DBRS: Montepio’s Ratings Confirmed at BBB (low), Negative Trend, After Sovereign Rating Action

DBRS, Inc. (DBRS) has today confirmed Caixa Económica Montepio Geral, S.A. (Montepio or the Group)’s Senior Long-Term Debt & Deposits at BBB (low) and Short-Term Debt & Deposits at R-2 (low). The trend on all ratings is Negative.These ratings have been removed from Under Review with Negative Implications, where they were placed on 24 May 2012. This rating action follows DBRS’s confirmation of the BBB (low) rating of the Republic of Portugal with a Negative trend on 30 November 2012.

The confirmation of the sovereign ratings reflects DBRS’s assessment that, despite an unfavourable external environment, Portugal has made significant progress consolidating public finances, unwinding external imbalances and implementing structural reforms. The statement from Euro area countries that additional financing would be available to Portugal, if necessary, as long as there is strict policy implementation in the context of the EU-IMF programme, provides additional support to the ratings. The Negative trend, however, recognises that there is substantial uncertainty regarding Portugal’s growth outlook with downside risks emanating from external demand, stressed economy-wide funding conditions and adverse effects from the fiscal consolidation effort.

Montepio’s intrinsic assessment (IA) of BB (high) remains unchanged. However, in light of the continued difficult environment, DBRS will continue to evaluate the IA of the Group. Additionally, DBRS maintains its SA-2 support assessment for Montepio, which indicates an expectation of timely systemic support in case of need. This currently provides a one notch uplift to the Group’s ratings.

Montepio’s intrinsic assessment (IA) of BB (high) is based on its franchise resiliency, revenue generation capacity, capable management of liquidity and funding through an extended period of stress, effective risk management, and improved capitalisation. These strengths are enabling the Group to cope with elevated credit costs and the difficult funding and liquidity environment that reflect the stress on the Portuguese sovereign. The assigned IA incorporates the pressures on Montepio from lack of liquidity in the wholesale markets, combined with the challenge of sustaining franchise momentum and earnings growth in a slower growth environment. The rating also incorporates the benefits of Montepio being part of Montepio Geral Associação Mutualista (MGAM), the largest mutual association in Portugal and in Iberia. Additionally, the ratings also incorporate the benefits and challenges from the acquisition of Finibanco Holding SGPS, S.A. (Finibanco), which was fully consolidated in 2Q11.

DBRS views Montepio as coping 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. This deleveraging process has helped Montepio to reduce its loan-to-deposit (LTD) ratio to 122% at the end of 2011, down from 148% at the end of 2010. The LTD ratio was reduced further to 118% in 1H12.

DBRS views elevated credit costs as absorbing a substantial portion of recurring earnings and reducing significantly the resources to grow capital through retained earnings. However, 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) of EUR 90 million.

The Group maintains solid capitalization levels under the latest regulatory requirements, in particular under the EBA criteria that include a buffer for sovereign debt. Montepio has been thus far successful in improving 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 and the Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. All can be found on the DBRS website under Methodologies. 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: William Schwartz
Initial Rating Date: 27 June 2011
Most Recent Rating Update: 24 May 2012

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