DBRS Confirms Caja Rural de Granada’s Long-Term Ratings at BBB (low), Trend Changed to Positive

DBRS Ratings Limited (DBRS) confirmed Caja Rural de Granada’s (CRG or the Bank) ratings, including the Long-Term Issuer Rating at BBB (low) and the Short-Term Issuer Rating at R-2 (middle). The Trend on the ratings was revised to Positive from Stable. CRG’s Support Assessment remains SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of CRG’s Long-Term Issuer Rating at BBB (low) takes into account the Bank’s consistent fundamentals, underpinned by a stable funding and liquidity profile, combined with an ample capital cushion. The ratings also reflect the Bank’s membership of the Asociación Espanola de Cajas Rurales (AECR), the largest cooperative group in Spain by total assets. In addition, the ratings reflect CRG’s modest but stable profitability as well as the still sizable, albeit reducing, stock of non-performing assets (NPAs).

The change in the trend reflects the significant de-risking of CRG’s balance sheet, through a 12% reduction in NPAs (YoY) and a significant improvement in their coverage. This has led to an improvement in the Bank’s risk profile. The change also takes into account the gradual improvement in the Bank’s core profitability as reflected by an 8.6% YoY core revenues growth. In addition, the trend change also considers the likely positive benefits on CRG’s franchise from the Bank’s membership of the newly created Institution Protection Scheme (IPS).

RATING DRIVERS
Future positive rating pressure could arise if CRG continues to improve its profitability and makes further progress in improving its asset quality, including reducing its NPA ratio below 10% and its NPL ratio below 5%. Negative pressure on the ratings could arise from a failure to progress in reducing NPAs, particularly if this is accompanied by any weakening of the capital position.

RATING RATIONALE
The Bank has a solid franchise in its home market of Granada, where at end-September 2018 it had significant market shares in loans (15%) and deposits (24%). CRG is also a member of the Asociación Espanola de Cajas Rurales (AECR), the largest cooperative group in Spain by total assets. The AECR comprises 29 Cajas Rurales (CRs) operating throughout Spain. On March 2018 the General Assembly of the AECR approved the constitution of an IPS between the AECR members, Banco Cooperativo Español (BCE, rated BBB Stable) and the Holding Company “GrucajRural”. The IPS was officially recognised by the Bank of Spain at end-March 2018.

The structure of this new IPS does not create a consolidated banking group, as the IPS members remain as autonomous institutions. However, there are significant benefits regarding supervisory treatment such as 0% risk weights for exposures to other IPS members and liquidity waivers. In addition, the IPS has created a uniform definition of standards and methodologies for the risk management of the member banks. At the same time, members have created an ex-ante fund of EUR 170 million to provide support in the event that a member institution has severe financial difficulties. The goal of the IPS is to increase the size of this fund to around EUR 300 million or 1% of the AECR combined RWAs by 2024. DBRS considers CRG’s membership of both the AECR and the IPS to be a positive as they provide other significant benefits such as access to a well-developed common technology system, central clearing and liquidity services.

The Bank´s core profitability has been gradually improving during recent quarters, following some pressure in the past, largely due to the low interest rate environment. In 9M18 core revenues started to pick-up, growing by 8.6% YoY, mainly driven by increasing Net Interest Income (NII) and net fees and commissions. DBRS expects this trend to continue, benefitting from the positive economic trends in Spain. In addition, the Bank’s revenue should benefit from an increase in interest rates, as the majority of its loan book is linked to Euribor. However, the Bank’s reported net income was down 2.8% YoY in 9M18, as a result of increased operating costs related to the Bank’s investments in digitalisation and higher asset provisions although DBRS notes that the 9M18 net profit is broadly in line with the full year result in 2017.

DBRS views positively the progress the Bank has made in de-risking its balance sheet in recent years. CRG’s stock of non-performing assets (NPAs) stood at 11.7% at end-September 2018, down from 13.9% at end-September 2017. The reduction in NPAs (by around 8% YoY) was mainly due to a decrease in NPLs, which over the same period reduced by around 18%. Following the further provisions taken in 9M18 the Bank’s coverage levels of NPAs, have increased significantly, and stood at 49% at end-September 2018. DBRS sees the further reduction of NPAs a key rating driver, given the increased pressure from regulators and market participants to reduce these assets and expects CRG to maintain similar trends during 2019.

CRG’s funding and liquidity profile remains sound, mainly supported by its stable deposit base. At end-September 2018 the Bank had a robust net loan-to-deposit ratio of 83%, lower than most European and domestic peers. Funding from the European Central Bank (ECB) stood at EUR 382 million at end-September 2018, accounting for 7% of total funding, and mostly relates to the TLTRO-II.

CRG’s capitalisation remains robust with a total capital ratio of 18.50% under the phased-in criteria at end-September 2018. This compares to a minimum SREP Capital Requirement (OCR) for total capital of 11.50% for 2018. DBRS considers CRG’s membership within AECR and the IPS positively as it provides potential support from the ex-ante fund should CRG face severe financial difficulties, however, the Bank’s ability to improve capital through organic generation or to access capital markets is limited.

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

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). 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 and company reports. 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 - Vice President - Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director – Global FIG
Initial Rating Date: December 3, 2013
Most Recent Rating Update: November 21, 2017

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