DBRS Confirms Banco Comercial Portugues’ Senior Rating at BB (High); Stable Trend

DBRS Ratings Limited has today confirmed Banco Comercial Português, S.A. (BCP or the Group) Senior Long-Term Debt and Deposits rating at BB (high) and its Short-Term Debt & Deposits rating at R-3. At the same time, the agency has confirmed its Long-Term Critical Obligations Rating (COR) at BBB and Short-Term COR at R-2 (high). The trend on all ratings is Stable and the Group's Intrinsic Assessment is BB (high). See a full list of rating actions at the end of this press release.

The confirmation of BCP’s ratings with a Stable trend reflects the fact that the Group has reported some stabilisation in asset quality and profitability, despite the ongoing challenges in the operating environment. DBRS considers that the Group has demonstrated the capability to generate internal capital since returning to profitability in 1Q15. The Group’s results have been supported by significant net income from the growing international businesses in Poland, Angola and Mozambique as well as sizeable capital gains from the sale of sovereign debt. DBRS also notes that BCP has also made good progress in restoring its core banking profitability in Portugal over the last four quarters and expects this to contribute to an improvement in 2016 results. In addition asset quality, although still a challenge for the Group, has shown some stabilisation within the last year and impairment charges have declined.

DBRS, however, views that BCP, along with its domestic peers, remains challenged by the still difficult operating and banking environment in Portugal, including very low levels of investor confidence. The Portuguese economy is taking more time than initially anticipated to fully recover, and the low interest rate environment continues to pressure interest revenue generation. In addition, the Group has a meaningful presence in Poland, where political and legal risks have increased. Tougher regulation for banks in Poland could potentially have a negative impact on the subsidiary’s contribution to the Group’s results.

Despite the difficult environment, BCP has demonstrated improved recurrent banking revenues since 1Q15, particularly in Portugal, largely supported by both reduced retail and wholesale funding costs as well as steady growth in commissions. The Group has continued to work on reducing its operating cost base, and the cost of risk also improved year-on-year (YoY) to 1.2% in 1Q16, down from 1.6% in 2015 and 2.1% in 2014, evidencing some stabilisation in asset quality deterioration.

Nevertheless, the Group's asset quality remains weak and vulnerable to any changes in the macroeconomic environment. The stock of non-performing assets (NPAs) remains significant, although it has stabilised in the last two years. The credit-at-risk ratio (CaR), which includes total credit and interest past due, other restructured credit and insolvent/bankrupt credits, was 11.5% of total gross loans at end-March 2016, improved from 12% at end-2014. BCP’s level of NPAs (including CaR loans and foreclosed assets, FAs) remains high but fairly unchanged since end-2014, representing 14.1% of total gross loans and FAs at end-March 2016.

Capitalisation, albeit improved, remains weak, especially when compared with international peers. The Group had outstanding State CoCos of EUR 750 million at end-March 2016. The fully loaded Common Equity Tier 1 (CET1) ratio was 10.1% at end-March 2016 (pro-forma and considering the deconsolidation of the BCP’s business in Angola), flat YoY.

BCP’s ratings reflect the Group’s presence in Portugal as the second largest bank by assets at end-March 2016 and significant market shares domestically with circa 18% in retail loans and deposits. The ratings also consider the Group’s international diversification, mostly through its controlling stake in Bank Millennium in Poland, but also through its presence in Portuguese affinity markets such as Angola and Mozambique. BCP’s ratings also take into account the Group’s satisfactory funding position with a net loan to deposit ratio of 100% at end-March 2016 (according to DBRS’ calculations) and good level of liquid assets.

RATING DRIVERS
Upward pressure to the senior long term debt and deposits ratings could arise if BCP demonstrates a longer-track record of sustained core profitability in Portugal, a significant reduction of NPAs and further strengthens its capital position.

Downward pressure to the Senior Long-Term Debt and Deposits ratings could arise if BCP experiences a substantial weakening of asset quality, notably increases its risk profile, and experiences pressure on profitability. It could also arise if DBRS sees any evidence of weakening in the Group’s ability to face the increasingly challenging legal and regulatory environment in Portugal or its international markets.

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) and Critical Obligations Ratings Criteria (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 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: Elisabeth Rudman
Initial Rating Date: June 10, 2011
Most Recent Rating Update: September 29, 2015

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