DBRS Downgrades 31 European Banking Groups due to Removal of Systemic Support Uplift

DBRS Ratings Limited and DBRS Inc., collectively DBRS, have downgraded the senior debt and deposit ratings of 31 banking groups in Europe that had previously benefited from some uplift for systemic support. The short-term debt ratings of 13 banking groups were also downgraded. At the same time, positive fundamental trends have led to an upgrade of the Intrinsic Assessment of 10 banks, which has offset the removal of support uplift for these banks.

These rating actions conclude the reviews that were initiated on 20 May 2015. They reflect DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Overall, DBRS views this as negative for European banks’ senior bondholders, whilst noting that certain fundamental improvements - particularly in capitalisation - have offset some of the impact from these developments.

DBRS has reviewed and changed the support assessment for 46 banking groups to reflect DBRS’s view of the reduction in the predictability of systemic support. This has led to the removal of systemic support uplift from the senior debt ratings for a total of 31 banking groups, removing 1 notch of uplift from 29 banks and 2 notches of uplift from 2 banks. At the same time the Intrinsic Assessments (IAs) of 10 banks were raised by 1 notch, offsetting the impact of the removal of support uplift. In addition, the senior debt ratings of 5 banks were unaffected by the change in the support assessment, because their Intrinsic Assessments were already at the same level as or higher than the respective sovereign rating.

Banks whose ratings were unaffected by the change in support assessment are Banco Santander S.A., Banco Bilbao Vizcaya Argentaria S.A., CaixaBank S.A., Caixa Geral de Depósitos, S.A., Intesa Sanpaolo SpA.

Banks whose ratings have been confirmed are Abanca Corporación Bancaria S.A., Allied Irish Banks, p.l.c., Belfius Bank SA/NV, Danske Bank A/S, Governor and Company of the Bank of Ireland, KBC Group N.V., permanent tsb p.l.c, Svenska Handelsbanken AB (publ), Swedbank AB (publ), UBS AG.

Banks whose senior ratings have been downgraded by one notch are ABN AMRO Group N.V., Banca Monte dei Paschi di Siena SpA, Banco Comercial Português, Banco Cooperativo Español S.A., Banco de Sabadell, S.A., Banco Popolare Societa Cooperativa, Banco Popular Español S.A., Bankinter S.A., Barclays Bank PLC, BNP Paribas SA, Caixa Económica Montepio Geral, S.A., Crédit Logement, SA, Credit Suisse Group AG, Deutsche Bank AG, DNB Bank ASA, DZ BANK AG, Groupe Crédit Agricole, HSBC Holdings plc, ING Bank N.V., Landesbank Berlin AG, Liberbank S.A., Lloyds Banking Group plc, Nationwide Building Society, Nordea Bank AB, Rabobank Nederland, Royal Bank of Scotland Group plc, Skandinaviska Enskilda Banken AB, Société Générale, S.A., Sparkassen-Finanzgruppe.

Banks whose senior ratings have been downgraded by two notches are Deutsche Pfandbriefbank AG, Novo Banco S.A.

During the review period, DBRS also considered three related issues: the relative ranking of deposits compared to senior unsecured debt, the benefit provided to senior debt ratings by higher levels of subordinated debt and equity, and the availability of systemic support for government-owned banks. This analysis has not led to any additional rating actions at this point in time, but DBRS continues to closely monitor developments in the application of the resolution framework and possible impact in these areas (see more detail below). Separately, DBRS published on 9 September 2015 a proposal to introduce a Preferred Obligations Rating. This rating will cover certain obligations/ exposures that have a higher probability of remaining in a continuing bank in the event of the resolution of a troubled bank, whether or not explicitly excluded from being bailed-in.

IMPACT OF IMPLEMENTATION OF BRRD
Countries across Europe continue to make progress in enacting the Bank Recovery and Resolution Directive (BRRD) into their national legislation. BRRD has harmonized the approach that will be taken in the resolution of failing banks across Europe. These developments have led DBRS to conclude that there is not sufficient certainty of systemic support to provide any uplift in the senior debt and deposit ratings of European banks.

At the same time, DBRS recognizes there are also some differences between countries in the implementation of BRRD in national legislation, which could potentially lead to different resolution outcomes. DBRS will continue to monitor whether these differences will warrant a differentiated rating approach in due course.

