DBRS Confirms CEMG’s Long-Term Ratings at BB, Trend Remains Negative

DBRS Ratings Limited (DBRS) confirmed the ratings of Caixa Económica Montepio Geral, S.A. (CEMG or the Bank), including its Long-Term Issuer Rating at BB and the Short-Term Issuer Rating at R-4. The trend on the Long-Term ratings remains Negative while the trend on the Short-term ratings is Stable. The Banks’s Intrinsic Assessment (IA) has been maintained at BB and the Support Assessment remains at SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of CEMG’s Long-Term Ratings reflects the Bank’s progress in asset quality and profitability in the last twelve months. These improvements largely relate to the reduction in Non-performing loans (NPLs) and the reinforced coverage levels. It also reflects the bank’s improved retained earnings as well as the signs that the customer deposit base has stabilised. The Negative Trend reflects the Bank’s small capital cushion over minimum regulatory requirements and the need for further progress in asset quality and profitability.

RATING DRIVERS
For the trend to return to Stable, the Bank would need to demonstrate a strengthening of overall capital levels together with continued improvement of asset quality, and continued progress in profitability.

Negative pressure on the ratings could arise if the Bank fails to further improve asset quality and reinforce regulatory capital cushions.

RATING RATIONALE
CEMG’s activities are mostly concentrated in Portugal, where it has a domestic market share of 6% for total loans and deposits. After years of reporting losses, CEMG returned to full year profits in 2017. The bank has reported positive net income in the last 18 months, but profitability remains weak. Results have been supported since 2017 by lower loan loss provisions and cost restructuring, despite much lower capital gains from financial operations. In 1H18, the bank reported net attributable income of EUR 15.8 million, up 21% year-on-year (YoY). Net interest income (NII) remained under pressure in 1H18, down 6.3% YoY, primarily affected by lower revenues from fixed-income securities following a significant reduction of the portfolio in 2017. The Bank is making progress in growing commissions, which were up 4% YoY.

CEMG’s asset quality remains weak with a high stock of NPLs (European Banking Authority (EBA) definition) and an elevated NPL ratio (EBA definition, excluding exposures to central banks and credit institutions). DBRS recognises that CEMG has made progress by reducing NPLs 24% since end-2016 and is committed to improving asset quality further. However, the NPL ratio, albeit improved, remains high at 15.5% at end-June 2018 (as calculated by DBRS). The NPL reduction was largely driven by an NPL securitisation of EUR 580.6 million to institutional investors completed in 4Q17. Improving economic conditions in Portugal has also translated into lower gross entries of NPLs. DBRS also notes that the Bank’s NPL coverage ratios have improved in the last 12 months to 51.7% at end-June 2018, from 44.9% at end-2017.

CEMG’s funding and liquidity position is underpinned by its mutual status. After significant stress in 1Q17, the Bank’s customer deposits appear to have stabilised. DBRS expects that the recently appointed management should bring further stabilisation to CEMG’s franchise and this remains a key consideration for the ratings. CEMG has also reduced its reliance on funding from the European Central Bank in the last year, although this funding source still represents a relatively high 8% of total assets at end-June 2018.

CEMG’s capital position remains weak given its small cushion over minimum regulatory requirements, particularly in relation to total capital. DBRS recognises that the bank is making progress in internal capital generation but needs to see further progress on the capital front for the trend to return to Stable. CEMG reported a 13.5% Common Equity Tier 1 (CET1) phased-in ratio at end-June 2018, which had improved from 10.4% at end-2016, largely as a result of a capital injection received from its shareholder, the Montepio Geral Associação Mutualista in June 2017. The total capital (phased-in) ratio was 13.6% at end-June 2018 These ratios compare to the 2018 minimum Overall Capital requirement (OCR) for CET1 phased-in of 9.4% and of 12.9% for Total Capital (phased-in).

The Grid Summary Grades for CEMG are as follows: Franchise Strength – Good/Moderate; Earnings Power – Weak; Risk Profile – Moderate/Weak; Funding & Liquidity – Moderate/Weak; Capitalisation – Weak.

Notes:
All figures are in Euro unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company disclosures. 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 Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: June 27, 2011
Last Rating Date: September 27, 2017

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