DBRS: BCP Q1 2014 Losses Lower on Expense Reduction, Improved NII; Asset Quality Concerns Remain

Summary:
• BCP reported Q1 2014 net loss of EUR 41 million, an improvement of 73% year-on-year (YoY) and the lowest in eight sequential quarters of reported losses.
• Interest Before Provisions and Taxes (IBPT) increased by 89% YoY driven by significant improvement in Net Interest Income (NII) and operating expense decline YoY.
• Asset quality deterioration remains a concern with still elevated cost of risk.
• DBRS rates BCP’s Senior Long-Term Debt & Deposit at BBB (low) with a Negative trend.

DBRS Ratings Limited (DBRS) considers the Q1 2014 results of Banco Comercial Português, S.A. (BCP or the Bank) as illustrating the progress that the Bank is achieving, under its restructuring plan, towards becoming profitable again. BCP reported IBPT of EUR 231 million in Q1 2014, up from EUR 105 million in Q4 2013 and EUR 122 million in Q1 2013. The important improvement was driven by a reduction in operating expenses and a positive trend in net interest income. This upward trend in NII was mainly driven by an improvement in net interest margin (NIM), which increased by 36 bps YoY to 1.3%, primarily helped by the reduction in cost of funding (mainly through a reduction in the cost of deposits). As part of its restructuring plan, the Bank plans to repay EUR 400 million of its hybrid financial instruments (CoCos) underwritten by the Portuguese Government this year, which if achievable, would help to further improve BCP´s NII. Operating expenses reduced by 4.3% YoY, showing a downward trend since December 2012, which primarily reflecting the strong cost control implemented in Portugal. As a result of the cost reductions and the improvement in revenues, the Bank reported a cost-income ratio of 55% in Q1 2014, a significant improvement on the 71% level in Q1 2013. On the other hand, the level of impairment charges remains elevated, absorbing 109% of IBPT and leading the Bank to report a net loss of EUR 41 million, although this was improved from a net loss of EUR 143 million in Q4 2013 and a net loss of EUR 152 million a year ago.

BCP´s international diversification is proving to be crucial throughout the persistent difficult economic conditions in Portugal to partially offset domestic operations´ negative results. Net profit from international activity has increased by 18% YoY to EUR 48 million in Q1 2014 mainly driven by the satisfactory trend in performance in Poland, which has increased its reported net income by 29% YoY and 9% quarter-on-quarter (QoQ).

Asset quality deterioration remains a concern with a stock of non-performing loans (NPLs) of EUR 6.7 billion as of Q1 2014. The Bank reported an overdue ratio (+90 days) of 7.2%, 10 bps higher than in Q4 2013 and significantly higher than most of its Portuguese peers as of March 2014. Although net new entries of NPLs in Portugal have decreased by 52% YoY, DBRS is looking for a solid and continued downward trend in the NPL stock and the cost of risk. Positively, BCP’s credit-at-risk ratio, as calculated per Bank of Portugal requirements, has decreased 20 bps YoY and 10 bps QoQ signaling that the peak of non-performing assets may be reached in the coming months.

BCP has reinforced its regulatory capital ratios since December 2012, mainly through the execution of a strong decrease in risk-weighted assets (RWAs) of circa 20% YoY. This decline has been achieved through deleveraging (including the deconsolidation of a Greek subsidiary), a synthetic securitization transaction and the effect of the roll-out of Internal Ratings-Based models in Portugal. However, the core Tier I capital base has decreased by 7.2% YoY, impacted by continued losses. The Bank has reported its Common Equity Tier 1 (CET1) ratio under Basel III of 12.2%, phased-in, and 5.4%, fully-loaded. Both ratios exclude the potential effect of BCP’s circa EUR 2.2 billion in deferred tax assets (DTAs). If these assets are treated as tax credits, as was already done in Spain and Italy, the Bank´s fully loaded CET1 ratio would increase to 9.5%. So far there has been no official position from the Portuguese authorities regarding the treatment of DTAs, and, DBRS is concerned that if these assets are not treated as tax credits and the break-even point in profits is not reached soon, the Bank will face further deterioration in its capital level that will continue to pressure regulatory ratios. Furthermore, a sizable portion of BCP’s CET1 capital is comprised of CoCos underwritten by the Portuguese government, which will need to be replaced prior to maturity in 2019.

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.