CHANGES IN SYSTEMIC SUPPORT ASSESSMENTS
DBRS has changed the Support Assessment (SA) for the 46 banking groups in Europe that were previously designated SA2 (indicating the likelihood of timely systemic support) to SA3 (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).

For further information on DBRS’s approach to systemic support see Criteria: Support Assessments for Banks and Banking Organizations (March 2015).

CHANGES IN INTRINSIC ASSESSMENTS AND TRENDS FOR FUNDAMENTALS
At the same time as concluding this review of systemic support, DBRS has also announced an improvement in the Intrinsic Assessment of 10 banks, and a change in the trends on fundamentals of 8 banking groups.

The changes included a change in the trend from Negative to Stable for 6 banking groups: Banco de Sabadell, S.A., Banco Popular Español S.A, Bankinter S.A, Liberbank S.A., Banco Comercial Português, Société Générale, S.A. The trend on the ratings of Novo Banco was changed to Stable following the review status that had been in place since its formation. There was also a change in the trend from Stable to Positive for the long term ratings of ABN AMRO Group N.V.

An upgrade of the IA for 10 banking groups which has offset the removal of support and consequently led to a confirmation of the existing senior debt and deposit ratings and an upgrade of rated subordinated and capital instruments: Abanca Corporación Bancaria S.A., Allied Irish Banks, p.l.c., Belfius Bank SA/NV, Danske Bank A/S, Governor and Company of the Bank of Ireland, KBC Group N.V., permanent tsb p.l.c., Svenska Handelsbanken AB (publ), Swedbank AB (publ), UBS AG.

DBRS has also announced it is maintaining the IA and negative trend on Caixa Económica Montepio Geral, S.A. and also on Banca Monte dei Paschi di Siena SpA, concluding the existing review on the fundamentals of the latter bank.

For more details on the rationale behind these changes see separate commentaries on each issuer. Links to these can be found at the end of this press release.

DOWNGRADE OF DEPOSIT RATINGS IN LINE WITH SENIOR DEBT RATINGS
Alongside the actions on senior debt ratings, DBRS has also taken equivalent actions on bank deposit ratings – a rating that is applied to non-covered deposits (covered deposits are eligible deposits up to EUR 100,000 and are excluded from the bail-in tool). DBRS notes that under BRRD non-covered deposits can be bailed in, if necessary, to rescue a distressed bank, but that wholesale and retail deposits could be treated differently. Non-covered deposits of natural persons and SMEs receive preferential treatment and have a greater degree of protection from being bailed-in, whereas DBRS considers that wholesale deposits of institutions and corporations could be treated in line with senior debt. Given the lack of clarity from regulators on this issue at this stage and the lack of disclosure on the priority of different types of deposits, DBRS has decided not to differentiate currently between the ratings of senior debt and deposits at this time. DBRS will continue to monitor developments in this area.

IMPROVED LOSS ABSORPTION OF BANK CAPITAL INSTRUMENTS

BRRD provides a framework which allows bank capital instruments, including subordinated debt, to more readily absorb losses outside the liquidation of a bank than was possible before. Even though DBRS is still of the view that the best form of capital to protect a bank on a going-concern basis remains tangible common equity (TCE), DBRS recognises the benefit to senior obligors from the increased loss absorption of other capital instruments and this is incorporated in DBRS’s analysis of a bank’s intrinsic assessment. However, BRRD is still a relatively new development and its transposition into each national law and full implementation remains a work in progress. Therefore once the practical consequences and application of measures introduced in BRRD become clearer, and it is accompanied by greater stability in the overall regulatory framework, DBRS may look to increase the recognition given for higher levels of bank capital instruments in a bank’s intrinsic assessment.

DBRS also notes that whilst capital levels (both tangible common equity and other forms of capital) have increased at a large number of European banks since the financial crisis, this has not always led to an increase in banks’ intrinsic assessments because of a range of offsetting factors, including a challenging operating environment, higher regulatory requirements, ongoing conduct costs, and weakening asset quality.

