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

DBRS, Inc. (DBRS) has today confirmed Caixa Geral de Depósitos, S.A. (CGD or the Group)’s Senior Long-Term Debt & Deposits at BBB (low) and Short-Term Debt & Deposits at R-2 (middle). 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.

CGD’s intrinsic assessment (IA) of BBB (low) 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 CGD, which indicates an expectation of timely systemic support in case of need. However, with the current rating for the Portuguese sovereign at the same level as the intrinsic assessment for CGD, there is currently no uplift to the Group’s ratings.

The adverse environment has affected CGD’s recent financial performance. CGD reported a net loss of EUR 130.0 million in 9M12, as the Group’s provisions and credit impairments reached EUR 1,095 million in 9M12. CGD generated gross operating income, or income before provisions and taxes (IBPT), of EUR 1,031 million, below the level of provisions and impairments. Additionally, the bottom line results were negatively impacted by taxes, and minority interests. 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.

Nevertheless, 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 195.9 million, or 19% of consolidated IBPT, in 9M12. IBPT within international operations decreased 0.3% year-over-year, driven by negative pressure from the Group’s operations in Spain. With a reduced contribution from 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.

Indicative of the Group’s resiliency in this uncertain environment, CGD issued a 3-year EUR 500 million unsecured debt on 4 December 2012. 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 reached 11.8% at September 2012, based on Bank of Portugal standards, and 9.8%, 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 6.2% at 3Q12 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 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: 23 December 2011
Most Recent Rating Update: 24 May 2012

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