DBRS Confirms Liberbank’s Senior Ratings at BBB (low), Trend Now Negative

DBRS Ratings Limited (DBRS) has today confirmed Liberbank, S.A.’s (Liberbank or the Bank) ratings including its Issuer Rating and Senior Debt and Deposit Rating at BBB (low) and its Short Term Debt and Deposit rating at R-2 (middle). The Trend on all ratings has been changed to Negative from Stable. The Bank’s Intrinsic Assessment (IA) is BBB (low) and the Support Assessment remains at SA3. See the full list of ratings in the table at the end of this press release.

The confirmation of the ratings follows DBRS’s annual review of the Bank’s credit profile. The Bank’s ratings reflects DBRS’s view that Liberbank’s franchise in certain regional markets in Spain continues to underpin the Bank’s customer deposit base, which has remained stable despite recent market pressure on the share price. However the Bank is still burdened by a high level of non-performing assets (NPAs, including non-performing loans and foreclosed assets), and this remains a key driver for the ratings, despite progress made by the Bank in gradually improving its risk profile.

The revision of the Trend to Negative, reflects DBRS’s increasing concerns around the timeframe for the Bank to reduce its high stock of NPAs. DBRS sees that increased scrutiny from regulators and market participants is resulting in a greater need to reduce these assets according to plan, which could be challenging given moderate earnings and higher regulatory capital requirements. The Negative Trend also reflects the challenges the Bank is facing in improving profitability amid the persistent low interest rate environment. While the environment in Spain is improving, earnings will likely continue to be pressured, partly driven by the high stock of NPAs.

Liberbank’s profitability remains negatively affected by the low interest rate environment which continues to pressure core revenues, however the Bank has been able to sustain consistent net income. In 2016, the Bank reported a net profit of EUR 128.8 million, similar to the level reported in 2015, however, results were supported by sizeable gains from the sale of sovereign debt and lower provisions offset the pressure on core revenues. These trends were also reflected in the 1Q17 results. Liberbank posted EUR 32 million net attributable profit in 1Q17, down 15% YoY, primarily affected by pressure on net interest income (NII), as the benefits of lower cost of funding were not sufficient to compensate the pressure asset pricing.

Liberbank’s asset quality is a key challenge for the Bank, with an elevated stock of NPAs of EUR 6 billion representing around 23.4% of gross loans and foreclosed assets at end-March 2017. However, DBRS also notes the progress made by the Bank in reducing the stock of NPAs in recent years, and especially the acceleration in the pace of the reduction seen in the last 15 months. At end-March 2017, Liberbank's NPAs were down 24% (EUR 1.9 billion) since end-2015. The NPA reduction since end-2015 was assisted by some write offs of assets that had previously been covered by the Asset Protection Scheme (APS), but also through the sale of real estate assets which has been intensified in the last quarters. Around 87% of total real estate developers are already accounted for as NPLs, above the levels seen at domestic peers, which means that any further potential deterioration in this portfolio is fairly limited. However, total coverage levels of NPAs was around 40% at end-March 2017, below the sector average, which could potentially put some pressure on the pace of reduction of NPAs.

DBRS views Liberbank’s funding and liquidity position as largely underpinned by the Bank’s large and stable customer deposit base which DBRS understands has proven to be resilient amid some market volatility in recent weeks. Liberbank’s liquidity position is good, and at end-March 2017 the Bank had a liquidity coverage ratio (LCR) of 332% and a strong loan-to-deposit (LTD) ratio (as calculated by DBRS and excluding repos and covered bonds) of around 88%. In addition, Liberbank has EUR 6.9 billion of unencumbered liquid assets at end-March 2017. Liberbank is a regional bank with significant market shares for customer deposits in four regions in Spain. Its customer deposit base is largely retail and DBRS notes that a high proportion of deposits are under EUR 100,000 and therefore covered by the deposit guarantee fund.

Liberbank’s phased-in common equity tier 1 (CET1) ratio declined to 12.0% at end-March 2017, down from 13.7% at end-2015, as a result of the expiration of the APS (the expiration of the APS led to the addition of around EUR 2.5 billion of risk weighted assets, that were previously weighted 0% under the APS). However, Liberbank was able to issue EUR 300 million of subordinated debt and the total regulatory capital ratio recovered to 14% at end-March 2017, in line with the end-2015 ratio. Both the total capital ratio and CET1 ratios were above the minimum regulatory requirements set under the SREP of 11.75% and 8.25%, respectively. However, DBRS also considers the level of capital needed in the context of the Bank’s risk profile and high proportion of NPAs.

RATING DRIVERS:

Positive rating pressure on the Issuer Rating and Senior Debt and Deposits rating is unlikely in the short-medium term given the current trend. However, it would require a substantial reduction of both NPLs and NPAs as well as further improvement of core profitability.

Negative rating pressure on the Issuer Rating and Senior Debt and Deposits rating could arise if there is any material deterioration in the Bank’s deposit base or if DBRS perceives any sign of a weakening in the franchise as a result of reduced customer confidence in the Bank. A failure to demonstrate continued material reduction of NPAs or continued improvement in core profitability could have negative rating implications.

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). 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 Spain 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.

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: March 11, 2014
Most Recent Rating Update: March 7, 2017

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