Press Release

DBRS Initiates Coverage of CaixaBank, S.A. – Senior Long-Term Debt at A (low); Negative Trend

Banking Organizations
March 04, 2013

DBRS, Inc. (DBRS) has today initiated coverage of CaixaBank, S.A. (CaixaBank or the Group). DBRS has assigned a Senior Unsecured Long-Term Debt & Deposit rating of A (low) and a Short-Term Debt & Deposit rating of R-1 (low) to CaixaBank. The trend on the long-term ratings is Negative, while the trend on the short-term ratings is Stable. At the same time, DBRS assigned an intrinsic assessment (IA) to the Group of A (low). Also today, DBRS assigned a rating of A (low) to the government guaranteed Senior Notes (the Notes) issued by CaixaBank with a Negative Trend. This rating is based on the explicit guarantee provided by the Kingdom of Spain and reflects the current DBRS rating on the sovereign of A (low) with a Negative Trend.

The IA of A (low) reflects the Group’s solid underlying performance, which is supported by CaixaBank’s significant market shares within Spain, as well as good credit fundamentals and proven risk management that is enabling the Group to weather difficult times. CaixaBank, whose franchise is predominantly in Spain, has been impacted by the challenging environment in its home market. As such, CaixaBank’s rating is currently limited by DBRS’s Long-Term sovereign debt rating on the Kingdom of Spain of A (low) with a Negative trend. As one of the largest banking groups in Spain, with total assets of EUR 348 billion at the end of 2012, DBRS anticipates that CaixaBank would likely receive some form of timely systemic support in a highly stressed scenario, resulting in an SA2 support assessment for the Group. However, given the sovereign rating of A (low), this does not bring any uplift for the Group’s final rating from its IA. The Negative trend primarily reflects considerable downside risks to the economic growth outlook in Spain, reflected in the trend on the sovereign rating, but also considers the challenges posed by the acquisitions of Banca Cívica, S.A. (Cívica) and Banco de Valencia (BdeV) in the current environment.

While conditions in the Group’s home market of Spain remain challenging, CaixaBank is having success in sustaining its net interest income despite a loan book that has a sizeable proportion of lower-yielding retail mortgages. The Group has been able to maintain margins across its various product offerings by re-pricing its shorter-term corporate and small and medium enterprises (SME) loans to reflect the higher funding costs, while also boosting mortgage loan spreads on new mortgage production. Reduced retail funding costs have also contributed. As a result, DBRS sees CaixaBank as having some success in sustaining its net interest margin (NIM) in a stressed environment at 1.23% on average in 2012 vs. 1.17% in 2011. Success in maintaining noninterest income has also been important. By cross-selling to its significant customer base, CaixaBank has also been able to maintain a solid level of fee and commission income. The Group’s pre-impairment income, or income before provision and taxes (IBPT), was largely flat year-on-year (YoY) posting EUR 3.2 billion in 2011 and 2012 as CaixaBank successfully controlled expenses. CaixaBank maintained a low cost/income ratio of 52.9% in 2012, only slightly up from 51.3% in 2011, illustrating the capacity to absorb Cívica and resulting in a greater share of revenues passing through to the bottom line. Given the importance of efficiency for strengthening earnings at a time of slower revenue growth, DBRS views positively the Group’s efforts to achieve substantial synergies with the Cívica and BdeV acquisitions.

DBRS notes that CaixaBank completed the acquisition of Cívica in 3Q12, with its results consolidated from the 1 July 2012 closing date. Cívica contributed approximately EUR 72 billion of assets and increases the Group’s market shares to 13.4% of loans and 13.7% of deposits in Spain. In addition to the Group’s leadership in Cataluña, the Cívica acquisition brings the Group to the #1 position in Navarra with a market share of 34.3% by branches, #1 in Andalucía with a market share of 21.0%, #1 in the Canary Islands with a market share of 28.1%, and #2 in Castilla y Leon with a market share of 13.4%. The Group expects to achieve synergies of EUR 540 million in three years, having already achieved EUR 104 million in synergies in 2012. On 27 November 2012, CaixaBank agreed to purchase BdeV, which had approximately 20 billion of assets, from the Fund for Orderly Bank Restructuring (FROB). Under the terms of the deal, the acquisition includes capital support, an asset protection scheme (APS), and negative goodwill. Additionally, distressed assets totalling EUR 1.9 billion were transferred to the Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (SAREB). BdeV further increases the Group’s market shares in Spain, positioning the Group as #1 in the region of Valencia, although CaixaBank is committed to closing a significant number of BdeV’s branches as per the EU requirements.

