DBRS: BCP Reports 2013 Net Loss, Adjustment Plan Still on Track

Summary:
•Net loss of EUR 740 million in 2013, following a net loss of EUR 1.2 billion in 2012, driven by weak economic environment and compressed net interest income (NII).
•Progress achieved in the adjustment plan, including cost restructuring and a significant reduction in risk-weighted assets (RWAs), which increased Core Tier 1 capital ratio to 13.8% (Bank of Portugal), but ongoing losses continue to reduce the core capital base.
•DBRS rates BCP’s Senior Long-Term Debt & Deposit at BBB (low) with a Negative trend.

DBRS Ratings Limited (DBRS) considers Banco Comercial Português, S.A.’s (BCP or the Bank) 4Q13 results as highly pressured by the still deteriorating economic environment in Portugal. The Bank reported a net loss of EUR 740 million in 2013, following a EUR 1.29 billion net loss in 2012. NII declined by 15% mainly driven by the sizeable deleveraging process the Bank is undertaking and the high interest expense associated with the hybrid financial instruments (contingent convertible; CoCo’s) underwritten by the Portuguese Government. Net operating income was also impacted by lower trading income compared to 2012, despite the gains obtained with the sale of Piraeus Bank during 2013 which generated EUR 167.6 million.

The difficult economic conditions in Portugal contributed to a net loss in domestic operations of EUR 874 million in 2013, an increase from a net loss of EUR 656 million in 2012, as the impact of deleveraging has had a notable impact on NII. Positively, loan impairments (net of recoveries) are declining. The contribution from international activity (after discontinued operations) of EUR 178 million was not sufficient to offset the earnings pressures domestically. The international business units of Poland, Angola and Mozambique all reported an improvement in net income.

The Group continues with its ambitious plan to reduce operational costs. Reported costs were down only 2%, but excluding the impact of early retirements and mutually agreed terminations, costs were down by 10.6%. Loan loss provisions and other impairments declined year-on-year (YoY), but at EUR 1.3 billion they continue to overwhelm income before provisions and taxes (IBPT) of EUR 474 million.

While BCP’s regulatory capitalization has improved with an aggressive reduction in risk-weighted assets (RWAs), achieved through deleveraging (including the deconsolidation of a Greek subsidiary), a synthetic securitization transaction and the effect of the roll-out of advanced internal rating based models in Portugal, core capital levels continue to be eroded by net losses. The Core Tier 1 Capital ratio, according to Bank of Portugal (BoP) criteria, increased to 13.8%, up from 12.4% at the end of 2012 and above the regulatory requirement of 10%. Indicative of the decline in the equity base, the Bank’s tangible equity to tangible assets ratio declined to 3.7% at year-end 2013 from 4.2% at year-end 2012.

The Bank did not report its estimated capital ratio in accordance with Basel III, but DBRS notes that BCP has sizable deferred taxes assets (DTAs) of EUR 2.2 billion which have the potential to be deducted from core capital under Basel III criteria as they are phased in. So far, there has not been any guidance from the Portuguese authorities with regards to the treatment of DTAs by the domestic banks.

As part of its restructuring plan the Bank envisages repaying part of its CoCo’s each year until 2017. The successful completion of that plan would clearly relieve some of the pressure on NII, but BCP would be in a better position to achieve that objective, if it returns to profit. For 2014 the bank is planning to repay EUR 400 million of its CoCo’s during the first half of this year. Despite an excess of capital in relation to the BoP’s minimum requirement, DBRS notes that the repayment of the CoCo’s is dependent on BoP approval.

BCP’s funding profile continues to improve with the impact of deleveraging and a steady increase in deposits in 2013. The Bank’s loan-to-deposit ratio at 4Q13 was 117%, an improvement from 128% in 4Q12. However, elevated wholesale funding costs mean that the Bank still relies heavily on ECB funding for approximately 42% of its wholesale funding needs with the use of EUR 10 billion of the LTRO funding facility at year-end 2013.

DBRS rates BCP’s Senior Long-Term Debt & Deposit at BBB (low) with a Negative trend.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]