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(The following statement was released by the rating agency)
Nov 23 -
-- We now see higher economic risk for banks operating in Spain following the rapid deterioration of the sovereign's creditworthiness, which has been reflected in our rating actions on Spain, including our recent two-notch downgrade.
-- In our view Spanish banks face increased credit risk as Spain's weakening economy, public sector cuts, austerity measures, and high unemployment will likely hamper the creditworthiness and resilience of public and private sector borrowers.
-- In light of the higher credit risk in the economy, we believe Banco de Sabadell's capital position has deteriorated according to our methodology. We also see imbalances in its funding profile. These factors are counterbalanced in our opinion, however, by the potential for extraordinary government support and the funding support it receives from the European Central Bank.
-- We are therefore affirming our 'BB/B' long- and short-term ratings on Sabadell and removing the long-term rating from CreditWatch negative.
-- We are lowering our issue ratings on Sabadell's nondeferrable subordinated debt to 'B-' from 'B+' and our issue ratings on its hybrid capital instruments to 'CCC' from 'B-' as a result of increased pressure on the bank's stand-alone creditworthiness.
-- The negative outlook primarily reflects that on Spain. It also incorporates our view that the difficult economic and operating conditions in Spain could lead to a deterioration of Sabadell's stand-alone credit profile and a lowering of the ratings.
On Nov. 23, 2012, Standard & Poor's Ratings Services affirmed its 'BB/B' long- and short-term counterparty credit ratings on Spain-based Banco de Sabadell S.A. (Sabadell). We also removed the long-term rating from CreditWatch with negative implications, where we placed it on Oct. 15, 2012. The outlook is negative.
At the same time we lowered our issue ratings on Sabadell's nondeferrable subordinated debt to 'B-' from 'B+' and its hybrid capital instruments to 'CCC' from 'B-' and removed them from CreditWatch with negative implications, where we placed them on Oct. 15, 2012.
The affirmation follows our review of the wider implications for economic risk and industry risk in the Spanish banking sector of our two-notch downgrade of the Kingdom of Spain (BBB-/Negative/A-3) on Oct. 10, 2012. We believe banks operating in Spain face higher credit risk, not only from their increasing exposure to a weaker public sector, but also owing to a riskier, less resilient private sector, which will suffer the effects of the economic recession, austerity measures, and high unemployment. The affirmation also reflects our view of the limited impact we see on Sabadell's business and financial profile should its recently announced intention to acquire part of Banco Mare Nostrum's business materialize.
To reflect the higher credit risk we now see in the Spanish market we lowered our Banking Industry Country Risk Assessment (BICRA) for Spain to group '6' from '5' and revised our economic risk score, a component of the BICRA, to '7' from '6' (see "Various Rating Actions On Spanish Banks Due To Rising Economic Risks," published Nov. 23, 2012).
Consequently, we also revised down our anchor, the starting point for our ratings on financial institutions operating primarily in Spain, to 'bb+' from 'bbb-'.
In the context of heightened credit risk, we believe Sabadell's capital position has deteriorated according to our methodology. We have lowered our assessment of the bank's capital and earnings to "weak" from "moderate." We now expect Sabadell's risk-adjusted capital (RAC) ratio, before diversification adjustments, to be about 4.2% at the end of 2013, versus about 5% previously. We also believe that the possible negative impact of the potential acquisition of part of Banco Mare Nostrum's assets on our RAC estimate would likely be limited to about 30 basis points, and would not affect our assessment of Sabadell's capital and earnings.
We have also reviewed the funding and liquidity of Spanish banks, aiming to differentiate to a greater extent our assessments of these factors for the banks, in line with the approach we communicated earlier this year (see "ECB's Funding "Bazooka" Gives Eurozone Banks Time To Reshape Their Business Models And Balance Sheets," published on Feb. 29, 2012, and "CreditWatch Actions On Four Spanish Banks On Potential Implications Of State Recapitalization," published on Aug. 7, 2012). The review resulted in the lowering of our assessment of Sabadell's funding to "below average" from "average," while we have maintained our view on liquidity as "adequate."
