DBRS Confirms CaixaBank Ratings at A (low), Negative Trend

DBRS, Inc. (DBRS) has today confirmed the A (low) Unsecured Long-Term Debt & Deposit rating of CaixaBank, S.A. (CaixaBank or the Group), and its R-1 (low) Short-Term Debt & Deposit rating. The trend on the long-term rating remains Negative; the trend on the short-term rating remains Stable. DBRS also confirmed the A (low) Senior Notes, Guaranteed by the Kingdom of Spain (the Notes) issued by CaixaBank with a Negative trend. This rating is based on the explicit guarantee provided by the Kingdom of Spain and reflects the current DBRS rating on the sovereign of A (low) with a Negative trend.

CaixaBank´s ratings reflect an intrinsic assessment (IA) of A (low) combined with a support assessment of SA-2. The SA-2 considers CaixaBank’s role as a systemically important entity to the financial system in Spain and DBRS’s expectation of timely systemic support in a stressed scenario. However, with the current rating for the Spanish sovereign at the same level as the intrinsic assessment for CaixaBank, there is currently no uplift to the Group’s ratings. The ratings were confirmed following a review of the Group’s operating results, financial fundamentals and outlook.

DBRS views the Group’s A (low) intrinsic assessment as underpinned by CaixaBank’s strong franchise in Spain, its solid underlying earnings generation ability that allows it to absorb the still higher than normalized cost of risk and its strong and improving liquidity and capital position. While DBRS views the Group as having solid credit fundamentals, the A (low) rating incorporates still elevated levels of cost of risk, which are driving high levels of provisioning and constraining returns on capital.

CaixaBank, whose franchise is predominantly in Spain, has been impacted by the challenging environment in its home market. CaixaBank’s rating is currently constrained by DBRS’s long-term sovereign debt rating on the Kingdom of Spain of A (low) with a Negative trend. DBRS’s sovereign debt ratings incorporate recent evidence of macroeconomic stability including more balanced economic activity, the stabilization of the financial sector, better financial market conditions, higher foreign capital inflows, and an ongoing forceful policy response to the crisis. The Negative trend on the long-term sovereign debt ratings reflects DBRS’ judgment that in spite of these positive signals, risks remain to the downside. DBRS views CaixaBank’s sizable exposure to Spanish sovereign risk, which stood at 2.5x equity at year-end 2013 and is generally longer-term in duration, as contributing to the sovereign rating constraint and is reflected in the Negative trend on the Group’s long-term rating.

Expanding its significant market shares within Spain, CaixaBank completed the integration of Banca Cívica in April 2013 and the integration of Banco de Valencia in July 2013. Banca Cívica contributed with EUR 72 billion of assets and increased the Group’s market shares to 13.4% of loans and 15% of deposits in Spain. Banco de Valencia contributed with EUR 21 billion of assets and increased the Group’s market shares in Valencia and Murcia regions.

Further enhancing its market position domestically, CaixaBank recently announced the acquisition of the Retail Banking, Wealth and Investment Management and Corporate Banking businesses in Spain of Barclays Bank (Barclays Spain) which will add another EUR 21.6 billion of assets, boosting the Group’s market shares with affluent customers in Spain, as well as enhancing its position in the key region of Madrid. While DBRS views these acquisitions as long-term positives for CaixaBank’s franchise, there are risks with such sizable acquisitions in the current environment. DBRS notes that CaixaBank has a proven track record of successfully integrating recent acquisitions, but will continue to monitor the Group’s ability to capitalize on opportunities, such as expanding the range of products offered to customers, and capture synergies. DBRS expects the Group to benefit from its significant market shares across products and regions and strong reputation, though a weak economy may add additional stress in the Group’s loan book, which could further pressure asset quality and earnings.

Despite the still challenging economic environment in Spain, CaixaBank continues to report solid underlying earnings generation capacity, underpinned by its well-positioned franchise in its home market. The Group reported income before provisions and taxes (IBPT) of EUR 1.8 billion in 2013, down 42% year-on-year (YoY), with increased expenses and charges mainly associated with the integration of acquisitions. As expense saves have been implemented, improvement in IBPT was evident in the first six months of 2014 (1H14) with the Group reporting IBPT of EUR 1.7 billion, up 118% on the same period of 2013. CaixaBank has been able to maintain its net interest income despite a loan book that has a sizeable proportion of lower-yielding retail mortgages mainly through the reduction of retail funding costs that has helped to offset the impact of mortgage repricing, deleveraging and customer delinquencies. As a result, CaixaBank’s net interest margin (NIM) was 1.24% in 1H14 vs. 1.19% in 2013.

Loan loss provisions continue to weigh on profitability. Total loan loss provisions stood at EUR 4.3 billion in 2013, absorbing 1.6x of the Group’s IBPT, partially impacted by the provisioning requirement under Royal Decree Law 18/2012 implemented in 2012 and the full application of the new criteria for refinanced transactions recommended by Bank of Spain. However, in 1H14, in light of the incipient recovery and due to the high levels of provisions taken throughout 2012 and 2013, the level of provisioning decreased by 31% YoY on a recurrent basis. Cost of risk continues to decline, reaching 1.17% in 2Q14 as compared to its peak of 2.98% in 1Q13, though still remains elevated as compared to more normalized levels.

Positively, there appears to have been a turning point observed in asset quality deterioration, with a shift in trend in the growth of non-performing loan (NPL) balances in the four most recent quarters. The Group’s NPL ratio was 10.8% at end-June 2014, down from a peak of 11.7% at year-end 2013. Despite this improvement, this ratio remains elevated driven by CaixaBank’s exposure to real estate developers with an NPL ratio of 57.8% at end-June 2014. This exposure also contributes to repossessed real estate assets, which has been increasing in recent quarters as the Group forecloses on long-term delinquencies. DBRS notes that the Group’s coverage ratio remains solid at 59%.

The Group’s funding profile is viewed by DBRS as strong, reflecting the Group’s strong core retail funding base and well-diversified wholesale funding sources. CaixaBank has considerable deposit funding at 72% of total funding at 2Q14. The Group’s loan-to-deposit (LTD) ratio of 102% at June-end 2014 has been reduced from a peak of 133% in 2011, driven by deposit growth and deleveraging. DBRS would anticipate further improvement in this ratio in the future, although at a slower pace. CaixaBank has reduced significantly its dependence on the European Central Bank (ECB) to just EUR 9 billion of LTRO funding as of June 2014, down 73% from year-end 2012. Further supporting its strong liquidity profile, CaixaBank continues to build up its liquidity buffer, reaching EUR 63.5 billion at 2Q14, a sizable 19% of total assets. This buffer compares well to wholesale maturities for 2014-2016 of EUR 15.8 billion, while also providing substantial coverage for other contingencies such as the maturity of LTRO funding in February 2015.

CaixaBank continues to strengthen capitalisation through earnings retention and reductions in risk-weighted-assets (RWAs). Capitalisation levels are strong with a Common Equity Tier 1 (CET1) ratio of 12.7% based on Basel III phased-in methodology and 12.4% Basel III fully-loaded criteria. Furthermore, the Bank reported a leverage ratio of 5.5% under Basel III fully-loaded methodology in 2Q14.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Elisabeth Rudman
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.