DBRS Confirms Caixa Económica Montepio Geral’s Long-Term Issuer Rating at BB; Trend Remains Negative

DBRS Ratings GmbH (DBRS) confirmed the ratings of Caixa Económica Montepio Geral, S.A. (Banco Montepio or the Bank), including its Long-Term Issuer Rating at BB and the Short-Term Issuer Rating at R-4. The trend remained Negative on the Long-Term Issuer Rating and Stable on the Short-term debt. The Banks’s Intrinsic Assessment (IA) has been maintained at BB and the Support Assessment remains at SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings takes account the recent progress made by the Bank in reducing its problem assets by means of disposals, as well as improved capital buffers following the issuance of EUR 100 million in subordinated debt in April 2019. Nonetheless, the Negative Trend reflects the downside risks from the Bank’s ongoing weak profitability in a tough environment with persistent revenue stress from lower interest rates and highly competitive pressure, as well as increasing pressure to reduce the remaining high stock of problem assets. In addition, in DBRS’s view, the Bank continued to face instability in their corporate governance and challenges with its restructuring plan.

RATING DRIVERS
A return to a stable trend would require further improvements in asset quality supported by adequate capital buffers, as well as a stabilisation of revenues and some improvement in profitability.

Negative pressure on the Issuer Rating could arise if the Bank fails to stabilise its revenues or improve efficiency. Negative implications could also arise from a weakening of the capital buffers or instability in the customer deposit base. Lack of success in strengthening the Bank’s organisational structure would also be viewed negatively.

RATING RATIONALE
Banco Montepio is a small bank with total assets of around EUR 19 billion at June 2019 and is majority owned by the Montepio Geral Associacao Mutualista (MGAM). In the highly competitive market of Portugal, the Bank has kept its market position for deposits, whereas its market share for loans has steadily declined. The Bank, which has experienced high management turnover, is implementing a restructuring plan aiming at strengthening its balance sheet and organisation. Although some progress has been made, in DBRS’s view, further actions are needed to strengthen the Bank’s corporate governance, risk control and competitive position.

The Bank’s profitability remains weak. In 1H 2019, Banco Montepio posted a net result of EUR 3.6 million, down from EUR 15.8 million in the same period of 2018 mainly as a result of lower revenues and higher tax expenses. The net interest income (NII) fell by 11% YoY due to the combination of lower interest rates and reducing lending volumes. The Bank is highly sensitive to interest rate changes. At the same time, the total fee income was largely flat while the trading income on the Bank’s portfolio of Sovereign securities continues to remain volatile.

The pressure on revenues was partially offset by lower operating costs and lower loan impairments in 1H19. Nonetheless, the Bank’s cost-to-income ratio remains high at 68%, while the large stock of Non-Performing Exposures (NPEs) will likely continue to impact the total cost of risk.

DBRS recognises that Banco Montepio has made some progress in reducing its stock of problem assets, mainly by means of disposals. Over the recent period, the Bank completed NPE disposals for a total consideration of EUR 560 million. Including the disposal of July 2019, Banco Montepio’s NPE stock (pro-forma) at 1H 19, decreased by 27% YoY while the NPE ratio (European Banking Authority (EBA) definition) was reported at 12.9% , down from 15.8% in 1H 2018. Despite this reduction, the Bank’s asset quality remains significantly weaker than the European average.

The Bank is largely funded by deposits, which accounted for around 74% of their total funding sources in 1H 2019. The customer deposits have stabilised after a period of significant stress in 2017. Accessing the unsecured wholesale market, however, remains more challenging and costly. In terms of liquidity, Banco Montepio maintains a sizable stock of eligible liquid assets with a comfortable LCR ratio at 197%, up from 152% in 1H 2018. The Bank’s NSFR strengthened to 104%, from 99.5% in 1H 2018. This level, however, continues to remain below the peer average.

The Bank’s regulatory capital buffers strengthened following the issuance of Tier 2 bonds for EUR 100 million. Some capital relief also came from the reduction in RWAs. Nonetheless, the Bank’s capital position remains vulnerable taking into account its weak internal capital generation and high stock of unreserved NPEs.

In 1H 2019, Banco Montepio’s total capital ratio, phased-in, was reported at 15.2%, up from 13.6% in 1H 2018, while the CET1 ratio remained largely stable at 13.7%. On a fully loaded basis, including the impact from IFRS 9 and Deferred Tax Assets, the Bank reported its total capital ratio and CET1 at 13.4% and 11.9%, respectively. These ratios are at the lower end of the Bank’s peer group.

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

Notes:
All figures are in Euro 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 S&P Global Market Intelligence and company disclosures. 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: Nicola De Caro, Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: June 27, 2011
Last Rating Date: March 28, 2019

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