DBRS Confirms Abanca’s Senior Ratings at BBB (low); Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Abanca Corporación Bancaria S.A.’s (Abanca or the Bank) Issuer and Senior Debt and Deposit rating at BBB (low) and its Short-Term Debt and Deposits rating at R-2 (middle). All ratings have a Stable Trend.

The confirmation of the ratings reflect Abanca’s good progress in derisking its balance sheet, the bank's relatively low risk concentrations compared to peers, a robust capital position and sound non-performing assets (NPAs) coverage reserves. As a result, DBRS view that Abanca should be well positioned to further benefit from the improved economic conditions in Spain, and in particular in its core operating area of Galicia.

DBRS expects that given the lower proportion of NPAs and concentration to real estate assets compared to similarly rated domestic peers, the Bank should continue to benefit from relatively low levels of impairments. This, together with opportunities to grow domestic lending, could support a gradual improvement in its net interest margin that currently lags most domestic peers. In DBRS’s view, a constant delivery of improving core revenue generation could be positive for the rating.

DBRS considers Abanca has a strong regional franchise in its home market of Galicia where it is the leading bank for customer deposits with around 40% market share. The ratings take into account the Bank’s improved funding mix with a significantly lower proportion of funding from the European Central Bank and robust liquidity position with substantial unpledged liquid assets. The ratings, however, also reflect the Bank’s challenge, as for the rest of domestic peers, to continue to reduce NPAs to more normalised levels as well as improving core profitability.

Abanca reported net income of EUR 186 million in 1H16, fairly flat YoY (EUR 182 million in 1H15), as lower loan loss and other asset provisions partly compensated for the pressure from the low interest rate environment and lower year-on-year (YoY) gains from the fixed income portfolio. Results also reflect the Bank’s improved capacity to sustain core revenue generation amid the low interest rate environment and lower opportunities to realised one-off gains from the sale of sovereign debt. Indeed, core revenues (net interest income - NII - and income from fees and commissions) have remained fairly resilient in the last four quarters, primarily helped by a reduction of funding costs, new lending growth and increasing fee income. Profits in 1H16, however, were supported by significant reversals of provisions, which in DBRS’s view is a reflection of the bank’s cleaner balance sheet.

Abanca’s non-performing asset (NPA) ratio (including non-performing loans and foreclosed assets) and as calculated by DBRS was 12.0% at end-June 2016, now below the average for Spanish banks. The Bank’s Common Equity Tier 1 ratio (phased-in) ratio was strong at 14.3% at end-June 2016.

RATING DRIVERS

Positive rating pressure on the ratings, could occur from longer track record of core revenue generation and no major deterioration in its other fundamentals strength.

Negative rating pressure on the ratings could arise from a material deterioration of capitalisation as a result of asset quality deterioration and significant increase of the Bank’s risk profile.

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 Financials 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 12, 2014
Most Recent Rating Update: September 29, 2015

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