DBRS Confirms Liberbank’s Issuer Rating at BBB (low); Trend Stable

DBRS Ratings GmbH (DBRS) confirmed the ratings of Liberbank, S.A. (Liberbank or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The trend on all ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is BBB (low), while its Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of Liberbank’s Long-Term Issuer Rating reflects the Bank’s stable franchise in certain regional markets in Spain, which underpins the Bank’s customer deposit base. The confirmation also considers the Bank’s good progress in reducing its Non-performing Assets (NPAs), as well as its satisfactory capital cushion over regulatory capital requirements. However, the ratings continue to reflect the still high, albeit decreasing, level of NPAs that remain above most European peers, as well as the challenge to materially improve profitability in the low interest rate environment.

RATING DRIVERS
Positive rating pressure to the Long-Term Issuer Rating could arise if Liberbank demonstrates a longer track record of consistently improving its risk profile. Achieving a sustained improvement in core profitability could also lead to positive pressure on the ratings. Negative rating pressure to the Long-Term Issuer Rating could arise if there is a deterioration in asset quality.

RATING RATIONALE
Liberbank is a Spanish regional bank largely focused on individuals, small and medium sized businesses (SMEs). The Bank is the 12th largest banking group in Spain, as measured by total assets at end-March 2019 (EUR 40.6 billion). Liberbank enjoys regional market shares above 20% for loans and deposits in core areas such as Asturias, Cantabria Cáceres and Toledo. However, the Bank’s national market shares for loans are more modest at around 2% at end-2018.

The Bank was recently involved in a corporate transaction that eventually failed to materialise. In December 2018, Liberbank announced that a potential merger between Unicaja Banco SA (Unicaja) and Liberbank was being studied by both banks. The merger would have created the sixth largest entity in Spain, with total assets of approximately EUR 100 billion and an estimated 4% domestic market share. However, in May 2019, both banks announced that they were unable to agree on a share swap and cancelled the merger plans. DBRS views that this transaction was aimed to improve the banks’ weak profitability.

DBRS considers that Liberbank´s profitability has been negatively affected by the low interest rate environment, which continues to pressure core revenues. During 2018, the Bank reduced its German sovereign bonds exposure to invest in Spanish and Italian sovereign bonds, as well as grew its net lending stock around 7% YoY (year-over-year). As a result, the Bank´s net interest income (NII) was up 11.5% YoY. Nevertheless, low trading income and an elevated cost-to-income translated into weak profitability metrics. The Bank reported a return on average equity (ROAE) of 4% in FY2018. DBRS considers that achieving a sustained improvement in core profitability could lead to positive pressure on the ratings.

DBRS views that the Bank is successfully meeting the targets included in its NPA reduction plan to date. Liberbank achieved a notable 31% reduction YoY in NPAs in 2018, driven by a decrease of EUR 800 million in NPLs and EUR 560 million in foreclosed assets (FAs). In 1Q19, asset quality continued to benefit from a further reduction in NPAs in line with the Bank’s plan and the NPL ratio reduced to 4.2% (as calculated by DBRS), a level that is below the average of the Spanish banking system. Despite the improvement, Liberbank’s NPA ratio remains high and above most domestic peers at 11.1% at end-1Q19. Moreover, including Liberbank´s investment properties exposures, the NPA ratio stood at around 13.5%. Nevertheless, DBRS considers as positive the Bank´s progress in reducing its large stock of NPAs and expects the Bank to follow the same positive dynamics in the following quarters, resulting in more normalised NPA levels by mid-2020.

Liberbank’s funding position is sound, underpinned by the Bank’s large and stable customer deposit base. Customer deposits (excluding repos and covered bonds) are the Bank’s largest funding source, representing around 66% of total funding at end-2018. The Bank posted solid liquidity ratios at end-1Q19. Liberbank’s Loan-to-deposit (LTD) ratio, Liquidity Coverage Ratio, and the Net Stable Funding ratio are stronger than most domestic banks. In addition, the Bank has a sizeable capacity to issue covered bonds of around EUR 5.1 billion.

DBRS considers Liberbank’s capital position as satisfactory. The Common Equity Tier 1 (CET1) (phased-in) ratio was 14.03% and the Total capital ratio (phased-in) ratio was 15.62% at end-1Q19. As a result, Liberbank’s regulatory capital ratios are above minimum regulatory requirements of 9.5% for CET1 and 13.0% for Total capital. The Bank is currently working to migrate its mortgage book to IRB models, which should have a positive impact on Liberbank´s capital ratios. However, DBRS recognises that the migration is a lengthy process and it could take some time before the Bank receives the supervisory approval.

The Grid Summary Grades for Liberbank, S.A. are as follows: Franchise Strength – Good / Moderate; Earnings Power– Moderate / Weak; Risk Profile – Moderate; Funding & Liquidity – Good / Moderate; 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 (June 2019). 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 disclosures, the Bank of Spain and the European Banking Authority (EBA). 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Pablo Manzano, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG, Global FIG
Initial Rating Date: 11 March 2014
Last Rating Date: 14 June 2018

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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