DBRS Places Caixa Geral de Depósitos Ratings Under Review With Negative Implications

DBRS Ratings Limited (DBRS) has today placed the ratings for Caixa Geral de Depósitos, S.A. (CGD or the Group) and its subsidiaries Under Review with Negative Implications. The review includes the Senior Long-Term Debt & Deposit rating of BBB (low), the Short-Term Debt & Deposit rating of R-2 (middle), the Dated Subordinated Notes rating of BB (high) and the BBB (high) / R-1 (low) Critical Obligations Rating. As part of the review, the Group’s Intrinsic Assessment (IA) of BBB (low) will also be reassessed. A full list of the rating actions is included at the end of this press release.

The review of the ratings reflects the increased risks that the Group is facing in relation to corporate governance issues, the planned recapitalisation, and the Group’s ongoing difficulties in improving profitability and asset quality. In particular, the review will consider how the recent resignation of the majority of the board of directors on November 27 will affect the planned restructuring of the Group. In addition, although the Group is in the process of a significant recapitalisation which would strengthen the balance sheet, the review period considers the delays that are taking place in this process and the execution risk for the plan. As a result, DBRS expects the Group to be weakly capitalised for longer than initially envisaged.

The Group is in the process of a recapitalisation plan involving an injection from its sole shareholder, the Portuguese government, of up to EUR 2.7 billion, the EUR 500 million transfer of shares of ParCaixa, and the conversion of EUR 900 million government held contingent convertible bonds into CGD shares. The transaction is essential to strengthen the Group’s balance sheet. Also as part of the recapitalisation initially agreed between the Portuguese government and the European Commission (EC), the Group is required to issue EUR 1 billion of subordinated instruments to private investors. DBRS sees the successful placement of the subordinated instruments in the market as challenging given the present global financial volatility and the very limited access of CGD to the non- secured funding markets. The recent resignation of the board of directors, is in DBRS’s view posing further challenges for the Group to return to profitability, reduce asset quality problems and improve investor confidence in the Group. Whilst DBRS understand that the government has continued to support the Bank when needed, it sees as less likely that such support will remain unconditional if the Group needed to further reinforce its capital position in the medium term.

DBRS considers that CGD remains challenged to return to sustainable profitability due to ongoing asset quality deterioration and the challenging operating environment, which is characterised by low interest rates, increasing regulation and sluggish economic prospects for Portugal. This weakness continues to lead to asset-quality issues and high loan-loss provisions. CGD reported a net attributable loss of EUR 189.3 million in 9M16, compared to net attributable income of EUR 3.4 million in 9M15. The Group has remained loss making since 2012, largely as a result of weakening domestic earnings generation and high loan impairment charges due to asset quality deterioration. Gross operating revenues (as calculated by DBRS and including revenues for associated companies) were down 26.5% in 9M16 year-on-year (YoY) and loan impairment charges totalled EUR 407.4 million in 9M16, which were up 14.3% YoY. Asset quality deteriorated in 9M16 and the Credit at risk loans (CaR) ratio weakened to 12.2% at end-September 2016 compared to 11.5% at end-2015.
DBRS notes that CGD’s ratings continue to reflect its leading banking franchise in Portugal, where the Group has solid market shares of around 22% for loans and 29% for customer deposits, as well as the Group’s sound funding profile underpinned by a resilient customer deposit base.

RATING DRIVERS

Positive rating pressure is unlikely in the short-to-medium term given the review. It could require an upgrade of Portugal’s sovereign rating together with a sustained track record of sound profitability, significant derisking of the balance sheet and further strengthening of the Group’s domestic franchise.

The ratings are Under Review with Negative Implications. During the review period, which could last longer than 3 months, DBRS will focus on the recapitalisation process, including the placement of subordinated debt instruments to private investors, as well as the corporate governance issues and asset quality and profitability challenges.

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), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016), DBRS Criteria: Guarantees and Other Forms of Support (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 Portugal. 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.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: 23 December 2012
Most Recent Rating Update: 20 November 2015

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.