DBRS Upgrades Banco Comercial Português’s Issuer Ratings to BBB (low) / R-2 (middle); Trend Stable

DBRS Ratings GmbH (DBRS) upgraded Banco Comercial Português, S.A.’s (BCP or the Bank) Long-Term Issuer Rating to BBB (low), from BB (high), and the Short-Term Issuer Rating to R-2 (middle) from R-3. The Trend on these ratings is now Stable. The Bank’s Intrinsic Assessment (IA) was raised to BBB (low) and the Support Assessment remains unchanged at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The upgrade of BCP’s Long-Term Issuer Rating to BBB (low) reflects the progress the Bank has made in improving its asset quality through reducing its stock of Non-Performing Exposures (NPEs), as well as improving profitability in the Bank’s domestic market. However the ratings continue to reflect the still high cost of risk and the large stock of NPEs, which, albeit improving, remain above European peers. The Stable Trend takes into account the Bank’s stable funding position and acceptable capital ratios.

RATING DRIVERS

A rating upgrade would require further reduction in NPEs, as well as a longer track record of profit generation in Portugal. In addition, further clarity around the outlook for profitability in Poland as a result of the recent proposals on CHF mortgages would be a pre-requisite for any further upgrade. Downward rating pressure could arise from a material deterioration of earnings or significant weakening in the Bank’s funding and capital.

RATING RATIONALE

BCP is the second largest banking group in Portugal where it maintains solid market shares in both loans and deposits of around 17%. Outside Portugal, the Bank has a significant presence in Poland. International activities represented around 29% of the Group’s consolidated assets at end-1Q19.

The Bank’s profitability improved in 2018 supported by improving results in Portugal and a solid contribution from the International operations. In FY18, BCP reported a total net income of EUR 301 million, up from EUR 186 million in FY17. Results were underpinned by a significant reduction in loan impairments, especially in Portugal, and more resilient revenues. The Bank also maintained good efficiency levels with a cost to income ratio of 47% in 2018. The cost of risk decreased to 92 bps from 122 bps in 2017, but remains high in Portugal.

In 2018 and 1Q19, the Bank’s results continued to benefit from a solid contribution from the International business. Poland, which is BCP’s second largest market, was the main contributor, and its performance was underpinned by favourable economic conditions. Nonetheless, BCP’s Polish subsidiary faces risks from its legacy exposure to mortgages denominated in CHF. These risks heightened following a Government proposal to introduce a mortgage levy. This envisages a quarterly contribution of up to 0.5% on the mortgage loans in foreign currency into a new restructuring fund with the aim of facilitating the voluntary conversion of the loans to zloty. If implemented, the proposal could have a significant impact on the Bank’s profits. In DBRS’ view, part of this pressure might be alleviated by the ongoing recovery of the Bank’s profitability in Portugal.

In 2018, BCP accelerated the reduction of its NPEs by means of disposals, recoveries and write-offs, supported by the favourable operating environment in Portugal. The total gross NPE stock decreased to EUR 5.2 billion at 1Q19, down by 32% compared to FY17, and was mainly driven by the NPE reduction in Portugal. In DBRS’s view, the Bank is well on track to achieve its NPE target by reducing its NPEs to EUR 3 billion in 2021. The gross NPE ratio (based on the European Banking Authority, or EBA, definition) was reported at 10.1%, down from 15.0% at FY17, whilst total NPE coverage by loan loss reserves strengthened to 55% at 1Q19 from 48% at 1Q18. The Bank’s NPE levels, however, continue to remain above the European average.

BCP’s solid funding profile is underpinned by its large customer deposit base. The Bank has a solid liquidity position with EUR 16.9 billion of ECB eligible assets at 1Q19, net of haircuts, including EUR 7.4 billion of Portuguese Sovereign bonds. Total deposits increased in 2018 and 1Q19, supporting further reduction in the LTD ratio to 87% from 93% in 2017. The Bank has also reduced its exposure to ECB funding. Despite more volatile market conditions, the Bank maintained access to the international funding market with the issuance of Additional Tier 1 (AT1) instruments in January 2019 (EUR 400 million) . By July 2022, the Bank is required to meet a minimum MREL ratio of 26.61% of its risk-weighted assets.

The Bank’s capital ratios provide an acceptable cushion over the ECB SREP minimum requirements. At 1Q19 the Bank reported a fully-loaded CET1 ratio of 12.7%, while the total capital ratio was 15.2% in 1Q19, up from 13.5% at FY18, supported by AT1 issuance. The Bank expects a negative impact of around 40 bps on its CET1 ratio from the acquisition of Euro Bank in Poland, which is targeted for completion in 2Q19.

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.

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) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents and SNL Financial. 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Nicola De Caro, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: June 10, 2011
Last Rating Date: May 16, 2019

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