DBRS Downgrades Banco Popular’s Senior Ratings to BB (low), All Ratings Placed Under Review Negative

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 BB (low) from BBB (low), its Short-Term Debt & Deposit rating to R-4 from R-2 (middle) and its Subordinated Debt rating to B (low) from BB (high). Additionally, Preferred Shares issued by Popular Capital S.A. have been downgraded to B (low) from B (high). The Bank’s Long Term Critical Obligations Rating (COR) has been lowered by two notches to BBB (low), and its Short Term COR has been downgraded to R-2 (middle) from R-1 (low). A full list of ratings actions is included at the end of this document.

All ratings have been placed Under Review with Negative Implications (URN). Popular’s Subordinated Debt was previously placed URN on January 13, 2017, as part of a wider review of European bank’s subordinated debt (see: “DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications”). With today’s action, Popular’s Subordinated Debt remains URN, in line with the other ratings of the Bank.

Today’s rating actions follow the lowering of Popular’s Intrinsic Assessment (IA) to BB (low) from BBB (low). This reflects DBRS’s increasing concerns over the Bank’s ability to restore its very weak capital levels following a significant deterioration of investor and customer confidence in recent days. This has been driven by the impact of various events that have led to a significant decline in the Bank’s market capitalisation. As a result, DBRS considers that management’s ability to successfully reinforce capital through either a rights issue or corporate acquisition has become more challenging. The downgrade also reflects DBRS’s concerns about the Bank’s credit fundamentals, which have the potential to deteriorate quickly as a result of the weakened investor and customer confidence.

In downgrading the Subordinated Debt and Preferred Shares, DBRS is reflecting the increased risk of loss absorption being imposed on these instruments as one of the means to support Popular and protect senior debt holders. This could potentially occur if the Bank fails to reinforce its capital position through either a rights issue or corporate acquisition. The downgrade of the Subordinated Debt to B (low) has resulted in a widening of the notching from the IA to three notches, from one notch.

The Bank’s Long Term Critical Obligations Rating (COR) has been lowered by two notches to BBB (low), and its Short Term COR has been downgraded to R-2 (middle) from R-1 (low). These ratings have also been placed URN. The BBB (low) / R-2 (middle) ratings reflect DBRS’ expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under covered bond programmes, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and being included in a going-concern entity.

DBRS has taken a number of rating actions on Popular over the past few months, as the Bank has made announcements regarding losses and capital adjustments beyond DBRS’s expectations. The current weakened capital position has severely constrained the Bank’s ability to respond to current pressures, despite the Bank’s strong SME franchise in Spain, its resilient performance throughout the recent financial and real estate crisis in Spain and previous success in maintaining shareholder support, as illustrated in 2016, when Popular raised EUR 2.5 billion of capital.

DBRS downgraded the senior ratings of Popular to BBB, Negative trend, on February 10, 2017 as a result of higher than expected net losses in 2016 and increased concerns about the Bank’s capital position. Further, on April 6, 2017, the senior ratings of Popular were downgraded to BBB (low), Negative trend, following the announcement of further negative adjustments to the Bank’s capital. The Negative Trend incorporated DBRS’s concerns over the Bank’s low buffer above minimum regulatory capital requirements, and thus, limited flexibility to react to any adverse events. Popular’s total regulatory capital ratio weakened to 11.91% at end-1Q17, only 53 bps above the minimum total capital requirement under the SREP (Supervisory Review and Evaluation Process) of 11.375%.

RATING DRIVERS

The Issuer Rating and the Bank’s Debt & Deposit ratings are currently Under Review with Negative Implications. Any upside pressure is unlikely in the short term. However, a meaningful improvement in the Bank’s capital position together with a material reduction of non-performing assets could lead to a positive rating pressure. During the review period DBRS will focus on the capital, funding and liquidity position of the Bank which could come under pressure, especially if negative headlines persist. Any further weakening in the Bank’s fundamentals could also lead to further negative rating pressure. The ratings of Popular’s subordinated debt and preference shares could be downgraded if DBRS sees any signs of increased risk of these holders to absorb losses as a result of a failure to reinforce capital levels through a corporate operation or further support from shareholders.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These 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.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: April 6, 2017

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