DBRS Confirms CaixaBank’s Senior Ratings at A (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed CaixaBank, S.A.’s (CaixaBank or the Bank) ratings including its Issuer Rating and Unsecured Long-Term Debt & Deposit rating at A (low), its Long-Term Critical Obligations Rating (COR) at A (high), its Short-Term Debt & Deposit rating at R-1 (low) and the Short-Term Critical Obligations Rating at R-1 (middle). All ratings have Stable Trend. At the same time, CaixaBank’s Dated Subordinated debt rating of BBB (high) remains Under review with Negative Implications (URN) (see DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications). The Bank’s Intrinsic Assessment (IA) is A (low) and the Support Assessment remains at SA3. See the full list of ratings in the table at the end of this press release.

The confirmation of CaixaBank’s ratings reflects the Bank’s resilient underlying earning generation amid the low interest rate environment, as well as its improved asset quality and risk profile through a significant reduction Year-on-Year (YoY) of non-performing assets (NPA). The confirmation of the ratings also reflects DBRS’s view that the acquisition of Banco BPI S.A. (Banco BPI) in Portugal does not materially change the Bank’s risk profile and capital position, as well as DBRS’s expectation that CaixaBank will be able to manage this new exposure in a conservative manner. CaixaBank’s ratings also recognize the Bank’s solid financial profile, supported by a strong funding and liquidity position, and regular access to the wholesale market for funding, as well as the Bank’s sound capital position and solid internal capital generation.

Supporting the ratings is the strength of CaixaBank’s Franchise in Spain where it is one of the leading banks for customer deposits and loans with market shares of around 14% and 16% respectively. On February 8, 2017, CaixaBank gained management control of the Portuguese bank Banco BPI S.A., where it had been present as a minority shareholder since 1995. CaixaBank has increased its stake to 84.51% from its historical stake of 44.1%. Going forward, Banco BPI will be fully consolidated into CaixaBank. DBRS views Banco BPI’s acquisition makes strategic sense for CaixaBank, as it will strengthen CaixaBank’s position in the Iberian market and considers that CaixaBank is well positioned to benefit from Banco BPI’s franchise in Portugal, where is the fifth bank by total assets. While there are some risks largely linked to economic developments in Portugal and Banco BPI’s remaining equity-accounted exposure to Angola, DBRS considers the acquisition to be manageable for CaixaBank. At end-2016, Banco BPI represented around 10% of total loans and deposits of the aggregated CaixaBank and Banco BPI’s balance sheet.

CaixaBank’s profitability remains negatively affected by the low interest rate environment, but it has significantly improved in the last three years. CaixaBank reported a net attributable income of EUR 1,047 million in 2016, up 28.6% YoY, largely driven by significantly lower asset impairments and lower non-recurrent costs than in 2015, which were mostly associated with the acquisition of Barclays Spain and other restructuring costs. Results were also affected by various one-offs in 2016, such as the additional provisions to cover the cost of full retroactivity on interest rate floors in mortgages (EUR 110 million), as well as a one-off negative impact of EUR 149 million due to a tax reform in Spain. Core banking revenues (Net Interest Income plus Net fees and Commissions) have shown improving trends, growing Quarter on Quarter (QoQ) since 1Q16. The Bank’s return on equity (ROE) of 4.4% and return on assets (ROA) of 0.30%, however, remain below similarly rated European banks.

DBRS also considers Caixabank’s asset quality to be better than most banks in Spain, supported by a good pace in its reduction of its high stock of NPAs in the last three years. The NPA reduction has been assisted by the improved economic and real estate market conditions in Spain, as well as the Bank’s strong focus on enhancing recoveries and increasing sales of foreclosed assets (FAs). CaixaBank’s total NPAs (includes Non-Performing Loans (NPLs) and FAs), represented around 13.4% of loans and FAs at end-2016, which is still higher than most comparable European peers. Nevertheless, this ratio is gradually improving from 14.3% at end-2015 and 16.2% at end-2014. The main driver of the reduction of NPAs has been lower NPLs, down 43% since end-2013, with an average reduction of EUR 3.5 billion per year. Importantly, the Bank has also achieved a reduction in the stock of gross FAs, which went down for the first time in some years at the end-2016.

CaixaBank has a solid funding and liquidity position, reflecting its large and stable customer deposit base and indicated by its sound 116% Net Loan to Deposit (LTD) ratio, (excluding repos and covered bonds included in deposits) at end-2016. CaixaBank’s liquidity profile remained strong with debt maturities of EUR 4.8 billion in 2017, well covered by EUR 50 billion of liquid assets at the end-2016. CaixaBank continues to have good access to the capital markets, as indicated by its recent issuance of a EUR 1 billion Tier 2 Subordinated debt in February 2017. Funding from the ECB remains a substantial proportion of total funding and has increased in 2016 to EUR 26.8 billion. However, all of this funding relates to the Targeted Long-Term Refinancing Operations II (TLTRO II), which has long-term maturity and is used as a means of improving profitability through its low funding cost.

DBRS views CaixaBank’s capital position as sound, especially in the context of the Bank’s strengthening ability to generate capital internally through retained earnings. The Bank reported a fully loaded CET1 capital ratio of 12.4% at end-2016, compared to 11.6% at end-2015. Considering the integration of Banco BPI, the pro-forma 2016 fully-loaded CET1 ratio would stand at a sound 11.2%. For 2017, the Bank has received from the European authorities the decision that the Bank needs to maintain a minimum Overall Capital Requirement (OCR) for CET1 (phased-in) ratio of 7.375%, and a total OCR 10.875%. Pro-forma and incorporating the acquisition of Banco BPI at end-2016, CaixaBank comfortably exceeds all these capital requirements.

RATING DRIVERS

Upward pressure on the rating would likely require further improvement in the rating of the Kingdom of Spain, together with a continuation of the Bank’s strong track record of improved underlying profitability and asset quality.

Negative pressure on the ratings, although unlikely in the short to medium term, would likely be driven by a material deterioration of profitability and asset quality, impacting capital levels.

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: Critical Obligations Rating Criteria (February 2017), Support Assessments for Banks and Banking Organisations (March 2016) and Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). 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 Spain and the 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 – Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: March 4, 2013
Most Recent Rating Update: April 13, 2016

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