic loans from the pandemic and the Russia-Ukraine conflict, we think asset quality deterioration will be manageable. We could raise the rating if the bank delivers on its plan to further expand its buffer of subordinated bail-in-able debt, with evidence that its ALAC buffer will remain above

...Sabadell is progressing in its strategic plan, but significant improvements will come only after 2023. We view positively that Sabadell is re-orienting its efforts to extract more value from its domestic franchise through a further digitalized retail offering, while turning around its U.K. operations and deleveraging some highly capital-consuming international businesses. We forecast that its return on equity will stand somewhat above 5% by the end of 2023 (versus 3.2% on average in 2018-2021), and its cost-to-income ratio at about 62% by the same date (versus 66% on average in 2018-2021). However, at such levels, Sabadell's returns and efficiency would still be suboptimal relative to its higher rated peers and to the bank's relevant scale and SME franchise in Spain. Sabadell has made good progress in the clean-up of NPAs from the previous downturn, which provides some room to absorb additional asset quality deterioration. At the end of March 2022, Sabadell reported a gross NPA ratio of...

Full Report