DBRS Confirms Liberbank’s Issuer Rating at BBB (low); Trend Now Stable

DBRS Ratings Limited (DBRS) confirmed the ratings of Liberbank, S.A. (Liberbank or the Bank), including its Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The trend on all ratings has been changed to Stable from Negative. The Intrinsic Assessment (IA) for the Bank is BBB (low), 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 Liberbank’s Long-Term Issuer rating and the change in the trend to Stable takes into account the Bank’s strengthened capital position after the capital increase completed in November 2017 and the improvement in the Bank’s risk profile from a material reduction in non-performing assets (NPAs). The ratings, however, continue to reflect the high, albeit decreasing, level of NPAs, which remain above most European peers as well as the challenge to materially improve profitability in the low interest rate environment.

RATING DRIVERS

Positive rating pressure to the Long-Term Issuer Rating would arise if the Bank continues to improve its risk profile and reduce NPAs notably. It would also require a sustained improvement of core profitability, including further stabilisation of its cost of risk and core revenue growth. Negative rating pressure to the Long-Term Issuer Rating could arise if there is a material deterioration in asset quality.

RATING RATIONALE

After a net loss of EUR 259 million in 2017, Liberbank reported net attributable income of EUR 29 million in 1Q18, which compares with EUR 32 million in 2016. Results were supported by lower operating costs and much lower loan loss provisions, which helped offset the negative pressure on net interest income from low interest rates. Commissions grew slightly YoY in 1Q18, partly offsetting lower capital gains from sovereign debt sales. Liberbank’s NII grew in 1Q18 YoY supported by new lending volumes and higher yields on the fixed-income portfolio, after the bank increased its sovereign debt portfolio in 1Q18.

DBRS considers that the Bank is successfully meeting the targets included in its NPA reduction plan. Liberbank achieved a notable 29% reduction in NPAs in 2017, driven by a decrease of EUR 1.3 billion of NPLs and EUR 495 million of foreclosed assets (FAs). This reduction was also supported by the sale of EUR 602 million of foreclosed assets to a Company jointly created with Bain Capital Credit and Oceanwood. Liberbank retains a 10% stake in this company. In 1Q18, asset quality continued to benefit from a further reduction of NPAs in line with the Bank’s plan and the NPL ratio reduced to 7.8%, a level that is close to the average of the Spanish banking sector. Despite the improvement, Liberbank’s NPA ratio remains high and above most domestic peers at 16.9% at end-1Q18. Liberbank used the proceeds from the EUR 500 million capital increase, as well as the capital gain from the sale of its Real Estate servicer, to reinforce coverage levels of NPAs. This, together with additional provisions as a result of the first implementation of IFRS 9, reinforced NPA coverage levels to 50.5% at end-2017, from a much lower 40% at end-2016. DBRS considers coverage levels to be in line with the majority of domestic peers.

Liberbank’s funding position is underpinned by the Bank’s large and stable customer deposit base. Customer deposits (excluding repos and covered bonds) are the Bank’s largest funding source, representing around 65% of total funding at end-March 2018. The bank reported, at end-1Q18, a strong loan-to-deposit (LTD) ratio (excluding repos) of around 93% (as calculated by DBRS), lower than most domestic banks.

DBRS notes that Liberbank’s capital position significantly improved after the EUR 500 million capital increase. In DBRS’s view the successful completion of the capital increase demonstrated greater confidence from the investor community. Liberbank’s CET1 (phased-in) ratio was 13.25% at end-March 2018 and the total capital ratio (phased-in) was 15.4%, well above minimum regulatory requirements of 8.875% and 12.375% respectively.

The Grid Summary Grades for Liberbank, S.A. are as follows: Franchise – Good / Moderate; Earnings – Moderate / Weak; Risk Profile – Moderate; Funding & Liquidity – Good / Moderate; Capitalisation – 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). 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 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: 11 March 2014
Most Recent Rating Update: 16 June 2017

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