banco sabadell, s.a....note: q4 2019 and q1 2020 npa ratio is pro-forma, reflecting closing of npa...

FINANCIAL INSTITUTIONS

CREDIT OPINION22 May 2020

Update

RATINGS

Banco Sabadell, S.A.Domicile Sabadell, Spain

Long Term CRR Baa1

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt Baa3

Type Senior Unsecured -Dom Curr

Outlook Stable

Long Term Deposit Baa2

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Maria Jose Mori +34.91.768.8227VP-Sr Credit [email protected]

Alberto Postigo +34.91.768.8230VP-Sr Credit [email protected]

Carola Schuler [email protected]

Maria Cabanyes +34.91.768.8214Senior Vice [email protected]

Romy Van Rooij +44.20.7772.1638Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Banco Sabadell, S.A.Update to credit analysis

SummaryBanco Sabadell, S.A.'s (Banco Sabadell) Baa2 long-term deposit ratings and Baa3 long-termsenior unsecured debt ratings, with a stable outlook, reflect the bank’s ba2 Baseline CreditAssessment (BCA); the results of our Advanced Loss Given Failure (LGF) analysis, which leadsto a two-notch uplift for deposits and a one-notch uplift for senior debt; and a one-notchuplift for the deposit and senior debt ratings based on our assumption of moderate supportfrom the Government of Spain (Baa1 stable).

Banco Sabadell’s ba2 standalone BCA reflects the bank’s moderate asset-risk profile after thedivestment of the bulk of its foreclosed real estate assets portfolio and a decline in the stockof its nonperforming loans (NPLs); the group’s still-modest, but improved capital; its weakerprofitability, which has been affected by the additional provisions booked in the first quarterof 2020 in anticipation of the coronavirus outbreak-related losses; and its good liquidity.However, there are potential downside risks to the bank's credit profile, namely in terms ofasset quality and profitability, as a result of the deteriorating operating environment becauseof the coronavirus outbreak.

Exhibit 1

Rating Scorecard - Key financial ratios

4.6% 8.2%0.3%

23.2% 25.5%

0%

5%

10%

15%

20%

25%

30%

35%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Banco Sabadell, S.A. (BCA: ba2) Median ba2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1218529

https://www.moodys.com/credit-ratings/Banco-Sabadell-SA-credit-rating-600011156

https://www.moodys.com/credit-ratings/Spain-Government-of-credit-rating-704550?emsk=2&isMaturityNotDebt=0&isWithDrawnIncluded=0&emvalue=Government%20of%20Spain

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Moderate asset risk because of significant balance-sheet de-risking

» Sound buffer of liquid assets, mitigating the reliance on market funds

Credit challenges

» Capital score constrained by its low leverage ratio

» Strain on the bank's asset quality and profitability, stemming from the weakening operating environment

OutlookThe stable outlook on Banco Sabadell's deposit and senior unsecured debt ratings incorporates our expectation of a weakening in thebank's asset quality and profitability metrics over the next 12-18 months as a result of the deteriorating operating environment.

Factors that could lead to an upgradeBanco Sabadell’s BCA could be upgraded as a result of an improvement in its profitability and capital ratios, amid the current adversemacroeconomic conditions.

Upward pressure on Banco Sabadell’s deposit and senior debt ratings could emerge from changes in the loss given failure faced bythese securities.

Factors that could lead to a downgradeA worsening of Banco Sabadell’s asset quality and profitability from its current levels, prompted by the deterioration of the operatingenvironment, could lead to a lower BCA. A weakening in the bank's risk-absorption capacity as a result of lower capital ratios could alsotrigger a BCA downgrade.

