DBRS Confirms Liberbank, S.A. Senior Debt at BBB (low); Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Liberbank, S.A.’s (Liberbank or the Bank) Issuer & Senior Debt and Deposits rating at BBB (low) with a Stable trend and its Short-Term Debt & Deposits rating at R-2 (middle) with a Stable trend. Concurrently, DBRS maintained Liberbank’s Intrinsic Assessment (IA) at BBB (low) and the Support Assessment at SA3.

The confirmation of the ratings with a Stable trend reflects DBRS’ view that the Bank has further strengthened its internal capital generation through improved core profitability during 2015 and 1Q16, despite the challenging operating environment of low interest rates and increasing regulatory costs. Moreover, the Bank’s asset quality has further stabilised as the level of new entries to non-performing loans (NPLs) has reduced, partly helped by the improved economic environment in the Bank’s home markets. DBRS expects Liberbank’s regulatory capital ratios to come under pressure as the Asset Protection Scheme (APS) expires by end-2016. Nevertheless, DBRS considers that given Liberbank’s improved underlying profitability, the Bank should be able to restore capital levels through retained earnings in the next two years.

At end-2016, the risk-weighting of the assets covered by the APS will increase above the current 0%. This is expected to be translated into RWAs increasing by EUR 2.7 billion at end-2016, leading to a reduction in the Bank’s phased-in Common Equity Tier 1 (CET1) ratio to circa 12% at end-2016 from 13.1% at end-March 2016. However DBRS notes that this is still well above the minimum SREP (Supervisory Review and Evaluation Process) requirement of 10.25% for end-2016. In addition, DBRS anticipates that the reserves coverage of the assets currently covered by the APS will increase as DBRS expects Liberbank to fully use the remaining EUR 598 million available cash provided on the creation of the APS. The APS was granted by the Deposit Guaranteed Fund following the acquisition of the banking business of the troubled Caja de Ahorros de Castilla la Mancha in 2010.

Liberbank’s profitability continued to benefit in 2015 and 1Q16 from lower asset impairments, as a result of the improved economic environment in the Bank’s core markets. Net interest income (NII), its main source of revenue, remained resilient despite the low interest rates, and grew 5% in 2015 mostly helped by a further reduction of funding costs, both from retail and wholesale funds. The latter fully offset the pressure on interest income from the very low interest rate environment and a lower contribution from the ALCO portfolio. DBRS also noted that Liberbank’s results continued to benefit from large capital gains from the sale of sovereign debt portfolios, both in 2015 and 1Q16. These were partly used to build up extraordinary provisions for potential legal actions, including those related to claims from the removal of mortgage floor clauses. At end-2015, Liberbank implemented a voluntary redundancy plan to significantly reduce its workforce and optimise its cost base, which DBRS considers should help it to sustain profitability going forward. Already noticeable in 1Q16, staff costs were down 10% quarter-on-quarter (QoQ).

Reflecting the improved economic and property market conditions in the Bank’s main core regions, Liberbank’s stock of NPLs has been reducing every quarter since 2013. This positive trend accelerated in 2015 and 1Q16, and total NPLs (including those covered by the APS) were EUR 4.8 billion at end-March 2016, down 16% since end-2014. However, Liberbank’s NPL ratio for the total portfolio remained very high at 19.4% at end-March 2016. Out of the total NPL stock, 57% were NPLs covered by the APS. Including foreclosed assets (FAs), the non-performing asset (NPA) ratio was 28.8% at end-March 2016. Liberbank’s exposure to Spanish sovereign debt remains sizeable, representing a significant 3.7x of the Bank’s equity base at end-2015, which in DBRS’ view makes the Bank vulnerable to developments in the Spanish sovereign’s position. Liberbank’s funding structure continues to benefit from a large, stable customer deposit base and an ample liquidity buffer.

Liberbank’s ratings are underpinned by the Bank’s franchise strength in its home markets. The Bank is a dominant player with meaningful market shares of 25.3% for deposits and over 21% for loans in core areas such as Cáceres, Toledo, Asturias and Cantabria. The Bank maintains a strong net loan to deposit ratio of 93% at end-March 2016 (as calculated by DBRS), supported by its large customer deposit base. The ratings also consider the Bank’s high level of NPAs and meaningful exposure to Spanish sovereign debt.

RATING DRIVERS
Positive rating pressure on the Issuer & Senior Debt and Deposits rating could arise if the Bank is able to further improve core profitability, substantially reduce its large stock of problematic assets and significantly strengthen its capital levels.

Negative rating pressure on the Issuer & Senior Debt and Deposits rating could arise from weaker underlying earnings generation and higher than expected provisioning levels, negatively affecting the Bank’s internal capital generation. A slower than expected reduction of non-performing assets and inability to gradually restore capitalisation would also put downward pressure on the ratings.

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 documents, SNL. 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: 11 March 2014
Most Recent Rating Update: 25 September 2015

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