DBRS Maintains BCP’s Intrinsic Assessment at BB (High); Senior Ratings Remain Under Review Negative

DBRS Ratings Limited has today maintained the intrinsic assessment (IA) of Banco Comercial Português, S.A. (BCP or the Group) at BB (high). This concludes the review that was initiated on October 28, 2014. However, the Group’s BBB (low) Senior Long-Term Debt & Deposits rating and R-2 (middle) Short-Term Debt & Deposits rating, as well as the ratings of associated entities, remain Under Review with Negative Implications (URN), due to the action taken on May 20, 2015 related to DBRS’s assessment of systemic support. See a full list of rating actions at the end of this press release.

DBRS has today maintained BCP’s IA at BB (high) following a detailed review of the Group’s operating results, financial fundamentals and future prospects. In maintaining the IA at BB (high) DBRS considers that BCP’s fundamentals are showing signs of stabilisation and that some of the downside risks faced by the Group have been reduced. In particular, the pace of asset quality deterioration is slowing down and core banking revenues are improving, helped by reduced funding costs and volume growth in its international operations. The Group was originally placed URN in October 2014 after the European Banking Authority’s (EBA) stress test results announcement which revealed a sizeable EUR 1.1 billion capital shortfall for BCP in the adverse scenario. Since then, DBRS considers that the Group has taken sufficient steps to improve its capitalisation and regulatory capital ratios have been reinforced, helped by among other measures, internal capital generation and the sale of a 15% stake in the Group’s Polish subsidiary Bank Millennium in 1Q15.

Challenges remain for the Group, however, given that the operating environment in Portugal is still difficult and vulnerable to economic and sovereign developments in Europe. The latter could potentially negatively impact BCP, as its exposure to Portuguese and Polish sovereign debt remains substantial, representing 1.5 times of the Group’s equity at end-March 2015. In addition Portugal’s economic recovery remains slow, demand for new credit remains muted and the low interest rate environment continues to pressure net interest income. Profitability also remains under pressure from relatively high loan impairment charges and capital levels which, albeit improved, remain relatively weak when compared to international peers.

Downward pressure on the IA could arise if BCP is unable to continue to improve capital or to restore profitability to more normalised levels, or experiences a substantial further weakening of its asset quality. Positive pressure is unlikely at this time, taking into consideration BCP’s modest, albeit improving, profitability, fairly weak capital levels and high level of asset quality problems.

Supporting the IA of BB (high) is BCP’s major presence in Portugal through its 695 branches. The Group has significant market shares domestically, with 18.9% in customer loans and deposits. The IA also considers the Group’s diversification internationally, mostly through its controlling stake in Bank Millennium in Poland, but also through its presence in Portuguese affinity markets such as Angola and Mozambique.

BCP reported a net profit in 1Q15 of EUR 70.4 million, its first profit since 1H12, driven by reduced retail funding costs and significantly lower costs related to the State Contingent Convertible Bonds (CoCos) which the Group repaid a large part of during 2014. The positive result also reflected large capital gains obtained with the sale of Portuguese sovereign debt. Core recurrent operating revenues (excluding one-off capital gains), grew by 19% quarter-on-quarter (QoQ). Total operating expenses were down 2% in 1Q15 year-on-year (YoY), and 9% in Portugal as a result of the reduction of 53 branches and 828 employees. DBRS considers the Group's growing international businesses in Poland, Mozambique and Angola to be important in supporting the Group's profits and internal capital generation.

DBRS views BCP’s funding and liquidity position as satisfactory. The Group’s net loans to deposits ratio further improved to 107% at end-March 2015 (according to DBRS calculations) and wholesale funding maturities for the next three years are manageable. The Group holds an acceptable unpledged pool of liquid assets, which covers 1.7x the total Group’s wholesale maturities, but DBRS notes that the Group’s ECB funding is mostly short-term and still represents a relatively high 8% of total assets at end-March 2015.

Asset quality, albeit stabilising, remains relatively weak, with a credit-at-risk ratio (CaR, total credit and interest past due, other restructured credit and insolvent/bankrupt credits % total gross loans), at 12.1% at end-March 2015. If foreclosed assets (FAs) are included, the credit at risk ratio would rise to 14.8%. CaR coverage levels are viewed as adequate by DBRS.

DBRS sees BCP’s capital levels as relatively weak in the context of the Group’s risk profile and the slow economic recovery in Portugal. DBRS notes, however, that, the quality of capital has substantially improved due to internal capital generation and the EUR 2.2 billion capital raise completed in July 2014. This was used to repay EUR 1.8 billion of the total EUR 3 billion of CoCos received from the Portuguese Republic in 2012. The Group had outstanding State CoCos of EUR 750 million at end-March 2015. The Common Equity Tier 1 (CET1) capital ratio under the fully-loaded criteria was 9.9% at end-March 2015, improved from 8.9% at end-2014.

The Group’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 May 20, 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 for systemically important banks (SIB). Currently, BCP is considered by DBRS as a SIB in Portugal and as a result has a support assessment of SA-2, which results in a one-notch uplift from BCP’s IA of BB (high) to the final rating of BBB (low). During the review period DBRS is considering whether to change the support designation of a number of European Banks from SA2 to SA3, 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.

Separately, DBRS has also withdrawn the BBB (low) ratings on debt guaranteed by the Republic of Portugal, as this debt has been repaid.

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 Portugal 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.

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: June 10, 2011
Most Recent Rating Update: May 20, 2015

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