Morningstar DBRS Confirms All Credit Ratings of Kutxabank, S.A., Including its Long-Term Issuer Rating at "A", Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Kutxabank, S.A. (Kutxabank or the Bank) and Cajasur Banco, S.A. (Cajasur), including its Long-Term Issuer Rating of "A" and the Short-Term Issuer Rating of R-1 (low). All credit ratings have a Stable trend. Kutxabank's Intrinsic Assessment (IA) is "A" and the Support Assessment is SA3; Cajasur's Support Assessment is SA1, thus Cajasur's credit ratings are equalised with those of Kutxabank. As a result, any movement on Kutxabank's credit ratings would be mirrored in Cajasur's credit ratings. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
Kutxabank's credit ratings primarily reflect its much-improved profitability over recent years and Morningstar DBRS' expectation that the Bank will continue to report solid levels of profitability on the back of the higher-than-pre-2022 interest rate environment, credit growth, high efficiency levels, and very low cost of risk. Morningstar DBRS' credit ratings also consider Kutxabank's strong risk profile, which is underpinned by sound risk management practices and very solid asset quality metrics as evidenced by a net nonperforming asset (NPA) ratio of 0.0% at the end of September 2024. Finally, the credit ratings also incorporate the Bank's strong capital position, with very large capital buffers over minimum regulatory requirements, top-class capital quality, and proven recurrent organic capital generation through the years.

The Bank's Intrinsic Assessment of "A" has been assigned at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views Kutxabank's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade Kutxabank's credit ratings if the Bank demonstrates a continued and sustained record of solid and resilient profitability whilst maintaining strong asset quality metrics and robust capital levels.

Morningstar DBRS would downgrade Kutxabank's credit ratings in the event of a prolonged and material deterioration in profitability, asset quality, and/or capital position.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good/Moderate
Kutxabank is a medium-size Spanish retail bank with EUR 66 billion of total assets at the end of September 2024. It is mainly concentrated in the Basque Country and Córdoba, Andalusia, where it has a leading franchise with significant market shares for loans, deposits, and pension plan management. In addition, the Bank was the third entity in net investment fund subscriptions in Spain at the end of September 2024, with a total market share for investment fund management services of 7.4%. Kutxabank is the only Spanish banking institution that is 100% owned by banking foundations, namely Fundación BBK (BBK), Fundación Kutxa, and Fundación Vital.

Earnings Combined Building Block Assessment: Good/Moderate
Kutxabank's profitability is underpinned by its leading banking franchise in its home markets; a well-diversified revenue structure, which helps to mitigate revenue volatility in a changing interest rate environment; a well-controlled expense base; and very low cost of risk. The Bank reported a net profit of EUR 396 million in the first nine months of 2024 (9M 2024), up 2.6% year over year (YOY) driven by the continuous positive momentum in net interest income. The Bank's return on equity, as calculated by Morningstar DBRS, was 7.9% in 9M 2024 compared with 8.1% in 2023 and 5.3% in 2022. Kutxabank also reported a very strong efficiency ratio of 36% compared with 38% in 2023 and a very low net cost of risk of 4 basis points (bps) in 9M 2024, reflecting the Bank's conservative risk profile and the positive evolution of the Spanish economy. However, other provisions and impairments, mainly related to potential legal claims as well as foreclosed assets (FAs), were 3.5 times (x) higher YOY in 9M 2024, as the Bank prudently took advantage of its very high revenue generation capacity to keep reducing legacy real estate assets.

Risk Combined Building Block Assessment: Strong
Kutxabank's risk profile is strong; the Bank has a large proportion of mortgage loans, which are generally less risky, and substantial coverage ratios. The Bank's Stage 3 loans declined by 2.5% in 9M 2024 to EUR 656 million, largely driven by a recovery in the SMEs segment, reflecting Spain's solid economic performance. In addition, Kutxabank's net FAs declined significantly by 73.1% in 9M 2024 owing to a substantial increase in FA provisions and, to a lesser extent, a reduction in gross FAs. As a result, the Bank's net NPA ratio, as calculated by Morningstar DBRS, declined to 0.0% at the end of September 2024 compared with 0.5% at YE2023.

Funding and Liquidity Combined Building Block Assessment: Good
Kutxabank's funding and liquidity profile is solid and is supported by a large and resilient customer deposit base, which is the Bank's largest source of funding, accounting for 93% of total nonequity funding at the end of September 2024. As a result, the net loan-to-deposit ratio, as calculated by Morningstar DBRS and excluding repurchase agreements, stood at 91% at the end of September 2024. Kutxabank's wholesale funding, although modest, is well diversified by instruments, including covered bonds, senior preferred and nonpreferred debt, and commercial paper. The Bank had a comfortable liquidity position, with total liquid assets of EUR 17 billion at the end of September 2024, representing 1.0x total customer deposits not covered by the Deposit Guarantee Fund and debt maturities up to YE2025. Finally, Kutxabank reported strong liquidity ratios at the end of September 2024, with a 12-month trailing liquidity coverage ratio of 176% and a 12-month trailing net stable funding ratio of 143%.

Capitalisation Combined Building Block Assessment: Strong/Good
Kutxabank's capital position is robust on the back of very large capital buffers over minimum regulatory requirements, high capital quality, and recurrent organic capital generation. The Bank reported a regulatory CET1 and total capital ratio of 18.9% at the end of September 2024, up 86 bps compared to YE2023, driven by retained earnings and the positive valuation adjustments in equity instruments. As a result, the Bank's total capital cushion over minimum regulatory requirements was 720 bps. Because of the nature of the Bank's ownership structure, Morningstar DBRS does not foresee a material reduction in the Bank's capital position in the medium term. In addition, Morningstar DBRS considers the reserve fund provided by BBK as an additional capital cushion to cope with severe financial difficulties. Kutxabank's Minimum Requirement for Own Funds and Eligible Liabilities stood at 23.8% of its total risk-weighted assets at the end of September 2024, above its minimum requirement of 20.2%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/445939.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or 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), 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 (13 August 2024) 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://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents, Kutxabank's 2024 and 2023 quarterly reports and presentations, Kutxabank's annual reports (2018-23), Kutxabank's semiannual reports (H1 2023 and H1 2024), and European Banking Authority and ECB 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/445935.

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

Lead Analyst: María Jesús Parra Chiclano, Vice President, European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director, Global Financial Institution Ratings
Initial Rating Date: 20 January 2023
Last Rating Date: 19 January 2024

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