DBRS Confirms Caixa Económica Montepio Geral at BBB (low), Negative Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Caixa Económica Montepio Geral (Montepio or the Group) and associated entities, including Montepio’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 were previously confirmed on 5 December 2012 following DBRS’s confirmation of the Republic of Portugal (Portugal) at BBB (low) with a Negative trend. At the same time, DBRS has confirmed Montepio’s intrinsic assessment (IA) at BB (high).

DBRS views Montepio as a Systemically Important Bank (SIB) in Portugal. As the savings bank of the country’s largest mutualistic organisation, Montepio Geral Associação Mutualista (MGAM), Montepio provides financial services to a broad base of retail customers while continuing to build its corporate customer base, primarily with SMEs. Further, as a provider of deposits and mortgage loans, significant distress for Montepio, if not addressed promptly, could materially affect Portugal’s financial system. Consequently, DBRS maintains its SA-2 support assessment for Montepio, which indicates an expectation of timely systemic support, if needed. DBRS views the ability of the government to provide support as having been enhanced by the agreement with the EU/IMF, which provides EUR 12 billion of resources to strengthen the capital base of Portuguese banks, with approximately half of these resources still available. The SA-2 designation results in a one-notch uplift from the IA of BB (high) to the final rating of BBB (low), which is at the same level as the long-term debt rating of the Republic of Portugal. While Montepio is currently classified as an SIB, DBRS notes that the support environment for financial institutions across Europe continues to evolve and the outcome of this evolution could reduce support for Montepio placing downward pressure on the rating.

In confirming the IA, DBRS recognises Montepio’s franchise resiliency, its ability to cope with the elevated stress in Portugal, and strengthened its capitalisation backed by support from MGAM. Further, DBRS notes that Montepio has not needed support from the State to meet Bank of Portugal capital requirements. Counterbalancing these strengths is the continued weakness of Portugal’s economy and the uncertainty of when a recovery might begin, an outlook that will sustain pressure on profitability, the need to overcome funding stress in financial markets, and the challenge Montepio faces in sustaining franchise momentum in a slower growth environment in Portugal which is reflected in the Negative trend on Montepio’s final rating.

Anchoring Montepio’s IA is its solid domestic franchise, with services distributed through its 458 branches. The Group is maintaining overall market share at a reported 6.44% (year-end 2012), having increased from 5.28% (year-end 2010) driven by the Finibanco acquisition. The most notable contributor to this increase has been Montepio’s share of corporate lending in Portugal, which includes primarily SME customers; this share increased from a reported 4.1% at year-end 2010 to 5.6% at year-end 2012, benefitting from the acquisition of Finibanco in 2011. Meanwhile, benefitting from its mutualistic origins and savings orientation, the Group maintains a reported 6.7% market share in total deposits (flat YoY), with particular strength in individual deposits that mostly comprise small household savings. In addition to corporate and individual lending, Montepio is active in complementary businesses, such as life and non-life insurance, leasing, and pension fund management.

The resiliency of Montepio’s franchise is helping the Group cope with sustained stress in Portugal. While revenues are pressured by a challenging domestic operating environment, which resulted in lower yields on loan portfolios relative to funding costs along with weaker product demand, these pressures were somewhat mitigated by effective loan re-pricing, a sharpened focus on cross-selling, and the full consolidation of Finibanco, which added higher margin corporate business. However, Montepio’s expenses remain elevated following the Finibanco integration, which, together with lower net interest income, put downward pressure on income before provisions and taxes (IBPT), while impairments and provisioning continue to rise, driven by the difficult domestic operating environment. Collectively, these factors have reduced Montepio’s bottom line results and led to a pre-tax loss for 2012. This loss was offset by a deferred tax expense resulting in net income of EUR 2.1 million for 2012 (vs. EUR 45.0 million for 2011). Importantly, reflecting its ability to cope with the sustained stress in Portugal, Montepio maintained its record of having generated positive net income on an annual basis throughout the crisis. Looking ahead, though, the substantial uncertainty regarding Portugal’s growth outlook is likely to significantly pressure earnings in 2013 and to continue to test Montepio’s ability to cope in a highly stressed environment.

With the Portuguese economy remaining weak, deteriorating credit quality is taking its toll on the Group’s results. In 2012, provisions for impairments (net) increased 39% YoY to EUR 232 million against EUR 64 million in IBPT (vs. EUR 158 million in provisions and EUR 191 million in IBPT for 2011 and EUR 125 million in provisions and EUR 176 million in IBPT for 2010). Given the macroeconomic dynamics in Portugal, DBRS expects elevated provisioning to continue pressuring results at Montepio. Meanwhile, the evolution of Montepio’s credit metrics reflects the mix shift that has resulted from the Finibanco acquisition, with a greater weight of corporate loans in the book. The Group’s overdue and doubtful loan ratio increased to 6.3% at year-end 2012 (vs. 5.0% at year-end 2011 and 3.8% at year-end 2010), driven by weakness in corporate exposures, chiefly from the construction, real estate activities, and the wholesale and retail trade lending books. Positively, credit performance in Montepio’s mortgage book remains resilient, with an overdue loan (greater than 90 days) ratio of 1.8% at year-end 2012. The overdue loan ratios are reported per Bank of Portugal standards, which include only the portion of the loan that is non-performing. The broader credit-at-risk ratio, which includes total credit and interest past due, other restructured credit and insolvent/bankrupt credits, was 11.0% at year-end 2012, up from 7.8% at the end of 2011 and 5.1% at the end of 2010. Reflecting Montepio’s shift in business mix, the Group’s credit-at-risk ratio is now above the Portuguese banking system average of 9.8% for 2012 (vs. 7.7% for 2011 and 5.2% for 2010).

DBRS views Montepio as maintaining a satisfactory liquidity and funding position given the current environment. Deposits constituted 72% of total funding at year-end 2012, reflecting the benefits derived from access to the savings-oriented nature of MGAM’s sizeable and growing member base. By increasing deposits by 32.5% since year-end 2010, and selectively reducing lending, Montepio reduced its LTD ratio to 120.5% at year-end 2012 (vs. 124% at the end of 2011 and 148% at the end of 2010). DBRS recognises, however, that the Group remains exposed to continued funding stress as access to markets may continue to be restricted in 2013 due to macroeconomic concerns. Montepio has increased its net reliance on ECB funding from EUR 500 million at the end of 2009 to a peak of EUR 2.0 billion in 2011 before declining marginally to EUR 1.8 billion at year-end 2012. The Group maintains a liquidity buffer of EUR 2.2 billion, which can be used as collateral with the ECB for additional funding. With no maturities for the remainder of 2013, this buffer is more than sufficient to meet the EUR 198.2 million maturing over 2014-2015.

The Group maintains adequate capitalisation levels and has complied with all related regulatory requirements. Montepio’s Core Tier 1 capital ratio rose from 10.2% at year-end 2011 to 10.6% at 31 December 2012. Montepio has been successful in improving its regulatory capital levels through deleveraging and capital injections from MGAM. Although MGAM and Montepio no longer operate under the same Board of Directors, they do share the same Chairman and strategic objectives. As such, DBRS expects that Montepio will continue to benefit from MGAM’s willingness and ability to provide support as needed. DBRS notes that Montepio did not request support from the State to meet the 10% Core Tier 1 capital ratio minimum required by the Bank of Portugal.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents, DBRS’s rating for the Republic of Portugal 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: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 27 June 2011
Most Recent Rating Update: 5 December 2012

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/

The conditions that lead to the assignment of a Negative or Positive Trend are generally resolved within a twelve month period. DBRS’s trends and ratings are constantly under surveillance.

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