DBRS Assigns First-Time Ratings to Caixa Catalunya: Senior Unsecured at A (high)

Dominion Bond Rating Service (DBRS) has today assigned long-term deposit and senior debt ratings of A (high) and a short-term rating of R-1 (middle) to Caixa d’Estalvis de Catalunya (Caixa Catalunya), all with Stable trends. The ratings are based on Caixa Catalunya’s strong and established franchise as the second-largest savings bank in Spain’s wealthy region of Catalunya, its improving profitability as a consequence of revenue diversification and better cost controls, and its good progress in risk management. The ratings also reflect the bank’s risk concentration to property developers in terms of both revenues and credit and investment exposure, as well as the fact that a material part of its capital is tied up in equity holdings. Finally, the ratings incorporate marginally DBRS’s expectation of some form of timely systemic support for Caixa Catalunya in the very unlikely event of a stress scenario – given the bank’s relevance for the region and its important position in Spain’s savings bank system in general.

Caixa Catalunya is Spain’s fourth-largest savings bank. Its business mix encompasses retail and commercial banking, primarily in Catalunya, as well as an important participation in the property development market. Specifically, some one-third of the bank’s operating revenues come from property development – primarily via PROCAM, which is Caixa Catalunya’s specialised affiliate. In recent years the bank has made significant progress in improving its revenue base and in cutting costs, although efficiency indicators still rank behind those of other large Spanish financial institutions. Caixa Catalunya’s improved performance has been aided to a large extent by the country’s solid economic progress, of which rising property prices represent an important part. In recent years, Caixa Catalunya has focused on new sources of retail revenues, such as the region’s growing immigrant population which has led to a GDP boost.

“Caixa Catalunya has achieved significant progress in strengthening its risk-management culture and processes.” says Anne Caris, DBRS Vice President and lead analyst for the bank, who has observed this positive evolution in recent years. Similar to other Spanish banks, it displays very low levels of impaired loans. DBRS notes the large retail component of the credit portfolio – mainly residential mortgages. At the same time, the property-development concentration makes the loan portfolio inherently more vulnerable going forward, especially since the ongoing property-price boom in Spain – including in the Barcelona region – is not expected to last. In this respect, a source of comfort for the rating agency is the fact that senior management team recognizes this potential vulnerability and exercises tight credit controls. It is also DBRS’s understanding that the property-development exposure will decline in the future in relative terms, as Caixa Catalunya continues to grow its retail financial-service activities.

The rating agency also notes that Caixa Catalunya holds some significant equity investments in its balance sheet – many of them strategic – and as a consequence a material part of its capital is tied up in these holdings. That said, management has committed to strengthen the bank’s Tier 1 ratio to 7% to 7.5% in the near future (it reached 6.13% at year-end 2005) primarily through the sale of some equity participations (a process that has already started), further securitisation, and internal capital generation. With respect to Basel II and the Capital Requirement Directive, the bank has opted for the most advanced approaches for both credit, market and operational risk and DBRS believes that it is well on its way in the forthcoming compliance process. The rating agency concludes that the mix of strengths and challenges cited above underpin an “A” intrinsic assessment equivalent.

DBRS also views Caixa Catalunya as a systemically important financial institution in Spain, given its large regional footprint and also its position as one of the larger members of the savings bank system which as whole represents more than half of the country’s banking market. As such, Caixa Catalunya is likely to receive some form of timely outside systemic support in case of need, which underpins a SA2 support assessment. The bank’s A (high) rating is consequently positioned one notch above its intrinsic assessment equivalent. That said, DBRS views the scenario of a bank with good credit fundamentals like Caixa Catalunya needing any form of support as very unlikely for the foreseeable future.

Referring to rating-change drivers, DBRS notes that Caixa Catalunya’s ratings should in time benefit from (a) a significant reduction in the total exposure to property development from both a credit-risk and a revenue-generation angle; (b) materially higher recurring revenues, achieved primarily from core banking activities; and (c) a reduction in non-strategic equity holdings, with capital re-deployed to grow core activities. Conversely, ratings could be negatively affected by (a) a shift in strategic choices, in the sense of a higher appetite for wholesale banking and for international expansion; (b) an even higher reliance on earnings related to the property market or to a higher level of participations in non-financial companies; and (c) a material increase in short-term market funding not supported by an appropriate liquidity cushion.

DBRS adds that an economic slowdown in Spain should not necessarily have negative rating connotations for Caixa Catalunya, as the ratings are positioned to withstand cyclical trends. Important in this respect will be the Bank’s willingness and capacity to diversify activities away from the property-development sector.

Intrinsic and support assessments (the latter on a scale from SA1 to SA4) are the two building blocks of DBRS’s bank ratings, as per the new bank rating methodology announced in 2006. At this time DBRS is in the process of adjusting all its existing bank ratings to this methodology – a process which is still ongoing.

The following ratings were assigned:

• A (high) for Senior Unsecured Long-Term Debt & Deposit
• A for Subordinated Debt
• R-1 (middle) for Short-Term Debt & Deposit

DBRS notes that, at this time, it has not assigned ratings to Caixa Catalunya’s mortgage covered bonds (or cédulas hipotecarias).

Caixa Catalunya is headquartered in Barcelona, Spain, and reported total assets of €59 billion at the end of June 2006.