Because the bank’s debt and deposit ratings are linked to its standalone BCA, any change in the BCA would also likely affect theseratings.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 22 May 2020 Banco Sabadell, S.A.: Update to credit analysis


Key indicators

Exhibit 2

Banco Sabadell, S.A. (Consolidated Financials) [1]

12-192 12-182 12-172 12-162 12-152 CAGR/Avg.3

Total Assets (EUR Million) 223,753.6 222,322.4 221,348.3 210,730.5 206,422.4 2.04

Total Assets (USD Million) 251,163.1 254,146.7 265,794.5 222,268.5 224,235.6 2.94

Tangible Common Equity (EUR Million) 7,481.4 6,710.7 8,306.4 7,821.0 7,411.3 0.24

Tangible Common Equity (USD Million) 8,397.9 7,671.2 9,974.3 8,249.2 8,050.9 1.14

Problem Loans / Gross Loans (%) 3.9 4.4 5.4 6.4 8.2 5.75

Tangible Common Equity / Risk Weighted Assets (%) 8.2 7.4 9.5 8.2 7.7 8.26

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 56.9 63.8 65.4 75.7 88.9 70.15

Net Interest Margin (%) 1.7 1.8 1.9 2.0 1.8 1.95

PPI / Average RWA (%) 1.8 1.9 2.5 2.3 3.1 2.36

Net Income / Tangible Assets (%) 0.4 0.2 0.4 0.3 0.4 0.35

Cost / Income Ratio (%) 65.9 66.1 57.6 57.9 48.2 59.15

Market Funds / Tangible Banking Assets (%) 23.2 27.9 30.3 25.5 25.3 26.45

Liquid Banking Assets / Tangible Banking Assets (%) 25.5 26.6 26.6 20.1 19.1 23.65

Gross Loans / Due to Customers (%) 103.8 108.4 113.4 115.8 119.7 112.25

[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scaleof reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Sources: Moody's Investors Service and company filings

ProfileBanco Sabadell, S.A. (Banco Sabadell) has a sound franchise, underpinned by its position as Spain’s fourth-largest banking group, with€223 billion in total assets as of the end of March 2020. The group is a universal bank that provides commercial banking, corporatebanking, private banking and asset management services. It also offers investment banking, retail banking, international trade,consumer finance, treasury and capital market, and corporate and structured finance products. The acquisition of TSB Bank plc (TSB,Baa2 negative, baa2)1 in the UK in 2015 enabled the bank to become a more diversified banking group after years of acquisitions in theSpanish market.

Banco Sabadell holds a nationwide franchise, with a reported market share of 8.1% in customer loans as of the end of January 2020.

Recent developmentsThe very rapid spread of the coronavirus outbreak has led Spain to enforce strict and widespread limitations on movement, which willhave a significant impact on the country's economy, affecting both corporate and individuals, with more acute consequences for thesmall and medium-sized enterprise (SME) sector, as well as the self-employed, which account for a significant portion of banks’ loanportfolios.

Therefore, we expect Spanish banks' asset quality and profitability to weaken because of an increase in the share of problem loans,although the duration of the disruption and its implications for the overall economy and the Spanish banking system are dependentupon the containment of the virus and a gradual recovery in economic activity, which remain uncertain.

To some extent, the economic consequences will be mitigated by government actions. On 18 March 2020, the Spanish governmentapproved a support package (Royal Decree Law 8/2020) that included specific measures for the banking system. The package includedthe introduction of state guarantees for an amount of up to €100 billion, as well as some unemployment benefits and extraordinarysubsidies for individuals and the self-employed. The government also approved payment deferrals on mortgage loans, which we view ascredit negative for Spanish banks’ asset quality and profitability.

On 12 March 2020, the European Central Bank (ECB) announced a series of measures to help the European Union (EU) economiesweather the widening effects of the coronavirus pandemic, temporarily increasing banks’ liquidity provision and lowering regulatorycapital and liquidity requirements. As part of these temporary measures, the ECB increased its targeted long-term refinancingoperations (TLTRO III) under more favourable terms and expanded the scope of its financial asset purchase programme.


https://www.moodys.com/credit-ratings/TSB-Bank-plc-credit-rating-600016357

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1219776





The temporary suspension of capital buffer requirements (capital conservation buffer and Pillar 2 guidance), together with the optionfor banks to allow their liquidity coverage ratio (LCR) to fall below 100%, gives banks greater flexibility and additional leeway to absorbthe economic impacts, such as asset-quality declines. Overall, the package aims to help banks continue to finance corporates and SMEssuffering from the effects of the coronavirus outbreak.

To reflect the growing strain from the coronavirus outbreak-related disruption, in March 2020, we changed the outlook on six Europeanbanking systems to negative, including in Spain.

