DBRS Comments on BCP’s Rating Actions – Trend now Stable

As detailed in the press release “DBRS Downgrades 31 European Banking Groups due to Removal of Systemic Support Uplift”, published earlier today, DBRS Ratings Limited (DBRS) downgraded the ratings of Banco Comercial Português, S.A. (BCP or the Group), including the Senior Unsecured Long-Term Debt and Deposits ratings to BB (low) and the Short-Term Debt and Deposits rating to R-3. The trend on the all ratings is Stable. The downgrade reflected a change in DBRS’s support assessment for BCP to SA-3, from SA-2, which resulted in the removal of one notch of uplift from the Intrinsic Assessment (IA) for potential systemic support. BCP’s intrinsic assessment has been maintained at BB (high) but the trend on the senior debt ratings has now been changed to Stable. This commentary provides further background to the change in the trend.

RATIONALE FOR THE CHANGE IN TREND:

DBRS maintained the IA of BCP at BB (high) in May 2015. The Stable trend reflects DBRS’s view that BCP’s fundamentals have now stabilised, supported in part by the improved economic environment in the Group’s domestic operating environment. In particular, the stable trend reflects the improvement in the Group’s capitalisation, which has in part been supported by gradually improving core profitability, which was further evidenced in 1H15.

In maintaining the IA at BB (high), DBRS recognises BCP’s major presence in Portugal, with the Group maintaining market shares of 18.9% in customer loans and deposits. DBRS also notes the Group’s diversification internationally, through both its controlling stake in Bank Millennium in Poland, and its presence in Portuguese affiliated markets, such as Angola and Mozambique. BCP’s IA also reflects the challenges still faced by the Group, which include the high level of loan impairment charges, which continue to pressure earnings, along with its relatively weak asset quality and vulnerability to economic and sovereign developments in Portugal and Europe, as a result of its significant exposure to Portuguese and Polish sovereign debt.

RATING DRIVERS:

The trend on the Group’s ratings is now Stable. Upward pressure to the IA could arise from a significant reduction of non-performing assets (NPA) (including credit at risk loans and foreclosed assets), sustained core banking profitability generation, particularly in Portugal, and substantial strengthening of its capital position. 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 any substantial further weakening of asset quality.

SUPPORT ASSESSMENT:

The rating action concluded the rating review initiated in May 2015 and reflected DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Countries across Europe continue to make progress in enacting the Bank Recovery and Resolution Directive (BRRD) into national legislation, including Spain. BRRD has harmonised the approach that will be taken in the resolution of failing banks across Europe and has led DBRS to conclude that there is not sufficient certainty of support to have any uplift in the senior debt ratings of European banks. Consequently the support assessment for BCP was changed to SA-3 (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) from SA-2 (indicating the likelihood of timely systemic support).

RATIONALE FOR THE CONFIRMATION OF THE JUNIOR SECURITIES:

DBRS today also confirmed the ratings of the dated subordinated debt issued by BCP at BB. DBRS's approach is to notch junior securities from the bank's Intrinsic Assessment (IA), and therefore as a result of the maintenance of the IA and conclusion of the support review, the dated subordinated debt ratings have been confirmed.

Note:
All figures are in Euros unless otherwise noted.