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

DBRS, Inc. (DBRS) has today commented that its ratings of Caixa Geral de Depósitos, S.A. (CGD or the Group) remain unchanged following the extension of DBRS’s review of the Portuguese sovereign rating. DBRS rates CGD’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 CGD.

CGD reported negative net income of EUR 12.7 million in 1H12, as the Group’s provisions and credit impairments approximately doubled YoY to EUR 729 million in 1H12. While CGD generated enough gross operating income, or income before provisions and taxes (IBPT), of EUR 792 million to absorb these provisions and impairments, the bottom line results were negatively impacted by taxes, minority interests and the extraordinary contribution to the banking sector, driving the net loss. This follows a net loss of EUR 488 million in 2011, which was attributable to significant provisions and impairments, and net income of EUR 251 million in 2010.

DBRS views positively the Group’s continued effort to diversify its earnings by focusing on the contribution of its international operations, which is a strength underpinning its rating. The Group continues to increase the contribution of its international operations by focusing on strategic markets of Africa, Brazil and Asia. CGD generated IBPT from international operations of EUR 146.9 million, or 19% of consolidated IBPT, in 1H12. IBPT within international operations increased 20.7% YoY despite negative earnings pressure from the Group’s operations in Spain. With a much reduced contribution from domestic banking and investment banking, the importance of international operations as a proportion of consolidated profits has increased. Given the uncertainty around the Portuguese sovereign and weak growth prospects domestically, international expansion has become a crucial component of CGD’s ability to generate positive earnings.

DBRS views the Group’s capitalization levels as having improved, following the recapitalization plan which resulted in an increase in CGD’s share capital by EUR 750 million, fully subscribed by the Portuguese state. The Group also issued EUR 900 million 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 11.4% at June 2012, based on Bank of Portugal standards, and 9.5%, based on EBA requirements. CGD met its regulatory requirements as of June 2012 and maintains a cushion above minimum regulatory requirements. DBRS also notes that this recapitalization resulted in a boost to the Group’s equity / assets ratio, which improved to 5.8% at 2Q12 from 4.4% at the end of 2011.

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 G. Reid
Initial Rating Date: 23 December 2011
Most Recent Rating Update: 29 June 2012

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