DBRS Maintains Liberbank’s Intrinsic Assessment at BBB (low); Snr Ratings remain Under Review Neg

DBRS Ratings Limited (DBRS) has today has maintained Liberbank, S.A.’s (Liberbank or the Bank) intrinsic assessment (IA) at BBB (low). The Bank’s Issuer, Senior Debt & Deposit rating of BBB and its Short-Term Debt & Deposit rating of R-2 (high), remain Under Review with Negative Implications (URN), due to the action taken on 20th May 2015 related to DBRS’s assessment of systemic support.

DBRS has today maintained Liberbank’s IA at BBB (low) following a detailed review of the Bank’s operating results, financial fundamentals and future prospects. In maintaining its IA at BBB (low), DBRS recognises the successful completion of the Bank’s restructuring plan agreed with the European Commission ahead of time, as well as the Bank’s improved capitalisation. This, together with the improved economic conditions in Spain and its core operating regions, has helped the Bank to stabilise its fundamentals. In particular, asset quality has been improving with lower net non-performing loans (NPL) entries for four consecutive quarters up to 1Q15, and this has translated into lower loan loss provisioning requirements. The Bank continues to improve its underlying profitability, demonstrating effective cost control and resilient earnings generation capacity, and the Bank has also notably strengthened the quality and level of its capitalisation in 2014. Among other capital measures, the Bank successful raised EUR 575 million of equity capital in the market and fully repaid the EUR 124 million contingent convertible bonds (CoCos) that were subscribed by the Fund for Orderly Bank Restructuring (FROB).

Liberbank, however, continues to face the challenge of successfully expanding its small and medium size (SME) business franchise amid strong competition, in order to compensate for the high proportion of low-yield residential mortgages affected by the low interest environment. In this sense, DBRS notes that Liberbank is well-positioned to benefit from SME business growth in its home regions where it is the market leader for customer deposits and loans with over 20% market shares. DBRS also notes that the Bank is having success in growing its SME business outside its core regions. New lending volumes are picking up gradually, but still remain low compared to the overall loan book.

Positive rating pressure is unlikely over the medium-term given that the ratings remain URN due to DBRS’s review of systemic support assumptions. Positive pressure on the IA would likely be driven by further improvement in fundamentals, including sustaining stronger core recurrent banking revenues, continuing to reduce the cost of risk to more normalised levels and reductions in its non-performing asset levels, whilst also maintaining Liberbank’s solid funding and liquidity profile and capitalisation levels. Negative pressure on the IA, although unexpected given the Bank’s improved fundamentals, could arise from weaker underlying earnings generation and higher than expected provisioning levels, negatively impacting the Bank’s internal capital generation.

In 1Q15, the Bank reported net income of EUR 50 million, partly helped by significantly lower loan impairments (down 56%). Results were down 56% year-on-year (YoY) however, due to EUR 200 million lower trading gains in the period, but core pre-provision profit (ex-trading gains) was up 93% YoY driven by reduced funding costs and flat operating costs.

Liberbank’s stock of NPLs has reduced every quarter since 4Q13 and at end-1Q15 totaled EUR 5.5 billion, around 56% of which were covered by the Asset Protection Scheme (APS). However, DBRS notes the reduction is still relatively low compared to the total stock of NPLs. The NPL ratio for the total portfolio remained very high at 21.4% in 1Q15 although it reduced to 10.7% excluding the loan portfolio covered by the APS. DBRS considers that total NPLs are adequately covered by provisions at around 50% at end-March 2015. Liberbank’s exposure to Spanish sovereign debt remains sizeable representing a significant 3.5x of the Bank’s equity base at end-2014 which, in DBRS’s view, makes the Bank vulnerable to developments in the Spanish sovereign’s position.

Liberbank’s funding structure benefits from a large, stable customer deposit base and an ample liquidity buffer. At end-March 2015, Liberbank’s net loan to deposit ratio was a conservative 85% (as calculated by DBRS), among the best in the Spanish banking sector. The Bank also had a large pool of unpledged assets of EUR 9.5 billion (after hair-cuts) well in excess of upcoming refinancing needs. ECB funds represented a relatively high 8% of total assets at end-2015, albeit significantly reduced from very high levels.

In DBRS’s view, Liberbank’s capital position is solid for its risk profile. The Bank substantially reinforced its capital levels during 2014, with a EUR 575 million capital increase and two voluntary conversions of outstanding retail CoCos that generated EUR 62 million capital. The Bank had a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio of 12% at end-March 2015.

The Bank’s ratings remain Under Review with Negative Implications due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, Liberbank has a support assessment of SA-2, which results in a one-notch uplift from Liberbank’s IA of BBB (low) to the final rating of BBB. During the review period DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

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 Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).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.

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.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: Roger Lister
Initial Rating Date: March 11, 2014
Most Recent Rating Update: May 20, 2015

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