Morningstar DBRS Upgrades Banco Montepio's Long-Term Issuer Ratings to BBB (low), Changes Trend to Stable

DBRS Ratings GmbH (Morningstar DBRS) upgraded the credit ratings of Caixa Económica Montepio Geral, caixa económica bancária, S.A. (Banco Montepio, or the Bank), including the Long-Term Issuer Rating and Long-Term Senior Debt to BBB (low) from BB (high), and the Long-Term Deposits to BBB from BBB (low). The Bank's Short-Term Debt and its Short-Term Issuer Ratings were also upgraded to R-2 (middle), from R-3, and the Bank's Short-Term Deposits rating was upgraded to R-2 (high). At the same time, Morningstar DBRS changed the trends on all ratings to Stable.

Banco Montepio's Intrinsic Assessment (IA) was also raised to BBB (low) and the Support Assessment maintained at SA3. The Bank's BBB Long-Term Deposits rating is one notch above the IA, reflecting the legal framework in place in Portugal, which has full depositor preference in bank insolvency and resolution proceedings. See a full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The upgrade of Banco Montepio's credit ratings into the investment grade territory reflects the sustained improvement in the Bank's risk profile, earnings, and capitalisation. The Bank's reduction in the stock of non-performing assets in recent years has been material, and its improved profitability has benefitted from stronger interest revenues and lower loan loss provisions. Consequently, organic capital generation has strengthened the capital position. The upgrade considers Morningstar DBRS's expectation that profitability will be sustained despite declining interest rates, driven by higher lending volumes.

Banco Montepio's credit ratings reflect its good retail franchise in Portugal and sound capital buffers. The Bank's deposit base and recent success in raising market funds strengthen its funding and liquidity positions. However, the credit ratings also reflect the bank's small size, and its modest profitability that remains below domestic and international peers.

CREDIT RATING DRIVERS
Banco Montepio's credit ratings would be upgraded if there is sustain improvement in profitability and the risk profile, while maintaining robust capital and liquidity, and demonstrating consistent access to a variety of market funding. The credit ratings would be downgraded in the case of material weakening of the Bank's profitability, risk profile, or capital.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Moderate

Banco Montepio is a small Portuguese retail and commercial bank with total assets of EUR 18.9 billion as of March 2025 and is majority owned by the Montepio Geral Associação Mutualista. It is the seventh largest bank by assets in Portugal, and as part of a long and successful turnround, the Bank streamlined its branch footprint and reduced its headcount. It has 224 branches as of 1Q 2025 in Portugal, and a total market share of around 5% for loans and deposits. The Bank's strategic re-focus on its core Portuguese market included the sale of Finibanco Angola in August 2023. The Bank's business model, centered on traditional retail and commercial banking with limited diversification, has benefitted from the reduction in legacy problem assets and the higher interest rate environment.

Earnings Combined Building Block Assessment: Moderate/Weak

Banco Montepio's profitability has significantly improved in recent years, driven by a series of restructuring initiatives, balance sheet de-risking, and the rise in interest rates. Despite the gradual decline in interest rates more recently, we expect rates to remain above pre-pandemic levels. The Bank's consolidated net income exceeded EUR 100 million in 2024, and net income for the first quarter of 2025 increased 6.7% YOY and return on equity (as reported) was 10.6% in Q1 2025, up 0.5 percentage points from end-2024. Strong results have been supported by a reversal of provisions on loans, resulting in a cost of risk (as reported) of -41 bps in the first three months of the year. The lower provisions and a lighter tax bill more than offset lower net interest income (NII), which changed -5.8% year-over-year (YOY) in 2024 and -13.7% YOY in Q1 2025 due to lower interest rates and higher funding costs from volume growth in customer deposits. Net interest margin (NIM) narrowed in 2024 to 2.2% from 2.4% a year earlier. The 10.0% increase in the Bank's operating costs in Q1 2025, due to higher staff costs and administrative expenses, was partially offset by the 8.6% YOY increase of fees and commissions in the same quarter. Non-interest income has benefitted from a pickup in lending volume growth. Cost pressures increased the cost-to-income ratio to 59.4% in the first quarter of 2025, from 53.1% at the end of 2024, though Banco Montepio's efficiency ratio compares well to its Portuguese peer group.

