DBRS Confirms Banco Comercial Português’ Senior Ratings at BB (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Banco Comercial Português, S.A.’s (BCP or the Bank) ratings, including the Issuer Rating and Senior Long-Term Debt & Deposit Rating at BB (high) and the Short Term Debt & Deposit rating at R-3, the subordinated debt rating of BB (low) and the BBB / R-2 (high) Critical Obligations Ratings (COR). All ratings have a Stable Trend. See the full list of ratings in the table at the end of this press release.

The Bank’s ratings reflect the challenges presented by its still high stock of non-performing loans (NPLs), as well as some improvements achieved by BCP in the last year, particularly in its domestic profitability, asset quality and capital. In particular, the Bank has made some progress in reducing NPLs and has strengthened its capital position, following the capital increase completed in February 2017 and the subsequent repayment of the state Cocos. However while DBRS recognises the progress achieved by the Bank with regards to asset quality, the stock of NPLs remains very elevated and the NPL ratio, as defined by the European Banking Authority (EBA), remained at a very high 17.5% at end-March 2017, above most European peers. The current rating level incorporates the expectation that there will be further progress in reducing the level of NPLs. The Bank’s ratings continue to reflect its strong franchise in Portugal where the Bank has meaningful market shares of around 17% for deposits and 18% for loans. The ratings also reflects the Bank’s satisfactory funding and liquidity position with a net loan to deposit ratio of around 97%, as calculated by DBRS at end-March 2017.

BCP has made significant efforts to reinforce capital levels in the last year and this was a key factor in the confirmation of the ratings, given DBRS’s view that further capital was required in the context of the high stock of NPLs. During 2016, BCP completed a EUR 175 million private placement of shares allowing a new shareholder, Fosun Industrial Holdings Limited to become a shareholder of the Bank. Following this, in February 2017, BCP completed a EUR 1.3 billion rights issue, part of these proceeds were used to reimburse the outstanding EUR 700 million of State CoCos. As a result, BCP’s fully loaded CET1 ratio improved to 11.2% at end-March 2017, from 9.6% at end-2016. At end-March 2017, BCP reported a CET1 (phased-in) ratio of 13.0% and a total capital ratio (phased-in) of 14.2%. Both ratios are well above the minimum regulatory requirements set under the Supervisory Review and Evaluation Process (SREP).

Asset quality remains a significant challenge for the Bank but DBRS notes the reduction in the high stock of non-performing loans (NPLs) in the last year. At end-March 2017, BCP had EUR 8.3 billion of NPLs in Portugal, as defined by the European Banking Authority (EBA). The reduction of NPLs has been accelerated since end-2015 and since then the level of NPLs has fallen by EUR 1.5 billion, driven by the Bank’s active management of the portfolio, but also benefitting from some improvement in the Portuguese economy. In addition net new entries of NPLs have continued to reduce QoQ. DBRS also notes that the coverage levels for the Group were reinforced to 40.5% at end-March 2017 from 32.3% at end-2015, which remains weak.

Profitability continued to improve in 2016 and 1Q17. BCP’s net income remains supported by strong contributions from its international operations, and in particular from its Polish subsidiary which recorded a profit of EUR 160 million in 2016 and EUR 32.6 million in 1Q17. The Bank’s domestic profitability remains weak with net income of EUR 9 million in 1Q17, albeit slightly up from EUR 1.9 million in 1Q16. Impairment charges (including loan loss provisions and other financial assets provisions) were lower in 1Q17, although DBRS notes that they still absorbed around 57% of Income before Provisions and Taxes (IBPT), but improved from 105% in 2016 (as calculated by DBRS).

RATING DRIVERS:
Positive rating pressure is unlikely in the medium-term, however if the Bank is able to demonstrate a longer-track record of sustained core profitability in Portugal together with a material reduction of NPL ratio would be viewed positively.

Negative rating pressure could arise if BCP fails to continue to reduce its level of NPLs or if domestic profitability does not improve.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). Other applicable methodologies include the DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company disclosures, Bank of Portugal and the European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Maria Rivas – Vice President - Global FIG
Rating Committee Chair: Roger Lister – Managing Director, Chief Credit Officer, Global FIG and Sovereign ratings
Initial Rating Date: June 10, 2011
Most Recent Rating Update: June 9, 2017

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