Credit Report - Banco de Sabadell: Sabadell reveals new medium-term plan

  • Banco de Sabadell revealed its new strategic medium-term plan 2021-2023 today: the group is targeting a RoTE of more than 6% by 2023 (2020: around 0%). Sabadell intends to deleverage international exposures to fund growth in its domestic business. It expects core revenue to grow, with net interest income (NII) at a low single-digit CAGR (2020-23E) and fee income at a mid-single-digit rate, while it sees costs at EUR 2.9bn by 2023, around EUR 100mn lower than in 2020. The plan also anticipates a credit cost of risk at around 45bp by 2023 (2020: 86bp), a modest increase in the gross non-performing asset (NPA) ratio to below 5% (end-2020 : 4.4%) and a stable fully-loaded CET 1 ratio, at above 12% by 2023 (end-2020: 12.0%), implying an MDA buffer of more than 350bp.
  • Funding: Having reported an MREL ratio of 24.27% at the end of 1Q21, Sabadell said it is already compliant with the minimum requirement for own funds and eligible liabilities (MREL) and the related subordination requirement. According to the group’s funding plan, MREL levels will be pushed to around 26% of RWA by end-2023. Sabadell plans around EUR 1bn of net issuance of covered bonds and securitization (combined) per year. Net annual issuance of senior preferred (SP) and senior non-preferred (SNP) debt will not exceed EUR 1bn. The group intends to keep Tier-2 and AT1 buckets full and anticipates issuance of ESG bonds on a regular basis.
  • Our view: After Sabadell suffered the largest yoy drop in pre-provision operating profit among the larger Spanish peers (down close to 20% in 1Q21), it will focus on improving efficiency (above all in Spain), keeping its leading position in SMEs and achieving growth in some areas (retail & business in Spain, mortgages at its UK unit TSB), as broadly expected. With confidence growing that the worst impact of the COVID-19 pandemic may have passed, and the worst forecasts avoided, Sabadell’s management struck a sanguine tone about the economic development and the outlook for commercial activity. The implementation of further cost savings and a less-dense branch network in Spain appear reasonable, as Sabadell’s cost/income ratio still compares poorly with that of its domestic peers, but we think savings targets could have been even more ambitious. Due to its business mix, asset quality remains among the main risks for Sabadell, which has a relatively large exposure to corporates, SMEs and the self-employed. We therefore remain cautious with respect to the longer-term impact of the COVID-19 pandemic on Sabadell’s asset quality, but we acknowledge that the outlook for the coming quarters appears to be brightening. Sabadell's fully-loaded CET1 ratio will remain on a stable trajectory around the 12% mark, which looks adequate and positive, from a credit perspective. Overall, we are confident that Sabadell’s new management team is on the right path to successfully overcome the challenges the group is facing. We think that the group’s ability to generate non-interest income will be of particular importance in the coming quarters, as the NII target could prove challenging. Moreover, we do not expect Sabadell to divest TSB in the short term, as it will likely wait on such transaction to maximize value; however, a sale may still be in the cards once further turnaround progress at TSB has been achieved.
  • Relative value: We like Sabadell’s senior notes; our preferred picks are SABSM 0.625% 11/24-25 (--/BBB/BBB) and SABSM 1.75% 5/24 (Ba3,BBB-,BBB-), which we regard as attractively valued given the bank’s fundamentals.

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