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Fitch Affirms Four Portuguese Banks' Ratings
March 16, 2017 / 5:52 PM / 9 months ago

Fitch Affirms Four Portuguese Banks' Ratings

(The following statement was released by the rating agency) LONDON, March 16 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of: Banco BPI S.A. at 'BBB-'; Caixa Geral de Depositos, S.A. (CGD) and Banco Comercial Portugues, S.A. (Millenium bcp) at 'BB-'; and Caixa Economica Montepio Geral (Montepio) at 'B'. The Outlooks on the Long-Term IDRs for all banks are Stable. A full list of rating actions is at the end of this rating action commentary. The rating actions are part of a periodic review of Portuguese banks rated by Fitch. The weak operating environment in Portugal led to a deterioration in the banks' asset quality metrics and persistently low interest rates have squeezed margins. All four banks are actively restructuring their businesses to improve efficiency and enhance weak internal capital generation. We believe that meaningful improvement in these banks' credit profiles will only be achieved in the medium term. KEY RATING DRIVERS IDRS, SENIOR DEBT AND SUPPORT RATING - BANCO BPI Banco BPI's IDRs, senior debt ratings and Support Rating reflect a high probability of support from its ultimate parent, Caixabank (BBB/Positive), in case of need. Fitch believes Portugal is a strategically important market for Caixabank as demonstrated by the longstanding investment in Banco BPI and its willingness to take control of the bank despite the related capital consumption and the difficulties inherent in a cross-border acquisition. Banco BPI's Long-Term IDR is capped one notch above that of Portugal; hence, it is on a Stable Outlook. Fitch believes Caixabank's propensity to support Banco BPI is linked to Portugal's operating environment, since this affects the attractiveness of Banco BPI to the group and Banco BPI's impact on Caixabank's overall risk and returns profile. VR - BANCO BPI Banco BPI's Viability Rating reflects stronger asset quality and funding profile than domestic peers but also just acceptable capitalisation and weak earnings generation capacity. Capitalisation is acceptable for the Portuguese operating environment, and the bank maintains moderate buffers over regulatory common equity Tier 1 (CET1) capital requirements. Considering Caixabank's track record in implementing synergies in acquired institutions we expect Banco BPI will achieve its strategic objectives, which are mainly related to improving operating efficiency. The bank's earnings profile has been highly variable. Despite some improvements in core domestic revenues Banco BPI's cost/income ratio remains high, reducing internal capital generation capacity. Banco BPI's asset quality is better than domestic peers' but remains vulnerable to changes in the tough Portuguese operating environment. The Non-performing Loan (NPL) ratio under the European Banking Authority's (EBA) definition was 8.2% at end-June 2016 and we believe the ratio has remained broadly stable at year end. Banco BPI's NPL ratio compares well with domestic peers' but is still higher than international peers'. Banco BPI has a generally stable funding profile and acceptable liquidity position. At end-2016 the bank's domestic operations had a loans/deposits ratio of 106% and large liquidity buffers relative to upcoming wholesale debt maturities. We believe the ownership by Caixabank is positive for the bank's funding and liquidity profile. IDRS, VR AND SENIOR DEBT - CGD CGD's ratings reflect the bank's weak asset quality and poor core profitability which together put pressure on its capitalisation. The ratings also take into account the agreement to increase capital by EUR2.5 billion by end-March, the bank's leading retail franchise in Portugal and its acceptable funding profile and liquidity position. CGD's asset quality remains weak by international comparison, suffering from the tough operating environment in Portugal. The bank reported a high NPL ratio (as per EBA's definition) of 17% and a NPL reserve coverage of just 44% at end-June 2016. CGD's asset quality has remained broadly stable in the second half of 2016. In addition the bank is exposed to valuation risk on its repossessed properties portfolio and corporate restructuring fund holdings. In March 2017 CGD announced its 2017-2020 strategic plan, which includes a capital increase of EUR2.5 billion and the issuance of EUR0.5 billion of additional Tier 1 debt. The positive impacts of the capital increase are already taken into account in CGD's ratings. This will allow CGD to restore its capital buffers, which have been dented by large loan impairment charges in 2016, by increasing the fully loaded CET1 ratio to 11.8% on pro-forma basis at end-2016. However capital encumbrance from unreserved problem assets remain high, making the bank's vulnerable to delays in problem asset reductions, in particular in a context of weak economic growth in Portugal. CGD's ratings also factored in the bank's weak core profitability, suffering from a high cost base and large loan impairment charges. Under its new strategic plan the bank aims to improve efficiency by enhancing revenues and cutting domestic operating costs by 20% by 2020. International activities will be downsized and some non-core operations sold. New top management has been recently appointed, but the still tough domestic operating environment might challenge the execution of the strategic plan. CGD's funding profile is based on a large retail customer deposit base that has been stable. The liquidity position of the bank