DBRS Assigns First-Time A (low) Issuer Rating to Unión de Créditos Inmobiliarios, E.F.C (UCI)

DBRS Ratings Limited (DBRS) has assigned first-time ratings to Unión de Créditos Inmobiliarios, E.F.C (UCI or the entity), a specialised mortgage lender in Spain and Portugal, and a Joint Venture (JV) between Banco Santander S.A (Santander) and BNP Paribas Group (BNPP). The ratings assigned are A (low) Long-Term Issuer Rating and R-1 (low) Short-Term Issuer Rating. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
DBRS has assigned a support assessment of SA1 to UCI which implies the expectation of predictable support from its shareholders. DBRS has an A (high) Long-Term Issuer Rating with a Stable Trend on Santander and a Long-Term Issuer Rating of AA (low) with a Stable Trend on BNPP. The Issuer Rating for UCI is two notches below the Issuer Rating of Santander (the lower rated shareholder), reflecting both an expectation of a high likelihood of parental support in case of need, as well as that UCI is a non-bank subsidiary in which neither shareholder has a majority stake. DBRS notes that due to its ownership and the expectation of support, UCI’s ratings are positioned multiple notches above the entity’s intrinsic creditworthiness.

RATING DRIVERS
Given the SA1 designation, which implies the expectation of predictable support from the shareholders, UCI’s ratings will generally move in tandem with the ratings of its lower rated shareholder. However, the ratings of UCI may deviate from those of the shareholders if, in DBRS’s opinion, the likelihood of support was to reduce or if the ownership structure were to change.

RATING RATIONALE
UCI’s franchise focuses on mortgage lending, with a mortgage market share in Spain of around 2% at end-2017. DBRS notes that UCI’s profitability is highly concentrated on net interest income as it is a monoline mortgage lender. Positively, UCI´s business model is underpinned by a cost-efficient branch network. UCI has in the past targeted clients with a riskier credit profile than traditional commercial banks and this translated into higher non-performing loan (NPL) ratios and higher margins than retail banks. However, DBRS recognises that UCI has reported profits in 6 of the last 7 years, amid a very challenging economic environment in Spain and that asset quality on new lending has, to date, shown better performance. In addition, UCI’s funding profile has a high reliance on short term funding from the shareholders, although this has been reducing in recent years. UCI’s capital profile is limited due to tight capital buffers over its regulatory requirements, however DBRS expects that the shareholders would provide extra capital if needed.

UCI S.A. was created in 1989 as a Joint Venture between Banco Santander S.A. (Santander) (50%), Union Credit pour le Batiment S.A. (40%) and Compagnie Bancaire, S.A. (10%). With both the latter two entities becoming part of the BNPP Group, UCI is now a Joint Venture (JV) between Santander and BNPP with both groups holding a 50% stake. UCI S.A. is a holding company which in turn owns 100% of UCI E.F.C., the rated entity. UCI is a finance company, “Establecimiento Financiero de Credito” (EFC), which means it is not allowed to take deposits but is regulated by the Bank of Spain. UCI’s franchise focuses on the mortgage market, with total loans under management of around EUR 11 billion and a mortgage market share in Spain of around 2% at end-2017. UCI operates mainly in Iberia with 88% of loans to Spanish borrowers and 10% to Portuguese borrowers at end-2017. The entity has non-material exposures in Greece and new lending ceased in 2011.
UCI´s business is highly correlated with the Spanish housing and mortgage markets, both of which were impacted by the global financial crisis and the real estate downturn in Spain. This is reflected in UCI´s new lending activity which peaked at EUR 3.5 billion during 2006 and was at a lower level of EUR 538 million in 2017, albeit up 44% year-on-year. DBRS notes that UCI has, with the crucial liquidity support from its shareholders, managed a very challenging economic and financial environment since 2008.

DBRS considers UCI’s liquidity position as impacted by its high reliance on short term funding from its shareholders. Traditionally UCI has used securitisations as its main funding source, in the form of Residential Mortgage Backed Securities (RMBS). However, after the global financial crisis, the Spanish RMBS market was closed and UCI required liquidity support from its shareholders, peaking at EUR 8.4 billion or 71% of total funding at end-2013. Since 2015, UCI has placed in the market a total of 5 securitisations, raising funding totaling EUR 1.7 billion and as a result has been able to repay part of the short term credit lines and at the same time finance its new lending activity. However, at end-2017, funding from credit institutions remained high at EUR 7.2 billion or 62% of total funding.

DBRS views UCI´s earnings power as constrained due to the lack of revenue diversification as its income is concentrated mainly on net interest income from its mortgage book. UCI’s profitability remains negatively affected by the low activity in the Spanish mortgage market since the beginning of the global financial crisis. This is also reflected in a low return on equity (RoE) of 2.6% and reported net income of EUR 10.3 million in 2017. Positively, UCI´s business model is underpinned by a cost-efficient branch network.

UCI’s risk profile is mainly driven by its loan book which has an elevated Non-Performing Assets ratio (including Foreclosed Assets (FAS) and Non-Performing Loans) of 16.7% of gross loans and FAS at end-2017. In addition, the high cost of risk leads to weak risk profile metrics with provisions as a percentage of IBPT being around 70% on average since 2011. UCI’s new securitisation program (Prado) is used as a funding tool but DBRS notes that the credit risk is not transferred to investors as the entity has retained the mezzanine tranches, and therefore the loans remain on the balance sheet of the entity. Other risks include interest rate risks related to maturity and repricing gaps between assets and liabilities.

As an EFC, UCI’s capitalisation requirements are lower than banks. DBRS considers the leverage ratio to be weak at 3.3% at end-2017 and notes that UCI has relatively tight capital buffers over minimum requirements. However, DBRS expects that the shareholders would provide extra capital if needed. The applicable legal framework and capital regulations for UCI, as for all EFCs in Spain, are different to the applicable regulation for banks. Currently, EFCs are required to comply with the Basel II capital ratios or a minimum Total Capital ratio of 8% and a minimum Tier 1 ratio of 4%. At end-2017 UCI had a Total Capital ratio of 8.77% and a Tier 1 ratio of 6.88%, higher than minimum requirements.

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 the Global Methodology for Rating Finance Companies (November 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, SNL Financial, European Banking Authority and Bank of Spain. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS rating on this issuer.

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: Ross Abercromby, Senior Vice President, Global FIG
Initial Rating Date: April 16, 2018
Most Recent Rating Update: Not Applicable as no last rating date

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