DBRS Confirms ICO Ratings – Senior Unsecured Debt at A (low), Negative Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Instituto de Crédito Oficial (ICO or the Bank). The Senior Unsecured Debt rating is confirmed at A (low) with a Negative Trend and the Short-Term Debt and Deposit rating at R-1 (low) with a Stable Trend. ICO’s Senior Unsecured Debt is backed by the explicit, unconditional, irrevocable and direct guarantee from the Kingdom of Spain (or the State). Therefore, the ratings and trend are equalised with the Long-Term and Short-Term Foreign and Local Currency ratings of the Kingdom of Spain.

ICO is a credit institution by law and is considered to be a State Finance Agency of Spain. ICO benefits from an explicit, irrevocable, unconditional and direct guarantee from the Kingdom of Spain that is stated in its by-laws under the Royal Decree Act 706/1999. ICO’s links to the Spanish government are evident in its Board of Directors, which includes representatives from the Ministries of Economy and Finance, but also in its mandate to act as a Financial Agency on behalf of the State when appropriate.

ICO’s role is to support and develop any economic activities contributing to the growth of the Spanish economy and improving the distribution of the country’s national wealth. It was founded in 1971 and became a state-owned bank after the reform of the Spanish State banking sector in 1991. In carrying out its public service mandate, ICO acts to maintaining its profitability rather than maximising profits. ICO has remained profitable since its founding, weathering the crisis, despite increased credit costs. It has been helped by its sound recurring revenue generation and low cost/income ratio. Demonstrating its strength, the Bank reported income before taxes (IBT) of EUR 101.07 million (unaudited figures) an increase of approximately 21% year-on-year, driven by revenue growth and its sustained low level of expenses. With revenues growing, the Bank’s efficiency ratio has improved further, with operating income to ordinary revenues declining to 4.53%, 21 basis points lower than in 2012 and down from 16.6% at the end of 2007.

The Bank lends primarily indirectly to micro companies, small and medium sized enterprises (SMEs) and entrepreneurs, which have more difficulties accessing private lending channels, through the Spanish banks’ branch network (58% of the loan book at year-end 2013); with direct lending (42% of the loan book) being typically participations in syndicated loans to large companies. ICO’s main financing activities are productive investments, liquidity lines and internationalization projects. As a promoter of the Spanish economy, ICO has a countercyclical role in supporting the flow of funding to the economy. This support is evident in its lending book, which increased from EUR 27.7 billion at the end of 2007 to EUR 73.2 billion at the end of 2013. To further its objectives, ICO participates in other activities, including venture capital and providing financing to support international activities of Spanish companies and entrepreneurs.

DBRS views ICO’s risk appetite as generally conservative due to the nature of its activity, with the majority of the Bank’s lending done indirectly through ICO lines to banks that, in turn, lend the funds to SMEs. This indirect lending results in the banks being exposed to the risk of non-performance, rather than ICO. DBRS views ICO as managing well the operational risk associated with this type of lending. ICO’s direct lending poses more of a risk and is the driver of the Bank’s nonperforming loan ratio. This ratio increased to 5.25% at the end of 2013 up from 3.68% at the end of 2012, though this compares favourably to a national average of 13.6%. The Bank’s reserve coverage ratio remains solid at 132% as of December 2013. Nevertheless, DBRS notes that since direct loans are mainly dedicated to finance big projects through syndicated loans, the default of just a few borrowers could affect ICO’s capacity to absorb losses.

In addition to providing funding as a state-owned bank, ICO also has the duty to contribute to the mitigation of the economic effects deriving from serious economic recessions, natural catastrophes or similar situations, as well as to act as the instrument for executing certain economic policy measures. Illustrating this responsibility, ICO played a central role in the 2012 implementation of the “Fondo para la Financiación de los Pagos a Proveedores” (FFPP) through the distribution of the loans to the regions and municipalities, as well as providing EUR 6.3 billion of the total EUR 30 billion 5-year syndicated loan issued in March 2012. Aligning its funding needs with its lending activities, ICO funds itself primarily through the capital markets.

The last rating action on the Kingdom of Spain was taken on 11 April 2013, when DBRS confirmed its Long-Term Foreign and Local Currency ratings at A (low) and maintained the 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 include the following: DBRS Criteria: Support Assessment for Banks and Banking Organisations, and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include SNL Financial, Bank of Spain and company documents. 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 regulations only.

Lead Analyst: Rui Croca
Rating Committee Chair: Roger Lister
Initial Rating Date: 25 February 2013
Most Recent Rating Update: 21 April 2014

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