DBRS Comments on Banco Popular Español S.A.’s Q2 2009 Results; AA Rating Unchanged

DBRS has today commented that its ratings of Banco Popular Español S.A. (Popular or the Group) remain unchanged after the announcement of the Company’s Q2 2009 results. DBRS rates the Senior Unsecured Long-Term Debt & Deposits at AA with a Negative trend. Popular reported profits attributable to the Group of EUR 217 million for the quarter, which were down only moderately from profits of EUR 225 million in the prior quarter, though down 38% from Q2 2008.

Despite a difficult operating environment, Popular demonstrated the strength of its franchise in Q2 2009 by sustaining net interest income. Popular grew lending to customers, focusing on its core client base of small- and medium-sized enterprises (SMEs) and private individuals, while simultaneously growing its deposit base. The Group maintained its customer spread at about the same quarterly run rate of the prior four quarters, helped by significantly lowering the rate paid on deposits. This helped Popular maintain its strong net interest margin, which increased by 14 basis points in the first half of 2009 versus H1 2008. Expansion of the net interest margin combined with asset growth underlies the sustainable increase in revenues. Gross operating income was EUR 1.0 billion in Q2 2009, stable versus the prior quarter and up 12% compared to the year ago quarter.

On the expense side, Popular continued to manage its capacity by reducing the number of branch offices and strictly controlling costs, resulting in a quarter-over-quarter decline in administrative expenses of 11%. Popular’s exceptional ability to streamline operations enabled it to improve its efficiency ratio to a record 28.3% in H1 2009, down 363 basis points (bps) as compared to the first half of 2008. By sustaining revenues and controlling expenses, the Group managed to improve its income before provisions and taxes (IBPT) to EUR 722 million in Q2 2009 from EUR 694 million in the prior quarter and enabled it to absorb increased provisions, while still maintaining profitability.

Though Popular produced solid pre-provision earnings, its asset quality continues to deteriorate, overshadowing the strength of the franchise. Loan and asset impairment charges increased to EUR 512 million in the quarter, as the Group conservatively added to provisions rather than drawing on generic reserves. While the coverage ratio slipped to 47.1% in the quarter from 50.9% in the prior quarter, the coverage of specific provisions increased by 197 bps to 26.6%. Additionally, the growth rate of non-performing loans slowed in the quarter. The non-performing loan ratio jumped to 4.39% from 3.82% in the prior quarter, though the increase was just 57 bps versus an increase of 102 bps in the prior quarter. The decrease in additions to non-performing loans was helped by a recovery team that was established by the Group to work on restructurings and increase recoveries on troubled and delinquent loans. Popular also booked losses of EUR 74 million in Q2 2009 for the possible impairment of property assets. This was fully offset by one-time gains of EUR 156 million in the quarter from the sale of property.

Popular continues to strengthen its balance sheet, capital and liquidity. The Group’s focus on deposit gathering has not only reduced its funding costs, but also strengthened its funding profile by decreasing the commercial gap between customer funding and loans, and reducing its reliance on wholesale funding. Popular’s core capital ratio is now 7.37%, up 14 basis points from Q1 2009 and 20 basis points from year end 2008; the Tier 1 capital ratio was 8.68%, which was helped by preferred stock issuance in Q1 2009. DBRS views positively that the Group has not received any capital injection from the government. Popular maintains a solid second line of liquidity of EUR 11.5 billion, which covers the next twelve months of wholesale debt maturities.

Popular continues to face a challenging environment within the Spanish banking sector, which is experiencing rising unemployment and soaring non-performing loans. In this context, Popular is taking the appropriate steps to protect its franchise through expense reduction, building up loan loss reserves, bolstering capital and enhancing liquidity. At the same time, the Group continues to generate modest balance sheet expansion through growth in loans and deposits, contributing to the generation of positive recurring earnings. While the H1 2009 results highlight Popular’s strengths going into the second half of the year, DBRS maintains its Negative trend on the ratings as the economic environment in Spain remains very stressed and financial markets generally are still fragile. DBRS will continue to monitor the Group’s underlying earnings, capital levels and liquidity lines. Any significant weakening in levels would be viewed as indicating stress on the Group and could result in further negative ratings pressure.

Banco Popular Group is headquartered in Madrid, Spain, and reported total assets of EUR 119 billion as of June 2009.

Note:
All figures are in Euros unless otherwise noted.

The applicable methodologies are, Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.