DBRS Upgrades CGD’s Issuer Ratings to BBB / R-2 (high); Trend Stable

DBRS Ratings GmbH (DBRS) upgraded Caixa Geral de Depósitos’s (CGD or the Bank) Long-Term Issuer Rating to BBB from BBB (low), and the Bank’s Short-Term Issuer Rating to R-2 (high) from R-2 (middle). The Trend on these ratings was changed to Stable from Positive. The Bank’s Intrinsic Assessment (IA) was raised to BBB 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 CGD’s Long-Term Issuer Rating to BBB takes into consideration the progress made, particularly in terms of the reduction in Non-Performing Loans (NPLs) and in profitability. Nonetheless, the ratings continue to reflect the still large stock of NPLs, as well as the challenges to strengthen revenues, especially net interest income. The Bank’s solid funding and capital position together with its leading market position in Portugal remain key factors underpinning the ratings and the Stable Trend.

Due to the introduction in Portugal of full depositor preference in bank insolvency and resolution proceedings in March 2019, DBRS rates the Deposit ratings of the Portuguese Banks one notch above the individual banks IA. In the case of CGD the Bank’s Long-Term and Short-Term Deposit ratings are currently rated at the same level as the Republic of Portugal (BBB / R-2 (high), Positive Trend), therefore further positive rating action would require an upgrade of the sovereign ratings.

RATING DRIVERS

An upgrade of CGD’s ratings would require an upgrade of the sovereign ratings, as well as a further reduction in NPLs and further evidence of an improvement in underlying profitability. Downward rating pressure could arise from a material deterioration of the Bank’s franchise and reputation, or a significant weakening in earnings and capital.

RATING RATIONALE

CGD is the largest banking group in Portugal where it is the market leader in several products and services in commercial and retail banking. Owned by the Portuguese State, the Bank is undertaking a restructuring plan for the 2017-2020 period, as agreed with the European Commission (EC) following the State-back recapitalisation in 2017. As part of this plan, the Bank has continued to reduce its stock of non-performing assets, streamline its operating structure by reducing headcount and branches, and downsize its operations outside Portugal. In 2018, CGD sold its activities in Spain and South Africa, pending regulatory approvals, whilst an exit from Brazil and Cape Verde is planned in 2019-2020.

The Bank returned to profit in 2017 after 6 years of losses. In 2018, CGD reported a net attributable income of EUR 496 million, up from EUR 52 million a year earlier, driven by an improvement in underlying profitability in Portugal. Results were supported by lower provisions, after the significant level of impairments made in 2016, lower expenses and stronger contribution from fee income. Nonetheless, results were still impacted by modest net interest income, partially due to the ongoing de-risking plan and the low interest rate environment, as well as one-offs from restructuring.

CGD has halved its NPL stock from the level of EUR 10.6 billion at FY16, through a combination of sales, write-offs and recoveries supported by the favourable operating environment in Portugal. In 1Q19, total NPLs were down 34% YoY, and the gross NPL ratio (based on the EBA definition) was 7.8%, down from 11.5% at 1Q18 (or 15.8% at FY16). This level, however, continues to remain above the average of European peers. Taking into account the Bank’s financial strengths, its reinforced NPL coverage of 62.8% and still favourable economic conditions in Portugal, DBRS expects CGD to achieve a gross NPL target below 7% in 2020.

The Bank maintains a solid funding and liquidity position, underpinned by its leading franchise position in customer deposits in Portugal. At end-1Q19, the net loan to deposit ratio was 79%, down from 83% at FY18, due to a combination of higher deposit funds and a smaller loan portfolio. On the wholesale debt markets, the Bank issued EUR 500 million of Tier 2 bonds in 2018, completing the last stage of its recapitalisation plan agreed in 2017. The Bank also maintains a solid liquidity position with a stock of ECB eligible assets of around EUR 12.1 billion, net of haircuts.

CGD’s capital position has significantly improved with the capital injection received in 2017. DBRS also recognises the significant progress in de-risking the balance sheet and the return to profitability. In 1Q19, CGD’s fully-loaded Common Equity Tier 1 (CET1) ratio was 15.0% (or 14.6% considering a dividend payment proposal of EUR 200 million) whilst the total capital ratio was 17.4%, providing a solid cushion over the ECB SREP minimum requirements.

DBRS withdrew the ratings on the liabilities issued by Caixa Geral de Depósitos Finance and guaranteed by CGD, following their repayment.

The Grid Summary Grades for Caixa Geral de Depósitos are as follows: Franchise Strength – Good; 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 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: December 23, 2011
Last Rating Date: April 11, 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrs.com.