DBRS Confirms Bankia’s Senior Ratings at BBB (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Bankia, S.A.’s (Bankia or the Bank) ratings including its Issuer Rating and Senior Unsecured Long Term Debt & Deposit Rating at BBB (high) and its Short-Term Debt & Deposit rating at R-1 (low). DBRS also confirmed the Bank’s Long Term Critical Obligations Rating at A, and its Short Term Critical Obligations Rating at R-1 (low). The Trend on all ratings remains Stable. The Bank’s Intrinsic Assessment (IA) is BBB (high) and the Support Assessment remains at SA3. See the full list of ratings is 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. It also considers DBRS’s view that the recently announced merger with Banco Mare Nostrum S.A. (BMN, not rated by DBRS) is considered as manageable for Bankia and does not materially change Bankia’s risk profile. Whilst the BMN transaction is expected to have a negative impact on Bankia’s regulatory capital ratios, DBRS expects capital levels post-transaction to remain adequate considering the merged group’s capacity to reinforce its capital through retained earnings and build on Bankia’s recent good track record. Moreover, DBRS expects the merger to be well-managed, given Bankia’s past success in integrating banks. Bankia’s ratings also consider DBRS’s expectation that Bankia will continue to report good recurrent earning capacity, despite some pressure from the low interest environment, and that it will continue to reduce the high stock of NPAs as it has over recent years. The Bank’s ratings also reflect Bankia’s strong franchise in Spain and its sound funding and liquidity position.

On June 27, 2017 the Boards of Directors of Bankia and BMN announced that the Bank’s had reached an agreement to merge. The transaction is expected to be completed by 4Q17-1Q18, after the approval of the Extraordinary General Shareholders Meetings of both banks (these are expected to take place in September 2017) and subject to receiving all regulatory approvals. DBRS sees BMN as a meaningful addition to Bankia and considers that the transaction makes sense strategically as it will strengthen Bankia’s franchise position as the fourth-largest Spanish lender, with around EUR 223 billion of total assets, EUR 133 billion of gross loans and EUR 135 billion of deposits. At end-2016, BMN represented around 17% of the combined pro-forma Bankia-BMN Group total assets, around 17% of total loans and around 22% of total deposits. BMN will help Bankia to further reinforce its market shares in the regions of Madrid, Valencia, Murcia and Baleares. After the merger, the FROB would remain the main shareholder of the combined Bankia BMN, with a 66.6% stake.

Post-transaction, the combined Bankia-BMN is expected to have non-performing asset (NPA) and coverage ratios at very similar levels to those currently reported by Bankia. This is due to the fact that although BMN has lower coverage levels on NPAs than Bankia, these are expected to be reinforced by around EUR 700 million at the time of the merger. Bankia is estimating that the merger should generate, by end-2020, around EUR 155 million of cost synergies after restructuring, and add around EUR 245 million of net income. Bankia’s fully loaded CET1 ratio is expected to decrease to 11.5% after the merger from the 13.4% reported at end-March 2017, primarily as a result of integrating BMN’s risk weighted-assets, although DBRS expects this ratio to improve in future periods due to profit retention.

Bankia’s profitability continues to be negatively affected by the low interest rate environment, which continues to pressure core revenues, as evidenced by the 2016 results which saw net attributable income reduce by 23% YoY to EUR 804 million. However, DBRS also considers that Bankia has demonstrated a good track record of recurrent results and internal capital generation in recent years. In 1Q17, Bankia reported net attributable income of EUR 304 million although core revenues remained pressured by the low interest rate environment. Net interest income (NII) was down 2.5% QoQ driven by loan deleveraging and despite the gradual stabilisation of the credit book yield and continued reduction of funding costs, especially in term retail deposits. This was, however, offset by lower provisions, partly reflecting the continued improvement in the economy. Cost optimisation continued to be key to offset the pressure on the revenue side.

Bankia’s asset quality has continued to improve and the Bank also managed to achieve a strong reduction in the level of its NPAs in the last year. This reduction partly reflects a continued improvement in economic conditions in Spain, but also the Bank’s strong focus on managing these exposures down proactively. Bankia reduced NPAs by EUR 2 billion in 2016 and a further EUR 536.1 million in 1Q17. The overall reduction of NPAs was around 12% in 2016 and a further 4% in 1Q17. At end-March 2017, the NPA ratio, including non-performing loans (NPLs) and foreclosed assets (FAs), was 12.1% of total loans and FAs. Of note is that during 4Q16, Bankia reclassified EUR 492 million of refinanced loans to NPLs due to the Anejo IX (the new provisioning standards introduced in Spain in October 2017), but this was more than offset by organic NPL reduction during the year.

DBRS views Bankia’s funding position as sound, largely underpinned by the Bank’s large and stable customer deposit base. This supports its net loan-to-deposit (LTD) ratio (ex-repos)) of 101% at end-March 2017. With EUR 29.3 billion of unencumbered liquid assets at end-March 2017 and a capacity to issue EUR 12 billion of covered bonds, DBRs considers Bankia’s liquidity to be well managed and that it is well positioned to face its upcoming wholesale funding maturities.

DBRS views Bankia’s capitalisation as supported by the Bank’s good coverage levels for NPAs, and its recurrent capacity to generate capital through retained earnings. The Bank reported a fully loaded common equity tier 1 (CET1) ratio of 13.4% at end-March 2017 (13.6% including the unrealised capital gains on the available for sale portfolio), 35 bps higher than at end-2016. At that date, the CET1 (phased-in) ratio was 14.9% and the total capital ratio was 16.9%. Both the total capital ratio and CET1 (phased-in) ratios were above the minimum Overall Capital Requirement (OCR) set under the Supervisory Review and Evaluation Process (SREP) decision of 11.375% and 7.875%, respectively.

RATING DRIVERS:

Positive rating pressure on the ratings could arise from a further strengthening of Bankia’s franchise together with improved core profitability and the reduction of non-performing assets (NPAs) to much lower levels. A successful integration of BMN would also be an important factor.
Negative rating pressure on the ratings could occur if there is a meaningful deterioration of core profitability and asset quality together with a notable increase in the Bank’s risk profile.

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: Roger Lister - Managing Director, Chief Credit Officer, Global FIG and Sovereign
Initial Rating Date: July 8, 2016
Most Recent Rating Update: March 7, 2017

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