DBRS: CaixaBank Solid IBPT in Q1 2014, Cost of Risk Continues to Improve

Summary:
• CaixaBank reported solid income before provisions and taxes (IBPT) in Q1 2014 with net interest income (NII) showing resiliency with the lower cost of deposits compensating for the lower volumes. Synergies from the integration of Banca Cívica and Banco de Valencia are materialising with a reduction in expenses.
• Cost of risk continues its improving trend since Q1 2013, provisions are down QoQ and YoY. Slowdown in the pace of new non-performing loan (NPL) entries continues, and NPL ratio fell in Q1 2014 for the first time since the beginning of the crisis.
• DBRS rate CaixaBank’s Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend.

DBRS Ratings Limited (DBRS) considers CaixaBank S.A.’s (CaixaBank or the Bank) Q1 2014 IBPT as solid. CaixaBank reported a net income of EUR 152 million in Q1 2014 which was down both year-on-year (YoY) and quarter-on-quarter (QoQ), however the bank displayed in Q1 2014 IBPT of EUR 829 million, comparing favourably YoY (EUR -82 million in Q1 2013, or EUR 677 million if we exclude extraordinary costs) and QoQ (EUR 409 million in Q4 2013). Backing the solid IBPT was the resiliency of NII, with the lower cost of deposits compensating for lower lending volumes, the good evolution of fees and commissions (up 2% YoY) and the trading gains in Q1 2014 (up 94% YoY). CaixaBank continues to show a good ability in managing customer spreads with net interest margin improving from 166 bps in Q1 2013 to 183 bps in Q1 2014.

With the integration of Banca Cívica (BC) and Banco de Valencia (BdV) well on track Caixabank demonstrated its capacity to generate cost synergies with recurrent expenses down 8% YoY and the absence of extraordinary costs for the first time since the integration. DBRS views positively the management’s focus on cost efficiency, with the cost to income ratio improving to 58.9% in Q1 2014 from 72.2% in Q4 2013. DBRS notes, however, that the Q1 2013 figures included EUR 759 million of extraordinary cost; if this effect were stripped out, still the evolution is positive with the cost to income ratio improving to 57.7% in Q1 2014 from 59.5% in Q4 2013.

The Bank reported EUR 650 million in asset impairments in Q1 2014, down from the levels reported in Q1 2013 (EUR 2.0 billion) and Q4 2013 (EUR 880 million). Despite still being elevated the cost of risk continues to improve, down to 115 bps in Q1 2014 from 298 bps Q1 2013. Asset quality continues its reversing trend with the NPL balance reducing for the third consecutive quarter. While the NPL ratio of 11.36% in Q1 2014 is still at a high level, it has reduced for the first time since the beginning of the crisis; down 30 bps comparatively to Q4 2013.

DBRS views CaixaBank’s funding profile as sound. The deleveraging process still underway, coupled with its capacity to grow customer deposits, has helped the Bank to improve its loan-to-deposit ratio to 105% in Q1 2014 from 125% in Q1 2013. As a consequence CaixaBank is steadily reducing its usage of the European Central Bank, with the Bank returning EUR 6.5 billion of Long-Term Refinancing Operation funding in Q1 2014 leaving its usage at EUR 9 billion, down from a substantial EUR 34 billion at the beginning of 2013 (including Banco de Valencia). Moreover, CaixaBank continues to access the wholesale markets opportunistically, including a EUR 1 billion covered bond issuance in Q1 2014 at a price of 80 bps over mid-swap.

Finally, DBRS considers that CaixaBank has strengthened its capitalisation level by reporting a robust Common Equity Tier 1 capital ratio of 12.1% according to Basel III fully loaded criteria. This indicator improved 40 bps QoQ, benefiting from a higher capital base and lower Risk-Weighted Assets as the Bank continues to deleverage its balance sheet. The leverage ratio at Q1 2014 was 5.5%, calculated under Basel III fully loaded 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.