DBRS Initiates Coverage of Banco Cooperativo Español, S.A. at BBB (high); Negative Trend

DBRS, Inc. (DBRS) has today initiated ratings coverage of Banco Cooperativo Español S.A. (Banco Cooperativo Español, BCE or the Bank). BCE acts as central treasurer and liquidity provider for most of the members of the Asociación Española de Cajas Rurales (AECR or the Group). DBRS has assigned to Banco Cooperativo Español a Senior Unsecured Debt & Deposit rating of BBB (high) with a Negative Trend and a Short-Term Debt & Deposit rating of R-1 (low) with a Negative Trend. At the same time, DBRS assigned an intrinsic assessment (IA) to the Bank of BBB.

DBRS has also confirmed its rating of A (low) with a Negative Trend for BCE’s Senior Notes, Guaranteed by the Kingdom of Spain. DBRS assigned this rating on 19 December 2012. This rating is based on the explicit guarantee provided by the Kingdom of Spain (Spain) and reflects the current DBRS rating for the sovereign of A (low) with a Negative Trend.

The IA of BBB reflects BCE’s solid credit fundamentals, including its stable and recurring earnings, its low risk profile, its well established access to funding and liquidity, and its solid regulatory capitalisation. This assessment takes into account Banco Cooperativo Español’s essential role as the central clearing bank and liquidity provider for its owners, that are members of the AECR (or “Cajas Rurales”), as well as its provision of a range of wholesale banking services to these banks. The Cajas Rurales are supported by their generally strong local franchises, their stable cooperative membership bases, and their typically favourable loan-to-deposit ratios. The IA of the Bank also considers its limited size and scope, which constrains the diversity of its revenue streams, its credit exposures, which are concentrated in Spain, and its modest equity, which is relatively low as compared to its total assets.

DBRS views AECR as a cohesive group, with its members being linked through various organizational and business relationships, and through the funding/central clearing functions that are provided by BCE. The Bank plays an important role in providing many of the services of a central bank to its owners. Also providing ancillary services to the AECR members are RSI (an information technology company) and Seguros RGA (insurance operations). The larger organisation including these entities is marketed as Grupo Caja Rural (GCR). Despite the cohesive nature of the GCR, DBRS does not view this organisation as warranting a group rating approach, given the modest size of the support fund available to the Cajas Rurales (around EUR 150 million) relative to the size of the AECR (EUR 59.3 billion in total aggregated assets), and the lack of a cross-guarantee or mutual support scheme across the entire GCR organisation.

DBRS anticipates that BCE would likely receive some form of timely systemic support in a highly stressed scenario, resulting in the Bank’s designation as a systemically important bank (SIB) with an SA2 support assessment. This designation reflects the important role that BCE plays for the AECR member cooperative banks and hence its importance for the Spanish financial system in the current environment. Despite its small asset size, BCE is an active participant in the capital markets and a key provider of wholesale banking services on behalf of the “Cajas Rurales”. AECR is the largest cooperative Group in Spain by asset size. The SA2 designation results in a one-notch uplift from the IA of BBB to the final rating of BBB (high), which is currently one notch below the long-term debt rating of Spain.

The Negative Trend primarily reflects the considerable downside risks to the economic growth outlook in Spain and the still stressed financial markets that are also evident in the trend on the sovereign rating.

BCE’s BBB (high) rating level takes into account the Bank’s business model and its role within the Grupo Caja Rural. As part of a cooperative group, BCE’s goal is not profit maximization, but is instead to achieve positive earnings that demonstrates stable performance and generates capital through retained earnings. DBRS views this strategy as inherently limiting risk-taking at the Bank, while also supporting growth. Indicative of its underlying strength, BCE has continued to deliver positive results during this extended crisis, generating net income of EUR 22 million in 2012, up from EUR 18 million in 2011, and EUR 15 million in each of the prior 3 years (2010, 2009 and 2008). Given its role as a central provider of services without a significant branch network, BCE benefits from its high level of efficiency that is shown by its low cost/income ratio of 36.5% in 2012, down from 41.3% in 2011. Reflective of BCE’s business model and conservative lending, loan loss provisions were low at EUR 6.8 million in 2012, largely unchanged from EUR 6.2 million in 2011. Income before provisions and taxes (IBPT) improved to EUR 37.8 million in 2012, from EUR 31.3 million in 2011, as growth was supported by increased borrowing from the ECB. Provisions represented 18.0% of IBPT in 2012 vs. 19.8% a year earlier.

BCE benefits from its funding relationships with the Cajas Rurales, as local cooperative banks typically hold a portion of their liquidity reserve with BCE. This source of relatively stable funding illustrates BCE’s role as an intermediary between its owners and the financial markets. Recently, access to the ECB has been used in an opportunistic way, given the low interest rate environment and the opportunity to generate net interest income. Generally, BCE has issued government guaranteed debt, which can be pledged to the ECB on behalf of the Cajas Rurales. While adding to net interest income at BCE, as well as the Cajas Rurales, access to the ECB is not needed as a source of liquidity given their significant deposit bases.

BCE’s risk profile benefits from its liquid balance sheet and stable deposit base from the retail funded Cajas Rurales. However, it has substantial counterparty risk with financial institutions that it deals with in the financial markets. While the Bank has increased its exposure to Spanish sovereign debt with the increase in ECB funding, this is largely short-term in nature and has been match-funded. At the Cajas Rurales, lending is constrained by their cooperative status that limits lending to customers that are not members of the Bank to 50% or less of total lending. This limit has helped to constrain the Cajas Rurales lending outside of their core markets and customer base. The aggregate NPL ratio at the Cajas Rurales was 7.26% at end-September 2012, well below the Spanish average during the same period.

With low risk-weighted assets (RWAs) under Basel II, BCE exceeds regulatory capital requirements with a core capital ratio of 12.09% at the end of 2012. Importantly, BCE has managed through the extended crisis without any government support. Furthermore, none of the Cajas Rurales within AECR have needed to resort to public funds. While very low levels of RWAs contribute to strong regulatory capital ratios, DBRS views the Bank’s equity capital of just EUR 300 million in 2012 as providing only a limited amount of loss-absorbing capital for the Bank. DBRS views an equity/assets ratio of just 1.4% at the end of 2012 as very low. The still weak credit and economic conditions in Spain adds pressure on banks generally to have even larger capital cushions to be considered well-capitalised and well equipped to absorb stress. While DBRS views positively the Bank’s ability to meet regulatory capital requirements, DBRS would view growth in total equity positively from a ratings perspective.

Notes:
All figures are in Euros 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 the company documents, SNL Financial, and DBRS rating of the Kingdom of Spain. 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: Lisa Kwasnowski
Rating Committee Chair: Alan Reid
Initial Rating Date: 19 December 2012
Most Recent Rating Update: 19 December 2012

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