GOVERNMENT-OWNED BANKS AND SYSTEMIC SUPPORT
During the review period, DBRS has considered its assessment of support for fully-owned government banks, where the banks have a policy function and are expected to remain fully-owned for the foreseeable future. DBRS expects the government, as owner, to have some flexibility to take the necessary actions to maintain the capital and other fundamentals of such banks, and this analysis would be incorporated in the intrinsic assessment of the banks. However, as there are constraints in providing extraordinary support under BRRD, DBRS is assigning an SA3 support rating for such banks, rather than an SA2.

SYSTEMIC SUPPORT IN NORWAY
DBRS expects that Norway, as a member of the European Economic Area (EEA), will implement legislation that resembles the BRRD, and therefore the systemic support assumptions for Norwegian banks have also been changed in line with other European countries.

SYSTEMIC SUPPORT IN SWITZERLAND
While BRRD does not apply in Switzerland, DBRS views the Swiss resolution regime as moving in the same direction as the path taken by European Union countries, implying that the likelihood and predictability of systemic support has declined. The Swiss regulator has detailed its preferred resolution strategy as being single-point of entry, and legislation has been passed to provide the legal basis for resolution proceedings. While the resolution strategy allows for flexibility, it clearly expresses the strong political will to avoid any state support being provided to banks, and therefore DBRS’s systemic support assumptions for Swiss banks have also moved in line with other European countries.

ISSUER COMMENTARIES
Abanca Corporación Bancaria S.A.: <a href=" http://www.dbrs.com/research/284830/" target="blank">
ABN AMRO Group N.V.: <a href=" http://www.dbrs.com/research/284842/" target="blank">
Allied Irish Banks, p.l.c.: <a href=" http://www.dbrs.com/research/284840/" target="blank">www.dbrs.com/research/284840 </a> Banca Monte dei Paschi di Siena SpA: <a href=" http://www.dbrs.com/research/284844/" target="blank">www.dbrs.com/research/284844</a> Banco Comercial Português, S.A.: <a href=" http://www.dbrs.com/research/284845/" target="blank">www.dbrs.com/research/284845</a> Banco de Sabadell, S.A.: <a href=" http://www.dbrs.com/research/284846/" target="blank">www.dbrs.com/research/284846</a> Banco Popular Español S.A.: <a href=" http://www.dbrs.com/research/284847/" target="blank">www.dbrs.com/research/284847</a> Bankinter S.A.: <a href=" http://www.dbrs.com/research/284852/" target="blank">www.dbrs.com/research/284852</a> Belfius Bank SA/NV: <a href=" http://www.dbrs.com/research/284834/" target="blank">www.dbrs.com/research/284834</a> Caixa Económica Montepio Geral: <a href=" http://www.dbrs.com/research/284849/" target="blank">www.dbrs.com/research/284849</a> Danske Bank A/S: <a href=" http://www.dbrs.com/research/284837/" target="blank">www.dbrs.com/research/284837</a> KBC Group N.V.: <a href=" http://www.dbrs.com/research/284836/" target="blank">www.dbrs.com/research/284836</a> Liberbank, S.A.: <a href=" http://www.dbrs.com/research/284848/" target="blank">www.dbrs.com/research/284848</a> Novo Banco S.A.:<a href=" http://www.dbrs.com/research/284850/" target="blank">www.dbrs.com/research/284850</a> permanent tsb p.l.c: <a href=" http://www.dbrs.com/research/284838/" target="blank">www.dbrs.com/research/284838</a> Société Générale, S.A.: <a href=" http://www.dbrs.com/research/284835/" target="blank">www.dbrs.com/research/284835</a> Svenska Handelsbanken AB (publ): <a href=" http://www.dbrs.com/research/284839/" target="blank">www.dbrs.com/research/284839</a> Swedbank AB (publ): <a href=" http://www.dbrs.com/research/284841/" target="blank">www.dbrs.com/research/284841</a> The Governor and Company of the Bank of Ireland: <a href=" http://www.dbrs.com/research/284843/" target="blank">www.dbrs.com/research/284843</a> UBS AG: <a href=" http://www.dbrs.com/research/284851/" target="blank">www.dbrs.com/research/284851</a>

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). 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 SNL Financial, Company Documents, the European Commission and national Central Banks and Banking Regulators. 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

For full rating committee disclosures see:
<a href=" http://www.dbrs.com/research/284886/" target="blank">