DBRS Confirms Caja Rural de Granada, S.C.C. at BBB (low); Trend Changed to Stable

DBRS Ratings Limited (DBRS) has today confirmed Caja Rural de Granada, Sociedad Cooperativa de Crédito (Caja Rural de Granada, CRG or the Bank)’s Issuer and Senior Debt & Deposit rating of BBB (low) and Short-Term Debt & Deposit rating of R-2 (low). The trend on both ratings has been revised to Stable from Negative. At the same time, DBRS maintained CRG’s intrinsic assessment (IA) of BBB (low).

The IA of BBB (low) reflects the strength of CRG’s franchise in its home market, which provides it with a strong, stable and loyal customer deposit base. Moreover, it considers the Bank’s sound capitalisation on the back of continued support from its members, and CRG’s benefits from being a member of the Spanish Association of Rural Cooperatives (AECR). On the other hand, it takes into consideration the Bank’s large stock of Non-Performing Assets (NPAs) and relatively weak financial flexibility and small size and limited geographic scope, which constrain the diversity of its revenue streams and earnings generation.

The change in the trend to Stable from Negative reflects the fact that the Bank has demonstrated its ability to satisfactorily weather the challenging economic conditions in its home markets of Granada, Almeria and Malaga. At the same time, the Bank has managed to sustain adequate financial fundamentals, including stable, albeit modest profitability despite being concentrated in a region where economic conditions are weaker than in other parts of Spain. The change in the trend to Stable incorporates DBRS’s view that CRG’s franchise has benefitted from increased customer deposits resulting from consolidation in the Spanish financial sector and that the Bank’s capital position is adequate for its risk profile.

DBRS notes that whilst ECB funding was relatively significant at end-September 2014, it mostly relates to LTRO which will be repaid in February 2015. As ECB funds are used to fund a large part of the fixed-income debt portfolio, DBRS expects the Bank’s exposure to Sovereign debt to reduce to a more normalised level in line with the reduction in ECB funds.

With total assets of EUR 6 billion as of September 2014, DBRS does not view CRG as systemically important and thus the ratings do not incorporate the expectation of timely support for the Bank in the event of a highly stressed scenario. As such, DBRS has assigned a SA-3 support designation which does not provide upward rating support for the IA. The final rating for CRG of BBB (low) is thus equal to the IA.

Upward rating pressure is unlikely given its size and geographical concentration in the small province of Granada, which constrains the diversity of revenue streams and businesses. Negative pressure could come from weakening underlying earnings generation and higher than expected provisioning levels, negatively affecting the Bank’s internal capital generation. Downward rating pressure would also come from slower than expected reduction of non-performing assets (including impaired loans and foreclosed assets).

The Bank’s ratings are underpinned by its strong, albeit niche, local franchise in the province of Granada, where CRG has significant market shares of around 22.5% for deposits and 13.4% for credits. The ratings also take into account the fact that CRG is member of the AECR, which means that the Bank is supported by a common technology system, central clearing and liquidity services, and an insurance and asset management company. Banco Cooperativo Español (BBB (high)/Stable Trend) acts as the central treasurer and liquidity provider for the AECR.

The Bank reported a net income of EUR 26 million in 9M14 mostly due to lower credit provisions helped by non-performing loans (NPLs) recoveries. Net interest income (NII) slightly improved compared to the same period the year before on the back of lower funding costs although it was also supported by carry trade contributions. Operating costs went up 7%, mostly as a result of increased contributions on the pension fund for employees which were not incurred in 2012-2013 in order to contain costs. However, the cost to income ratio remains sound at 49%. DBRS expects overall profitability to remain relatively modest under the still fragile economic environment, but supported by lower credit costs helped by improved economic conditions and better NII helped by lower retail funding costs.

Asset quality problems remain elevated and the NPA ratio (NPLs + Foreclosures) was a high 19% at September-end 2014. However, DBRS considers that risks are well covered by provisions of around 52% of total NPAs. DBRS sees that CRG’s asset quality has started to benefit from improved economic conditions and lower unemployment figures, which should be translated into a lower level of provisions in 2015. CRG’s residential mortgage NPL ratio of 5.7% is slightly below the system average of 6.1%.

CRG has a sound funding profile supported by a stable deposit base, which has continued to grow benefitting from the consolidation of the Cajas sector in Andalusia. The net loans to deposits ratio stood at 81% at end-September 2014, which is among the strongest in the Spanish banking sector. CRG has a sizeable unencumbered liquid asset portfolio of around EUR 1 billion.

DBRS views CRG’s capitalisation as sound and supported by the fact that as a credit cooperative, it can raise capital through its members. The Bank has a strong Common Equity Tier 1 (CET1) ratio of 14.3% at end-September 2014 and its tangible common equity over tangible assets is robust at 9% at 9M14. In addition, DBRS considers that some form of support may be forthcoming from the EUR 150 million AECR insolvency fund in case of need. Past history has also seen support for weaker banks provided by stronger banks within AECR.

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: Maria Rivas
Rating Committee Chair: Roger Lister
Initial Rating Date: December 9, 2013
Most Recent Rating Update: December 9, 2013

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