DBRS: Liberbank’s Full Year 2014 Results Improve with Lower Cost of Risk

Summary:
• FY14 net income of EUR 117 million supported by lower funding costs and reduced credit and asset impairments. Sizeable capital gains from sale of debt portfolio also boosted operating revenues
• Gross NPL entries (excluding APS portfolio) notably declined YoY. Total non-performing loans (NPL) however remained weak at 22%
• DBRS rates Liberbank at BBB for Issuer & Senior Debt & Deposits with a Negative trend

DBRS Ratings Limited (DBRS) views Liberbank S.A.’s (Liberbank or the Bank) 2014 results as having improved from previous years supported by reduced loan impairments. The Bank reported full year 2014 net income of EUR 117 million, up 5.3x year-on-year (YoY) (for comparative purposes DBRS is considering pro-forma 2013 results after incorporating the effect of the adoption of IFRIC 21 on levy liabilities). DBRS notes that the results continued to include sizeable capital gains from the sale of debt and equity portfolios.

Liberbank’s underlying profit before tax (PBT) was EUR 118 million in 2014, which compares to a loss of EUR 50 million in 2013. The main driver of improved results was lower credit impairments which were down by 25% YoY. Total provisions absorbed 71% of income before provisions and taxes (IBPT) in 2014, which albeit relatively high is down from 118% a year ago. This reflects, in DBRS’s view, Liberbank’s good progress in managing down asset quality issues combined with the gradual recovery on Spain’s economic and property market.

Gross operating revenues grew by 12% YoY and grew by 8% YoY if trading gains were excluded. Nevertheless, revenues remained under pressure from the very low interest rate environment and ongoing deleveraging in Liberbank’s corporate and real estate portfolio. Positively, loan deleveraging is slowing down as Liberbank extended about EUR 2 billion new loans in 2014, mostly to SMEs.

Liberbank’s net interest income (NII) grew by 13.5% YoY mostly driven by a sharp reduction in the cost of funding, both retail and wholesale. The Bank’s net interest margin (NIM) widened quarter-on-quarter (QoQ) to 1.19% in 4Q14, a trend seen for the last five quarters. However, interest income remained highly dependent on the ALCO portfolio which contributed to 34% of interest income in 2014. Liberbank successfully reduced operating costs in 2014 (down by 5% YoY) which shows good implementation of its restructuring plan. As a result, the cost to income ratio improved to 47% in 2014 from 55% in 2013.

Asset quality continued with the positive trend experienced in the last quarters and non-performing loans (NPLs) continued to decline in 4Q14. Gross NPL entries on the non Asset Protection Scheme (APS) portfolio declined by 43% YoY. However, Liberbank’s total NPL ratio remained very elevated at 21.7%. Around 58% of total NPLs where covered by the APS, which has been extended until 2016. Excluding the APS portfolio, the NPL ratio was 10.6%, below the average of Spanish banking system, but still considered weak by DBRS when compared to international peers. DBRS views the non-performing asset (including Foreclosed Assets) coverage level for the total portfolio of 50% at end-2014 as adequate.

Liberbank’s funding mix benefitted in 4Q14 from lower reliance on wholesale and ECB funding. After the successful capital raising in June 2014, the Bank reported a relatively strong Common Tier 1 Equity ratio under Basel III (fully loaded) of 11.1% and a 5.5% leverage ratio (phased-in) at end-December 2014.

DBRS rates Liberbank Issuer & Senior Debt & Deposits at BBB with a Negative trend. The Negative trend primarily reflects the downside risks to the Bank from the still fragile operating economic and property market environment in Spain, especially in the Bank’s home markets.

Note:
All figures are in Euros unless otherwise noted.