DBRS Assigns First time Ratings to Abanca – Senior Long-Term Debt at BBB (low); Positive Trend

DBRS Ratings Limited (DBRS) has today assigned first time ratings to Abanca Corporación Bancaria, S.A. (Abanca or the Bank). DBRS has assigned an Issuer and Senior Debt & Deposit rating of BBB (low) with a Positive Trend and a Short-Term Debt & Deposit rating of R-2 (middle) with a Positive Trend. At the same time, DBRS assigned an intrinsic assessment (IA) to the Bank of BB (high).

The IA of BB (high) reflects Abanca’s strong franchise in its home markets, its improved funding structure and ample liquidity buffer, good capital levels and low exposure to real estate and construction risks after the transfer of loans and foreclosed assets to SAREB in December 2012. However, it also takes into account the Bank’s high proportion of European Central Bank (ECB) funds and the limited access to wholesale markets for funding, the large stock of Non-Performing Assets (NPAs) and the Bank’s relatively weak financial flexibility. DBRS considers Abanca’s limited geographic scope as constraining the diversity of its revenue streams and therefore limiting the Bank’s capacity to improve earnings generation.

In DBRS’s view the Bank has achieved good progress in the implementation of the restructuring plan agreed with the European Commission (EC) and the Bank of Spain. Nevertheless challenges remain and given that the new management team has been in place for a relatively short period of time, DBRS will closely monitor the progress of management in further improving the Bank’s performance. The Positive Trend reflects that there would be upward pressure on the ratings in the short to medium term should the Bank’s fundamentals further improve, particularly through stronger recurrent banking revenues, a rebalancing of its funding structure that lowers reliance on ECB funding, a reduction in NPA levels, and maintaining capital buffers at current or higher levels.

Negative rating pressure, although unlikely given the current trend, could come from weaker underlying earnings generation and higher than expected provisioning levels, negatively affecting the Bank’s internal capital generation. A slower than expected reduction of non-performing assets (including impaired loans and foreclosed assets) would also put downward pressure on the ratings.

Abanca was sold to Banesco Holding Financiero 2, S.A. at end-2013, which already had banking interests in Galicia through its majority stake in Banco Etcheverría, a small bank based in Galicia. Top management and the Board of Directors were mostly replaced after the acquisition; the Fund for Orderly Bank Restructuring (FROB) no longer has representatives on the Board. Nevertheless, as the Bank received state aid in 2011-2012, it continues to be under the supervision of the European Commission until the restructuring plan is completed. Abanca and Banco Etcheverría merged on 14th November 2014 and the Bank was renamed Abanca Corporación Bancaria, S.A..

Underpinning the IA is Abanca’s resilient franchise in its home region of Galicia, Asturias and León. In particular, the Bank was able to maintain a dominant market share in Galicia of around 30% for loans and deposits. Given its regional importance, DBRS anticipates that the Bank would likely receive some form of timely systemic support in a highly stressed scenario, resulting in the Bank’s designation as a systemically important bank (SIB) with an SA-2 support assessment. Explicit support was provided in 2011 when Abanca was nationalised and state capital support was provided by the FROB and the Deposit Guarantee Fund. The Bank also received further state aid from the European Union (EU) at end-2012. The SA-2 designation results in a one-notch uplift from the IA of BB (high) to the final rating of BBB (low).

The Bank returned to profitability in 2013 after two consecutive years of significant losses. In 9M14 the Bank reported net income of EUR 342 million, driven by lower provisions and reduced operating costs. Net income was also supported by some extraordinary capital gains from the sale of debt portfolios. Under the restructuring plan, Abanca is required to gradually dispose of a large part of its fixed-income portfolio, which has been important in compensating for weak recurrent banking revenues that have been constrained by economic conditions, the low interest rate environment and low credit demand in Spain. Provisions were very low in 9M14 partly helped by write off and non-performing loans (NPLs) recoveries. As a result, DBRS expects that future credit costs will be higher than in 9M14, although at lower levels than those seen in the past. In addition, the Bank’s asset quality is expected to continue to benefit from lower net NPL entries helped by the gradual improvement in Spanish economic conditions and lower unemployment.

Abanca has improved its funding structure through customer deposit growth and deleveraging. At end-September 2014, Abanca’s net loan to deposit ratio was robust and better than most Spanish peers at 81%. It had a large pool of unencumbered assets (EUR 9.3 billion) and had additional capacity to issue EUR 2.9 billion of covered bonds, which is in excess of upcoming refinancing needs. However, funding from the ECB remained significant at around 22% of total funding. DBRS notes that ECB funding is used to fund the large fixed-income debt portfolio, and is expected to be reduced to a more normalised level in the next two years in line with the expected reduction of the fixed-income portfolio.
NPAs, which include non-performing loans and foreclosed assets, remained significant at 19% of total exposures at end-September 2014. DBRS considers that the risk in these exposures is well covered by provisions at around 55%. Capital ratios have improved, primarily driven by the significant reduction of risk weighted assets. The Bank had a Transitional Common Equity Tier 1 (CET1) ratio of 12.9% at end-September 2014.

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 applicable methodologies 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 sources of information used for this rating include company reports, the European Central Bank, European Banking Authority, Bank of Spain and SNL Financial. 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: María Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: n.a.
Most Recent Rating Update: n.a.

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