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Fitch Affirms Sabadell at 'BB+', Outlook Stable; Withdraws Ratings
March 26, 2014 / 6:42 PM / 3 years ago

Fitch Affirms Sabadell at 'BB+', Outlook Stable; Withdraws Ratings

(The following statement was released by the rating agency) BARCELONA/LONDON, March 26 (Fitch) Fitch Ratings has affirmed Spain-based Banco de Sabadell's (Sabadell) Long-term Issuer Default Rating (IDR) at 'BB+' with Stable Outlook, Short-term IDR at 'B' and Viability Rating (VR) at 'bb+'. Fitch has simultaneously withdrawn all of Sabadell's ratings because, in the agency's view, the level of public information provided by the bank on a quarterly basis is insufficient to maintain the rating. Accordingly, Fitch will no longer provide ratings or analytical coverage for Sabadell. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT The affirmation of the VR, IDRs and senior debt ratings reflects Sabadell's sound domestic franchise, which has been expanded by several bank acquisitions, continued improvements in funding and liquidity, and a loss absorption buffer that remains moderate in light of further asset quality pressures. The main rating drivers are its asset quality, which is somewhat above peers, and its moderately vulnerable capitalisation. The VR also takes into account the need to improve the profitability of its banking business, especially from acquired banks, which now looks weak, and manages a large stock of impaired assets amid a mild economic recovery and still weak housing sector dynamics. Sabadell's reported impaired assets remain well above the sector average due in part to an asset protection scheme (APS) from the Deposit Guarantee Fund, which covers the weakest assets from the acquired Banco CAM, largely real estate-related. Excluding the APS, Sabadell's non-performing loan (NPL) ratio was 14.1% at end-2013, slightly above many peers, largely affected by stricter reclassifications of restructured loans and loan contraction. However, the pace of NPL formation decelerated in 2H13, showing signs of a turning point. Reserves against NPLs were acceptable at 52% at end-2013 considering that most of these assets have mortgage collateral, potentially providing additional protection. A EUR1.4bn fresh capital increase finalised in October 2013 boosted Sabadell's Fitch core capital (FCC) ratio to 9.8% at end-2013. Conversions of deferred tax assets into tax credits will also support capital ratios. However, Fitch still views Sabadell's capitalisation as moderately vulnerable to further value corrections, as shown by a non-reserved impaired asset exposure that exceeds FCC. Positively, this level of capital should benefit from better earnings prospects as funding costs reduce further and some additional synergies from recent integrations are reached as planned. Sabadell has been able to rebalance its funding mix towards customer sources more quickly than Fitch's expectations. Along with better market access, this helped reduce ECB borrowings to relatively modest levels. Fitch considers the stock of liquid assets, at 11% of total assets at end-2013, large in light of diversified debt repayments. The Stable Outlook reflects Fitch's view that upside and downside rating potential are currently limited as Sabadell's financial and risk profile have only just started to stabilise. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR Sabadell's Support Rating of '3' and Support Rating Floor (SRF) of 'BB+' currently reflect Fitch's view that there is a moderate likelihood of government support for the bank, if needed. This is because Sabadell's national systemic importance, with national market shares of between 8%-9% for loans and deposits. In Fitch's view there is a clear intent to ultimately reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. We expect to see the EU's Bank Recovery and Resolution Directive (BRRD) voted through European parliament in the coming weeks and implemented into national legislation and practice within one to two years. We also expect progress towards the Single Resolution Mechanism (SRM) for eurozone banks in this timeframe. In Fitch's view, these two developments will dilute the influence European states have in deciding how their domestic banks are resolved and increase the likelihood of senior debt losses in its banks if they fail solvability assessments. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Sabadell and by Sabadell International Equity Ltd are all notched down from the bank's VR in accordance with Fitch's criteria 'Assessing and Rating Bank Subordinated and Hybrid Securities'. Subordinated lower Tier 2 debt is rated one notch below the bank's VR to reflect below-average loss severity. Subordinated upper Tier 2 debt is rated four notches below the VR to reflect high loss severity risk relative to average recoveries (two notches) and high non-performance risk (two notches). Preferred stock issued by Sabadell and Sabadell International Equity Ltd are rated five notches below Sabadell's VR to reflect high loss severity risk of these instruments when compared to average recoveries (two notches) and higher non-performance risk (an additional three notches). Subordinated debt and other hybrid securities' ratings have also been withdrawn in line with the withdrawal of Sabadell's VR. The rating actions are as follows: Banco de Sabadell: Long-term IDR: affirmed at 'BB+'; Outlook Stable; withdrawn Short-term IDR: affirmed at 'B'; withdrawn Viability Rating: affirmed at 'bb+'; withdrawn Support Rating: affirmed at '3'; withdrawn Support Rating Floor: affirmed at 'BB+': withdrawn Senior unsecured long-term debt: affirmed at 'BB+'; withdrawn Senior unsecured short-term debt: affirmed at 'B'; withdrawn Commercial paper: affirmed at 'B'; withdrawn Subordinated lower tier 2 debt: affirmed at 'BB'; withdrawn Subordinated upper tier 2 debt: affirmed at 'B'; withdrawn Preferred stock: affirmed at 'B-'; withdrawn State-guaranteed debt: affirmed at 'BBB'; withdrawn Sabadell International Equity Ltd. Preferred stock: affirmed at 'B-'; withdrawn Contact: Primary Analyst Josep Colomer Director +34 93 323 8416 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Secondary Analyst Roger Turro Director +34 93 323 8406 Committee Chairperson Olivia Perney Senior Director +33 1 44 29 9174 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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