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

DBRS, Inc. (DBRS) has today commented that its ratings of Banco Comercial Português, S.A. (Millennium bcp, BCP or the Group) remain unchanged following the extension of DBRS’s review of the Portuguese sovereign rating. DBRS rates BCP’s Senior Long-Term Debt & Deposits at BBB (low) and Short-Term Debt & Deposits at R-2 (middle). 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 BCP.

With 1H12 results, BCP reported negative net income of EUR 544.3 million, as the Group’s net loan impairments remained elevated at EUR 537.3 million. While BCP generated just enough operating income before impairments, or income before provisions and taxes (IBPT), of EUR 593.8 million to absorb these impairments, the bottom line results were negatively impacted by taxes, minority interests and a EUR 450.0 million impairment for expected losses in Greece, driving the net loss for the Group. This follows a net loss of EUR 762.8 million in 2011, which was driven by one-off items such as the partial transfer of BCP’s pension fund liabilities to the Portuguese state and write-downs on Greek and Portuguese debt, and net income of EUR 403.8 million in 2010.

BCP’s domestic revenues are supported by its significant nationwide franchise with strength in corporate and mortgage lending, enabling Millennium bcp to defend its margins. The advantages of the Group’s geographic diversification were evident in the positive net income of EUR 22.2 million generated in BCP’s international businesses, with the international components of its core franchises – Poland, Mozambique and Angola – contributing EUR 115.9 million in net income before minority interests. DBRS views BCP’s success in building out its international franchises as supporting the Group’s intrinsic strength, given that the contribution is helping to compensate for the pressure on its domestic businesses. At the same time, DBRS views non-core franchises, such as Greece and Romania, as negatively pressuring the Group’s risk profile during this sustained period of stress.

DBRS views the Group’s capitalization levels as having been improved, based on regulatory requirements, following the recapitalization of the Group that is backed by the Portuguese state and the EU/IMF. The Group issued EUR 3.0 billion of Core Tier 1 eligible hybrid securities, fully subscribed by the Portuguese state. As a result, the Group’s Core Tier 1 ratio improved to 12.1% at June 2012, based on Bank of Portugal standards, and 9.7%, based on EBA requirements. Millennium bcp met its regulatory requirements as of June 2012 and maintains a cushion above minimum regulatory requirements. Despite the boost to regulatory capital ratios, the Group’s tangible equity / tangible assets ratio continues to deteriorate, declining to 4.0% at 2Q12 from 4.4% at the end of 2011 and 5.5% at 2Q11. BCP has planned a rights issue of EUR 500 million, which is fully underwritten by the Portuguese state, to be carried out by 28 September 2012, which will provide an improvement to current capital levels.

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: 10 June 2011
Most Recent Rating Update: 24 May 2012

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