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Rating Action:

Moody's downgrades Banco Sabadell to Ba2 from Ba1; negative outlook assigned

14 Jan 2014

Madrid, January 14, 2014 -- Moody's Investors Service has today downgraded the debt and deposit ratings of Banco Sabadell S.A. (Banco Sabadell) to Ba2/Not Prime from Ba1/Not Prime, following the lowering of the bank's baseline credit assessment (BCA) to ba3, equivalent to a standalone bank financial strength rating (BFSR) of D- (from D/ba2). All of the bank's ratings now carry a negative outlook.

This rating action concludes the review for downgrade initiated on 4 July 2013 (please see "Moody's places Banco Sabadell's Ba1 ratings on review for downgrade").

The downgrade of Banco Sabadell's ratings takes into account (1) the bank's weakened financial profile and significant challenges ahead, which are stemming from its large amount of problematic assets that have significantly increased in most asset classes over the last year and may give rise to additional provisions; and (2) some moderate signs that the Spanish economy is improving in 2014, which should reduce the pressure on the bank's asset quality over the medium to long-term. Moody's believes that Banco Sabadell's asset quality has deteriorated significantly both due to the acquisitions it has made (mainly of Banco CAM in 2012), as well as due to the pressure on its core SME and real estate segments.

In downgrading Banco Sabadell's ratings, Moody's has concurrently considered the bank's recent reinforcement of its capital base in October 2013 and improved liquidity position. However, Moody's considers that the bank's overall cushion (shareholders equity plus loss reserves) in relation to its deteriorating asset quality remains weak. Today's rating action also takes into consideration the impact on Banco Sabadell's credit profile of its acquisitive strategy during 2013.

RATINGS RATIONALE

--- DOWNGRADE OF THE SENIOR DEBT AND DEPOSIT RATINGS

The one-notch downgrade of Banco Sabadell's senior debt and deposit ratings reflects (1) the one-notch lowering of the bank's BCA; and (2) Moody's assessment of a high probability of support for the bank from the Spanish government (Baa3 stable), in case of need.

The negative outlook on Banco Sabadell's standalone rating drives the negative outlook on the bank's debt and deposit ratings.

--- LOWERING OF THE BCA

The lowering of Banco Sabadell's standalone BCA to ba3 from ba2 reflects the bank's ongoing asset-quality deterioration across all asset classes, particularly in the corporate loan-book. This deterioration not only affects those exposures related to the real-estate and construction sectors, but also loans extended to companies related to other economic sectors. Banco Sabadell's exposure to corporates represents the bulk of its credit portfolio, accounting for 55% (excluding the part of the portfolio hedged by the asset protection scheme (APS), for further information please refer to "Banco Sabadell, S.A.: Answers to Frequently Asked Questions" published on 18 October 2013) of total loans at end-September 2013. Given Banco Sabadell's focus on the corporate sector and the time lag between macroeconomic indicators and its impact on borrowers' credit quality, Moody's expects Banco Sabadell's asset-quality indicators to remain under pressure during 2014. However, the pace of deterioration is likely to be slower than that registered throughout 2013.

Banco Sabadell's non-performing loan ratio (NPL; excluding the impact of the APS portfolio) increased to 14.9% at end-September 2013, from 11.5% at year-end 2012 and above the system's average of 12.7% for the same period (which has increased from 10.4% at year-end 2012). A share of the increase in NPLs both for the bank and for the system as of September 2013, is the result of the reclassification of performing and substandard refinanced loans to the non-performing category as recommended by Bank of Spain, which highlights the higher risks associated with these loan types.

In addition to NPLs, Banco Sabadell has other problematic exposures related to real-estate assets the bank acquired over recent years. If included -- and again excluding the impact of the APS portfolio -- the NPL ratio rises to a high 20.5%. Furthermore, Moody's notes the high percentage of refinanced loans at the bank (13% of gross loans). The aggregation of refinanced loans (those not captured in the non-performing loan ratio) to the overall problem loan ratio (which then rises to 26.8% of total loans) indicates the existing balance-sheet pressures the bank faces.

In downgrading Banco Sabadell's ratings, Moody's has taken into account the EUR1.4 billion capital increase carried out by the bank in October 2013, which has resulted in an improved core Tier 1 capital ratio of 11.4% at end-September 2013 compared to 9.6% at end-June 2013. Despite this increase and the growth in provisions, Moody's considers that the bank's overall cushion in relation to its deteriorating asset quality remains weak, with limited visibility of a sufficient pick-up in earnings which could reverse this trend.

However, Moody's acknowledges Banco Sabadell's recurring earnings power, which, albeit having benefited from the bank's acquisitive strategy in 2013, compares favorably to those of its domestic peers. Moody's also notes Banco Sabadell's improved liquidity position with declining reliance on European Central Bank (ECB) funding; lower refinancing requirements, which will be namely addressed through the higher growth of deposits versus loans, as well as improved market access as reflected by the secured and unsecured market issuance made in 2013.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook that Moody's has assigned to the BFSR reflects the bank's vulnerability to a further weakening of its credit profile in light of the still modest growth expected for Spain in 2014. The negative outlook also captures the downside risks to Moody's macroeconomic forecasts, which could exert further credit-negative pressure, if these risks were to materialise.

---DOWNGRADE OF SUBORDINATED DEBT AND HYBRID RATINGS

Moody's has today downgraded the senior subordinated debt ratings of Banco Sabadell to B1 from Ba3 and the preferred shares ratings to Caa1 (hyb) from B3 (hyb), with a negative outlook, in line with the lowering of the bank's BCA.

WHAT COULD MOVE THE RATING UP/DOWN

An upgrade of Banco Sabadell's standalone BFSR is currently unlikely, given the negative outlook. An improvement of its BCA could be driven by clear visibility that asset quality was improving, together with a sustainable recovery in recurring earnings. Any significant macroeconomic growth beyond our central scenario of 0-1% in 2014 could underpin signs of a turnaround.

Downward pressure would be exerted on the bank's standalone BCA if (1) operating conditions worsen beyond our current expectations; (2) the bank's liquidity profile deteriorates significantly; and/or (3) its franchise weakens as the consolidation and restructuring of the banking system increases the focus of many peers on the SME sector.

The bank's debt and deposit ratings are linked to the standalone BCA, and any change to the BCA would likely also affect these ratings.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Jose Mori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Banco Sabadell to Ba2 from Ba1; negative outlook assigned
No Related Data.
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