DBRS Confirms Caja Rural de Granada, S.C.C. at BBB (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Caja Rural de Granada, Sociedad Cooperativa de Crédito (Caja Rural de Granada, CRG or the Bank)’s Issuer and Senior Debt & Deposit rating of BBB (low). At the same time, the agency has upgraded the Short-Term Debt & Deposit rating to R-2 (middle) from R-2 (low). The trend on both ratings remain Stable. At the same time, DBRS maintained CRG’s intrinsic assessment (IA) of BBB (low).

The confirmation of CRG’s ratings with a Stable trend reflects the strength of the Bank’s franchise in its home market of Granada, where it has significant market shares in loans and deposits of around 14% and 23% respectively. The ratings also reflect the Bank’s stable and resilient fundamentals throughout the financial crisis. Also considers the benefits CRG derives from being a member of the Asociación Espanola de Cajas Rurales (AECR), the Bank’s strong funding profile, supported by a its resilient and loyal customer deposit base, and its sound capital levels.

CRG’s ratings, however, also consider the challenging banking environment in Spain with persistent low interest rates and low demand for credit, which could further affect CRG’s already low profitability levels. Moreover, this adds to the fact that CRG is a small rural cooperative with limited geographical diversification and the Bank’s large stock of non-performing assets (NPAs).

The change in CRG’s Short-Term Debt & Deposit rating reflects the strength of the Bank’s funding and liquidity position and stability of its customer deposit base. The Bank, as generally seen in the rest of its cajas rurales peers, maintained one of the best net loan to deposit (LTD) ratios in the Spanish banking system at 78% at end-September 2015.

Upward rating pressure is unlikely in the short to medium term, mainly due to the Bank’s geographical and sectorial concentrations in the small province of Granada. However, positive rating pressure could arise if the Spanish sovereign’s position and the economy continue to improve, together with sustained enhancement of core profitability and a substantial reduction of the level of NPAs. Negative pressure could come from weakening underlying earnings generation and a sharp deterioration of asset quality, that would also negatively affect the Bank’s internal capital generation.

Supporting the ratings is also CRG’s membership within AECR, which provides significant benefits. Members have access to a well-developed common technology system, central clearing and liquidity services, as well as a range of other wholesale banking services, and products provided by AECR’s insurance and asset management companies. Banco Cooperativo Español (BCE, BBB Stable) acts as the central treasurer and liquidity provider for the Group.

The Bank continued to improve its core profitability supported by lower credit costs and lower retail funding costs, something that DBRS sees as potentially driving CRG’s 2016 results as well. Net income was EUR 26 million in 9M15, flat YoY and supported by 46% lower loan loss provisions.

Historically, credit cooperatives have had a relatively low credit risk profile given its business mix focused on mortgages to individuals and loans granted to local small and medium sized enterprises (SMEs), traditionally focused on agribusiness. While this was partly the case for CRG, the Bank also expanded its lending into real estate and construction sectors during the boom years. As a result, the Bank‘s exposure to the real estate and construction sector is generally higher than most credit cooperatives in Spain, at 12.4% of total loans and foreclosed assets at end-September 2015. These drive a significant part of the Bank’s NPAs. Positively, DBRS notes that the Bank is making good progress in reducing its stock of NPAs, benefiting from the improved economic and property market conditions in Spain. The NPA ratio was 17.8% at end-September 2015 although NPAs were adequately covered by provisions at 56% at that date.

CRG’s funding profile has benefitted from increased customer deposits resulting from the consolidation in the Spanish financial sector in its home market. CGR has made only limited use of the wholesale markets for funding. Funding from the ECB that is coordinated through Banco Cooperativo was reduced YoY, but remains relatively high at 15% of total assets at end-September 2015. The proportion of ECB funds is generally above domestic peers, but it is used to fund SME lending and the Bank’s proportionately large portfolio of sovereign debt, which has an average maturity of 3.7 years. The Bank built up its large sovereign debt portfolio (EUR 909 million at end-September 2015) during the last four years in order to compensate for the very low interest rates that highly affected CRG’s revenue generation capacity.

CRG’s capitalization is solid. While the Bank has a Common Equity Tier 1 (CET1) capital ratio of 16.6% under the fully loaded criteria at end-September 2015, its small capital base, together with modest internal capital generation, provides limited cushion for loss-absorbing capacity. DBRS considers however, the potential for support that may be forthcoming from the AECR. AECR maintains an insolvency fund of approximately EUR 150 million available to support member banks in the case of need, although the Bank could also be called on to support the fund. Past history has also shown support for weaker banks provided by stronger banks within AECR.

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 company reports, the European Central Bank, European Banking Authority, Bank of Spain 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 9, 2013
Most Recent Rating Update: December 10, 2014

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