Our revised assessment of Sabadell's funding reflects the imbalances we see owing to the bank's higher-than-average reliance on European Central Bank (ECB) funding, which makes it more dependent on deleveraging trends and funding conditions in both domestic and international markets to redress imbalances built up in its funding profile. We understand that Sabadell's potential acquisition of part of Banco Mare Nostrum's business also includes liabilities (mostly retail deposits), and therefore do not anticipate a meaningful impact on the bank's funding and liquidity position.
Our revised assessments of the bank's capital and earnings and funding profile led us to lower our assessment of Sabadell's stand-alone credit profile to 'b+' from 'bb'. However, this has no impact on the ratings. This is because we now incorporate into the ratings two notches of uplift above Sabadell's SACP:
-- One notch of short-term support to reflect our view that the ongoing access to ECB funding facilities, particularly the long-term refinancing operations (LTROs), creates time for Sabadell to implement plans to rebalance its funding profile to a more sustainable position.
-- One notch of extraordinary government support to reflect our view of the "moderately high" likelihood that Sabadell would receive extraordinary financial support from the Spanish government if needed. This is because of our view of Sabadell's "high" systemic importance in Spain, a jurisdiction that we classify as "supportive" toward its banking sector.
We have not changed our assessment on other factors of Sabadell's SACP. We have maintained our "adequate" view of its business position, which we believe would not materially change if the Banco Mare Nostrum acquisition were successful, as, among other things, Sabadell would remain the fifth-largest bank in terms of loans. We have also kept our "moderate" assessment of Sabadell's risk position, which would not be substantially affected by the addition of Banco Mare Nostrum's small portfolio, together with its associated provisions.
The downgrade of Sabadell's nondeferrable subordinated debt and hybrid capital instruments was triggered by the lowering of the bank's SACP.
The negative outlook on Sabadell primarily reflects that on Spain. A negative rating action on Spain would likely trigger a similar action on the bank because, everything else being equal, we would no longer incorporate the one-notch uplift for extraordinary government support.
The negative outlook also reflects the possibility that we could downgrade Sabadell if we lowered our assessment of Sabadell's SACP. This could occur if we saw that:
-- The operating environment in Spain became more difficult than we currently anticipate;
-- The bank's internal capital generation was undermined by significant credit losses and/or revenue decline, leading to a RAC ratio below 3%;
-- Sabadell's asset quality during the current downturn was weaker than we expect or if we thought the bank was unable to manage the execution risks arising from the integration of Banco CAM ;
-- The bank was unable to rebalance its funding structure and significantly reduce its high reliance on ECB funding so that, we anticipated that by the time LTROs expire it would likely maintaining a comparatively high reliance on short-term central bank funding; or
-- The bank undertook additional meaningful acquisitions that in our view weaken its creditworthiness.
We currently view an outlook revision to stable as unlikely in the next 12-18 months. Still, we could revise the outlook on Sabadell to stable if we revised the outlook on Spain to stable, and we observed that the pressures on the SACP were abating and the economic and operating environment in Spain was improving.
If Sabadell manages to successfully reduce its reliance on central bank financing, while not accumulating other imbalances on its funding profile, all other things being equal, the ratings on the bank would likely remain unchanged. This is because we would likely change our assessment of the bank's funding to "average" from "below average" and remove the one-notch uplift for short-term funding support.
Ratings Score Snapshot
Issuer Credit Rating BB/Negative/B BB/Watch Neg/B
SACP b+ bb
Anchor bb+ bbb-
Business Position Adequate (0) Adequate (0)
Capital and Earnings Weak (-1) Moderate (-1)
Risk Position Moderate (-1) Moderate (-1)
Funding and Liquidity Below Average Average
and Adequate (-1) and Adequate (0)
Support +2 0
GRE Support 0 0
Group Support 0 0
Sovereign Support +1 0
Short-Term Support +1 0
Additional Factors 0 0
Related Criteria And Research
-- Various Rating Actions On Spanish Banks Due To Rising Economic Risks, Nov. 23, 2012
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009