DBRS Confirms Banco Cooperativo Español’s Senior Rating at BBB, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Banco Cooperativo Español S.A’s (BCE or the Bank) Senior Long-Term Debt & Deposit rating of BBB and the Short-Term Debt & Deposit rating of R-2 (high). The trend on both ratings remain Stable. At the same time, DBRS maintained BCE’s intrinsic assessment (IA) of BBB, and its support assessment of SA3.

In confirming BCE’s ratings DBRS recognizes the Bank’s important role as the central clearing bank and liquidity provider for the Cajas Rurales (CRs) that are members of the Asociación Española de Cajas Rurales (AECR). It also considers the Bank’s low risk profile, its stable and resilient profitability, and the benefit it receives from its funding relationship with the AECR members, who provide a stable deposit base. BCE’s ratings also take into account BCE’s size and scope, with business and revenues geographically concentrated in Spain, its small equity base, as well as its material risk concentration to Spanish sovereign debt.

The Bank reported net income of EUR 32.1 million in 9M16, up 9% year-on-year (YoY), as a result of a continued reduction of funding costs and lower loan impairments. Higher trading gains also supported profits in 9M16. However, DBRS noted that BCE’s role is not profit maximization but instead to report sustainable profits that build up capital internally.

DBRS views BCE’s funding profile as sound, supported by its large and stable deposit base, a large part of which is backed by AECR Cajas Rurales. Regulated by a Treasury Agreement, the AECR Cajas Rurales deposit their excess liquidity in BCE in the form of bank deposits. BCE invests the excess liquidity received from the Cajas Rurales mainly in sovereign bonds and interbank funding with a maximum maturity of 18 months. As a result, BCE has counterparty risk with the financial institutions that it deals with in the financial markets. However, DBRS sees this counterparty risk as mitigated by the fact that BCE has a Treasury Agreement with the Cajas Rurales whereby it guarantees any losses or commitments that could arise from the fixed income portfolio or the interbank placements that BCE makes on behalf of the Cajas Rurales. As a result of its business model, the Bank has a large exposure to Spanish sovereign bonds of EUR 9.6 billion, representing a substantial 20 times its equity. Although sizeable, BCE’s concentration in Spanish sovereign bonds is mitigated by the fact that circa 41% of the debt exposure was covered under the Treasury Agreement with a maximum maturity of eighteen months.

DBRS views BCE’s risk profile as solid, reflective of its generally low-risk business mix and specialized franchise. BCE’s main risk is counterparty risk from the financial institutions, primarily the CRs. Credit risk linked to direct customers lending is marginal and represented only 4.7% of total assets at end-September 2016. The Bank had a low non-performing loans (NPL) ratio of 0.5% at end-September 2016. DBRS sees BCE as having adequate regulatory capital ratios given its low risk profile. The Common Equity Tier 1 (CET1) capital ratio was 17.1%, under the phased-in criteria, at end-September 2016, however, BCE’s tangible equity to tangible asset ratio of 2.3% at end-September 2016 remains extremely low. Although BCE’s leverage is affected by its role of intermediary with the Cajas Rurales, and by the low risk weighting of its exposures, it does highlight the need for BCE to continue to manage its operations in an extremely conservative manner.

AECR is the largest cooperative group in Spain, by asset size, with EUR 56.9 billion assets at end-September 2016. The CRs are supported by their generally strong local franchises, their stable cooperative membership bases, and their typically favourable loan-to-deposit ratios. DBRS views AECR as a cohesive group, with its members being linked through various organizational and business relationships, and through the funding/central clearing functions that are provided by BCE. The Bank plays an important role in providing many of the services of a central bank to its owners. Also providing ancillary services to the AECR members are Rural Servicios Informáticos (an information technology company) and Seguros RGA (insurance operations). The larger organization including these entities is marketed as Grupo Caja Rural (GCR). Despite the cohesive nature of the GCR, DBRS does not view this organisation as warranting a group rating approach, given the lack of a cross-guarantee or mutual support scheme across the entire GCR organisation.

RATING DRIVERS
Upward rating pressure, although unlikely in the short to medium term, could be achieved if BCE gains greater importance for the CRs, if it significantly improves its equity base and if the AECR achieves greater importance within the Spanish banking system. Ratings could come under pressure if BCE’s importance for the CRs is reduced. Negative rating pressure could also come from a material increase in its risk profile, including counterparty risks.

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: Roger Lister, Managing Director, Chief Credit Officer - Global FIG

Initial Rating Date: 16 December 2013
Most Recent Rating Update: 21 December 2015

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