DBRS Confirms ICO’s, Senior Unsecured Debt at A (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Instituto de Crédito Oficial (ICO or the Bank). The Issuer Rating and Senior Unsecured Debt ratings have been confirmed at A (low) with Stable trend. At the same time, the agency has confirmed the Short-Term Debt and Deposit rating at R-1 (low) with Stable trend. This rating action follows DBRS’s confirmation of the Kingdom of Spain at A (low) with a Stable trend on April 7, 2017. At the same time, the agency has also conducted a full review of the Bank's operating results and credit fundamentals.

ICO is a credit institution by law and is considered to be a State Finance Agency of Spain. ICO benefits from an explicit, irrevocable, unconditional and direct guarantee from the Kingdom of Spain that is stated in its by-laws under the Royal Decree Act 706/1999. Hence, ICO’s Senior Unsecured Debt is backed by the explicit, unconditional, irrevocable and direct guarantee from the Kingdom of Spain (or the State). Therefore, the ratings and trend are equalised with the Long-Term and Short-Term Foreign and Local Currency ratings of the Kingdom of Spain.

ICO’s role is to support and develop any economic activity contributing to the growth of the Spanish economy. It was founded in 1971 and became a state-owned bank after the reform of the Spanish state banking sector in 1991. As a state agency, ICO is responsible for managing state funds and for providing financing to contribute to the growth of Spanish economy. In addition to providing funding as an institutional lender, ICO also has a duty to contribute to the mitigation of economic effects from serious economic recessions, natural catastrophes or similar situations, as well as to act as the instrument for executing certain economic policy measures.

In carrying out its public service mandate, ICO’s goal is not to maximise profits, however the Bank has never reported a loss in its history. Nevertheless, given its countercyclical nature, profits have shown volatility over time. DBRS views ICO’s earnings power as supported by its adequate recurring revenue generation and its low cost base. The Bank’s pro-forma net income totaled EUR 317 million in 2016, up from EUR 34 million in 2015, mostly attributable to a significant release of loan provisions largely associated to the implementation of new provisioning standards in October 2016. DBRS expects revenues to remain under pressure due to lower business activity, as a result of the recovery of the Spanish economy which is allowing for better access to funding for SMEs and entrepreneurs. However, profitability and net income are likely to continue to benefit from the very low cost of risk.

DBRS views ICO’s risk appetite as generally conservative due to the nature of its activity. The Bank’s lending is carried out indirectly through lines to banks that, in turn, lend the funds to SMEs/entrepreneurs, and through some direct lending. The indirect lending results in ICO having counterparty credit risk to the participating banks. At end-2016 ICO’s total indirect lending totaled EUR 19.2 billion, down 30% Year over Year (YoY), whereas the direct lending represented around EUR 15 billion, decreasing 12% YoY. The deleveraging of its balance sheet reflects the Bank’s countercyclical nature, and DBRS expects this to continue over the coming years as economic conditions and access to credit continues to improve. ICO granted around EUR 5 billion of new loans in 2016, a decrease from 2015 (EUR 10.3 billion).

Direct loans are the only driver of the Bank’s non-performing loan (NPLs) ratio. The Bank’s NPL ratio on its direct lending increased to 10.48% at end-2016 from 10.25% at end-2015 (as calculated by DBRS). However, DBRS notes that the deterioration of the NPL ratio was primarily driven by the effect of the loan deleveraging and the outstanding balance of NPLs actually decreased 6.7% YoY. The Bank’s reserve coverage ratio for these NPLs remains solid at 114% at end-2016 (as calculated by DBRS). ICO contributes to the funding of large-scale projects by participating in syndicated loans. This leads to a high level of borrower concentration, which is a concern, but DBRS acknowledges that this reflects the Bank’s role within the Spanish financial system.

ICO’s funding structure is reliant on wholesale funding. The Bank has not experienced any notable difficulties in accessing the markets since its creation and has been able to tap the markets on a regular basis, even during the financial crisis. Refinancing risk is also mitigated by the fact that ICO lends at much shorter maturities than the funding it obtains on the capital markets. DBRS views ICO’s capitalisation as robust. ICO’s Common Equity Tier 1 capital ratio reduced to 29.3% at end-2016 from 32.2% at end-2015.

RATING DRIVERS:

The Issuer Rating, Senior Unsecured Debt and the Short-term Debt and Deposit ratings move in line with the ratings of the Spanish sovereign.

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, company disclosures 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: Ross Abercromby – Senior Vice President- Global FIG
Initial Rating Date: September 16, 2011
Most Recent Rating Update: October 12, 2016

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