DBRS Confirms Caixa Geral de Depósitos Issuer Rating at BBB (Low); Trend Now Positive

DBRS Ratings Limited (DBRS) confirmed the ratings of Caixa Geral de Depósitos, S.A. (CGD or the Group), including its Long-Term Issuer Rating of BBB (low), the Short-Term Issuer Rating of R-2 (middle), the BBB (high) / R-1 (low) Critical Obligations Ratings (COR), and the Dated Subordinated Notes of BB. The trend on all ratings has been changed to Positive from Negative, except for the trend on the R 1 (low) COR, which has been changed to Stable from Negative. The Intrinsic Assessment (IA) for the Group is BBB (low), while its Support Assessment remains SA3. A full list of the rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of CGD’s Issuer Rating at BBB (low) reflects DBRS’s view that the significant challenges faced by the Group have materially reduced and management is on track in implementing the strategic plan. Over the last year the Group has demonstrated a significant improvement in relation to its risk profile and profitability, including returning to profitability in FY17, and showing good progress with regard to domestic core revenues. In addition, Non-Performing loans (NPLs), which were a key consideration for the previous Negative trend, have materially reduced. CGD’s ratings continue to reflect its leading franchise position in Portugal, where it has significant market shares for loans and deposits. The ratings also consider the Group’s sound capital and liquidity and funding position, laregly underpinned by its strong customer retail deposit base.

The Positive trend reflects DBRS’s view, that boosted by the improved economic conditions in Portugal, the Group’s good NPL coverage and its improving ability to generate capital through retained earnings, the Group should be able to further accelerate the reduction of NPLs in coming quarters to levels more in line with European peers. Moreover, the Positive trend incorporates DBRS’s expectations that the Group will improve its domestic profitability to levels close to its franchise potential as the leading bank in Portugal, where it has predominant market shares for loans and deposits.

RATING DRIVERS

Positive rating pressure would require a track record of continued progress in domestic profitability together with continued reduction of Non-Performing loans (NPLs). Negative rating pressure would arise if domestic profitability and capital weakens significantly as a result of net operating losses and asset quality deterioration.

RATING RATIONALE

DBRS considers CGD has achieved a key milestone in 2017 when it returned to profitability at the Group level after 6 years of continued net losses. The improvement continued in 1Q18, when the Group posted net positive results in its domestic operations, following several quarters with net losses. After many years of profitability negatively affected by significant loan impairment charges, and helped by the significant level of provisions made in 2016, the Group reported net attributable income of EUR 51.9 million in 2017, and EUR 68.0 million in 1Q18. In 2017, results were boosted by a significant improvement in domestic performance, although the group reported a net loss in Portugal, mostly affected by one-off costs of around EUR 564 million (net of tax) related mainly to staff reduction programmes in Portugal and provisions to cover the potential sale of some international operations. The Group’s international operations from Macau and France helped to offset the domestic net loss. In 1Q18, further progress was seen in domestic profitability, with results driven by significantly lower provisions and core revenue growth.

CGD has significantly reduced its NPLs in the last 15 months, however, despite this progress, DBRS continues to view the NPL ratio as high and above most European peers. The stock of NPLs (as defined by the European Banking Authority, EBA and calculated by DBRS) was down by a material 31% on an accumulated basis since end-2016 to 1Q18 to EUR 7.3 billion. Around 25% reduction of the stock of NPLs was achieved in 2017. The NPL ratio was 12.6% of gross loans to customers at end-March 2018, down from the 15.4% at end-2016.

CGD’s capital position has significantly improved since 2016. This is largely due to the capital injection received in 2017 but DBRS also recognises that the Group has strengthened its capital levels thanks to the significant progress in de-risking the balance sheet and the return to profitability in 2017 and 1Q18. As a result, DBRS views CGD as maintaining solid buffers over minimum regulatory requirements of around 473 bps for CET1 (phased-in) and 293 bps for total capital (phased-in) at end-March 2018. CGD’s phased-in Common Equity Tier 1 (CET1) (phased-in) ratio was 13.6% and the total capital ratio (phased- in) was 15.3% at end-1Q18.

The Group maintains a strong funding and liquidity position, partly supported by its predominant franchise position in customer deposits in Portugal. At end-March 2018 the net loan to deposit ratio was a sound 87%. The Group also accessed the market for capital instruments in 2017 with a EUR 500 million Additional Tier 1 issuance. A further EUR 430 million issuance of capital instruments is expected in 2018, as part of the conditions agreed upon the recapitalisation.

DBRS has also discontinued the ratings on CGD London branch as the branch was closed in 2017 and the notes have been repaid.

The Grid Summary Grades for Caixa Geral de Depositos S.A. are as follows: Franchise Strength – Good; Earnings – Moderate/Weak; Risk Profile – Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018). 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 Banking Authority (EBA). 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

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 and US regulations only.

Lead Analyst: Maria Rivas, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 23 December 2012
Most Recent Rating Update: 7 March 2017

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