Morningstar DBRS Changes Trends on Banco Cooperativo Español S.A.'s Long-Term Credit Ratings to Positive from Stable and Confirms Long-Term Credit Ratings at BBB (high)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Banco Cooperativo Español S.A. (BCE or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). Morningstar DBRS also changed the trends on all long-term credit ratings to Positive from Stable while the trends on all short-term credit ratings remain Stable. The Bank's Intrinsic Assessment is BBB (high). BCE's Support Assessment is SA1, which reflects the Bank's position as part of a larger consolidated entity, GrucajRural Inversiones, S.L. (Grucajrural or the Group). See the full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The trend change to Positive from Stable on the long-term credit ratings reflects Morningstar DBRS' view that the Group and the members of the Asociación Española de Cajas Rurales (AECR), the largest cooperative group in Spain to which the Bank acts as the central treasurer and liquidity provider, are well positioned to largely sustain improved profitability on the back of higher-for-longer interest rates, contained operating costs, and moderate cost of risk. The Positive trends also consider the Group's low risk profile because of its business model, supported by its solid interest rate risk management as demonstrated in the current interest rate cycle, given the lack of unrealised losses in BCE's large, fixed-income portfolio. The AECR members also show adequate and improving asset quality supported by robust coverage ratios.

BCE's credit ratings also take into account its stable deposit base contributed by the AECR members, high liquidity, good capitalisation given its low risk profile, its relatively small size and scope, as well as its lack of funding diversification.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the Long-Term Issuer Rating on BCE if AECR's earnings performance and asset quality are sustained while the Group maintains sound risk, capital and earnings profile.

Conversely, Morningstar DBRS would change the trend if the Group's or the AECR's profitability experiences a sustained and significant deterioration or if their risk profile and/or capitalisation materially worsens.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment: Moderate
BCE acts as the central treasurer and liquidity provider for the AECR, the largest cooperative Group in Spain with total aggregated assets of EUR 92 billion and an average aggregated market share of around 4.2% of loans and 4.9% of deposits at a national level at the end of 2023, but with stronger market shares in the regions of Navarra, Aragón, Asturias, and Andalucía. BCE is mostly owned by Grucajrural, which is the entity at the highest level of prudential consolidation that holds BCE and RGA Seguros General Rural, S.A. de Seguros y Reaseguros (RGA). RGA is a Spanish insurance company that operates through the AECR members' branches. The AECR members, BCE and Grucajrural have also been members of an Institutional Protection Scheme (IPS) since 2018. The IPS does not create a consolidated banking group as its members remain autonomous institutions, but it provides benefits regarding supervisory treatment of capital and liquidity as well as risk management processes. The IPS has an ex-ante fund to provide support if a member faces severe financial difficulties. The size of this fund was EUR 375 million at the end of 2023.
Earnings Combined Building Block Assessment: Good/Moderate
Morningstar DBRS views the Group's core profitability as resilient and stable over time, but it has significantly increased in recent years with the rally in interest rates since H2 2022. In addition, the Group shows adequate revenue diversification with approximately 50% of revenues from its fixed-income portfolio and loans to credit institutions, 20% from its insurance business, 10% from fees largely related to wealth management, and 10% from commissions on nonfinancial services. The Group reported a net profit of EUR 120 million at the end of 2023, up 47% year over year (YOY) with a reversal in debt provisions in 2023 compared with a large debt provision of EUR 50 million in the insurance business in 2022. In addition, the IPS reported a net profit of EUR 942 million in 2023, up 58% YOY on the back of a significant increase in net interest income and despite a large loan-loss provision. As a result, the Group's return on equity (ROE; as calculated by Morningstar DBRS) rose to 9.7% in 2023 from 7.2% in 2022 while the IPS' ROE rose to 11.7% in 2023 from 8.2% in 2022.

Risk Combined Building Block Assessment: Strong/Good
The Group has a low risk profile driven by its business mix and specialised franchise. The main risks stem from its large exposure to financial securities because of BCE's intermediary role for the AECR members and its high borrower concentration in a small loan customer book. At the end of 2023, the Group had EUR 6.9 billion in debt securities (42% of total assets), down from EUR 9.0 billion at the end of 2022, mainly with BCE contributions largely related to Spanish sovereign bonds. Despite the size of this portfolio, Morningstar DBRS acknowledges BCE's solid interest rate risk management of its portfolio as demonstrated during the current interest rate cycle, given the lack of unrealised losses. Finally, because of its limited exposure to lending, the Group's nonperforming loans are nonmaterial.

Funding and Liquidity Combined Building Block Assessment: Good
The Group's funding and liquidity position is underpinned by a large and stable deposit base from credit institutions, mostly AECR members, which represents the bulk of the funding resources. At the end of 2023, the consolidated Group had a solid liquidity position with strong liquidity coverage and net stable funding ratios of 260% and 224%, respectively. However, Morningstar DBRS views the Group's diversification of funding sources as limited.

Capitalisation Combined Building Block Assessment: Good
Morningstar DBRS considers the Group's capitalisation to be solid, given its large regulatory capital ratios and low risk profile. The Group's resilient profits have supported the build-up of capital organically in recent years. Morningstar DBRS also views BCE's membership in the IPS positively as it provides potential support from the ex-ante fund if BCE faces severe financial difficulties. However, Morningstar DBRS also views the absolute nominal total capital as relatively modest as it provides limited loss-absorbing capacity for any potential shocks. The Group reported a consolidated CET1 ratio of 46.7% at the end of 2023, well above its minimum regulatory requirement of 11.8% in 2023. The Group's leverage ratio was also strong at 11.3% at the end of 2023. The Group and BCE met all minimum requirement for own funds and eligible liabilities at the end of 2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/441332.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents, BCE and AERC presentations, BCE's annual reports (2019-23), Grucajrural's annual and regulatory reports (2019-23), Audited IPS reports (2020-23), European Banking Authority data, and European Central Bank data. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/441331.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Maria Jesus Parra, Vice President - European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 16 April 2018
Last Rating Date: 19 October 2023

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