DBRS Confirms Montepio’s Senior Ratings at BB; Changes Trend to Negative

DBRS Ratings Limited (DBRS) confirmed the ratings of Caixa Económica Montepio Geral, S.A. (Montepio or the Bank), including its Long-Term Issuer Rating, its Long-Term Senior Debt rating and its Long-Term Deposit rating at BB, and its Subordinated Debt rating at B (high). The trend on these ratings has been changed to Negative, from Stable. Montepio’s Short-Term Issuer Rating, Short-Term Debt and Short-Term Deposit ratings have been confirmed at R-4. The trend on these ratings remain 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.

The change in the trend to Negative reflects DBRS’s concerns over weaknesses in the Bank’s funding profile following some deposit outflows in 1Q17, as well as the ongoing challenge to improve asset quality. However, the confirmation of the ratings also takes into account the fact that Montepio has made some progress in relation to profitability and capital in 1H17, with the Bank reporting a small profit, and receiving a capital injection of EUR 250 million from its majority shareholder, Montepio Geral Associação Mutualista (MGAM) in June 2017.

Montepio has a core retail deposit base, underpinned by its mutualistic origins and savings orientation, with customer deposits accounting for around 65% of the Bank’s funding. However, the Bank experienced significant outflows during 1Q17 and although the Bank appears to have subsequently stabilised its deposit funding, DBRS considers Montepio’s funding position to be weaker than most domestic peers. This is due to a fairly high net Loan to Deposits (LtD) ratio of 118% (as calculated by DBRS) and central bank funding representing a high 15% of total funding at end-June 2017.

Montepio’s asset quality remains weak and the Bank has not been able to significantly reduce non-performing assets (NPAs) to date. The Bank has a high NPA ratio of 19.8% (including Credit-at-Risk (CaR) loans and foreclosed assets (FAs)) at end-June 2017 (as calculated by DBRS). In addition, the Bank has some real estate funds which, if included, would increase the NPA ratio to around 23% at end-June 2017. DBRS recognises that Montepio is taking certain initiatives to de-risk its balance sheet, including through the launching of an NPL securitisation transaction, which according to the Bank is expected to reduce the CaR ratio once completed in 4Q17. The Bank’s coverage ratio of NPAs was 42.9% of total CaR loans and foreclosed assets at end-June 2017, which is below the average for most European and domestic peers, and is a key driver of the Negative trend.

Montepio reported positive net attributable income in 1H17 for the first time since 2013, with a net profit of EUR 13 million compared to a loss of EUR 67.6 million in 1H16. The improvement in the results in 1H17 was driven by growth in core revenues (net interest income and commissions), and a reduction in operating costs as a result of the significant restructuring initiatives taken by management in previous financial periods. A further driver of the improvement YoY was lower loan loss provisions, although the cost of risk remained high at 85 bps.

The Bank reported a 12.6% CET1 phased-in ratio at end-June 2017, much improved from the 10.4% at end-2016, following the capital injection by MGAM. Whilst this ratio is now in line with most Portuguese peers, the level of NPAs remains higher than most domestic peers and vulnerable to the bank’s ability to achieve sufficient NPA reductions. The unreserved NPA ratio over CET1 (phased-in) was high at 116.2% at end-June 2017, although improved from 140.3% at end-2016.

On September 14, Montepio was successfully transformed into a public limited company, after a long process initiated in 2012 with the deconsolidation of the corporate bodies between MGAM and Montepio, allowing the latter to further diversify its capital structure through new investors.

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

RATING DRIVERS

Although unlikely in the short-term given the current trend, positive pressure to the Issuer Rating could arise from a significant strengthening of capital levels, a reduction in the bank’s risk profile and material improvement of asset quality. It would also need to be accompanied by a consistent improvement in profitability.

Negative pressure on the Issuer Rating could arise if there are signs that Montepio’s franchise is weakening, as evidenced by a failure to further reinforce its retail deposit base. It could also arise if Montepio is unable to improve asset quality and further reinforce its profitability and capital position.

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 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 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: July 14, 2017

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.