DBRS Confirms ICO’s Senior Ratings at A, Trend changed to Positive
Banking OrganizationsDBRS Ratings GmbH (DBRS) confirmed Instituto de Crédito Oficial (ICO or the Bank) ratings, including the Long-Term Issuer Rating at “A” and the Short-Term Issuer Rating at R-1 (low). The Trend on all ratings has been changed to Positive from Stable. ICO’s Support Assessment remains SA1. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of ICO’s Long-Term Issuer Rating at “A” and the change of Trend to Positive follows DBRS’ confirmation of the Kingdom of Spain Long-Term Foreign and Local Currency rating at “A” with a Positive Trend on September 20, 2019. ICO’s ratings reflect its statutory ownership and the full guarantee of its liabilities by the Kingdom of Spain as stated in its by-laws under the Royal Decree Act 706/1999. As a result, DBRS’ support assessment for ICO is SA1 and ICO’s issuer ratings and trend are equalised with the Long-Term and Short-Term Foreign and Local Currency ratings of the Kingdom of Spain and will move in line with the rating of the Spanish sovereign.
RATING DRIVERS
The Long-Term and the Short-Term ratings move in line with the ratings of the Kingdom of Spain. A positive rating action on the Kingdom of Spain would be reflected in ICO´s ratings. Similarly, negative rating action on the Kingdom of Spain would be reflected in ICO´s ratings.
RATING RATIONALE
ICO is a credit institution by law and is considered to be a State Finance Agency of Spain. As a public specialised lending institution and the state’s financial agency, ICO enjoys a unique and dominant franchise in Spain. ICO´s role is to support and develop any economic activity contributing to the growth of the Spanish economy.
In carrying out its public service mandate, ICO’s goal is not to maximise profits, however the Bank has never reported a loss in its history. Nevertheless, given its countercyclical nature, profits have shown volatility over time. DBRS views ICO’s earnings power constrained by its weak operating margins, despite being partially off-set by its low cost base. The Bank’s net income totaled EUR 76 million in 2018, down from EUR 103 million in 2017. Results were positively affected by a net release of loan loss provisions of EUR 100 million in 2018 and EUR 156 million in 2017. DBRS notes that the provision release in 2018, as in the previous year, is linked to the Bank’s high level of coverage for non-performing loans (NPL).
DBRS views ICO’s risk appetite as generally conservative due to the nature of its activities. However, ICO´s credit profile is negatively affected by its high single-name concentrations. The Bank’s lending is carried out through two different channels: a) Indirect lending in which the Bank’s operates through credit lines to commercial banks that, in turn, lend the funds to SMEs/entrepreneurs. The indirect lending results in ICO having counterparty credit risk to the participating banks. At end-2018, ICO’s total indirect lending totaled EUR 10 billion at end-2018, down 28% Year on Year (YoY); b) Direct lending, which typically consists of providing syndicated loans to large companies or structured finance projects, either public or private, and represents around EUR 11 billion at end-2018, down 11% YoY.
The deleveraging of its balance sheet reflects the Bank’s countercyclical mission, and DBRS expects this to stabilise over the coming years. Despite this, ICO granted around EUR 4.6 billion of new loans in 2018, compared with EUR 5.4 billion in 2017. Direct loans are the only contributor to the Bank’s level of NPLs, as the Bank does not bear the underlying credit risk for the indirect lending. The Bank’s NPL ratio decreased to 5.9% at end-2018 from 8.5% at end-2017 (as calculated by DBRS), with gross NPLs totalling around EUR 637 million. The Bank’s coverage ratio for these NPLs remains very strong at 133% at end-2018 (as calculated by DBRS and not including other provisions).
ICO’s funding structure is reliant on wholesale funding and funding from multilateral development banks, mainly the European Investment Bank. The Bank has not experienced any notable difficulties in accessing the markets since its creation and has been able to tap the markets on a regular basis, even during the financial crisis. DBRS views ICO’s capitalisation as robust. ICO’s Common Equity Tier 1 capital ratio strengthened to 40.7% at end-2018 from 32.7% at end-2017 positively affected by lower Risk-Weighted-Assets (RWAs) given the deleveraging of its balance sheet.
Notes:
All figures are in Euros unless otherwise noted.
The principal applicable methodology is DBRS Criteria: Guarantees and Other Forms of Support (January 2019) and the Global Methodology for Rating Banks and Banking Organisations (June 2019). These can be found can be found at: http://www.dbrs.com/about/methodologies
The sources of information used for this rating include S&P Global Market Intelligence Financial and company reports. 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 EU FIG, Global FIG
Initial Rating Date: February 25, 2013
Most Recent Rating Update: March 27, 2019
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
For more information on this credit or on this industry, visit www.dbrs.com
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