Banco de Sabadell S.A.

The stable outlook assumes that following its successful turnaround, Sabadell will largely preserve the improved profitability and efficiency, further leverage its banking franchise, and progress in digitalizing its business. Despite the weakening economic activity in Spain and the U.K. and declining interest rates, we expect asset quality erosion to be modest, with total cost of risk increasing to just 60-65 bps of average loans in 2024-2025. Returns and capitalization should remain sound, with RoE ranging around 9%-10%, and RAC gradually strengthening toward 9%. We view an upgrade as unlikely. We may consider a positive rating action if the bank decides to operate with higher levels of capital, that is, with a RAC ratio sustainably above 10%, or holds a much

...Sabadell has strengthened its profitability and efficiency to levels commensurate with the depth of its franchise and those of peers. The bank reported record high profits in 2023, outperforming the target that it announced alongside its restructuring plan in mid-2021, and thereby narrowing the profitability and efficiency gap it previously had with higher rated peers. While high interest rates have particularly bolstered earnings, the bank has also benefited from streamlining its Spanish business and turning around its U.K. operations. As such, we anticipate that Sabadell will be able to preserve its improved profitability and efficiency this year and next. We expect it to further leverage its banking franchise and progress in digitalizing its business, with return on equity (RoE) ranging around 9%-10% and...

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