DBRS Confirms Caixa Geral de Depósitos Senior Ratings at BBB (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed its ratings for Caixa Geral de Depósitos, S.A. (CGD or the Group), including the Senior Long-Term Debt & Deposit rating of BBB (low) and the Short-Term Debt & Deposit rating of R-2 (middle). The trend is Stable. The Group’s intrinsic assessment (IA) is BBB (low) and the Support Assessment is SA3. A full list of the rating actions is included at the end of this press release.

In confirming CGD’s ratings, with a Stable trend, DBRS recognises the strength and stability of CGD’s leading banking franchise in Portugal, where the Group has solid market shares of around 22% for loans and 28% for customer deposits, as well as the Group’s improved funding profile and the progress it has made in achieving most targets set under the restructuring plan agreed with the European Commission (EC) in 2012. The ratings also reflect the ownership of the Group by the Portuguese government. The Stable trend considers that, in spite of the challenging political and operating environment in Portugal, the Group is likely to continue to benefit from broader improved macro-economic conditions and further reinforcement of its international operations, which together with the strength of its retail franchise in Portugal should position the Group to restore profitability and asset quality to better levels over the medium term.

CGD’s ratings are sensitive to a change in the rating of the Republic of Portugal. Downward pressure on the ratings could also come from a weakening in the Group’s fundamentals, including further persistent operating losses as a result of significant asset quality deterioration or considerably higher credit provisions that negatively affecting the Group’s profitability and capital levels. Positive rating pressure could arise from an upgrade of Portugal’s sovereign rating, together with a track record of improved fundamentals, including sustained core banking profitability in Portugal, enhanced capital levels and a steady reduction of problematic assets.

DBRS views positively the progress made by the Group in achieving most of the strategic targets of the restructuring plan agreed with the EC in 2012. At that time, CGD received state aid in the form of a direct injection of EUR 750 million of capital from the Portuguese government and EUR 900 million of contingent convertible bonds (CoCos). The restructuring plan included the reduction of the Group’s balance-sheet through the disposal of non-core assets and a required improvement in operational efficiency, primarily to be achieved through reducing costs, in part by reducing branches and employees in Portugal.

Domestic profitability remains a key challenge for the Group, despite the steady improvement achieved in 9M15. CGD reported a small net profit of EUR 3 million in 9M15, compared to significant losses of EUR 348 million in 2014 and EUR 519 million in 2013. Income before taxes (IBT) was EUR 176.7 million in 9M15, up 38.6% year-on-year (YoY), driven by lower funding costs and lower impairment charges, but also boosted by substantial capital gains from the sale of sovereign debt. The improved IBT in 9M15 was largely supported by strong growth of the Group’s international business. Domestic activities, although improved in 9M15, remained weak and loss making, reflecting that the operating environment in Portugal continues to be challenging. Although overall improvement is still very muted, DBRS sees the Group’s core recurrent revenues steadily improving, as the Group’s IBT, excluding one-off gains, would have been higher YoY. The improvement is mostly attributable to a reduction of funding costs in Portugal, both retail and wholesale, as well as a notable reduction of credit impairments. However, interest revenues continued to be pressured by the low interest rates and continued loan deleveraging.

Asset quality deterioration has slowed since end-2014 and the level of overdue loans has remained relatively stable YoY. Credit at risk (CaR) loans, which includes total credit and interest past due, other restructured credit and insolvent/bankrupt credits, went up 1.8% year to date (YTD) at end-9M15. The CaR ratio was 12.6% at end-9M15. The Group maintained a relatively high concentration in the real estate sector of around 16% of total gross loans at end-1H15, which is one of the segments largely driving the level of CaR loans. Nevertheless, DBRS considers the level of loan loss reserves adequate for the Group’s risk profile with a CaR loans coverage ratio of 58% at end-September 2015.
DBRS considers CGD’s funding profile as sound. CGD has steadily improved its funding profile and wholesale funding maturities; its European Central Bank (ECB) funds are manageable. CGD has rebalanced its funding mix as it is benefitting from an increased inflow of retail deposits given its state-owned status. Moreover, the Group’s restructuring plan imposed the disposal of non-core assets and loan deleveraging, which have resulted in significantly lower funding needs. As a result, the Group had a sound net loan to deposit (LTD) ratio (as calculated by DBRS) of 93% at end-9M15. Moreover, during 2015, the Group continued to reduce its usage of ECB funds, down 9.8% YTD, to EUR 2.8 billion at end-9M15. ECB funds represented only 2.9% of total assets at that date, one of the lowest proportion among domestic peers. CGD’s liquidity position was also sound, partly supported by a large portfolio of Portuguese sovereign debt of EUR 9.2 billion. However, this portfolio does represent a relatively high 1.3x CGD’s equity (including CoCos) at end-1H15.

The Group has maintained adequate capital levels with a fully loaded Common Equity Tier 1 (CET1) capital ratio of 9.7% at end-September 2015. CGD’s ratings incorporate DBRS’s expectation that the Portuguese government, as owner of the Group, would have some flexibility to take the necessary actions to preserve capital and other fundamentals of the Group. However, DBRS notes that there are constraints in providing extraordinary support under the Bank Recovery and Resolution Directive (BRRD). As a result, DBRS assigns a SA3 support assessment for CGD, which reflects DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support.

Notes:
All figures in Euros (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 company documents 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.

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: Maria Rivas
Rating Committee Chair: Roger Lister
Initial Rating Date: December 23, 2011
Most Recent Rating Update: December 16, 2014

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