DBRS Confirms Bankia at BBB (high), Stable Trend

DBRS Ratings Limited (DBRS) has confirmed Bankia S.A.’s (Bankia or the Bank) ratings including the Long-Term Issuer Rating of BBB (high), the Short-Term Issuer Rating of R-1 (low), the Long Term Critical Obligations Rating (COR) of A, and the Short-Term COR of R-1 (low). The Trend on all ratings remain Stable. The Bank’s Intrinsic Assessment (IA) remains at BBB (high) and the support assessment remains SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of Bankia’s long-term ratings at BBB (high), with a Stable Trend, considers the Bank’s solid retail national franchise in Spain, its good funding and liquidity position, improved access to the capital markets and its sound capital levels. It also takes into account the progress in improving core profitability and that the integration of Banco Mare Nostrum (BMN) is progressing. The ratings, however, also reflect the still large stock of non-performing-assets (NPAs) and its still high NPA ratio, which remains elevated compared to international and domestic peers. DBRS expects Bankia’s core revenue generation and profitability to continue to benefit from the improved economic conditions in Spain and the recent acquisition of BMN, largely by capturing cost synergies and enhancing cross selling with BMN’s customer base.

RATING DRIVERS

Positive rating pressure on the long-term ratings would require further evidence of improved earnings generation together with continued reduction of the Bank’s NPAs.

Negative rating pressure on the long-term ratings is unlikely but could arise if the capital position materially deteriorates or if the Bank were to significantly increase its risk profile.

RATING RATIONALE

Bankia’s ratings are underpinned by its well-established franchise as the fourth largest bank by assets in Spain. The franchise has been further reinforced through the acquisition of BMN, which complements its business mix and has reinforced Bankia’s presence in the Mediterranean coast of Spain. Bankia completed BMN’s IT integration in 1Q18, less than three months after the merger was legally completed and expects to generate around EUR 190 million of cost synergies in the next three years as a result of BMN’s integration.

DBRS considers Bankia’s profitability to be below its franchise potential, partly affected by the low interest rate environment which continues to put pressure on net interest revenues. In 2017 Bankia’s net attributable income was EUR 505 million, negatively affected by EUR 312 million of integration costs related to the BMN acquisition. In 1Q18, Bankia reported net attributable income of EUR 229 million, down around 25% Year-on-Year (YoY), as interest revenues were negatively affected by the low interest rate environment and a reduction in its fixed-income portfolio. Nevertheless, Bankia was able to partly, but not fully, offset this pressure by growing commissions from asset management and payment services. Operating expenses were maintained in 1Q18 YoY and the cost to income ratio remains sound by international standards at 51.7% (as calculated by DBRS). Positively, synergies stemming from BMN’s integration are expected to materialise in 2Q18 onwards, and these should also support core profitability and further reduce the cost base.

Bankia’s asset quality has continued to improve in 2017 and 1Q18 but the NPA ratio remains elevated compared with some domestic and international peers. The progress in the reduction of total stock of NPAs was distorted by the integration of BMN which added EUR 4.4 billion of NPAs at end-2017 (EUR 2.4 billion of NPLs and EUR 2.0 billion of foreclosed assets). On a pro-forma basis (excluding BMN), Bankia reduced NPAs by EUR 2.1 billion in 2017, a level similar to the EUR 2 billion reduction in 2016. This trend continued in 1Q18, and NPAs further reduced by EUR 667 million. At end-March 2018, the Bank reported a NPA ratio of 12.0%, down from 12.3% at end-2017 and 12.4% at end-2016 (as calculated by DBRS). The NPL ratio was 8.6% at end-1Q18, a sound improvement from the 9.7% level at end-2016. Under its new strategic objectives, Bankia is targeting to reduce its NPA ratio by half by 2020, to around 6%.

DBRS views Bankia’s funding position as sound, largely underpinned by the Bank’s large and stable customer deposit base. Excluding repos, customer deposits increased by 22.9% in 2017, largely as a result of the BMN integration. This supports its net loan-to-deposit (LTD) ratio (excluding repos and covered bonds) of 101% at end-March 2018. With EUR 33.6 billion of unencumbered liquid assets at end-March 2018 and a capacity to issue EUR 17.1 billion of covered bonds, DBRS considers Bankia’s liquidity to be well managed.

Bankia’s capitalisation is supported by its recurrent capacity to generate adequate capital through retained earnings, and its recent issuance in the capital markets of AT1 and Tier 2 capital instruments. The Bank reported a fully loaded common equity tier 1 (CET1) ratio of 12.7% at end-March 2018, compared to 12.5% at end-2017 and 12.7% at end-2016. The Bank also reported a total capital ratio fully loaded of 15.7%, and this was reinforced by the issuance of Tier 2 debt and AT1 instruments in 2017. DBRS considers Bankia maintains ample capital buffers over minimum regulatory requirements of 12.06% for the total capital and 8.56% for the phased-in CET1 ratio.

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

Notes:
All figures are in Euros 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, Bank of Spain, and the European Banking Authority. 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: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: July 8, 2016
Most Recent Rating Update: July 14, 2017

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