is acceptable but sensitive to confidence shocks in Portugal. Fitch is withdrawing the senior unsecured certificate of deposit Long-Term rating of CGD as the programme is only able to issue short-term certificates with maturity below one year. IDRS, VR AND SENIOR DEBT - MILLENIUM BCP Millenium bcp's ratings reflect its weak asset quality, which puts pressure on its operating profitability and internal capital generation, as well as on capitalisation. The ratings also reflect the bank's sound domestic franchise and improved funding and liquidity. The bank has made progress in reducing its large volume of NPLs (as per EBA definition), but these represented a still high 18% of loans at end-2016. This compares unfavourably with many peers. The reserve coverage of NPLs also improved but remained low at about 40% at end-2016, resulting in a high reliance on collateral valuation and realisation and guarantees. In addition, Millennium bcp is also highly exposed to valuation risk through its holdings of foreclosed assets and investments in corporate restructuring funds. The bank issued EUR1.33 billion equity in 1Q17 to repay the outstanding EUR700 million state contingent convertible bonds and enhance its solvency position. The pro-forma fully loaded CET1 ratio stood at 11.1% at end-2016. However, unreserved NPLs and foreclosed assets represented a still high 167% of pro-forma fully loaded CET1 at end-2016 reflecting that capitalisation remains highly vulnerable to additional asset quality shocks. The weak asset quality is also a drag on Millennium bcp's profitability. The restructuring plan implemented since 2012 resulted in improved efficiency to well above peers'; however, bottom-line earnings are still dented by large impairment charges and weak compared to peers. We believe that core earnings are improving and becoming more sustainable, due to lower funding costs and declining overheads. The bank's funding and liquidity is generally stable, and lending is mostly funded through customer deposits. The bank also has wholesale funding in the form of senior and covered bonds and ECB funding. The liquidity position is adequate but sensitive to investor sentiment in Portugal. IDRS, VR AND SENIOR DEBT - MONTEPIO Montepio's ratings reflect the bank's weak capitalisation and small buffers over minimum regulatory capital requirements, combined with poor asset quality metrics, which compare unfavourably with international peers. The bank's profitability is weak and heavily affected by the high level of problem assets and the challenging operating environment in Portugal. Montepio's NPL ratio (as per EBA's definition) stood at a high 20% at end-June 2016 and we expect it to have remained broadly stable by year-end as loan deleveraging will offset lower NPL inflows. At this date the reserve coverage was low, indicating the bank's reliance on collateral is high. In addition the bank's exposure to valuation risk is high, due to its relatively large holdings of foreclosed assets and investments in property. At end-September 2016 the bank reported a relatively low fully loaded CET1 ratio of 8.2%. In addition, unreserved NPLs and foreclosed assets represented over 2x the fully loaded CET1 at end-June 2016, indicating that the bank's solvency is highly at risk from additional asset quality shocks. The bank's core profitability is weak and highly variable through the business and interest rate cycle. The bank has been loss making since 2013 due to shrinking revenues, a large cost base and high impairment charges. Montepio's funding profile is less stable than at domestic peers as deposits remains more price sensitive. The gross loans/deposits ratio was acceptable at 122% at end-September 2016 but the bank's liquidity position is sensitive to confidence shocks in Portugal. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) - CGD, MILLENIUM BCP AND MONTEPIO CGD's '4' SR and 'B' SRF reflect Fitch's opinion that there remains a limited probability of extraordinary support being provided to CGD by the Portuguese state without the bail-in of senior creditors. This potential support is based on full and willing state ownership and CGD's market leading position in the Portuguese market. An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support it. While not impossible, this is highly unlikely, in Fitch's view. The SR of '5' and SRF of 'No Floor' for Millennium bcp and Montepio reflect Fitch's belief that senior creditors of the bank cannot rely on receiving full extraordinary support from the sovereign in the event that the banks become non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of - or ahead of - a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by CGD and Millennium bcp are notched down from their VRs, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. CGD's lower Tier 2 is notched down once from the bank's VR for loss severity. CGD's preference shares have been downgraded to 'CCC' because Fitch believes economic losses are likely to be moderate before coupon payment resumes. We estimate this will occur at the next coupon date after the recapitalisation and approval of 2016 accounts. The ratings of Banco BPI's subordinated debt and other hybrid capital reflect potential support from Caixabank. Subordinated debt is notched down once from Banco BPI's IDR for loss severity. Banco BPI's preference shares are capped at the level assigned to equivalent securities issued by the parent. SUBSIDIARY AND AFFILIATED COMPANY The ratings of CGD's subsidiary Caixa Banco de Investimento (Caixa - BI) are equalised with those of its parent, driven by the full