DBRS Confirms Caja Rural de Granada, S.C.C. at BBB (low), Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Caja Rural de Granada, Sociedad Cooperativa de Crédito (Caja Rural de Granada, CRG or the Bank), including the Long-Term Issuer Rating of BBB (low), and the Short-Term Issuer rating of R-2 (middle). The trend on all the ratings remains Stable. Concurrently, DBRS confirmed the Bank’s Intrinsic Assessment (IA) at BBB (low) and Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

The confirmation of CRG’s ratings reflect the resilient profitability in recent years, despite the impact from the low interest rate environment, the sound funding and liquidity position, supported by its large and stable customer deposit base, the benefits CRG derives from being a member of the Asociación Espanola de Cajas Rurales (AECR) and its robust capital levels. It also incorporates the Bank’s still large, albeit consistently reducing, stock of non-performing assets (NPAs).

Supporting the ratings is the Bank’s franchise strength in its home market of Granada, where it has significant market shares in loans and deposits of around 15% and 24% respectively. DBRS considers CRG’s membership within AECR positively as it provides significant benefits such as access to a well-developed common technology system, central clearing and liquidity services, as well as a range of other wholesale banking services and products provided by AECR’s insurance and asset management companies. Banco Cooperativo Español (BCE, rated BBB Stable) acts as the central treasurer and liquidity provider for the Group.

The Bank´s core profitability continues to be impacted by the low interest rate environment. In 9M17 CRG reported net income of EUR 25 million, down 25% year-on-year (YoY) as net interest income (NII) declined by 15%. The Bank also reported lower gains from the sale of its fixed income portfolio, although these were partly compensated by lower provisions. For FY17 DBRS expects CRG to report a similar net result as in 2016 and book additional provisions to reinforce coverage levels of NPAs.

CRG´s ratings also take into account the burden of the Bank’s still large, albeit consistently reducing, stock of NPAs. At end-9M17 the Bank’s stock of NPAs represented 14% of total gross loans and foreclosed assets. This is mostly driven by CRG’s legacy real estate and construction sector lending, which remain high, representing 11% of total gross loans and foreclosed assets at end-September 2017. Total coverage levels of NPAs were around 42% at end-September 2017, below the Spanish banking sector average. Nevertheless, CRG has a solid capital cushion to absorb losses under stressed conditions. DBRS also notes that the Bank is making progress in reducing its stock of NPAs, benefiting from the improved economic and property market conditions in Spain. DBRS sees the reduction of NPAs a key rating driver given the increased pressure from regulators and market participants to reduce these assets.

CRG’s funding and liquidity profile remains sound. At end-September 2017 the Bank had a robust net loan-to-deposit (LTD) ratio of 79%, lower than most domestic peers. Funding from the European Central Bank (ECB) stood at EUR 384 million at end-September 2017 accounting for 8% of total funding.

CRG’s capitalisation remains robust with a total capital ratio of 18.06% under the phased-in criteria at end-September 2017. This compares to a minimum SREP Capital Requirement (OCR) for total capital (phased-in), of 10.875% for 2017. DBRS also notes that as a member of the AECR, CRG could potentially benefit from potential support from the AECR, although as part of a cooperative group the Bank’s ability to improve capital through organic generation or to access capital markets is limited.

RATING DRIVERS
Upward rating pressure on the Long-Term ratings is unlikely in the short to medium term, mainly due to the Bank’s geographical and sectorial concentrations in the small province of Granada. However, positive rating pressure could arise with a significant sustained improvement in core profitability and a material reduction in the level of NPAs.

Negative pressure on the Long-Term ratings could arise from weakening underlying earnings generation. A failure to demonstrate continued reduction of NPAs could also have negative rating implications particularly if this is accompanied by any weakening of the capital position.

The Grid Summary Grades for Caja Rural de Granada, Sociedad Cooperativa de Crédito are as follows: Franchise Strength – Moderate; Earnings – Moderate; Risk Profile – Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – Good/Moderate.

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 documents 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: Pablo Manzano, Assistant Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 9 December 2013
Most Recent Rating Update: 14 July 2017

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