FINANCIALS: Sabadell: Positive For UK Lenders: Spread Risks To Downside

Sabadell (SABSM : BBB- pos/BBB) conf call; mgmt worked hard to sell a strong equity story but risks still seemed stacked to the downside for spreads which have tightened meaningfully on the BBVA bid. The timeline on that looks like it will extend to around year-end. The UK margin story is a positive for UK lenders, in our view.

• Guidance improvements: aside from the explicit upgrades outlined in our earlier comments, there’s a definite overriding bullish nature to mgmt’s comments this time around, largely based on an improving growth in the balance sheet, in our view. Our sense is that they have thrown everything at selling a strong equity story to defend against the BBVA bid.
• Margins: group margins were clearly better than expected but, within that, TSB in the UK seems the real star with lending margins something around 10bp higher q/q. This degree of re-pricing, whilst also generating net lending growth, is a positive for the UK domestic lenders (Lloyds, Nationwide BS, Santander UK, Virgin Money, Yorkshire BS).
• Equity distribution: perhaps most importantly for credit spreads, mgmt are going much further in explicit guidance here before indicating it will pay down excess capital (towards 13% CET1 ratio) more quickly than we had previously seen. With spreads having done so well, if the BBVA bid does fail, this has to be seen as downside risk, in our view. The bid timeline remains long, however, with a SAB shareholder vote unlikely until around year-end.