ownership, the integration of Caixa - BI within the parent bank and the offering of core investment banking products. Fitch does not assign a VR to the institution as we do not view it as an independent entity. The ratings of Banco Portugues de Investimento (BPI) are equalised with those of its 100% parent, Banco BPI. As well as its 100% ownership by Banco BPI, BPI's integration with and role within its parent bank mean there is a high probability of it being supported. We believe support from Caixabank would be allowed to flow through to BPI. Fitch does not assign a VR to this institution as the agency does not view it as an independent entity. RATING SENSITIVITIES IDRS, SENIOR DEBT AND SUPPORT RATING - BANCO BPI Banco BPI's IDRs and senior debt ratings and Support Rating would likely be downgraded if Portugal is downgraded, or if Fitch has reason to believe that Banco BPI has become less strategically important to Caixabank. Banco BPI's Long-Term IDR and senior debt ratings could be upgraded if the Long-Term IDRs of both Portugal and Caixabank are upgraded. VR - BANCO BPI The bank's VR is sensitive to developments in profitability, asset quality and capital. The VR could be upgraded if the bank improves its operating efficiency while improving or maintaining its asset quality metrics. This would result in a better internal capital generation capacity that would strengthen the bank's capital buffers over the regulatory minimum requirements. Conversely the VR could be downgraded if the bank's asset quality or core earnings metrics deteriorate sharply, weakening solvency. IDRS, VR AND SENIOR DEBT - CGD, MILLENIUM BCP AND MONTEPIO CGD's and Millenium bcp's ratings are primarily sensitive to developments in asset quality and profitability. Upward rating potential could arise from a material reduction in the exposure to problem assets, which combined with improved operating profitability, should help internal capital generation and reduce the vulnerability of capital to unexpected asset quality shocks. Conversely, downward rating pressure would primarily come from a further weakening of asset quality or profitability, which would put pressure on capital. Montepio's ratings could be downgraded if there is any setback in the bank's plan to improve asset quality and turn around profitability. The bank's capitalisation is tight and the exposure to problem assets high. Upside rating potential is currently limited but, in the medium term, could arise if there is a material improvement in the risk profile and profitability of the bank. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) - CGD, MILLENIUM BCP AND MONTEPIO An upgrade of the banks' Support Ratings and upward revision of the Support Rating Floors would be contingent on a positive change in the sovereign's propensity to support the banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by CGD, and Millennium bcp are primarily sensitive to any change in their VRs. The ratings of their preference shares are also sensitive to Fitch changing its assessment of the probability of the notes returning to performing status. Banco BPI's subordinated and hybrid instruments are ultimately sensitive to a change in Caixabank's IDR. SUBSIDIARY AND AFFILIATED COMPANIES The ratings of BPI and Caixa-BI are sensitive to rating actions on Banco BPI's and CGD's IDRs respectively. The rating actions are as follows: Banco BPI: Long-Term IDR: affirmed at 'BBB-', Outlook Stable Short-Term IDR: affirmed at 'F3' Viability Rating: affirmed at 'bb' Support Rating: affirmed at '2' Senior unsecured debt: affirmed at 'BBB-' Senior unsecured debt short-term rating: affirmed at 'F3' Lower Tier 2 subordinated debt: affirmed at 'BB+' Preference shares: affirmed at 'B+' Banco Portugues de Investimento: Long-Term IDR: affirmed at 'BBB-', Outlook Stable Short-Term IDR: affirmed at 'F3' Support Rating: affirmed at '2' CGD: Long-Term IDR: affirmed at 'BB-', Outlook Stable Short-Term IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' Senior unsecured debt Long-Term rating affirmed at 'BB-' Senior unsecured debt Short-Term rating affirmed at 'B' Senior unsecured certificate of deposit Long-Term rating withdrawn at 'BB-' Senior unsecured certificate of deposit Short-Term rating affirmed at 'B' Commercial paper programme affirmed at 'B' Lower Tier 2 subordinated debt affirmed at 'B+' Preference shares downgraded to 'CCC' from 'B-' Caixa - BI: Long-Term IDR: affirmed at 'BB-', Outlook Stable Short-Term IDR: affirmed at 'B' Support Rating: affirmed at '3' Millenium bcp Long-Term IDR affirmed at 'BB-'; Outlook Stable Short-Term IDR affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt long-term rating affirmed at 'BB-' Senior unsecured debt short-term rating affirmed at 'B' Preference shares affirmed at 'CCC' Montepio: Long-Term IDR: affirmed at 'B'; Outlook Stable Short-Term IDR: affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt Long-Term rating affirmed at 'B'/'RR4' Senior unsecured debt Short-Term rating affirmed at 'B' Contact: Primary Analyst Roger Turro Director +34 93 323 8406 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, 2nd Floor 08028 Barcelona Secondary Analyst (Banco BPI, Banco Portugues de Investimentos, CGD, Caixa - BI and Millennium bcp) Josu Fabo, CFA Director +34 93 494 3464 Secondary Analyst (Montepio) Arnau Autonell Associate Director +44 20 3530 1712 Committee Chairperson Olivia Perney Guillot Senior Director +33 144 299 174 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020676 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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