Detailed credit considerationsModerate asset risk to be challenged by the deteriorating operating environmentWe assign a baa3 Asset Risk score to Banco Sabadell, in line with the Macro-Adjusted score. Our Asset Risk score reflects the bank'scurrent stock of nonperforming assets (NPA; measured as NPLs + foreclosed real estate assets), as well as our expectation that thecoronavirus outbreak will have a direct negative effect on its asset quality. We could reassess our current assessment of this factordepending on the breadth and severity of the shock, and the broad deterioration in credit quality that it will trigger.

As of the end of March 2020, the bank's NPL ratio was 3.8% (below the system average of 5.6%), stable compared with the 3.8%reported as of December 2019, but improved from 4.1% as of March 2019. In contrast, Banco Sabadell's NPA ratio2 increased slightly to4.9% from 4.8% as of the end of December 2019, driven by an increase in foreclosed assets. However, the bank's overall stock of NPAhas been declining and was €9.1 billion as of the end of March 2020, compared with €16.4 billion a year earlier.

Exhibit 3

Banco Sabadell's asset-risk indicators

0%

5%

10%

15%

20%

25%

0

5,000

10,000

15,000

20,000

25,000

30,000

Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018 Q4 2019 Q1 2020

€ m

illio

n

NPLs RE assets NPL ratio NPL ratio (system) NPA ratio NPA ratio (system)

Note: Q4 2019 and Q1 2020 NPA ratio is pro-forma, reflecting closing of NPA disposalsSources: Banco Sabadell, Bank of Spain and Moody's Investors Service

In Q1 2020, Banco Sabadell updated its IFRS9 macro model to incorporate the Bank of Spain's most recent macroeconomic forecasts,which triggered additional provisions of €213 million to cope with the higher expected losses because of the coronavirus outbreak. As aresult, Banco Sabadell's annualised cost of risk as of March 2020 increased to 93 basis points (bps), while the bank expects a cost of riskratio between 90 bps and 95 bps for full year 2020. Excluding the coronavirus outbreak-related provisions, the cost of risk would havereached 39 bps.

Banco Sabadell's reported coverage ratio (that is, loan-loss provisions/NPLs) increased to 52.8% as of the end of March 2020 from49.6% as of the end of December 2019. The coverage of NPA also increased slightly to a reported 49.6% as of the end of March 2020from 46.9% as of the end of December 2019.

In August 2019, Banco Sabadell announced the sale of 100% of Solvia Desarrollos Inmobiliarios (Solvia), its real estate developer. InDecember 2019, the sale of Banco Sabadell's bulk portfolio of real estate assets to Cerberus was concluded.


https://www.moodys.com/research/Moodys-Moodys-changes-outlook-on-six-European-banking-systems-to--PBC_1221171



Capital constrained by a low leverage ratioWe assess Banco Sabadell’s Capital at b1, one notch below the Macro-Adjusted score. Our Capital score reflects the bank's tangiblecommon equity (TCE)/risk-weighted assets (RWA), which was 8.3% as of year-end 2019 (the latest available data). We make a one-notch negative adjustment to Banco Sabadell’s capital score to reflect the bank's low leverage ratio (measured as TCE/tangible assets),which was 3.5% as of year-end 2019. The dividend retention policy and the supervisory measures announced by the ECB give bankssignificant additional leeway to absorb asset-quality declines because capital requirements have temporarily been lowered (see Recentdevelopments).

As of the end of March 2020, Banco Sabadell’s fully loaded Common Equity Tier 1 (CET1) capital ratio deteriorated slightly to 11.6%from 11.7% as of the end of December 2019. The deterioration was driven by fair value reserve adjustments (-9 bps) and organic capitaldeterioration (-4 bps) as the coronavirus outbreak-related provisions and negative market conditions led to lower profit.

In Q1 2020, Banco Sabadell announced the sale of several business units, which is likely to increase the bank’s fully loaded CET1 ratio,such as its asset management unit (35 bps) and its institutional depositary business (7 bps). If these business disposals are considered,together with the sale of Solvia (5 bps), the CET1 ratio would increase to a pro forma value of 12.1%.

The bank decided not to pay a 2020 interim dividend, following the ECB's capital retention recommendations.

