Banco de Sabadell S.A.

The positive outlook on Sabadell reflects our view that the bank will continue delivering on its strategic plan and gradually improving the strength and profitability of its franchise over the next 12-24 months. It also reflects our expectation that it will maintain adequate capitalization, with a RAC ratio of 8.25%-8.75%, and a solid funding and liquidity profile. We could raise our long-term rating on Sabadell if it continues to improve its efficiency and reduce its profitability gap with peers, achieving returns more commensurate with the magnitude and depth of its franchise, and if its asset quality does not deteriorate significantly beyond our base case amid the current economic slowdown. We could revise the outlook back to stable if Sabadell does

...Sabadell is closing its profitability and efficiency gap with higher rated peers, attaining stronger returns while preserving its commercial dynamism and the depth of its franchise. 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. In fact, it has delivered on a number of its strategic targets sooner than announced. We forecast its return on equity at 8.0%-8.5% over the next 12-24 months, after factoring in the new windfall tax (versus our 9.0% average forecast for its closest peers and 8.2% forecast for the Spanish domestic sector). We also forecast its cost-to-income ratio will hover around 55% (55% average for its peer group and 48% forecast for the Spanish domestic...

Full Report