DBRS Confirms Caixa Geral de Depósitos at BBB (low), Trend Changed to Stable

DBRS Ratings Limited (DBRS) has today confirmed its ratings for Caixa Geral de Depósitos, S.A. (CGD or the Group), including the Senior Long-Term Debt & Deposit rating of BBB (low) and the Short-Term Debt & Deposit rating of R-2 (middle). The Group’s intrinsic assessment (IA) is BBB (low). The trend on both ratings has been changed to Stable. See a list of rating actions at the end of this comment.

DBRS views CGD as a Systemically Important Bank (SIB) in Portugal. CGD is the largest banking group in Portugal and is fully owned by the Republic of Portugal. DBRS maintains its SA-2 support assessment for CGD, which indicates an expectation of timely systemic support, if needed. Currently, there is no uplift to the Group’s ratings as CGD’s IA is at the same level as DBRS’s current rating for the Republic of Portugal of BBB (low) with a Stable trend.

The change in the trend to Stable from Negative incorporates both recent stabilisation in the financial fundamentals of CGD, as well as the benefit of Sovereign support for CGD’s rating. DBRS changed the trend in the BBB (low) Republic of Portugal rating to Stable in May 2014, and CGD’s ratings are sensitive to changes in the Sovereign rating, given its IA is at the same level as the Sovereign. DBRS considers that CGD’s franchise, the largest in the country, is well diversified and should benefit from increased stability and improved growth prospects in the broader economy as well as the good progress on its restructuring plan to cut costs, improve funding structure, and reduce balance sheet risks, as agreed with the Troika in 2012.

CGD’s IA is supported by the stability of its leading banking franchise in Portugal (supported by its status as a ‘state-owned bank’) and the progress of its restructuring plan, as part of which it has cut costs, improved its funding structure and strengthened capital. These strengths are balanced against the Group’s relatively modest operating profitability and high level of credit-at-risk loans and foreclosed assets, which continued to be under pressure from the improving but still fragile economic conditions with low interest rates and weak demand for credit. CGD’s international operations in Spain, Mozambique, Angola, and Macau are modest in scale and do not contribute significantly to revenues.

CGD’s ratings are sensitive to a change in Portugal’s Sovereign Rating, and could also come under pressure, from weakening fundamentals including significant asset quality deterioration and considerably higher credit provisions, negatively affecting the group’s profitability and ultimately capital levels.

The Group has maintained the largest domestic branch network in Portugal and had a market-leading 21.4% share in loans and 28.6% in customer deposits at end-September 2014. Since 2012 the Group reduced its balance sheet risks by disposing of loans and non-core assets, primarily equity investments and insurance operations. In 2014 the Group sold its 80% stake in its insurance companies Fidelidade, Companhia de Seguros, S.A., Multicare- Seguros de Saúde, S.A and Cares - Companhia de Seguros, S.A. Whilst the sizeable gains from the Group’s portfolio of Sovereign debt and from the disposal of non-core assets were necessary for the Group to report a positive net income of EUR 55.5 million, CGD has also cut costs significantly with fewer branches and staff and has imposed strict cost containment on its Portuguese and Spanish operations. Net interest income (NII) should benefit from reduced funding costs and, as the economy picks up, higher volumes.

The group still faces operating challenges reflecting those of the Portuguese economy. Low interest rates are likely to keep recurrent banking revenues and NII at modest levels. Despite good progress on restructuring, the Group has a relatively high concentration to real estate and construction sectors at around 14.7% of total gross loans at end-September 2014. Credit-at-risk loans, calculated as total credit and interest past due, other restructured credit and insolvent/bankrupt credits, weakened in 9M14, mostly driven by challenging economic conditions in Portugal. CGD’s credit-at-risk ratio was 12.7% at end-September 2014, which DBRS views as high, but adequately provisioned at around 54% of total credit at risk.

DBRS considers CGD’s funding profile sound. CGD’s state ownership and strong retail franchise has enabled it to maintain a strong customer deposit base, and the Group has benefitted from flight to quality. The net loans-to-deposit (LTD) ratio greatly improved at end-September 2014 to 96%, better than the recommended regulatory ratio of 120%. Wholesale refinancing risks are relatively low as wholesale funding maturities are moderate. With total unencumbered liquid assets of EUR 8.5 billion (after haircuts), the Group has sufficient liquidity relative to upcoming wholesale debt maturities to 2017. Moreover, CGD regained access to the wholesale markets for funding in 2013, and ECB funds have been greatly reduced to represent just 3.1% of total assets at end-September 2014.

In DBRS’s view, the Group maintains adequate capital levels. In 2012, the Republic of Portugal injected EUR 750 million of capital and subscribed to CGD’s issuance of EUR 900 million of Contingent Convertible bonds (COCOs). Capital ratios have since strengthened, largely due to the reduction of risk weighted assets and, more recently with the deconsolidation of the insurance assets at end-September 2014. CGD’s Basel III CET1 ratio (phase-in) ratio stood at 11.8% at end-September 2014 (10.9% CET1 ratio fully loaded).

Notes:
All figures in Euros (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 documents 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 23, 2011
Most Recent Rating Update: June 28, 2013

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.