DBRS Confirms Abanca’s Senior Ratings at BBB (low); Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Abanca Corporación Bancaria S.A.’s (Abanca or the Bank) Long-Term Issuer, Long-Term Senior Debt and Long-Term Deposit ratings at BBB (low) and its Short-Term Issuer, Short-Term Debt and Short-Term Deposits ratings at R-2 (middle). The Trend on all ratings has been confirmed at Stable. The Intrinsic Assessment remains BBB (low) and the support assessment SA3.

The confirmation of the ratings reflects Abanca's progress in relation to core profitability and asset quality. Since the last review of the ratings Abanca has continued to make good progress in diversifying its revenues streams, and has been growing commission income for several quarters, while sustaining net interest income in the challenging low interest rate environment. Moreover, in confirming the ratings DBRS recognises that Abanca continues to improve asset quality and has accelerated the reduction of non-performing assets (NPAs), either by selling real estate assets through its branch network, or by completing some portfolio sales of NPAs. The ratings also take into account Abanca’s franchise strength in its home region of Galicia where it is the leading bank for customer deposits with market shares of around 40%, as well as the Bank’s stable funding and liquidity position and portfolio of unpledged liquid assets, and its sound capital position. The ratings, however, also reflect the challenges that the Bank faces to improve profitability by further increasing revenue generation and /or reducing operating costs, while continuing to reduce the stock of NPAs in the evolving regulatory environment.

Core revenues have grown in the last two quarters, helped by growth in both net interest income and commissions. The latter has been supported by the continued growth in off-balance sheet products as well as good performance in insurance activities. Abanca reported net income of EUR 334 million in 2016, up very slightly from the EUR 330 million reported in 2015. The 2016 results were helped by net reversals of provisions, and this was repeated in 1Q17 when the Bank reported net income was EUR 153 million, up over 100% on 1Q16, and up 128% quarter-on-quarter (QoQ). The 1Q17 results were also boosted by significant capital gains from the sale of its stake in Compañía Logística de Hidrocarburos (CLH) in the quarter. Excluding this capital gain, Income before Provisions and Taxes (IBPT) was EUR 49.9 million in 1Q17 (1Q16: EUR 34.6 million), largely driven by core revenue growth. However, when non-recurrent capital gains are excluded, the cost-income ratio remains elevated, and above most domestic and international peers at 72% in 1Q17, albeit improved from 79% in 1Q16 and around 86% in 2016 (as calculated by DBRS). While DBRS recognises the positive trends in core revenue generation and the related improvement in efficiency ratios, further progress will be key to put positive pressure on the ratings.

Abanca’s asset quality has continued to improve since end-2015 and DBRS expects it to further benefit from the good economic conditions in its home market. Abanca reduced NPAs by EUR 59 million in 1Q17, building on the EUR 578 million reduction recorded in 2016. As a result the NPA ratio reduced to 10.8% at end-1Q17, compared to 13.2% at end-2015.

DBRS considers Abanca’s capital position as being supported by its good NPA provision levels (of around 54% at end-March 2017). The CET1 capital ratio (phased-in) remains one of the strongest among Spanish banks at 14.4% at end-1Q17. The total capital ratio (phased-in) was 14.73% at that date, almost entirely consisted of CET1 capital as the Bank has not issued AT1 or Tier 2 instruments, which is well above minimum total capital requirements with an excess of 373 bps above the minimum.

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

RATING DRIVERS

Positive rating pressure on the ratings could occur from a longer track record of profitability improvement through core revenue generation and improving efficiency together with further reductions in NPAs.

Negative rating pressure on the ratings could arise from weaker than expected profitability together with a material deterioration of capital levels and asset quality, especially if this is accompanied by a significant increase of the risk profile.

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). 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, company disclosures and the Bank of Spain. 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: Ross Abercromby - Senior Vice President - Global Financial Institutions Group
Initial Rating Date: December 10, 2014
Last Rating Date: July 14, 2017

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