DBRS Downgrades Novo Banco’s LT ratings to CCC (high); Negative Trend

DBRS Ratings Limited (DBRS) has today downgraded the ratings of Novo Banco, S.A. (NB or the Bank), including its Senior Long-Term Debt and Deposits rating to CCC (high) from B and its Short-Term Debt & Deposits rating to R-5 from R-4. The trend on the long term ratings is Negative and the trend on the short term ratings is Stable. The agency has also downgraded the ratings of the five senior debt securities that were transferred from NB to Banco Espírito Santo to D from B; these ratings were subsequently discontinued and withdrawn. In the meantime, DBRS has confirmed the rating on the Bank’s Unsubordinated Notes Guaranteed by the Republic of Portugal at BBB (low) with a Stable trend, in line with the sovereign rating of the Republic of Portugal. See a full ratings table at the end of this press release.

Today’s rating action follows the decision by the Bank of Portugal (BoP) on December 29, 2015 to change the perimeter of assets and liabilities of Banco Espírito Santo S.A. (BES) and NB, one year and five months after the initial perimeter was established on August 4, 2014. On December 29, 2015, the BoP announced it was transferring back to BES some of the senior debt issuances that were initially included on NB’s balance sheet. Consequently, DBRS has downgraded the aforementioned senior debt securities to D to reflect the transfer to BES, which is in resolution and will be liquidated. Under these circumstances, DBRS considers these bonds are highly likely to face non-payment of interest and absorb substantial losses. The ratings of these securities were subsequently discontinued and withdrawn.

The downgrade of NB’s Long-Term Debt and Deposits rating to CCC (high), with a Negative trend, reflects DBRS’s view that the decision taken by the BoP to transfer some of the senior debt instruments to BES will further impact investor sentiment and confidence in NB, as well as increasing reputational risk. These factors outweigh the progress achieved in the Bank’s fundamentals since its inception. In addition, DBRS notes that the BoP, as the resolution authority in Portugal, has to ensure the adequate capitalisation of the Bank in order to facilitate a successful sale of the Bank, a process that was initially to have been completed in 2015. DBRS considers that, should the sale not be completed, the risk to bondholders could further increase.

Following its creation in 2014, NB had made progress in restoring and protecting its franchise and improving its funding and liquidity profile. With an expectation that these positive trends would continue, DBRS changed the Bank’s Intrinsic Assessment on July 20, 2015 to B from B (low). Since then, however, uncertainty about the Bank’s prospects have increased as the sale process was cancelled and the Bank revealed a capital shortfall of EUR 1.4 billion under the adverse scenario of the ECB stress test. The BoP actions announced on December 29 have restored the identified capital shortfall, but capital levels remain weak, particularly in the context of weakening asset quality and ongoing operating losses, which will continue to pressure the Bank’s internal capital generation. Potential legal challenges to the BoP’s recent actions could also result in uncertainty about the extent to which the Bank will benefit from the newly created capital.

The Negative trend considers the potential for further weakening in the Bank’s position as a result of these recent events and the ongoing weakness in its financial fundamentals. Downward rating pressure on NB’s final rating could emerge if DBRS perceives any notable deterioration in the franchise, particularly within NB’s home market of Portugal, or if market confidence in the Bank weakens, which could negatively impact funding costs and liquidity. Further weakening of the Bank’s financial fundamentals could also pressure the ratings. Positive rating pressure could emerge if the BoP actions prove to be successful in strengthening the Bank’s capital position and enhancing market confidence, while the Bank also demonstrates improving financial performance and transparency that enhances market confidence in its prospects.

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 Portugal 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: María Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: August 5, 2014
Most Recent Rating Update: September 29, 2015

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