DBRS Downgrades Caixa Económica Montepio Geral to BB, Stable Trend

DBRS Ratings Limited (DBRS) has today downgraded the Senior Long Term Debt & Deposit Rating of Caixa Económica Montepio Geral (Montepio or the Bank) to BB from BB (high). The Short-Term Debt & Deposit Rating was downgraded to R-4 from R-3 and the Subordinated Debt Rating was downgraded to BB (low) from BB. The Intrinsic assessment of the Bank is now BB. The trend on all ratings is Stable. For a full list of ratings see the end of this press release.

The downgrade of the Senior Long-Term Debt & Deposit Rating of Montepio reflects the challenges that the Bank is facing to reinforce its weak capital levels in the context of the ongoing low interest rate environment, the sluggish economic recovery in Portugal, and a complex regulatory environment. DBRS considers that the combination of low capital levels and weak profitability prospects provides the Bank with little financial flexibility to organically reinforce capital levels in the short to medium-term.

At the same time, the ratings continue to reflect the long track record of consistent support from its main shareholder Montepio Geral Associação Mutualista (MGAM). This has been supported by a number of capital injections, the last of which took place in March 2016 comprising EUR 270 million and EUR 31 million from Unidades de Participação. The capital support provided by MGAM over the last two years has compensated for the significant annual losses, but these have only reinforced capital levels to just above the minimum regulatory levels (at end-June 2016 Montepio reported a CET1 ratio of 10.3% under the phased-in criteria, and 8.3% under the fully loaded criteria). DBRS considers that the willingness of MGAM to continue providing support to Montepio remains consistent, but that the challenging economic environment in Portugal could affect the ability of MGAM to continue to provide further support in the future.

The BB senior ratings continue to reflect the Bank’s strong, albeit relatively small, franchise in Portugal, its large and loyal mutual customer base and its relatively resilient fundamentals which has enabled it to avoid having to access State capital support. The ratings also consider Montepio’s high exposure to real estate and construction exposures, which primarily drives the bank’s weak asset quality.

The Bank has reported losses since 2013 and DBRS expects Montepio will likely report operating losses in 2016, albeit lower than in the past, and this could further pressure the already weak capital ratios. Nonetheless, DBRS views positively the progress the bank has been making since the appointment of a new CEO and expects that this progress should lead to a gradual improvement of profitability over the medium-term. In particular, a cost reduction programme has been implemented and asset quality deterioration is showing some signs of stabilisation, helped by active management, and this is leading to lower provision charges. These factors are incorporated in the BB senior ratings.

Montepio also reported a further net loss in 1H16 of EUR 67.6 million, compared to a EUR 28.9 million loss in 1H15, due primarily to impairments on some financial investments and the annual contributions to the European Resolution Fund, which were recorded in 2Q rather than in 4Q as in 2015. Results were also affected by higher operating expenses as a result of one-off costs associated with the rationalisation of the branch network and headcount in 1H16. DBRS notes, however, that loan impairment charges were substantially lower year-on-year (YoY). Core operating revenues (net interest income and commissions) were flat YoY.
The Bank’s asset quality continues to remain a key challenge given the high level of credit-at-risk loans and foreclosed assets. DBRS sees that whilst there were some signs of stabilisation in 2Q16, asset quality remains very vulnerable to economic conditions, which remain challenging in Portugal.
Concurrently DBRS has also withdrawn the ratings of Montepio’s Cayman Island branch as the branch has been closed.

RATING DRIVERS

Given the recent downgrade upward rating pressure is unlikely in the medium-term, however this could arise from a significant strengthening of capital levels, a reduction in the bank’s risk profile and material improvement of asset quality. It would also need to be accompanied by a consistent improvement in profitability.

Further downward pressure to the senior long term debt and deposits ratings could arise if Montepio fails to improve its profitability, asset quality and capital positon. It could also arise if there are signs that Montepio’s franchise is weakening, as evidenced by a potential reduction of its retail deposit base.

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, company disclosures, Bank of Portugal 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
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: June 27, 2011
Most Recent Rating Update: September 29, 2015

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