Sabadell is starting to stabilise

Sabadell

Société Générale | The situation seems to be calming down in TSB and there is more visibility. The IT problems and the negative PR will have an impact on the UK franchise, which we hope will be profitable this year. It looks like Sabadell is beginning to stabilise now, we expect a more limited impact from 2019 and reiterate our Neutral stance.

Due to the IT problem, we are forecasting a decline in credit growth from 7.5% year-on-year in 2017 to 3% in 2018. We also expect some deposits outflows (around 5%) – the bank will try to offset this with higher yields.

We are cutting our earnings estimate for TSB from £100 million for 2018e to break-even and lowering our forecast for 2019-20e by 4%. The trend in the Q1’18 results leads us to cut underlying EPS by 10% in 2018, but we are not changing our estimates for 2019-20 (-1% on average).

We believe the quality of Sabadell’s assets remains a key to its price. A block sale of legacy assets would be very positive, but the lack of progress in this area was a disappointment in the Q1 results.