Exhibit 4

Banco Sabadell's capital metrics

0%

2%

4%

6%

8%

10%

12%

14%

2015 2016 2017 H1 2018 2018 H1 2019 2019

CET1 ratio - fully loaded Moody's TCE ratio Moody's leverage ratio

Sources: Banco Sabadell and Moody's Investors Service

As of the end of December 2019, Banco Sabadell was subject to a universal capital conservation buffer of 2.50% and a 0.25% bufferfor being identified as an other systemically important institution in Spain. Effective March 2020, the Bank of England lowered thecountercyclical buffer applicable to all banks to 0%, which together with the capital relief measures announced by the ECB, decreasedBanco Sabadell's CET1 Supervisory Review and Evaluation Process (SREP) requirement to 8.52%. Despite lower capital requirements,Banco Sabadell's capital targets remained unchanged and the bank expects it to be maintained at around 12% over the next few years.

Our more conservative capital assessment relative to regulators' capital ratios is primarily explained by (1) regulators not deductingconvertible deferred tax assets from the capital base, while we give benefit, as a capital component, to only a share of them (seeFinancial Statement Adjustments in the Analysis of Financial Institutions); and (2) a more conservative risk weighting that we apply tothe sovereign exposures compared with regulators' risk weighting of 0% (see Moody’s Adjustment to Increase the Risk Weightings ofSovereign Debt Securities in the Analysis of Banks: Frequently Asked Questions).

Profitability has suffered from a steep increase in loan-loss provisions on the expectation of higher credit losses and adeteriorating operating environmentWe assess Banco Sabadell’s Profitability at b2, two notches below its Macro-Adjusted score. We have made this adjustment to reflectour expectation that the adverse macroeconomic scenario will result in lower operating revenue and an increased cost of credit risk forBanco Sabadell, which will trigger a deterioration in its profitability indicators.






As of the end of March 2020, Banco Sabadell reported net profit of €94 million, a 64% decrease from the €258 million reported ayear earlier, mainly driven by the €213 million coronavirus outbreak-related provisions. As of the end of March 2020, the group's pre-provision profit increased by 8.4% year over year, explained by the reduction in nonrecurrent expenses and by higher net tradingincome, which increased by 124% to a total €151 million, principally boosted by the gains on the disposal of Italian sovereign debt.

The net interest income declined by 1.8% year over year (-2.1% if we exclude TSB), but this was mitigated by the 1.9% increase in netfee and commission income, driven by service fees. In Q1 2020, operating expenses remained flat at around €778 million versus theyear-earlier period, but showed a sharp decline of 8% from the previous quarter, mainly explained by IT migration-related costs atTSB and lower general expenses. The bank is committed to deliver on its cost-efficiency plan, with a further intention of reducing thenumber of branches, and expects operating costs for 2020 to decrease further as a result of cost savings. Banco Sabadell's reportedcost-to-income ratio3 was 49.3% as of the end of March 2020, compared with 52.1% a year earlier.

Exhibit 5

Banco Sabadell's top-line earnings

0%

10%

20%

30%

40%

50%

60%

70%

-4,000

-2,000

0

2,000

4,000

6,000

8,000

2015 2016 2017 2018 2019 Q1 2019* Q1 2020*

€ m

illio

n

NII F&C Trading income Other income Operating Expenses Non recurrent expenses Cost-to-income

* AnnualizedSources: Banco Sabadell and Moody's Investors Service

TSB reported a small loss of £7 million in Q1 2020. The results included acquisition-related amortisation expenses allocated to depositsand brand intangible assets, and £20 million coronavirus related provisions4. When excluding the prorated amount of the amortisationexpenses, TSB's earnings on a standalone basis were close to £0.

Exhibit 6

Banco Sabadell's profitability metrics

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2016 2017 2018 2019 Q1 2020

€ m

illio

n

Adj. PPI (annualised) Adj. net income (annualised) Adj. net income / Tangible assets Cost of risk (adj.)




Reliance on market funds mitigated by a sound buffer of liquid assetsWe assess Banco Sabadell’s Combined Liquidity score at baa3, based on its wholesale funding structure and stock of liquid assets.

