DBRS Confirms Banco Comercial Português Issuer Rating at BB (high); Trend Now Positive

DBRS Ratings Limited (DBRS) confirmed the ratings of Banco Comercial Português, S.A. (BCP or the Bank), including its Long-Term Issuer Rating of BB (high), the Short-Term Issuer Rating of R-3, the BBB / R-2 (high) Critical Obligations Ratings (COR), and the Dated Subordinated Notes of BB (low). The trend on all ratings has been changed to Positive from Stable. The Intrinsic Assessment (IA) for the Bank is BB (high), while its Support Assessment remains SA3. A full list of the rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of BCP’s Issuer Rating at BB (high) reflects BCP’s improvement in its risk profile and profitability in Portugal in the last twelve months. The ratings also reflect the Bank’s strong franchise in Portugal, and well established international franchise in Poland and Mozambique. It also takes into account the Bank’s good funding and liquidity position and its adequate capitalisation. The ratings however, continue to recognise the Group’s high Non-Performing loans (NPLs) and its unreserved NPL ratio, which is higher than most European banks as well as its modest capital buffers over minimum regulatory requirements.

The Positive trend reflects DBRS’s expectations that, helped by good economic conditions in Portugal, its strong franchise position in Portugal and improving risk management, BCP will further reduce NPLs and cost of risk. The latter should ultimately translate into a higher capacity to generate capital organically through retained earnings.

RATING DRIVERS
The ratings could be upgraded if the Bank continues to reduce NPLs at a meaningful rate and to improve profitability in Portugal, through core revenue growth and lower cost of risk. Negative rating pressure could arise if there is a significant deterioration in asset quality and capital, and the Trend could also return to Stable if the Bank is unable to deliver planned reductions in NPLs.

RATING RATIONALE
BCP’s underlying profitability improved further in 2017, a trend which has continued in 1Q18. The improvement was primarily driven by its activities in Portugal through steady growth of core revenues and significantly lower year-on-year (YoY) impairments and provisions on loans and other assets. However, the Group’s profitability remains negatively affected by the high cost of risk, which stood at 83 bps in 1Q18 (as calculated by DBRS). BCP reported net attributable income of EUR 86 million in 1Q18, up 70% YoY. BCP’s profits in Portugal grew significantly YoY to EUR 46 million and for the first time in many years the contribution from domestic operations outpaced the contribution from international operations, which was primarily from Poland.

DBRS considers BCP has made significant progress in improving its risk profile, and in reducing its NPLs in the last 15 months. The reduction of NPLs accelerated in 2017 and this trend has continued in 1Q18, helped by active management of the portfolio, but also benefitting from some improvement in the Portuguese economy. The Group has announced that it plans to reduce NPLs to EUR 6.1 billion by end-2018 (a EUR 1.5 billion reduction of NPLs during the year). Total NPLs (as defined by the European Banking Authority, EBA) reduced by EUR 1.7 billion in 2017 (down 18% YoY) and a further EUR 501 million in 1Q18 (down 6.5%). As a result, DBRS considers BCP’s NPL plan for 2018 to be achievable. Despite the good pace of NPL reduction, BCP’s NPL ratio was still high at 14% at end-March 2018, albeit improved from 18.1% at end-2016 and 23% at end-2013, its peak level. The unreserved NPL/ CET1 (phased-in) ratio was 77% at end 1Q18. This has improved from 82% at end-2017, but still remains high.

The Group’s main source of funding is its retail deposit base, largely underpinned by its strong domestic franchise and stable deposit base in Poland. Customer deposits accounted for around 82% of the Group’s total funding at end-March 2018. Customer deposits have generally been increasing, benefitting from the improving confidence of customers in the bank after its capital increase. The Group has a sound loan to deposit ratio of 91% at end-March 2018 which compares well with peers.

BCP’s capitalisation improved significantly in 2017 following the rights issue in 1Q18 and the repayment of the State CoCos. Furthermore, regulatory capital also benefitted in 2017 from improved retained earnings and the issuance of Tier 2 instruments in December 2017. DBRS considers BCP’s capital ratios are above minimum requirements but considers the capital buffers to be relatively modest. Under the Supervisory Review and Evaluation Process (SREP), BCP is required to maintain a minimum Overall Capital requirement (OCR) for CET1 (phased-in) of 8.81% and of 12.31% for Total Capital (phased-in) for 2018. At end-1Q18, its CET1 (phased-in) ratio was 11.9% and total capital ratio (phased-in) was 13.6%. The fully loaded CET1 ratio was 11.78% at end-1Q18.

BCP is one of the largest banking groups in Portugal where it maintains strong market shares for loans and deposits of around 17.4% and 17.6% respectively at end-March 2018. The Bank is also present internationally in Poland and Mozambique, whose activities represented around 28% of total Group’s consolidated assets at end-March 2018.

The Grid Summary Grades for Banco Comercial Português, S.A. are as follows: Franchise Strength – Good; Earnings – Moderate; Risk Profile – Moderate/Weak; Funding & Liquidity – Good/Moderate; Capitalisation – Moderate/Weak.

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) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018). 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 Portugal and the European Banking Authority (EBA). 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 FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 10 June 2011
Most Recent Rating Update: 15 June 2017

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