DBRS Places BBB (low) Ratings of BES Under Review Negative After Sovereign Rating Action

DBRS, Inc. (DBRS) has today placed the ratings of Banco Espírito Santo, S.A. (BES or the Group) Under Review with Negative Implications following a similar rating action on the Republic of Portugal. Currently, the Group’s Senior Long-Term Debt & Deposit rating is BBB (low) and its Short-Term Debt & Deposit rating is R-2 (middle). These rating actions follow DBRS’s placement of the Republic of Portugal’s long-term foreign and local currency debt ratings of BBB (low) Under Review with Negative Implications. As such, DBRS has also placed the Group’s Unsubordinated Notes Guaranteed by the Republic of Portugal Under Review with Negative Implications.

BES’s intrinsic assessment (IA) of BBB (high) remains unchanged. Additionally, DBRS maintains its SA-2 support assessment for BES, which indicates an expectation of timely systemic support in case of need. However, with the current rating for the Portuguese sovereign below the BBB (high) intrinsic assessment for BES, there is currently no uplift to the Group’s ratings.

DBRS’s review will focus on the impact on the ratings of BES of the higher systemic risks that are pressuring the Portuguese sovereign rating. In DBRS’s view, the still challenging environment for Portuguese banks continues to pressure the ratings of the Group. The economy remains weak, credit costs remain elevated and further deleveraging has the potential to pressure earnings, though this should have less of an impact than the aggressive deleveraging in 2011. Adding to the headwinds, access to market funding continues to be unavailable to Portuguese banks, pressured by heightened market concerns with the adequacy of liquidity and capitalisation of financial institutions, as well as the position of the Portuguese sovereign. DBRS notes that further negative rating action on the Portuguese sovereign would likely impact the ratings of BES.

At the same time, DBRS has today assigned a Long-Term Instruments rating of BBB (high) and a Dated Subordinated Notes rating of BB (high) to BES Luxembourg Branch. These ratings have also been placed Under Review with Negative Implications.

Notes:
All figures in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include DBRS's rating action on the Republic of Portugal, company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Rating Committee Chair: Steven Picarillo
Initial Rating Date: 19 April 2011
Most Recent Rating Update: 31 January 2012

For additional information on this rating, please refer to the linking document under Related Research.