DBRS: Caixabank Generates Resilient Pre-provision 4Q13 income, but Credit Costs Pressure Net Income

Summary:
•Caixabank reported resilient core pre-provision earnings for 2013 with net interest income (NII) trending upward from a 2Q13 low. Further gains in Net Interest Margin (NIM) are expected in 2014, with improving deposit costs and loan yields. Extraordinary expenses elevated reported expenses in 1H13, but management’s progress on controlling costs is evident in lower ordinary expenses in 4Q13 vs 4Q12
•Even with higher expenses and increased provisions, the Bank reported net income of EUR 503 million, as it had significant non-recurring corporate transactions.
•Of concern, asset quality continued to deteriorate on a YoY basis.
•DBRS rates Caixabank’s Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend.

As evident in its 4Q13 results, DBRS Ratings Limited (DBRS) considers Caixabank S.A.’s (Caixabank or the Group) 4Q13 core income before provisions and taxes (IBPT) as resilient. Despite the adverse economic environment with historically low yields and the Bank’s deleveraging in 2013, Caixabank increased its net interest income by 2.1% year-on-year (YoY) and net commissions by 3.5% YoY, due to its ability to manage customer spreads and increase in its customer base with the integration of Banca Cívica (BC) and Banco de Valencia (BdV). NIM increased again from a low in 1Q13, but remained below the 4Q12 level; higher NIM is expected in 2014, with improving deposit costs and loan yields. Results in 2013 benefited from significant non-recurring corporate transactions including the recognition of BdV’s badwill and the partial sales of Servihabitat Servicing business and Grupo Financiero Inbursa among others.

DBRS views positively management’s focus on cost efficiency and synergy savings, which is beginning to show results. While total operating expenses were up 34% YoY from 2012, mainly due to extraordinary expenses and the full integration of BC and BdV, the Bank steadily reduced ordinary operating costs over the year to below their level in 4Q12.

Deteriorating asset quality is still a concern with the non-performing loan (NPL) ratio at 11.66% at end-2013. The Net NPL balance has increased 26% YoY, mainly due to the integration of BdV in 1Q13 and the reclassification of refinanced loans as recommended by the Bank of Spain in 2Q13. Reflecting this deterioration of credit, impairment losses have increased 9.8% YoY, despite the extraordinary provisioning effort carried out in 2012 due to the new regulatory requirements. Nevertheless, there are indications of a trend reversal in the net NPL balance since 3Q13.

DBRS views Caixabank’s funding profile as sound. The Bank’s deleveraging process coupled with its capacity to grow customer deposits (LTD ratio of 110% in 2013) is steadily reducing its usage of the ECB (down by 62% YoY) for funding. Moreover, Caixabank also demonstrated good success in tapping the wholesale markets opportunistically during 2013.

Finally, DBRS considers the Group as having strengthened its capitalization level. It has continued to reduce its RWAs through the deleveraging process and through the application of internal models to optimize its capital usage. It has also generated more eligible equity (up 0.6% YoY). At 4Q13 the Core Tier 1 ratio stood at 12.9%, up from 11% at year-end 2012 according to EBA criteria and 11.7% on a Basel III fully loaded basis. The leverage ratio at year-end 2013 was 5.5% calculated under Basel criteria.

DBRS rates Caixabank’s Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend.

Notes:
All figures are in Euros (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: Support Assessment for Banks and Banking Organisations. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulation only.

Lead Analyst: Rui Croca
Approver: William Schwartz
Initial Rating Date: March 4, 2013
Most Recent Rating Update: March 4, 2013

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