DBRS Upgrades Abanca’s Long-Term Issuer Rating to BBB, Stable Trend

DBRS Ratings GmbH (DBRS) upgraded the ratings of Abanca Corporación Bancaria S.A. (Abanca or the Bank), including the Long-Term Issuer Rating to BBB and the Short-Term Issuer Rating to R-2 (high). The trend on all ratings is Stable. The Intrinsic Assessment (IA) is now BBB, 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 upgrade of Abanca’s ratings reflects the continued improvement in core revenues, both through fees and commissions and net interest income (NII). In addition, the rating action incorporates the continued progress made in asset quality, with the Non-performing loans (NPL) ratio now more in line with international standards. The ratings are underpinned by the Bank’s sound funding and liquidity position and solid capital levels.

RATING DRIVERS
Whilst positive rating pressure in the short-to-medium term is unlikely given the recent upgrade, this would require continued improvement in core profitability and further progress in asset quality metrics. A track record of successfully integrating its recent acquisitions in Spain and Portugal would also be viewed positively.

Negative rating pressure on the ratings could arise from a material deterioration in capital or the Bank’s risk profile.

RATING RATIONALE
Abanca’s ratings are underpinned by its well-established regional franchise in Galicia, where it maintains leading market shares of around 33% for loans and 41% for deposits. DBRS also notes that Abanca has diversified geographically through the recent acquisition of the private and commercial client business of Deutsche Bank in Portugal, and will further reinforce its domestic footprint through the recently announced purchase of Banco Caixa Geral’s Spanish operations.

Abanca’s 2018 and 1Q19 results continued to be driven by core revenue growth and low levels of provisions for loans and other assets. Abanca reported net attributable income of EUR 430.4 million in FY18, up 17.3% year-on-year (YoY) from EUR 367.1 million in FY17. Higher core revenues and low levels of provisions continued to support profits despite some growth in operating expenses related to investments in the franchise. In 1Q19, the Bank reported net attributable income of EUR 156.2 million, stable YoY, as higher operating expenses related to acquisitions offset good core revenue growth.

Abanca’s asset quality has consistently improved since 2014, primarily through the reduction of NPLs. DBRS expects Abanca will continue to further improve its levels of non-performing assets (NPAs) due to the good economic and property market conditions in Spain. Abanca reduced NPAs by EUR 591 million in FY18 and a further EUR 53 million in 1Q19. As a result, the NPA ratio reduced to 5.9% at 1Q19, compared to 6.2% at FY18, and much improved from 8.2% at FY17. Total NPLs continued to show a declining trend and reached EUR 1.1 billion at 1Q19, compared to EUR 1.5 billion at FY17. As a result, Abanca’s NPL ratio (as calculated by DBRS) was 3.4% at 1Q19, much more in line with European peers.

Abanca’s funding and liquidity position is supported by its large and resilient customer deposit base, and its ample liquidity portfolio. Also reflecting the Bank’s focus on further diversifying revenue sources through commissions, the Bank’s off-balance sheet customer funds increased 3.4% YoY in 1Q19, principally due to mutual funds and insurance products. Abanca had a sound net loan-to-deposit ratio (LTD) excluding repos and covered bonds included in deposits, as calculated by DBRS, of 90.8% at 1Q19.

DBRS views Abanca’s capital position as sound, supported by a Common Equity Tier 1 (CET1) ratio (phased-in) that remained at 14.7% at 1Q19 (13.9% (fully loaded)), one of the strongest among Spanish banks. The total capital ratio (phased-in) stood at 16.9% (16.1% (fully loaded)), as the Bank issued AT1 (EUR 250 million) in October 2018, and Tier 2 instruments (EUR 350 million) in 1Q19. The total capital ratio is well above minimum total capital requirements with an excess of around 465 basis points above the minimum requirement at 1Q19.

The Grid Summary Grades for Abanca Corporación Bancaria, SA are as follows: Franchise Strength – Good / Moderate; Earnings Power – Good / Moderate; Risk Profile – Good / Moderate; Funding & Liquidity – Good / Moderate; Capitalisation – Good / 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 Company Disclosures, Bank of Spain, the European Banking Authority (EBA), and S&P Global Market Intelligence. 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: Arnaud Journois, Vice President – Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director– Global FIG
Initial Rating Date: December 10, 2014
Last Rating Date: July 19, 2018

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Amtsgericht Frankfurt am Main, HRB 110259

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