DBRS Confirms ICO, Senior Unsecured Debt at A (low), Trend Now Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Instituto de Crédito Oficial (ICO or the Bank). The Senior Unsecured Debt rating has been confirmed at A (low) and the trend has been changed to Stable from Positive. At the same time, the agency has confirmed the Short-Term Debt and Deposit rating at R-1 (low) with Stable trend.

The change in ICO’s Senior Unsecured Debt rating trend to Stable reflects the change in trend to Stable from Positive on the A (low) rating of the Kingdom of Spain at A (low) on April 8, 2016 (for more information please refer to www.dbrs.com). At the same time, the agency has also conducted a full review of the Bank's operating results and credit fundamentals. ICO is a credit institution by law and is also considered to be a state finance agency of Spain. ICO benefits from an explicit, irrevocable, unconditional and direct guarantee from the Kingdom of Spain as stated in its by-laws under the Royal Decree Act 706/1999. ICO’s ratings and trend are therefore equalised with the Long-Term and Short-Term Foreign and Local Currency ratings of the Kingdom of Spain and will move in line with the rating of the Spanish sovereign.

ICO’s role is to support and develop any economic activity contributing to the growth of the Spanish economy. It was founded in 1971 and became a state-owned bank after the reform of the Spanish state banking sector in 1991. As a state agency, ICO is responsible for managing state funds and for providing financing to contribute to the growth of Spanish economy. In addition to providing funding as an institutional lender, ICO also has a duty to contribute to the mitigation of economic effects from serious economic recessions, natural catastrophes or similar situations, as well as to act as the instrument for executing certain economic policy measures.

In carrying out its public service mandate, ICO’s goal is not to maximise profits, however the Bank has never reported a loss in its history. Nevertheless, given its countercyclical nature, profits have shown volatility over time. DBRS views ICO’s earnings power as supported by its adequate recurring revenue generation and its low cost base. The Bank reported net income of EUR 34 million in 2015, down from EUR 81 million in 2014, mostly attributable to a significant fall in net interest income, largely driven by the low interest rate environment as well as loan book contraction due to the countercyclical nature of the Bank,. Nevertheless, 2015 results were supported by substantially lower net loan loss provisions driven by significant write backs in the year.

DBRS views ICO’s risk appetite as generally conservative due to the nature of its activity. The majority of the Bank’s lending is carried out indirectly through ICO lines to banks that, in turn, lend the funds to SMEs/entrepreneurs. This indirect lending results in the banks being exposed to the credit risk of the final borrowers, rather than ICO. ICO has counterparty credit risk to the participating banks. In 2015 ICO granted around EUR 9.7 billion of new indirect loans in 2015, a decrease from 2014 (EUR 21.5 billion) which saw the highest volume granted since ICO’s inception.

ICO also carries out direct lending, which accounted for 40% of total gross loans at end-2015. Direct loans are the only driver of the Bank’s non-performing loan (NPLs) ratio. The Bank’s NPL ratio on its direct lending increased to 10.2% at end-2015 from 8.2% at end-2014 (as calculated by DBRS). However, DBRS notes that the deterioration of the NPL ratio was primarily driven by the effect of loan deleveraging and in fact the outstanding balance of NPLs decreased 3.4% YoY. The Bank’s reserve coverage ratio for these NPLs remains solid at 126% at end-2015 (as calculated by DBRS). ICO contributes to the funding of large-scale projects by participating in syndicated loans. This leads to a high level of borrower concentration, which is a concern, but DBRS acknowledges that this reflects the Bank’s role within the Spanish financial system.

ICO’s funding structure is reliant on wholesale funding. The Bank has not experienced any notable difficulties in tapping the markets since its creation and has been able to tap the markets on a regular basis even during the financial crisis. Refinancing risk is also mitigated by the fact that ICO lends at much shorter maturities than the funding it obtains on the capital markets.

DBRS views ICO’s capitalisation as robust. Following a government contribution of EUR 350 million, ICO’s Common Equity Tier 1 capital ratio strengthened to 32.2% at end-2015 from 23.3% at end-2014. The tangible equity to tangible assets ratio (as calculated by DBRS) was 8.6% at end-2015.

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 (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016).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: María Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: February 25, 2013
Most Recent Rating Update: October 13, 2015

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

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