DBRS Confirms Banco Cooperativo Español’s Senior Rating at BBB, Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Banco Cooperativo Español S.A’s (BCE or the Bank), including the Long-Term Issuer Rating of BBB, and the Short-Term Issuer rating of R-2 (high). The trend on all the ratings remains Stable. Concurrently, DBRS confirmed the Bank’s Intrinsic Assessment (IA) at BBB and Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

The confirmation of BCE’s ratings considers the Bank’s important role as the central clearing bank and liquidity provider for the Cajas Rurales (CRs) that are members of the Asociación Española de Cajas Rurales (AECR). It also considers the Bank’s low risk profile, its stable profitability which allows it to build up capital through retained earnings, and the benefit it receives from its funding relationship with the AECR members, who provide a stable deposit base. BCE’s ratings also take into account BCE’s size and scope, with low business and revenues diversification primarily concentrated in Spain, its small equity base, as well as its sizeable risk concentration to Spanish sovereign bonds.

The Bank has generated stable profits over recent years, with similar net results each year since 2013. In 9M17, BCE reported net attributable income of EUR 27.9 million, compared to EUR 32.1 million in 9M16. Results in 9M17 continued to be negatively affected by the lower yields on its asset side and increasing operating costs year-on-year (YoY) associated to business expansion. Trading gains and normalised loan loss provisions also supported profits in 9M17. Commissions and fees grew strongly in 9M17 YoY, although the growth did not fully compensate for the continued pressure on net interest income from the low interest rate environment.

BCE has a generally low risk profile driven by its low-risk business mix and specialised franchise. BCE’s main risks are its material exposure to Spanish Sovereign risk (50% of its total assets), lending to financial institution (19% of total assets) and its loan book to direct clients (8% of total assets). Reflecting BCE’s business model as part of its intermediary role for the AECR CRs, BCE has EUR 5.3 billion of Spanish Sovereign bonds representing a substantial 10 times its equity. However, an important part of the Sovereign debt exposure (44%) was covered under the Treasury Agreement, whereby the CRs guarantee any credit-related losses or commitments that could arise from the fixed income portfolio or the interbank placements that BCE makes on behalf of the CRs. BCE’s counterparty risk from the financial institutions represents 19% of its total assets or EUR 2.5 billion at end-September 2017. DBRS views counterparty risk as mitigated by the fact that BCE has also a Treasury Agreement with the AECR CR. Credit risk linked to direct customers lending is marginal (8% of total assets at end-September 2017), and which largely explains the Bank’s better than most domestic peers non-performing loans (NPL) ratio of 0.58% at that date.

DBRS views BCE’s liquidity position as good but DBRS also notes that the diversification of funding sources is limited. BCE’s funding and liquidity position is underpinned by a large and stable deposit base. Deposits from credit institutions (excluding repos) represents 51% of its total funding at end-September 2017, a large part of which is backed by the CRs from the AECR, who deposit their excess liquidity in BCE in the form of bank deposits. BCE invests those funds in sovereign bonds and interbank lending of up to a maximum 18 months maturity. Short-term funding in the form of repurchase agreements are significant totalling 35% of BCE’s funding. However, deposits from customers have increased during recent quarters to account 11% of its total funding compared to 5% at end-2016 due to new deposits inflows from public administrations. At end-September 2017, the bank had a solid liquidity position with liquid assets of EUR 4.75 billion after regulatory haircuts.

Although BCE does not aim for profit maximisation, the Bank’s sustainable profits have supported the build-up of capital organically in recent years. However, DBRS views the Bank’s nominal total capital as relatively small which provides a limited amount of loss-absorbing capacity for any potential shocks. BCE’s Common Equity Tier 1 (CET1) phased-in ratio was 22.3% at end-September 2017, significantly above the minimum capital requirements set under the SREP of 10.125% for 2017. BCE’s tangible equity to tangible asset ratio of 3.9% at end-September 2017 has improved materially over the last three years from a very low 2% at end-2014. The improvement in the ratio was largely related to the shrinking of the balance sheet largely driven by the reduction sovereign debt portfolio.

AECR is the largest cooperative group in Spain, by asset size, with EUR 60.3 billion assets at end-September 2017. The CRs are supported by their generally strong local franchises, their stable cooperative membership bases, and their typically favourable loan-to-deposit ratios. DBRS views AECR as a cohesive group, with its members being linked through various organisational and business relationships, and through the funding/central clearing functions that are provided by BCE. The Bank plays an important role in providing many of the services of a central bank to its owners. Also providing ancillary services to the AECR members are Rural Servicios Informáticos (an information technology company) and Seguros RGA (insurance operations). The larger organisation including these entities is marketed as Grupo Caja Rural (GCR). Despite the cohesive nature of the GCR, DBRS does not view this organisation as warranting a group rating approach, given the lack of a cross-guarantee or mutual support scheme across the entire GCR organisation.

RATING DRIVERS
Upward rating pressure, although unlikely in the short to medium term, could be achieved if BCE gains greater importance for the CRs, if it significantly improves its equity base and if the AECR achieves greater importance within the Spanish banking system.

Ratings could come under pressure if BCE´s importance for the CRs is reduced or if the AECR reduces its importance within the Spanish banking system. Negative rating pressure could also come from a material increase in its risk profile, including increasing counterparty risks.

The Grid Summary Grades for Banco Cooperativo Español are as follows: Franchise Strength – Good/ Moderate; Earnings – Good/ Moderate; Risk Profile – Good; Funding & Liquidity – Good; Capitalisation – Moderate.

Notes:
All figures are in EUR unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This 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 documents 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 and US regulations only.

Lead Analyst: Pablo Manzano, Assistant Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 16 December 2013
Most Recent Rating Update: 14 July 2017

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