DBRS: Montepio’s Ratings Unchanged at BBBL After Sovereign Rating Action, Ratings Remain UR-Neg

DBRS, Inc. (DBRS) has today commented that its ratings of Caixa Económica Montepio Geral, S.A. (Montepio or the Group) remain unchanged following the extension of DBRS’s review of the Portuguese sovereign rating. DBRS rates Montepio’s Senior Long-Term Debt & Deposits at BBB (low) and Short-Term Debt & Deposits at R-2 (low). The ratings remain Under Review with Negative Implications, where they were placed on 24 May 2012, following DBRS’s similar action on the Republic of Portugal.

DBRS has recently announced the extension of its review on Portugal’s ratings given the unusually high degree of uncertainty regarding Portugal’s growth outlook, which is essential for debt stabilization. As a result, DBRS will wait for the conclusions of the EU-IMF 5th Program Review, which is expected in September 2012, and the 2013 budget proposal, which must be presented by October 15, 2012, prior to finalising its review. DBRS rates the Republic of Portugal at BBB (low). The Republic of Portugal’s long-term foreign and local currency ratings remain Under Review with Negative Implications, where they were placed on 22 May 2012.

DBRS views the higher systemic risks and challenging environment in Portugal as continuing 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. These issues are likely to be exacerbated by the increased uncertainty about the prospects for the economy not only in Portugal, but more broadly in Europe. DBRS notes that potential negative rating action on the Portuguese sovereign would likely impact the ratings of Montepio.

DBRS views Montepio as continuing to cope with the adverse environment. In its 1H12 results, Montepio reported net income of EUR 4.8 million, continuing to maintain profitability following net income of EUR 45.0 million in 2011 and net income of EUR 51.4 million in 2010. The Group has been successful in maintaining its revenues throughout this prolonged crisis, as it has worked to improve margins and maintain net interest income. Helped by the integration of Finibanco, the Group has been successful at growing deposits, while selectively increasing its loan portfolio as it focuses on core lending to individuals, SMEs and corporates, while shrinking its exposure to the construction sector. This deleveraging process has helped Montepio to reduce its loan-to-deposit (LTD) ratio to 124% at the end of 2011, down from 148% at the end of 2010. The LTD ratio was reduced further to 120% in 1H12.

With the Portuguese economy weakening, deteriorating credit quality is pressuring the Group’s results. While total net impairments and provisions remain elevated at EUR 76.5 million in 1H12, the Group was able to absorb this cost through pre-provision profit, or income before provisions and taxes (IBPT). DBRS views elevated credit costs as absorbing a substantial portion of recurring earnings and reducing significantly the resources to grow capital through retained earnings. Montepio’s ratio of overdue loans to customers continues to trend upward, reaching 4.5% at the end of June 2012 (vs. 3.24% at the end of June 2011). Given the current macroeconomic forecasts for Portugal, further asset quality deterioration is likely to occur.

The Group faces additional capital demands from the Bank of Portugal, which is requiring the Group to reach a 10% core capital ratio by year-end 2012. DBRS notes that Montepio has been thus far successful in bolstering its regulatory capital levels through deleveraging, retained earnings, and capital injections from the Parent, reaching a core capital ratio of 10.14% at 1H12. The Group has also improved its equity capital base, increasing its tangible equity to tangible assets ratio to 5.5% at year-end 2011 from 5.4% at year-end 2010.

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

Lead Analyst: Roger Lister
Approver: Alan Reid
Initial Rating Date: 27 June 2011
Most Recent Rating Update: 29 June 2012

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