DBRS Confirms Caja Rural de Granada, S.C.C. at BBB (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Caja Rural de Granada, Sociedad Cooperativa de Crédito (Caja Rural de Granada, CRG or the Bank)’s Issuer and Senior Debt & Deposit rating at BBB (low) and its Short-Term Debt & Deposit rating at R-2 (middle). Both ratings have Stable trend. At the same time, DBRS maintained CRG’s Intrinsic Assessment (IA) at BBB (low).

The confirmation of CRG’s ratings with a Stable trend reflects the further stabilisation of asset quality trends through an ongoing reduction of the Bank’s non-performing assets (NPAs). The ratings reflect the Bank’s franchise strength in its home market of Granada, where it has significant market shares in loans and deposits of around 14% and 23% respectively, as well as in Malaga and Almeria where the Bank is also present. The ratings also reflect the Bank’s stable and resilient profitability throughout the years. The confirmation of the ratings also considers the benefits CRG derives from being a member of the Asociación Espanola de Cajas Rurales (AECR), its robust capital levels and its sound funding and liquidity position, supported by its large and stable customer deposit base.

However, CRG’s ratings also take into account the relatively small size of CRG and its status as a small rural cooperative with low geographical diversification as well as the Bank’s still large, albeit reducing, stock of NPAs.

Supporting the ratings is also CRG’s membership within AECR, which provides significant benefits. Members have access to a well-developed common technology system, central clearing and liquidity services, as well as a range of other wholesale banking services, and products provided by AECR’s insurance and asset management companies. Banco Cooperativo Español (BCE, rated BBB Stable) acts as the central treasurer and liquidity provider for the Group.

CRG reported net income of EUR 33 million in 9M16, up 26.6% year-on-year (YoY). The Bank continued to improve its core profitability in 9M16 YoY supported by much higher gains on financial assets and liabilities, cost control and continued reduction of retail funding costs, compensating for higher loan loss provisions and lower core revenues.

DBRS notes that the Bank is making good progress in reducing its stock of NPAs, benefiting from the improved economic and property market conditions in Spain. Nevertheless, CRG’s legacy real estate and construction sectors remain high representing 12.3% of total gross loans and foreclosed assets at end-September 2016. This exposure drives most of the Bank’s stock of NPA, which represent 17.2% of total gross loans and foreclosures at end-September 16.

CRG’s liquidity profile remained strong and the Bank has maintained a robust net loan-to-deposit (LTD) ratios of 78% at end-September 2016. CRG continued to benefit from growth of customer deposits, as being one of the reference banks in its home regions post consolidation of the cajas de ahorros sector. Funding from the European Central Bank (ECB) has substantially reduced to EUR 50 million at end-September 2016 and accounted for only 1% of total funding. The Bank, however, substituted this funding source with short-term interbank repo activity with BCE, in order to continue funding its large sovereign debt portfolio, which is primarily long-term with an average maturity of five years. DBRS considers that this funding source is not needed as a source of liquidity at CRG, given its significant deposit base, but is needed to fund the sovereign debt portfolio to increase CRG’s profitability. The Bank built up a large sovereign debt portfolio (EUR 1.2 billion at end-September 2016) during the last four years in order to compensate for the very low interest rates that affected CRG’s revenue generation capacity.

CRG’s capitalisation remained robust. While the Bank has a Common Equity Tier 1 (CET1) capital ratio of 16.1% under the fully loaded criteria at end-September 2016, which compares to a minimum SREP CET1 (phased-in) requirement of 10.25% for 2016. DBRS considers however, that there is potential for support from the AECR, in the form of support from the other cajas rurales. The Bank has managed throughout the Spanish financial crisis without any government or AECR capital or liquidity support. However, DBRS views the Bank’s capital base as small and internal capital generation as fairly modest, which in DBRS’s view provides a limited amount of loss-absorbing capacity.

RATING DRIVERS
Upward rating pressure is unlikely in the short to medium term, mainly due to the Bank’s geographical and sectorial concentrations in the small province of Granada. However, positive rating pressure could arise if the Spanish sovereign’s position further improves together with a significant sustained improved core profitability and a substantial reduction in the level of NPAs.

Negative pressure could come from weakening underlying earnings generation and a sharp deterioration of asset quality, negatively affecting the Bank’s internal capital generation.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 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 company documents, SNL Financial and the Bank of Spain. 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: 16 December 2013
Most Recent Rating Update: 23 November 2015

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