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

DBRS, Inc. (DBRS) has today confirmed Banco Comercial Português, S.A. (Millennium bcp, BCP 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.

BCP’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 BCP, 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 BCP, there is currently no uplift to the Group’s ratings.

The adverse environment has affected BCP’s recent financial performance. With 9M12 results, BCP reported negative net income of EUR 796.3 million, as the Group’s net loan impairments remained elevated at EUR 809.4 million. BCP generated operating income before impairments, or income before provisions and taxes (IBPT), of EUR 621.1 million, below the level of impairments. Additionally, the bottom line results were negatively impacted by minority interests and a EUR 427.2 million impairment for estimated losses in Greece, adding pressure. This follows a net loss of EUR 848.6 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 344.5 million in 2010.

BCP’s domestic revenues are supported by its significant nationwide franchise with strength in corporate and mortgage lending. With the deepening of the crisis, however, the Group’s Net Interest Margin is now down to 0.86% in 3Q12 vs. 1.70% in 3Q11. At the same time, BCP’s international businesses generated positive net income of EUR 8.5 million in 9M12, despite a net loss of EUR 104.4 million in Greece. The Group is benefiting from the increasing contribution of the international components of its core franchises – Poland, Mozambique and Angola, which generated EUR 174.3 million in net income before minority interests in 9M12, as compared to EUR 168.4 in 9M11. 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. DBRS would view positively any progress that the Group makes with its strategy to sell the Greek subsidiary, given its considerable impact on overall results.

The Group maintains solid capitalization levels under the latest regulatory requirements, in particular under the EBA criteria that include a buffer for sovereign debt. BCP completed a rights issue of EUR 500 million in October 2012 that was backed by the Portuguese state and the EU/IMF. The Group also issued EUR 3.0 billion of Core Tier 1 eligible hybrid securities, fully subscribed by the Portuguese state. As a result, the Group’s pro-forma Core Tier 1 ratio reached 12.8% at September 2012, based on Bank of Portugal standards, and 10.3%, based on EBA requirements pro-forma (including the rights issue). Despite the boost to regulatory capital ratios, the Group’s tangible equity / tangible assets ratio weakened, declining to 4.0% at 3Q12 from 5.5% at 3Q11, and 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 Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All 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: 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.

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