BBVA's Strategic Gambit: Can the Sabadell Deal Secure a Credit Rating Upgrade?

The merger of Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Sabadell has positioned BBVA at a critical juncture. In May 2023, Fitch Ratings placed BBVA on a Positive Rating Watch, signaling potential credit improvement if the deal delivers on its strategic and financial promises. For investors, this marks a pivotal test of BBVA’s ability to consolidate its dominance in Spain’s retail banking sector while navigating regulatory hurdles and integration risks.

The Strategic Rationale: A Play for Scale and Efficiency

The acquisition of Sabadell’s domestic operations, finalized in June 2023, aims to solidify BBVA’s position as Spain’s second-largest bank by assets, behind only Santander. The merged entity now commands a EUR1.0 trillion balance sheet, enhancing its risk diversification and systemic stability. Fitch highlights the deal’s strategic fit: BBVA’s lean operational structure (with a non-interest expense-to-income ratio of 54% in 2023, below peers’ 60–65%) could reengineer Sabadell’s cost base, unlocking EUR1.2 billion in annual synergies by 2025.

The merger also addresses BBVA’s long-term goal of focusing on core markets. By divesting Sabadell’s UK subsidiary, TSB (which accounted for 23% of Sabadell’s assets in 2024), BBVA aims to redirect capital toward high-growth regions like Mexico and Turkey. Proceeds from TSB’s sale—estimated at EUR2.5–3 billion—could bolster its Common Equity Tier 1 (CET1) ratio, a key Fitch metric. Current data shows BBVA’s CET1 ratio stood at 13.3% in Q1 2025, just above Fitch’s 13% threshold.

The Risks: Regulatory Scrutiny and Execution Challenges

While the strategic benefits are clear, risks loom large. Spain’s antitrust regulator, the CNMC, has imposed strict conditions to mitigate competition concerns. BBVA must divest 213 branches in high-concentration regions like Catalonia by Q2 2025, or face penalties or deal invalidation. Failure to meet this deadline could derail synergies and trigger a EUR300 million fine.

Political headwinds also persist. Spain’s government, under Prime Minister Sánchez, has opposed the merger due to fears of reduced competition. The CNMC’s second-phase review, initiated in late 2024, scrutinized potential SME lending declines and branch closures. BBVA’s proposed remedies—such as no branch closures within 300 meters of an alternative—have drawn criticism from Sabadell’s CEO, who called them “insufficient.”

Meanwhile, macroeconomic pressures in Spain, including high inflation and household debt, could strain BBVA’s profitability. A weak CET1 ratio post-merger or delayed synergies would likely lead Fitch to remove the Positive Rating Watch without an upgrade.

The Timeline: Hinge Points for Investors

• Q2 2025: Divestment of 213 branches must be completed.
• Late 2025: Shareholder vote requiring 50.01% approval.
• 2026: Realization of EUR500–700 million in annual synergies.

Fitch’s final rating decision hinges on these milestones. If BBVA meets the branch-sale deadline and maintains a CET1 ratio above 13%, an upgrade to BBB+ or A- could follow. However, regulatory delays or operational missteps might leave BBVA’s rating unchanged or even pressured if Spain’s banking concentration (Herfindahl Index of 0.133) sparks broader systemic concerns.

Conclusion: A High-Stakes Gamble with Clear Payoffs

BBVA’s Sabadell deal is a double-edged sword. On one hand, it creates a EUR1.0 trillion banking giant with enhanced scale, efficiency, and strategic focus—a recipe for Fitch to upgrade its rating. The synergies and TSB sale proceeds provide a clear path to maintaining capital adequacy.

On the other hand, regulatory and execution risks are existential. The Q2 2025 branch-sale deadline is non-negotiable, and political opposition remains a wildcard. Investors should monitor:
- Regulatory approvals: CNMC’s final decision by mid-2025.
- CET1 ratio trends: Whether BBVA sustains 13.3%+ despite integration costs.
- TSB divestment progress: Impact on capital and investor sentiment.

Should BBVA clear these hurdles, the merger could propel its credit rating upward, unlocking cheaper funding and better access to capital markets. A missed target, however, could leave the bank in a weaker position, with lingering uncertainty. For now, the Positive Rating Watch remains a cautiously optimistic bet—one that demands close scrutiny of 2025’s deadlines and outcomes.

In the end, BBVA’s success will be measured not just in balance sheet size, but in its ability to execute flawlessly in a high-stakes regulatory and economic environment. Investors would do well to stay vigilant as the clock ticks toward mid-2025.