DBRS Initiates Ratings for Bankia SA – Senior Unsecured Long-Term Debt at BBB (high); Stable Trend

DBRS Ratings Limited (DBRS) has today assigned first-time public ratings to Bankia, S.A. (Bankia or the Bank), assigning a Senior Unsecured Long-Term Debt & Deposit rating of BBB (high) and a Short-Term Debt & Deposit rating of R-1 (low). At the same time, the agency also assigned a Long Term Critical Obligations Rating (COR) of A and a Short-Term COR of R-1 (low). The trend on all ratings is Stable. Bankia’s intrinsic assessment (IA) is BBB (high), in line with the Bank’s Senior Unsecured Long-Term Debt & Deposits rating and the support assessment designation is SA3.

Bankia’s ratings reflect the Bank’s strong franchise in Spain, its relatively low risk profile with low real estate sector exposures, and solid capitalisation. DBRS considers that Bankia has successfully carried out a clean-up of its balance sheet and has been able to restore its leading domestic franchise strength since the Bank received public aid in 2012. In addition, litigation risks, which were a source of concern in the past, have notably reduced. The ratings, however, also reflect the Bank’s high exposure to the Spanish sovereign and to European Central Bank funding, as well as the need, as for the rest of domestic peers, to continue to reduce non-performing assets (NPAs) to more normalised levels.

DBRS considers that Bankia’s profitability has consistently improved since 2013, and that the Bank has successfully rebalanced its funding structure and substantially reduced NPAs through proactive management and portfolio sales. The Stable trend reflects the fact that, helped by its improved fundamentals, Bankia should be in good position to face the still challenging operating environment of low interest rates, uncertain global markets stability and increasing regulation. Given Bankia’s improved domestic franchise strength, DBRS expects the Bank to benefit from some improvement in the Spanish economy going forward. One of the challenges, however, is to continue to expand its small and medium sized enterprises (SMEs) franchise amid strong competition. Expansion of the SME franchise would help Bankia to mitigate the impact of the still high proportion of mortgage lending, where revenues are strongly under pressure from low interest rates.

Underpinning the ratings is Bankia’s strong and large national franchise where the Bank enjoys a meaningful market share of around 12% for retail mortgage loans and 9% for retail deposits. DBRS considers Bankia’s management team has a good track record, having been successfully met all the targets set under the restructuring plan agreed with the European Commission ahead of the 2017 completion timeframe.

DBRS notes that overall litigation risks have significantly reduced since 2013. There are still potential litigation claims that could arise from the institutional investors that participated in the 2011 IPO, however DBRS considers that Bankia is well positioned to manage this through internal capital generation. The Bank reported net income of EUR 1 billion in 2015 and a further EUR 236 million in 1Q16, largely supported by significant progress in restoring its core operating revenues, further optimisation of operating costs and notably lower loan impairment charges year-on-year (YoY). Capital gains from financial transactions continued to support profits, but DBRS notes that overall contribution to gross operating income is lower than for other domestic peers.

Bankia has also made good progress in improving its funding profile since 2012. Evidencing the Banks’s franchise strength and regained confidence from its historical large customer deposit base, at end-March 2016, the Bank’s customer deposits represented 58% of total funding and the net loan to deposit ratio (excluding repos), as calculated by DBRS, was 108%, reduced from its peak of 137% in 2012. In addition, Bankia had, at end-2015, an unused liquidity buffer of EUR 34.6 billion and additional capacity to issue EUR 8.5 billion of covered bonds, which is well in excess of upcoming wholesale debt maturities. Bankia does however, have a meaningful and above peers exposure to Spanish sovereign debt which represented 3.3x its equity base at end-2015. Part of the sovereign debt exposure is driven by EUR 17.4 billion SAREB bonds that were received in 2012 when the Bank transferred EUR 19.4 billion of net real estate exposures. Excluding SAREB bonds, Bankia’s exposure to Spanish sovereign debt is more in line with the proportion seen at domestic peers (1.9x equity).

Bankia’s asset quality has continued to benefit from some improvement in the economic conditions in Spain and the Bank’s proactive management to reduce problematic assets. In addition, the Bank has been able to substantially reduce NPAs by actively selling portfolios of non-performing loans (NPLs) and foreclosed assets (FAs). During 2015, Bankia sold EUR 1.9 billion of NPAs, with no material impact on profitability. The Bank’s NPA ratio, which includes NPLs and FAs, was 13% at end-March 2016 (as calculated by DBRS). Moreover, DBRS considers the Bank’s level of NPA coverage as solid and among the strongest for Spanish banks, at around 53% at that date.

Capitalisation is solid, supported by the Bank’s relatively low risk profile, solid coverage levels for NPAs and Bankia’s improving internal capital generation through retained earnings. The Bank reported a fully loaded CET1 capital ratio of 12.5% at end-March 2016, 26 basis points (bps) higher than at end-2015 and 3.92 percentage points stronger than at end-2013.

RATING DRIVERS
Positive rating pressure on the ratings could arise from a further strengthening of Bankia’s franchise together with core profitability improvement, a reduction of NPAs to low levels and a material reduction of Spanish sovereign debt.

Negative rating pressure on the ratings could occur if there is a meaningful deterioration of core profitability and asset quality together with a notable increase in the Bank’s risk profile.

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: July 7, 2016

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