DBRS: CaixaBank’s Move for Banco BPI Increases Country and Regulatory Risks; Has Strategic Benefits

DBRS Ratings Limited (DBRS) considers that the announcement by CaixaBank, S.A. (CaixaBank or the Bank) of a voluntary tender offer to acquire the remaining 55.9% stake in the Portuguese bank Banco BPI presents some risks, but makes strategic sense for the Bank (rated A (low), Stable trend). DBRS expects that, should the transaction be completed, the Bank will benefit over the medium-term from the broadening of its revenue and geographical diversification through Banco BPI’s operations in Portugal and Angola. At the same time, CaixaBank’s risk profile will be notably increased, as the Bank will be exposed to regulatory, economic and sovereign developments in these countries, and this could affect CaixaBank’s profitability. However, as CaixaBank has been involved with Banco BPI for a long period of time, and given the continued improvement in the Bank’s own underlying fundamentals, DBRS considers the risks manageable.

Caixabank’s underlying profitability in Spain is demonstrating improved core revenue generation capacity and lower provisioning levels but risks remain linked to further economic growth in Spain and asset quality stabilisation. Banco BPI’s profitability continues to suffer from the relatively weak economic conditions in Portugal, albeit to a lesser extent than its Portuguese peers, and in DBRS’s view the challenges in Portugal could lead to short-term pressure on CaixaBank’s profitability.

DBRS notes that CaixaBank has been present in the shareholder structure of Banco BPI since 1995 and has been involved in Banco BPI’s board of directors since that time. Banco BPI has one of the best asset quality among Portuguese banks, owing to its moderate credit risk profile. However, Banco BPI reported a loss of EUR 161.6 million in 2014 due to pressure on banking revenues and a relatively high cost base in its domestic activities. This compares to a total net income reported by CaixaBank of EUR 620 million in 2014. DBRS expects CaixaBank to help Banco BPI to streamline costs and realise synergies, which are expected to be at around EUR 130 million per annum from 2017.

If completed, DBRS views this transaction as being a major acquisition for CaixaBank which will ultimately mean the full consolidation of Banco BPI’s assets and liabilities into CaixaBank’s balance sheet. Exposure to Portugal would account for approximately 9% of the aggregated CaixaBank and Banco BPI’s end-2014 assets and loans. While total exposure to Angola seems manageable at around 2% of combined CaixaBank and Banco BPI’s end-2014 assets, Banco BPI is under regulatory pressure to reduce exposure to this country, as from 1st January 2015, the latter is exceeding the concentration limits imposed by the ECB.

Currently, the Bank holds a 44.1% stake in Banco BPI, but its voting rights are capped at 20%. The transaction aims to align CaixaBank’s economic and voting rights in Banco BPI. The completion of the transaction is subject to both CaixaBank achieving more than 50% stake post transaction and the removal of the 20% voting cap for which it would be needed a minimum acceptance of 75% of voting rights (including the 20% owned by Caixabank). The transaction is also pending regulatory approvals and is expected to be completed before end-1H15.

CaixaBank estimates that the maximum capital impact from this transaction could reduce its fully loaded Common Equity Tier 1 (CET1) to 10.1% from the 11.5% as reported by the Bank and pro-forma post-Barclays transaction at end-2014. However, CaixaBank has stated its commitment to maintain above 11% fully loaded CET1 ratio post-transaction, which DBRS sees as achievable considering CaixaBank’s long track record of successfully accessing and maintaining high levels of capital.

DBRS rates Caixabank’s Unsecured Long-Term Debt & Deposit rating of CaixaBank at A (low) with a Stable trend.

Notes:
All figures are in EUR unless otherwise noted.