These ratios are calculated for Banco Sabadell, excluding TSB, based on our assessment that liquidity between the group and itssubsidiary is not fungible and that the group intends to keep TSB's funding totally independent of its parent. We also make a one-notchnegative adjustment to Banco Sabadell’s liquid asset ratio because of asset encumbrance.

Moody's adjusted market funds/tangible banking assets was 24.4% as of the end of December 2019, which is equivalent to a baa3score.

Banco Sabadell reported a loan-to-deposit ratio of 100% as of the end of March 2020, broadly stable relative to that in recent quarters.On a consolidated basis, customer deposits represented 72% of total funding. Its wholesale debt5 is mainly composed of mortgagecovered bonds (55% of the total), senior debt (22%), subordinated debt (14%), securitisations (7%) and commercial paper (2%). Thebank has modest debt redemptions of €2.3 billion (the bulk being mortgage covered bonds) for the remaining months of 2020, whichrepresent around 11% of its outstanding debt.

The bank's ECB funding was €15.3 billion as of the end of March 2020, of which €13.5 billion is TLTRO II funds, with €3 billion maturingin 2020 and €10.5 billion in 2021. The bank has not withdrawn any TLTRO III funds yet, which are available up to €27 billion.

Banco Sabadell is subject to a Minimum Requirement for own funds and Eligible Liabilities (MREL) determined by the Single ResolutionBoard of 8.3% of the Total Liabilities and Own Funds (TLOF) effective from 1 January 2020. The bank has confirmed that it is currentlyMREL compliant. During 2019 and Q1 2020, Banco Sabadell issued €4.3 billion of MREL-eligible instruments: €1.5 billion of senior non-preferred debt, €2.5 billion of senior preferred debt and €300 million of Tier 2, as well as the €1 billion consumer loan securitisationexecuted in Q3 2019, in line with its funding plan. The bank has no immediate issuance needs because it is already MREL compliant.

As mentioned, we have adjusted liquid assets/tangible banking assets to exclude TSB as well as encumbered assets, which results in aLiquid Resources score of baa3, one notch below the Macro-Adjusted score of baa2.

Banco Sabadell's liquid assets buffer was €45 billion as of the end of March 2020 (€41 billion of total liquid assets available6 and €4billion of other assets eligible as ECB collateral). The bank's LCR was 172% as of the end of March 2020.

Exhibit 7

Banco Sabadell's funding and liquidity indicators

0%

5%

10%

15%

20%

25%

30%

35%

Q4 2015 Q4 2016 Q4 2017 Q2 2018 Q4 2018 Q2 2019 Q4 2019

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

€ m

illio

n

Adj. customer deposits Market funding / TBA Liquid assets / TBA


Global monetary easing and related initiatives triggered by the coronavirus outbreak will help relieve the liquidity pressure on banks(see Recent developments).

Environmental, social and governance considerationsIn line with our general view for the banking sector, Banco Sabadell has a low exposure to environmental risks. See our Environmentalrisk heat map for further information.





Overall, we expect banks to face moderate social risks. This includes considerations in relation to the rapid and widening spreadof the coronavirus outbreak, given the substantial implications for public health and safety, and the deteriorating global economicoutlook, creating a severe and extensive credit shock across many sectors, regions and markets. See our Social risk heat map for furtherinformation.

For Spanish banks, we have identified the potential litigation around the IRPH (Mortgage Loan Reference Index, Índice de Referenciade Préstamos Hipotecarios) index reference rate as a key social risk. On 3 March 2020, the European Union Court of Justice (ECJ) ruledthat the use of the index falls within the remit of the European Union's directive on unfair terms (Directive 93/13/EEC), and, therefore,Spanish courts can consider it abusive. The number of borrowers who take legal action against banks and Spain's judicial stance will bethe main determinant of the ECJ ruling's final effect on Spain's banks. As of December 2019, Banco Sabadell's total exposure to thesetype of loans amounted to €751 million, or equivalent to 0.5% of gross loans. However, litigation risks could also apply to already-paidmortgages or past interest payments under existing contracts.

