DBRS Confirms Novo Banco Senior Long-Term Ratings at CCC (high), Trend Changed to Stable

DBRS Ratings Limited (DBRS) has today confirmed Novo Banco, S.A.’s (NB or the Bank) Senior Long-Term Debt and Deposits rating at CCC (high), and changed the trend to Stable from Negative. At the same time, the agency confirmed the Short-Term & Deposit rating of R-5 with a Stable trend. DBRS has also confirmed the Critical Obligations Ratings (COR) at BB (low) / R-4, with the trend on the LT COR revised to Stable from Negative, and the Senior and Unsubordinated Notes Guaranteed by the Republic of Portugal at BBB (low), Stable trend. Please see full ratings table at the end of this press release.

The change in the trend to Stable from Negative reflects DBRS’s view that some of the risks faced by the Bank have materially reduced. These include that Banco Espírito Santo (BES) has entered the liquidation process and therefore DBRS considers a similar transfer of senior bonds as highly unlikely to be repeated. In addition investor confidence in the Bank has improved and DBRS would expect this process to continue when the sale of the Bank is completed. This is expected in January 2017. The change in the trend also reflects the good progress of the Bank with regard to the requirements of the restructuring plan.

The ratings also consider the challenge the Bank has to return to sustainable profits amid the low interest rate environment, the sluggish economic recovery in Portugal and ongoing regulatory requirements. The Group continues to have a strong presence in Portugal where it is the third largest bank by total assets with meaningful domestic market shares of around 16% in retail loans and deposits at end-June 2016 and where it retains leading positions in the SME and corporate segments with market shares of around 21%.

The Bank’s funding and liquidity position remains challenged and vulnerable to investor confidence although DBRS notes the improvements over the last year. In particular, DBRS notes that the bank has recently been able to regain access to certain funding sources, such as securitization and improved access of repo activities with counterparties, and that the level of funding from the European Central Bank has also declined. Whilst corporate deposits continue to reduce given the low ratings and the issues the Bank has faced, the Bank is gaining retail deposits, which were up EUR 800 million in the nine month period to end-September 2016. In spite of a still overall reduction of total deposits of 9% in the first nine months of 2016, the Bank continued to improve its loan-to-deposit ratio, mainly through the continued deleveraging.

The Bank’s asset quality remains weak but DBRS views positively that the pace of asset quality deterioration has slowed. Non-performing assets (NPAs) reduced slightly in the first nine months of 2016, however total Non-performing exposures (NPEs) still accounted for 36% of total gross loans at end-June 2016, significantly above domestic and most European peers. While coverage levels remain higher than most domestic peers, DBRS considers them essential to cover for NB’s larger than peers’ proportion of uncollateralized exposures.

Since its inception NB has reported annual losses which largely reflect the challenges that the Bank continue to face under the low interest rate environment and the challenging, albeit somewhat improving, economic conditions in Portugal. NB continued to be loss making in 9M16 reporting a EUR 359 million net loss, a slight improvement on the net loss of EUR 419 million reported in 9M15. Since the Bank launched its new strategic plan there have been some signs of improvement in its profitability, primarily through lower operating costs albeit the bank has also focused on growing core revenues. Positively, results significantly improved quarter-on-quarter (QoQ) as the Bank reported a EUR 3.7 million profit in 3Q16, its first quarterly profit since its inception.
DBRS continues to view the Bank’s capitalisation as weak in the context of the large stock of NPEs and large single name concentrations. NB reported an estimated phased-in CET1 ratio of 12.3% at end-September 2016, as well as an estimated fully loaded CET1 of 10.7%, both significantly lower than end-2015 on the back of the continued losses. In the context of the restructuring plan, DBRS expects the Bank to further improve its capital position through the disposal of non-core assets and the consequent reduction of risk-weighted assets (RWAs).

Separately, DBRS has also withdrawn the BBB (low) rating on debt guaranteed by the Republic of Portugal (ISIN PTBENFOM0027), as this debt has been cancelled.

RATING DRIVERS

Positive rating pressure could emerge if the Bank demonstrates sustained improving financial performance, and continues de-risking its balance sheet through improving asset quality and sale of non-core assets, which could also be accelerated by the successful sale of the Bank to a long-term investor. It would also require further stabilization of its funding and liquidity position.

Downward rating pressure could arise from a notable deterioration in the franchise, particularly within NB’s home market of Portugal, or if market confidence in the Bank weakens, which could negatively impact funding costs and liquidity. Further weakening of the Bank’s financial fundamentals could also pressure the ratings.

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), Critical Obligations Rating Criteria (February 2016) and 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, the European Central Bank, the European Banking Authority, the Bank of Portugal and SNL Financial. 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.

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

Initial Rating Date: 5 August 2014
Most Recent Rating Update: 7 January 2016

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