Fitch Affirms Sovereign Bancorp on Balance Sheet Restructuring.

NEW YORK -- Fitch Ratings affirms the long-term Issuer Default Rating (IDR) of Sovereign Bancorp, Inc. (SOV) at 'BBB-' following SOV's announcement to restructure its balance sheet and improve operating efficiency. The Rating Outlook remains Stable. A complete list of ratings is provided at the end of this release.

It appears as though new management has been given wide latitude to take appropriate steps to better position SOV financially for 2007. Recent initiatives are expected to enhance profitability by shedding low margin loans and securities, as well as improving the cost structure. Further, these actions will reduce interest rate risk, decrease existing NPAs, and sharply lower the level of wholesale borrowings in the funding mix. However, 2007 could prove to be a more challenging banking environment with the potential for additional problem loans and the likelihood of continued yield curve pressures.

SOV's latest balance sheet restructuring will entail charges totaling $230 million to $244 million (after-tax) in 4Q06 from loan sales of $9.5 billion and securities sales of $2 billion. This is on top of considerable charges announced last week for operating efficiency measures, a portion of which will be taken in 4Q06. The largest component of total charges will be an approximate $180 million (after-tax) charge stemming from the sale of the $4.5 billion correspondent home equity portfolio (a large portion of NPAs and charge-offs in recent periods). Other categories of loan sales include low-margin residential mortgages and multi-family loans. The bulk of loan sales are likely to be completed in 1Q07. Asset sales are primarily being used to pay down high-cost wholesale borrowings, although proceeds from $1.5 billion of securities sales will be reinvested for collateral and liquidity purposes.

Given bottom line losses, capital ratios are anticipated to dip in 4Q06 from already low levels when compared to most major banks in the United States. However, once the asset sales are complete (primarily in 1Q07), capital ratios are expected to be bolstered by a consequent reduction in risk-assets. Thereafter, internal capital generation and restrained asset growth should allow capital ratios to steadily improve further.

The Stable Rating Outlook factors in a return to profitability in 2007, stable asset quality, and an improved capital position by year-end 2007. Ratings could be positively affected if profitability and capital ratios improve to levels more line with industry norms. SOV's sizable franchise in the Northeast United States remains a favorable rating factor. SOV's Support rating of a '3' continues to be underpinned by a moderate probability of support from Banco Santander, SOV's largest shareholder, in the event of need.

Fitch has affirmed the following ratings with a Stable Outlook:

Sovereign Bancorp, Inc.

--Long-term IDR at 'BBB-';

--Short-term issuer at 'F3';

--Senior debt at 'BBB-';

--Individual 'C';

--Support rating at '3'.

Sovereign Bank

--Long-term IDR at 'BBB';

--Short-term Issuer at 'F2';

--Long-term Deposits at 'BBB+';

--Senior Subordinated at 'BBB-';

--Short-term Deposits at 'F2';

--Individual at 'B/C';

--Support rating at '3'.

Sovereign Capital Trust I, IV-VI

--Preferred Stock at 'BB'.

ML Capital Trust I

--Preferred Stock at 'BB'.

Sovereign Real Estate Investment Trust

--Preferred Stock at 'BB+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.