Governance is highly relevant for Banco Sabadell, as it is to all banks in the industry. Corporate governance weaknesses can lead to adeterioration in a bank’s credit quality, while governance strengths can benefit its credit profile. We do not have any particular concernaround Banco Sabadell's governance, and we believe that the bank displays an appropriate risk management framework commensuratewith its risk appetite. Nonetheless, corporate governance remains a key credit consideration and requires ongoing monitoring.

Support and structural considerationsLoss Given Failure (LGF) analysisBanco Sabadell is subject to the EU Bank Recovery and Resolution Directive, which we consider an operational resolution regime. Weassume a residual TCE ratio of 3% and post-failure losses of 8% of tangible banking assets, a 25% run-off in junior wholesale depositsand a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt and a 26%proportion of junior deposits. These metrics are in line with our standard assumptions.

For Banco Sabadell's deposits and senior unsecured debt, our LGF analysis indicates a very low and low loss given failure for depositsand senior unsecured debt, respectively, which lead us to position Banco Sabadell's Preliminary Rating Assessment two notches abovethe Adjusted BCA for deposits and one notch above the Adjusted BCA for senior debt. Please refer to the Loss Given Failure andGovernment Support table at the bottom of the scorecard.

For junior securities, our LGF analysis confirms a high level of loss given failure, given the small volume of debt and limited protectionfrom more subordinated instruments and residual equity. We also incorporate additional downward notching for preference shareinstruments to reflect coupon suspension risk, ahead of a potential failure.

Government support considerationsWe assign a moderate probability of government support for the fourth-largest bank in Spain, resulting in one notch of uplift for thedeposit and senior debt ratings.

Counterparty Risk Ratings (CRRs)CRRs are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRRliabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratingsassigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities mightbenefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralisedportion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchaseagreements.

Banco Sabadell's CRRs are positioned at Baa1/Prime 2The CRRs are positioned four notches above the Adjusted BCA of ba2, reflecting the extremely low loss given failure from the highvolume of instruments that are subordinated to CRR liabilities, which leads to three notches of uplift and one notch of uplift from amoderate likelihood of systemic support.

Under our methodology, a bank's CRR will typically not exceed the sovereign rating by more than two notches. Therefore, Spanishbanks' maximum achievable CRR is A2/Prime-1.






Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default, and apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

Banco Sabadell's CR Assessment is positioned at Baa1(cr)/Prime-2(cr)The CR Assessment, before government support, is positioned three notches above the Adjusted BCA of ba2, based on the bufferagainst default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 18%of tangible banking assets. The main difference in our Advanced LGF approach used to determine instrument ratings is that the CRAssessment captures the probability of default on certain senior obligations, rather than the expected loss. Therefore, we focus purelyon subordination and take no account of the volume of the instrument class.

The CR Assessment benefits from one notch of government support uplift, in line with our support assumptions on deposits andsenior unsecured debt. Our moderate probability of government support reflects our view that any support provided by governmentalauthorities to a bank, which benefits senior unsecured debt or deposits, is very likely to benefit operating activities and obligationsreflected by the CR Assessment as well. This is consistent with our belief that governments are likely to maintain such operations as agoing concern to reduce contagion and preserve a bank's critical functions.

Methodology and scorecardAbout Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When read inconjunction with our research, a fulsome presentation of our judgement is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.



Rating methodology and scorecard factors

Exhibit 8

Banco Sabadell, S.A.

Macro FactorsWeighted Macro Profile Strong - 100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 4.6% baa3 ←→ baa3 Expected trend

CapitalTangible Common Equity / Risk Weighted Assets(Basel III - transitional phase-in)

8.2% ba3 ←→ b1 Nominal leverage

ProfitabilityNet Income / Tangible Assets 0.3% ba3 ↓ b2 Expected trend

Combined Solvency Score ba2 ba3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 23.2% baa3 ←→ baa3 Market

funding qualityLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 25.5% baa2 ←→ baa3 Asset encumbrance

Combined Liquidity Score baa3 baa3Financial Profile ba2Qualitative Adjustments Adjustment

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint Baa1BCA Scorecard-indicated Outcome - Range ba1 - ba3Assigned BCA ba2Affiliate Support notching 0Adjusted BCA ba2

Balance Sheet in-scope(EUR Million)

% in-scope at-failure(EUR Million)

