DBRS Comments on Liberbank’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 Liberbank S.A (Liberbank or the Bank), including the Senior Unsecured Long-Term Debt and Deposits ratings to BBB (low) and the Short-Term Debt and Deposits rating to R-2 (middle). The trend on the all ratings is Stable. The downgrade reflected a change in DBRS’s support assessment for Liberbank 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. Liberbank’s intrinsic assessment has been maintained at BBB (low) but the trend on the senior debt ratings, which was Negative prior to the rating review initiated in May 2015, 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 Liberbank at BBB (low) in May 2015. The change from Negative to Stable reflects the continued progress of Liberbank, especially with regards to profitability and asset quality, partly helped by improved economic conditions and a more benign housing market environment in its core regional markets. In particular, the Bank has consistently improved its underlying profitability, demonstrating resilient earnings generation capacity as well as lower loan impairment charges. The Bank also continues to report improvements in asset quality, with the stock of non-performing loans, excluding the portfolio covered by the Asset Protection Scheme (APS), reducing by 4% quarter-on-quarter (QoQ) in 2Q15, as the number of gross entries reduced. As a result, the NPL ratio for the portfolio not covered by the APS improved 40 basis points (bps) in the quarter, to 10.3% at end-2Q15.

In maintaining the IA at BBB (low) DBRS recognises the Bank’s strong franchise in its home regional markets of Asturias, Cantabria, Extremadura and Castilla la Mancha, where it is market leader for customer deposits and loans with over 20% market share. It also recognises the successful completion of the Bank’s restructuring plan agreed with the European Commission, as well as the Bank’s improved capitalisation and sound funding and liquidity position, as well as improved capitalisation. Liberbank’s IA, however, also takes into account the Bank’s limited geographic scope, which constrains the diversity of its revenue streams, along with its significant stock of non-performing assets (NPAs).

RATING DRIVERS:

The trend on the Group’s ratings is now Stable. Further upward movement in the senior ratings would require continued improvement in core recurrent banking revenues, along with further reductions in the cost of risk, and the Bank’s stock of non-performing assets. Negative pressure on the IA, although less likely given the Bank’s improved fundamentals, could arise from weaker underlying earnings generation and higher than expected provisioning levels, which could negatively impact the Bank’s internal capital generation.

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 Liberbank 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).

Note:
All figures are in Euros unless otherwise noted.