Banco Sabadell acquisitions of Banco Gallego and Lloyds’ Spanish subsidiaries will be credit positive for Sabadell’s covered bonds because they increase overcollateralisation and improve the quality of the cover pool, Moody’s said yesterday (Monday).

Spain’s Banco Sabadell finalised the acquisition of Banco Gallego and Lloyds’ Spanish subsidiaries on 14 March, according to Moody’s.

The rating agency said that the inclusion of Banco Gallego’s and Lloyds España’s assets and liabilities will increase the size of Sabadell’s mortgage cover pool from Eu61.9bn to Eu65bn. Moody’s noted that Banco Sabadell will assume just Eu465m of covered bonds from the acquisition, with Lloyds España having never issued and Banco Gallego having only a limited volume of outstanding issues.

As a result, total overcollateralisation (OC) and eligible OC are expected to increase by around 17% and 13%, respectively, said the rating agency.

According to Moody’s, Banco Gallego’s pool weighted-average-loan-to-value is lower than that of Banco Sabadell’s pool (56% versus 59%) and the portion of commercial loans in Gallego’s total cover pool is also lower than that in Banco Sabadell’s, at 39% compared with 50.5%.

“This is credit positive, because we typically consider these commercial mortgage loans more risky than residential mortgage loan portfolios, which are more granular and tend to exhibit lower default rates,” said the rating agency.

The rating agency added that the portion of the Lloyds España total cover pool in respect of commercial loans is expected to be much lower than Banco Sabadell’s.

“Furthermore, the portion of the total cover pool comprised of eligible loans in Banco Gallego is higher than in Banco Sabadell (72% versus 63%), which indicates better quality,” the rating agency said. “It is expected to be higher again in Lloyds España.”

Moody’s noted that Banco Sabadell has a “proven track record of successful acquisition integration,” and as such does not expect the latest acquisition to present any technological or servicing challenges.

Banco Sabadell has acquired three other banks since 2010 – Banco Guipuzcoano in 2010, Banco CAM in 2012, and BMN-Caixa Peneds in June last year. Moody’s said that these acquisitions have allowed Banco Sabadell to increase its total and eligible cover pool by more than 100% since 2010.