% at-failure

Other liabilities 53,244 29.9% 63,664 35.7%Deposits 110,629 62.1% 99,345 55.8%

Preferred deposits 81,866 46.0% 77,772 43.7%Junior deposits 28,764 16.1% 21,573 12.1%Senior unsecured bank debt 4,829 2.7% 4,319 2.4%Junior senior unsecured bank debt 1,500 0.8% 3,000 1.7%Dated subordinated bank debt 1,408 0.8% 1,283 0.7%Preference shares (bank) 1,150 0.6% 1,150 0.6%Equity 5,343 3.0% 5,343 3.0%Total Tangible Banking Assets 178,104 100.0% 178,104 100.0%



De Jure waterfall De Facto waterfall NotchingDebt ClassInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De Jure De FactoLGF

NotchingGuidance

vs.Adjusted

BCA

AssignedLGF

notching

AdditionalNotching

PreliminaryRating

Assessment

Counterparty Risk Rating 20.6% 20.6% 20.6% 20.6% 3 3 3 3 0 baa2Counterparty Risk Assessment 20.6% 20.6% 20.6% 20.6% 3 3 3 3 0 baa2 (cr)Deposits 20.6% 6.1% 20.6% 8.5% 2 3 2 2 0 baa3Senior unsecured bank debt 20.6% 6.1% 8.5% 6.1% 2 0 1 1 0 ba1Junior senior unsecured bank debt 6.1% 4.4% 6.1% 4.4% -1 -1 -1 -1 0 ba3Dated subordinated bank debt 4.4% 3.6% 4.4% 3.6% -1 -1 -1 -1 0 ba3Non-cumulative bank preference shares 3.6% 3.0% 3.6% 3.0% -1 -1 -1 -1 -2 b2

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 3 0 baa2 1 Baa1 Baa1Counterparty Risk Assessment 3 0 baa2 (cr) 1 Baa1(cr)Deposits 2 0 baa3 1 Baa2 Baa2Senior unsecured bank debt 1 0 ba1 1 Baa3Junior senior unsecured bank debt -1 0 ba3 0 Ba3Dated subordinated bank debt -1 0 ba3 0 Ba3Non-cumulative bank preference shares -1 -2 b2 0 B2 (hyb)[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody’s Investors Service



Ratings

Exhibit 9

Category Moody's RatingBANCO SABADELL, S.A.

Outlook StableCounterparty Risk Rating Baa1/P-2Bank Deposits Baa2/P-2Baseline Credit Assessment ba2Adjusted Baseline Credit Assessment ba2Counterparty Risk Assessment Baa1(cr)/P-2(cr)Senior Unsecured -Dom Curr Baa3Junior Senior Unsecured -Dom Curr Ba3Senior Subordinate -Dom Curr (P)Ba3Pref. Stock Non-cumulative -Dom Curr B2 (hyb)

BANCO SABADELL S.A., LONDON BRANCH

Outlook StableCounterparty Risk Rating Baa1/P-2Bank Deposits -Dom Curr Baa2/P-2Counterparty Risk Assessment Baa1(cr)/P-2(cr)Commercial Paper P-3

CAM GLOBAL FINANCE

Outlook StableBkd Senior Unsecured Baa3

TSB BANK PLC

Outlook NegativeCounterparty Risk Rating Baa1/P-2Bank Deposits -Dom Curr Baa2/P-2Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa2Counterparty Risk Assessment A3(cr)/P-2(cr)Issuer Rating -Dom Curr Baa2

TSB BANKING GROUP PLC

Outlook NegativeIssuer Rating -Dom Curr Baa3Subordinate -Dom Curr Baa3

Source: Moody's Investors Service



Endnotes1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment

2 NPA ratio shown for December 2019 and March 2020 are pro-forma, reflecting closing of NPA disposals

3 Excluding amortisation expenses.

4 These amount to around £40 million annually, on a pretax basis.

5 As reported by Banco Sabadell, that is, excluding the ECB and Bank of England's funding, retail bonds, repos and interbank funds.

6 As defined by Banco Sabadell in its financial statements.



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banco sabadell, s.a....note: q4 2019 and q1 2020 npa ratio is pro-forma, reflecting closing of npa...

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