DBRS Downgrades Popular’s Senior Ratings to BBB (low), Negative Trend

DBRS Ratings Limited (DBRS) has today downgraded Banco Popular Español, S.A.’s (Popular or the Bank) ratings, including its Issuer Rating and Senior Unsecured Long-Term Debt & Deposit rating to BBB (low) from BBB, its Short-Term Debt & Deposit rating to R-2 (middle) from R-2 (high) and its Subordinated Debt rating to BB (high) from BBB (low). The Trend on the Issuer, Senior and Short-Term Debt & Deposits ratings remains Negative. Popular’s subordinated debt remains Under Review with Negative Implications (URN) (see: “DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications”). DBRS has also downgraded the Bank’s Long Term Critical Obligations Rating (COR) to BBB (high) and confirmed the Short Term COR at R-1 (low). The Trend on the COR ratings is now Negative. Please see a full list of ratings at the end of this press release.

The downgrade of the Issuer Rating and the Senior Unsecured Long-Term Debt & Deposit ratings reflects DBRS’s increasing concerns over Popular’s weakened capital position following the announcement of further negative adjustments to the Bank’s capital position on April 3, 2017. The pressure on capital had been a key driver for the downgrade and negative trend placed on Popular’s senior ratings in February following the announcement of a sizeable loss in 2016 (see “DBRS Downgrades Popular’s Senior Ratings to BBB, Negative Trend” on February 10, 2017). As a result of the most recent announcements, Popular’s capital position will materially weaken to levels that are approaching its regulatory minimums. According to the Bank, its pro-forma phased-in total capital ratio would be around 11.8% at end-March 2017, which DBRS considers leaves the Bank with limited flexibility and very low capital buffers over the minimum regulatory requirements. In DBRS’s view the Bank is vulnerable to the impact from any further adverse events and this makes it more challenging to significantly reduce its high stock of NPAs. The new management seems to be willing to make considerable changes to the Bank, however the benefit of some of those changes may take time to materialise, and DBRS considers the immediate priority is for the Bank to restore its capital position. The Negative trend reflects the fact that should capital levels not be restored in the short term, there could be additional downward pressure on the ratings.

On April 3, 2017, Popular announced that the recent internal audit had identified a shortfall of provisions associated with specific exposures. The internal audit also raised certain issues related to loans granted to customers that may have been used to participate in the capital increase completed by Popular at end-June 2016. In accordance with regulations, financing relating to the acquisition of a bank’s shares has to be deducted from capital. Popular has announced that as a result, the Bank’s regulatory capital could be negatively impacted by around EUR 549 million to EUR 770 million. Consequently, according to the Bank, the total capital (phased-in) ratio is expected to fall to between 11.7% and 11.85%, leaving the Bank with only a small buffer over the minimum 11.375% overall capital requirements (OCR) total capital ratio required for Popular under the SREP (Supervisory Review and Evaluation Process).

DBRS notes that Popular’s ratings continue to be supported by the Bank’s SME franchise strength in Spain, where it has significant market shares in total customer loans and retail deposits as the sixth largest bank by assets at end-2016.

RATING DRIVERS:

Upward pressure on the ratings is unlikely in the near-to-medium-term, as DBRS expects that it will take time for Popular to significantly strengthen its capital position and successfully execute NPA reduction. A return to solid and sustainable earnings would also be required for any upward pressure to materialise. However a meaningful improvement in the Bank’s capital position could lead to a stabilisation of the ratings at their current level.

Negative ratings pressure would arise if the Bank was unable to restore capital levels in the short term. Moreover, it could arise if the Bank does not demonstrate an ability to reduce NPAs, especially if this were in conjunction with any perceived weakening of the franchise.

Notes:
All figures are in Euros 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 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), DBRS Criteria: Guarantees and Other Forms of Support (February 2017) and Critical Obligations Rating Criteria (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 and 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: Elisabeth Rudman – Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: September 21, 2006
Most Recent Rating Update: September 27, 2016

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