DBRS Confirms Popular’s Senior Ratings at BBB (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Banco Popular Español, S.A.’s (Popular or the Bank) ratings including its Senior Unsecured Long-Term Debt & Deposit rating at BBB (high), its Short-Term Debt & Deposits rating at R-1 (low) and its Subordinated Debt rating of BBB. DBRS has also confirmed the Long Term Critical Obligations Rating (COR) at A and the Short Term COR at R-1 (low). All ratings have a Stable Trend.

The confirmation of the ratings reflects the Bank’s long-track record of operating resiliency, as well as continued support from its shareholders, which was recently evidenced by the EUR 2.5 billion capital increase completed at end-June 2016. The ratings are underpinned by Popular’s franchise strength in Spain where it is a leading provider of services to SMEs. Nevertheless, the Bank continues to suffer from significant asset quality problems, and the Bank’s ability to successfully execute and complete its proposed balance sheet clean up and improve core revenue generation is crucial for maintaining the current rating level.

Popular has a significantly higher than peers’ concentration to real estate assets (in the form of both loans and foreclosed assets) and DBRS has limited tolerance for further notable deterioration in asset quality metrics. The Bank has announced plans to reduce non-performing asets (NPAs), which should contribute over the longer-term to improved profitability through a more normalised level of provisions. The Bank expects to reduce NPAs by a total of EUR 15 billion (around 45% of the total NPAs) by 2018. This would be a material reduction, however the plan has, in DBRS’s view, high execution risks, as Popular’s reduction of NPAs to date has been at a slower pace than at similarly rated domestic peers, particularly in the last twelve months. DBRS also notes that new NPAs are still quite high with lower than expected recoveries, despite the growth in real estate properties sales through the Bank's large retail branch network. DBRS expects that the NPA ratio by end-2018 to remain weaker than at similar domestic peers but, if successful, the Bank should have a significantly lower risk profile and an improved capital position.

The tougher regulatory environment and very low interest rates continue to pose some challenges to the normalisation of the Bank’s profitability. However, DBRS also notes some changes being implemented by the Bank, which could facilitate the execution of the Bank’s balance sheet clean up and help to improve profitability. In particular, a new CEO has been appointed, and the Bank has announced a business reorganisation. Popular has also announced a cost optimisation programme and there are indications the Bank is planning a spin-off of some of the real estate exposures into a separate legal entity which will be run separately from the Bank. DBRS will closely monitor this potential development which could help to accelerate the balance sheet clean-up.

RATING DRIVERS:

Positive rating pressure is unlikely in the medium-term given the current challenges facing the Bank. Over the longer-term, positive rating action could occur if Popular were to significantly improve its asset quality, profitability and capital position.

Negative ratings pressure would arise if DBRS sees further notable deterioration in asset quality metrics, or if the Bank does not achieve the announced planned NPA reduction. Negative rating pressure could also arise if DBRS does not see improvement in the Bank’s core banking revenues, especially if this were in conjuction with any perceived weakening of the franchise.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2016). 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 SNL Financial and company disclosures, Bank of Spain and European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: September 21, 2006
Most Recent Rating Update: September 29, 2015

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