DBRS Confirms Caixa Geral de Depósitos at BBB (low), Negative Trend

DBRS, Inc. (DBRS) has today confirmed its ratings for Caixa Geral de Depósitos, S.A. (CGD or the Group), including the Senior Long-Term Debt & Deposit rating of BBB (low) and the Short-Term Debt & Deposit rating of R-2 (middle). 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. Concurrently, DBRS has confirmed the Group’s intrinsic assessment (IA) at BBB (low).

DBRS views CGD as a Systemically Important Bank (SIB) in Portugal. CGD is the largest banking group in Portugal and is fully owned by the Republic of Portugal but managed on an arm’s length. DBRS maintains its SA-2 support assessment for CGD, which indicates an expectation of timely systemic support, if needed. Currently, there is no uplift to the Group’s ratings as CGD’s IA is at the same level as DBRS’s current rating for the Republic of Portugal of BBB (low) with a Negative trend.

In confirming CGD’s IA, DBRS recognises the Group’s significant universal banking franchise with its strong position in retail banking, which provides the Group with a deposit base and substantial revenue generation capabilities. The Group also has international operations, which include a sizeable position in Spain that is struggling and a modest, but growing, presence in Portuguese affinity markets in Africa and elsewhere. CGD also benefits from the Republic of Portugal’s 100% ownership and its position as a “state” bank. Counterbalancing these positive factors is the uncertainty regarding Portugal’s growth outlook, which is likely to sustain pressure on profitability, continued stress in funding markets, and the challenge CGD faces in sustaining franchise momentum in a slower growth environment.

Underpinning CGD’s IA is its franchise position in Portugal. As the largest bank in Portugal by total assets, CGD benefits from its strong market positions across its franchise in the concentrated domestic banking market. Backed by the largest domestic branch network, the Group maintains leading market shares in loans to customers, reporting a 21.3% share at year-end 2012, and in customer deposits, with a 28.1% share at year-end 2012. In addition to these traditional strengths, the Group is a leading provider of insurance products (across life and non-life platforms) and asset management solutions, although the Group is working on divesting much of these operations, while keeping the distribution of their insurance products through its networks. CGD is working to broaden its presence with corporate customers by expanding its business with SMEs. One avenue is participation in the credit risk sharing agreements backed by the State designed to support economic activity domestically. Complementing CGD’s presence in Portugal are its international operations. The Group is focusing its growth strategy on affinity markets with cultural ties to Portugal as well as those with higher growth potential, including Mozambique, Angola, and Macau. Although DBRS views CGD’s international expansion as being generally successful, DBRS notes that the Group is working to resize its business in Spain that is struggling with the environment.

Despite its strong domestic franchise position, CGD is being challenged by the sustained stress in Portugal. Revenues are being pressured by the impact of lower interest rates on net interest income. Lower Euribor rates have reduced loan yields, particularly on mortgages where there are limited opportunities to reprice, while interest expense has not declined as much due to competition for deposits and sovereign funding costs. To some degree, this pressure on net interest income, has been largely mitigated by CGD’s sharpened focus on cross-selling that has supported stable fee income, gains on purchase of own debt and sales of Portuguese sovereign debt, as well as recurring income from CGD’s insurance operations. Meanwhile, to improve efficiency and reduce costs, the Group has undertaken headcount reduction, branch network rationalisation, and process enhancements. Reflecting a level of success with these initiatives, CGD’s efficiency ratio declined to 58.4% in 2012 from 60.8% a year earlier. As a result of these actions, CGD has delivered stable income before provisions and taxes (IBPT) during the crisis in the range of EUR 1.0 billion to EUR 1.2 billion range through year-end 2012, with 20%-25% of these sourced from CGD’s international operations. While IBPT in 2011 was sufficient to absorb credit impairments, the net loss of EUR -488 million was driven by securities impairments. In 2012, credit impairments reached EUR 1.0 billion leading to a loss of EUR -395 million. In 1Q13, CGD generated a net loss of EUR -36 million. Looking ahead, Portugal’s weak economic outlook is likely to sustain pressure on earnings in 2013.

With the Portuguese economy remaining weak, deteriorating credit quality is taking its toll on the Group’s results. Provisions and impairments of EUR 1.6 billion for 2012 exceeded IBPT of EUR 1.2 billion. Given the macroeconomic dynamics in Portugal, DBRS expects elevated provisioning to continue pressuring results at CGD. The Group’s overdue loan ratio increased to 6.2% at 31 March 2013, up from 5.7% at year-end 2012 and 3.9% at year-end 2011, driven by weakness in corporate exposures, chiefly from the construction, real estate activities, and the wholesale and retail trade lending book. Notably, credit performance in CGD’s mortgage book remains more resilient, with an overdue loan ratio of 3.0% at year-end 2012. DBRS notes that overdue loan ratios 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 9.5% at 31 March 2013, up marginally from 9.4% at the end of 2012 and 6.9% at the end of 2011. This level remains just below the Portuguese banking system average of 9.8% for 2012. DBRS notes that the Group has been taking remedial actions, such as the formation of a ‘Corporate Monitoring Division’ that works closely with customers who operate in riskier economic sectors.

DBRS views CGD as maintaining a satisfactory liquidity and funding position given the current environment. In line with its deleveraging strategy, increasing deposits and reducing lending has allowed CGD to improve its loan-to-deposit ratio from 136% at year-end 2010 to 113% at 31 March 2013. Reflecting the deposit-gathering capacity of CGD’s franchise, customer funds constituted 76% of total funding at 31 March 2013 (vs. 74% at year-end 2012 and 68% at year-end 2011). Importantly, CGD regained access to the unsecured markets during 2012 with a EUR 500 million 3-year issue that was following by a EUR 750 million 5-year covered bond issue in early 2013. 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. CGD’s usage of the ECB amounted to EUR 4.8 billion at 31 March 2013, down from EUR 7.0 billion at year-end 2012 and a peak of EUR 9.0 billion in 2011. With total eligible assets available to pledge to the ECB for funding of EUR 11.2 billion, the Group has sufficient liquidity relative to upcoming wholesale debt maturities (EUR 1.3 billion in 2013, and EUR 4.8 billion in 2014- 2016).

The Group maintains adequate capitalisation levels and has remained compliant with all related regulatory requirements. Aided in 2012 by a EUR 750 million capital injection from the State and by the issuance of EUR 900 million in hybrid instruments to the State that were eligible towards core capital, CGD’s Core Tier 1 capital ratio improved from 9.5% at year-end 2011 to 11.6% at year-end 2012 and stood at 11.5% at 31 March 2013 based on Bank of Portugal standards (9.4% at 31 March 2013 per EBA standards). DBRS views the provision of support from the State to CGD during 2012 as reinforcing DBRS’s view that timely support will be made available to CGD should it be needed.

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 DBRS Criteria – 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: 23 December 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.