DBRS Confirms Banco Cooperativo Español at BBB, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Banco Cooperativo Español S.A’s (BCE or the Bank) Senior Long-Term Debt & Deposit rating of BBB and the Short-Term Debt & Deposit rating of R-2 (high). The trend on both ratings remain Stable. At the same time, DBRS maintained BCE’s intrinsic assessment (IA) of BBB, and its support assesment of SA3.

In confirming BCE’s ratings DBRS recognizes the Bank’s solid and resilient fundamentals and its essential role as the central clearing bank and liquidity provider for the Cajas Rurales (CRs) that are members of the Asociación Española de Cajas Rurales (AECR). It also considers the Bank’s low risk profile, its stable and recurring earnings, and the benefit it receives from its funding relationship with the AECR members, who provide a stable deposit base.

BCE’s ratings also take into account BCE’s size and scope, with business and revenues geographically concentrated in Spain, its modest equity base, as well as the significant risk exposure to Spanish sovereign debt arising from investing excess liquidity deposited by the CRs in BCE.

Upward rating pressure, although unlikely in the short to medium term, could be achieved if BCE gains greater importance for the CRs, if it significantly improves its equity base and if the AECR achieves greater importance within the Spanish banking system. Ratings could come under pressure if BCE´s importance for the CRs is reduced. Negative rating pressure could also come from increasing risk profile, including increasing counterparty risks.

AECR is the largest cooperative group in Spain, by asset size, with EUR 56.8 billion assets at end-September 2015. The CRs are supported by their generally strong local franchises, their stable cooperative membership bases, and their typically favorable loan-to-deposit ratios.

DBRS views AECR as a cohesive group, with its members being linked through various organizational and business relationships, and through the funding/central clearing functions that are provided by BCE. The Bank plays an important role in providing many of the services of a central bank to its owners. Also providing ancillary services to the AECR members are Rural Servicios Informáticos (an information technology company) and Seguros RGA (insurance operations). The larger organization including these entities is marketed as Grupo Caja Rural (GCR). Despite the cohesive nature of the GCR, DBRS does not view this organisation as warranting a group rating approach, given the modest size of the support fund available to the Cajas Rurales (around EUR 150 million) relative to the size of the AECR, and the lack of a cross-guarantee or mutual support scheme across the entire GCR organisation.

BCE’s role is not profit maximization but instead to report sustainable profits that build up capital internally. The Bank reported net income of EUR 30 million in 9M15, down 16% year-on-year (YoY), driven by the impact of the low interest rate environment on net interest income (NII), and by lower capital gains from the sale of debt portfolios.

Despite its small asset size, BCE is an active participant in the capital markets and a key provider of wholesale banking services on behalf of the Cajas Rurales. DBRS views BCE’s funding profile as sound, supported by its large and stable deposit base, a large part of which is backed by AECR Cajas Rurales. Regulated by a treasury agreement, the AECR Cajas Rurales deposit their excess liquidity in BCE in the form of bank deposits. Deposits from the AECR Cajas Rurales are BCE’s main source of funding, and represented 71% of total funding at end-September 2015.

BCE invests the excess liquidity received from the Cajas Rurales in Treasury bonds and interbank funding with a maximum maturity of 18 months. As a result, BCE has counterparty risk with the financial institutions that it deals with in the financial markets. However, DBRS sees that counterparty risk is mitigated by the fact that BCE has treasury agreements with the Cajas Rurales whereby they guarantee any losses or commitments that could arise from interbank placements that BCE makes on behalf of the Cajas Rurales. Loans to Cajas Rurales, inter-bank placements and government and financial institutions securities accounted for 93% of BCE’s assets at end-September 2015.

The Cajas Rurales have maintained their regional footprint and focused on rural areas. In general, this focus meant that the CRs did not grow outside their area of expertise, to avoid competing on other CRs’ territory. As a consequence, the Cajas Rurales, in general, maintained their traditional business model and did not substantially increase their exposure to the real estate sector. In addition, the lending of the Cajas Rurales is constrained by their cooperative status that limits lending to customers that are not members of the Bank to 50% or less of total lending. This limit has also helped to constrain the Cajas Rurales’ lending outside of their core markets and customer base. As a result the Cajas Rurales tend to have better asset quality than domestic banks, as reflected in an aggregate NPL ratio of 9.9% for the AECR, at end-September 2015, below the Spanish average of 10.7%.

DBRS sees BCE as having adequate regulatory capital ratios given its low risk profile. The Common Equity Tier 1 (CET1) capital ratio was 19.3%, under phased-in criteria, at end-September 2015, however, BCE’s tangible equity to tangible asset ratio of 1.8% at end-September 2015 remains extremely low. Although BCE’s leverage is affected by the recent balance sheet growth, due to its role of intermediary with the Cajas Rurales, and by the low risk weighting of its exposures, it does highlight the need for BCE to continue to manage its operations in an extremely conservative manner.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 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 5, 2013
Most Recent Rating Update: December 9, 2014

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.