DBRS Confirms Caixa Geral de Depósitos Snr Ratings at BBB (Low); Trend Now Negative

DBRS Ratings Limited (DBRS) has today confirmed the ratings for Caixa Geral de Depósitos, S.A. (CGD or the Group), including its Issuer Rating and Senior Long-Term Debt & Deposit rating of BBB (low), the Short-Term Debt & Deposit rating of R-2 (middle), and the BBB (high) / R-1 (low) Critical Obligations Ratings (COR). The Trend on these ratings is Negative. CGD’s Dated Subordinated Debt rating the of BB (high) remains Under Review with Negative implications (see: “DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications”). The Group’s Intrinsic Assessment (IA) has been maintained at BBB (low). This concludes the review that was initiated on November 29, 2016. A full list of the rating actions is included at the end of this press release.

The confirmation of the Senior debt ratings at BBB (low) reflects the Group's strengthened capital position as a result of the completion of the recapitalisation process at end-March 2017. It also considers DBRS’s views that, with an improved capital position and supported by the incipient economic recovery in Portugal, the Group has more flexibility to execute on its strategic plan. Namely, DBRS will look for CGD to return to domestic profitability and improve its weak asset quality, primarily through a material reduction of non-performing loans (NPLs as per the European Banking Authority’s definition - EBA). DBRS also sees that the Group has resolved its corporate governance issues that had stemmed from the resignation of the majority of the board of directors in November. Subsequently, CGD recently appointed new board members and Chief Executive Officer (CEO) who seem to be executing on its strategic priorities including the planned recapitalization.

The Negative trend reflects DBRS’s view that the implementation of the strategic plan still carries execution risks. The Portuguese economy is gradually improving, but DBRS considers that any sudden change in economic conditions, or weakening of confidence in the sovereign and/or the banking sector could make it more difficult for the newly appointed management team to successfully implement the strategic plan. The ratings continue to incorporate CGD’s leading banking franchise in Portugal, where the Group has solid market shares of around 22% for loans and 28% for customer deposits, as well as the Group’s sound funding profile underpinned by a strong customer deposit base.

During 1Q17, CGD received around EUR 3.9 billion of capital from its sole shareholder the Portuguese State, through a capital injection of EUR 2.5 billion, the conversion of EUR 900 million of State Cocos received in 2012 and the transfer of EUR 499 million of stakes in ParCaixa S.G.P.S. At the same time, the Group completed the placement of EUR 500 million of AT1 instrument to institutional investors, which was the first issuance of this type for CGD and Portugal. As a result, CGD’s capital position was significantly reinforced. Its phased-in Common Equity Tier 1 (CET1) ratio improved to 12.3% at end-March 2017 from a weak 7% at end-2016, which was the result of record losses in 2016, and total capital improved to 14.2% total capital at end-March 2017, also helped by the new AT1 issuance. Both ratios at end-March 2017 were well above the minimum overall capital requirement set under the Supervisory Review and Evaluation Process (SREP) decision of CET1 of 8.25% for 2017 and total capital of 11.75%. The fully loaded CET1 ratio was also reinforced to 12.0% at end-March 2017 from a very weak 5.5% at end-2016 and a 10% at end-2015.

CGD reported a record loss of EUR 1.9 billion in 2016 largely driven by EUR 3 billion of impairments, of which EUR 2.4 billion related to loan loss impairments to write-off around EUR 1.9 billion of loans. 1Q17 results showed some progress in the implementation of the strategic plan but DBRS would need to see further achievements in order to stabilise the ratings. The Group reported a loss of EUR 38.6 million in 1Q17 impacted by restructuring costs and continued efforts to reinforce provisioning levels on certain assets. However, 1Q17 losses were lower than the EUR 74.2 million loss reported in 1Q16. Improved results in 1Q17 were supported by lower loan loss provisions and lower funding costs, largely from retail customer deposits but also due to the absence of the cost of the State CoCos, as they were converted into equity at the beginning of 2017. The Group expects to accelerate the reduction of NPLs to improve the NPL ratio to around 8% by 2020. In 1Q17 CGD reduced NPLs by 5.2% in 1Q17. Despite this, the NPL ratio remained weak at around 15% at end-March 2017, and in line with the reported ratio at end-2016, negatively affected by ongoing loan deleveraging. The loan loss coverage was reinforced to around 53% of NPLs at end-2016, and remained at the same level at end-March 2017, albeit much improved from around 49% reported at end‐2015.
RATING DRIVERS

Positive rating pressure is unlikely in the short-to-medium term given the current trend. It could require an upgrade of Portugal’s sovereign rating together with a sustained track record of sound domestic profitability, significant de-risking of the balance sheet and further strengthening of the Group’s domestic franchise. The ratings could be moved to Stable Trend if DBRS sees further achievements in the implementation of the strategic plan, including continued significant reduction of NPLs and improving profitability.

Negative rating pressure could arise if DBRS sees any signs of instability in the new management in conjunction with any material deviation to the key targets announced in the strategic plan, including a failure to return to domestic profits and materially reduce NPLs in the next 12 -18 months. It could also arise from a significant erosion of capital position due to higher than initially anticipated operating losses.

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 (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 company documents, SNL Financials and the Bank of Portugal. 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 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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