While DBRS views these acquisitions as long-term positives for CaixaBank’s franchise, there are risks with such sizable acquisitions in the current environment that also contribute to the Negative trend. DBRS notes that CaixaBank does not have a substantial track record of acquisitions, having largely grown organically, which adds to this risk. Furthermore, the integration of Cívica includes the need to integrate four different cajas, which were included within the Cívica banking group, but not fully integrated. Two cajas have already been integrated (Caja Navarra and Caja Sol), while Caja Canarias is expected to be integrated in 1Q13 and Caja Burgos in April 2013. Such acquisitions offer the Group opportunities to expand the range of products offered to Cívica’s and BdeV’s customers, both households and businesses, but also pose challenges in how quickly CaixaBank can achieve broader product penetration. DBRS expects the Group to benefit from its significant market shares across products and regions and strong reputation in a consolidating banking market where competition is fierce. At the same time, a weak economy may add additional stress in the Group’s loan book, which would drive further asset quality deterioration and pressure earnings. DBRS notes that, in the case of BdeV, significant downside risk is limited by the APS for BdeV’s remaining stressed exposures.

Indicative of its underlying strength, the Group continues to cope with elevated levels of provisioning by delivering positive results. CaixaBank reported net attributable profit of EUR 230 million in 2012 as compared to EUR 1.1 billion in 2011. On a quarterly basis, CaixaBank was marginally profitable in 4Q12, reporting net attributable profit of EUR 57 million, relative to EUR 7 million in 3Q12 and below EUR 208 million in 4Q11. Net income in 2012 was negatively impacted by significant net loan-loss provisions of EUR 3.2 billion, above the Group’s IBPT, largely related to new provisioning requirements in Spain. DBRS notes that CaixaBank has now covered 87% of the Bank of Spain’s new provisioning requirements for the Group, which leaves EUR 902 million of extraordinary provisions pending for the first half of 2013. With operating income, or IBPT, of EUR 1.3 billion in 1H12, which DBRS anticipates that the Group would be able to continue generating in 1H13, CaixaBank is expected to have the ability to absorb these extraordinary provisions, while still remaining profitable. DBRS expects that profitability will remain pressured throughout 2013.

While there is considerable stress in the current environment, CaixaBank’s risk profile benefits from its business mix and well-positioned franchise. Inclusive of Cívica, which was consolidated in 3Q12, the Group’s non-performing loan (NPL) ratio in its EUR 223.4 billion lending portfolio jumped to 8.42% at 3Q12 (6.14% excluding Cívica), up from 5.58% in 2Q12 (prior to Cívica). This ratio increased further in 4Q12 to 8.62%. While deteriorating, this metric still compares favourably to the sector average of approximately 11.4%, but compares less favourably to European peers. The absolute amounts of NPLs, however, decreased in 4Q12 by EUR 200 million; the increase in the NPL ratio was driven by a lower loan base. Driving the Group’s NPL ratio is its exposure to real estate developers of EUR 27 billion, which had an NPL ratio of 44.22% at the end of 2012. Despite the increase in NPL exposure with the Cívica acquisition, coverage has remained at 60% excluding mortgages guarantees. While overall asset quality trends for the Group deteriorated, the Group continues to focus on deleveraging, particularly through its real estate holding company (Building Center) to reduce exposure to real estate developers. While DBRS currently views this exposure as manageable, particularly given the Group’s increased provisioning efforts, these exposures are likely to continue to pressure earnings over the intermediate term.

Illustrating the Group’s efforts in deleveraging, the Group’s loan-to-deposits ratio was 127% at the end of 2012, down from 133% at the end of 2011. Further supporting its strong liquidity profile, CaixaBank continues to build up its liquidity buffer, reaching EUR 53.1 billion at end-2012, which included EUR 35.6 billion of unencumbered ECB-eligible assets (post-haircut) and EUR 17.5 billion of additional liquid assets on its balance sheet. This buffer compares well to wholesale maturities for 2013-2014 of EUR 15.5 billion. The Group has bolstered its levels of generic and specific provisions (EUR 12.0 billion at the end of 2012) to cover expected future losses translating into 53% coverage ratio for problematic assets for the Group in Spain. Demonstrating its access to the markets, CaixaBank recently issued EUR 1 billion in 3-year senior bonds. However, most of the Group’s wholesale funding is in the form of covered bonds. Capitalization is satisfactory given the environment. Besides having no capital shortfall under the Oliver Wyman stress tests, the Group reached a 10.4% European Bank Authority core Tier 1 ratio based at 4Q12 (vs. 10.9% at 4Q11).

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 the DBRS rating of the Kingdom of Spain, 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: 5 March 2013
Most Recent Rating Update: 5 March 2013

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

Ratings

CaixaBank, S.A.
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
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  • Unsolicited Non-participating

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