Risk Combined Building Block Assessment: Good/Moderate

Banco Montepio's risk profile has improved in recent years due to de-risking and significant reduction of non-performing exposures (NPEs). The Bank's active management of NPE and real estate assets has led to better asset quality metrics. Banco Montepio's NPEs declined by 34% YOY in Q1 2025 to EUR 254 million, down from nearly EUR 631 million at end-2022. The reduction was due to disposals, higher cures and recoveries, and was ahead of the Bank's strategic target. NPEs as a share of total loans fell to 2.1% in the first quarter of 2025, from 3.2% a year earlier. The reduction in foreclosed assets was also material, declining by 29% YOY to EUR 177 million and representing 0.9% of net assets, down from 1.4% a year earlier. At the same time, the total NPE coverage by provisions for balance sheet loans increased to 80.1% in Q1 2025 from 73.0% in Q1 2024. Asset quality is likely to continue to benefit from a benign economic environment in Portugal and the gradual reduction of interest rates.

Funding and Liquidity Combined Building Block Assessment: Good/Moderate

Banco Montepio's funding profile is underpinned by its customer deposits, the bulk of which are with retail clients. Customer deposits increased by 11.7% YOY in Q1 2025 to reach over EUR 15 billion, up 16% since end 2022. There has been a recent shift to term deposits accounting for 61% of the total at end-2024, from 49% at end-2022. This shift in preference for term deposits with higher remuneration could restrict the bank's ability to reduce funding costs to offset lower interest income as interest rates gradually decline. That said, the bank's historically sticky deposit base mitigates funding risks. With an MREL ratio of 25.0% in Q1 2025, the Bank exceeds its own funding requirement of 23.54%. The Bank returned to the wholesale market with one Tier 2 issuance of EUR 250 million in March 2024 (at a fixed interest rate of 8.5%) and two MREL eligible issuances in senior bonds: EUR 200 million in October 2023 (at a fixed interest rate of 10.0%) and EUR 250 million in May 2024 (at a fixed interest rate of 5.625%). Banco Montepio also maintains an adequate liquidity profile, the loan-to-deposit ratio declined to 79.4% in Q1 2025, down from 84.9% a year earlier. The Bank's liquidity buffer reached EUR 5.7 billion in the first quarter of 2025, including unencumbered assets and cash and deposits at Central Banks. LCR ratio and NSFR ratio were reported at 188.1% and 141.8% respectively in Q1 2025, comfortably above minimum requirements.

Capitalisation Combined Building Block Assessment: Good/Moderate

Banco Montepio continues to strengthen its capital buffers. The Bank's fully implemented CET1 increased to 16.2% in Q1 2025, from 15.5% a year earlier, and up from 13.2% in 2022. Fully implemented total capital improved by 3.7 percentage points since 2022 to reach 19.4% in the first quarter of 2025.This total capital ratio represents 536 bps of excess capital over minimum requirements. The improvement in the capital ratios in recent years is due to strong organic capital generation and significant de-risking through the reduction non-strategic assets, real estate exposures, and NPL disposals.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/456076.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social and 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 (16 May 2025) https://dbrs.morningstar.com/research/454196

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 May 2025) https://dbrs.morningstar.com/research/454637. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 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, 2024 and year to date 2025 quarterly reports and presentations, Banco Montepio annual reports (2022-2024), European Banking Authority (EBA) and European Central Bank (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's trends 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/456075.

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

Lead Analyst: Jason Graffam, Senior Vice President - Global Sovereign & Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 27 June 2011
Last Rating Date: 29 October 2024

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