DBRS Morningstar Confirms Caja Rural de Granada’s BBB (low) LT Issuer Rating, Trend Remains Positive

DBRS Ratings GmbH (DBRS Morningstar) confirmed Caja Rural de Granada’s (CRG or the Bank) ratings, including the Long-Term Issuer Rating at BBB (low) and the Short-Term Issuer Rating at R-2 (middle). The Trend on the ratings remains Positive and the Bank’s Support Assessment remains SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of CRG’s Long-Term Issuer Rating at BBB (low) takes into account the Bank’s consistent fundamentals, underpinned by a stable funding and liquidity profile, combined with an ample capital cushion. The ratings also reflect the Bank’s membership of the newly created Institution Protection Scheme (IPS) between the members of the Asociación Española de Cajas Rurales (AECR), the largest cooperative group in Spain. In addition, the ratings reflect CRG’s modest but improving profitability as well as the still sizable, albeit reducing, stock of non-performing assets (NPAs).

DBRS Morningstar notes that whilst that the Bank has reduced its NPA ratio below 9.5% and its Non-Performing Loan (NPL) ratio below 4.5% and improved its profitability (which were positive rating drivers outlined at the last rating action in November 2018), DBRS Morningstar considers that further improvements in asset quality are still needed for the ratings to be upgraded. In particular, DBRS Morningstar considers that the Bank could face a more challenging environment in the coming years, given that economic and property market conditions could deteriorate as the economic cycle matures. This is especially important given the Bank´s high exposure to land as a proportion of its overall stock of Foreclosed Assets (FAS). Nonetheless, the Positive Trend reflects the significant de-risking of CRG’s balance sheet in recent years and a significant improvement in coverage levels, which has led to an improvement in the Bank’s risk profile. The Positive Trend also takes into account the gradual improvement in the Bank’s core profitability.

RATING DRIVERS

The ratings could be upgraded if CRG demonstrates a longer track record of consistently meeting its NPA reduction plan in a potentially more challenging economic environment. Negative pressure on the ratings could arise from a failure to progress in reducing NPAs, particularly if this is accompanied by any weakening of the capital position.

RATING RATIONALE

The Bank has a solid franchise in its home market of Granada, where at end-June 2019 it had significant market shares in loans (17.4%) and deposits (23.5%). CRG is also a member of the Asociación Espanola de Cajas Rurales (AECR), the largest cooperative group in Spain by total assets. The AECR comprises 29 Cajas Rurales (CRs) operating throughout Spain. On March 2018, the General Assembly of the AECR approved the constitution of an IPS between the AECR members, Banco Cooperativo Español (BCE, rated BBB (high) Stable) and the Holding Company “GrucajRural Inversiones S.L.”. The IPS was officially recognised by the Bank of Spain at end-March 2018.

The structure of this new IPS does not create a consolidated banking group, as the IPS members remain as autonomous institutions. However, there are significant benefits regarding supervisory treatment such as 0% risk weights for exposures to other IPS members and liquidity waivers. In addition, the IPS has created a uniform definition of standards and methodologies for the risk management of the member banks. At the same time, members have created an ex-ante fund to provide support in the event that a member institution has severe financial difficulties. The goal of the IPS is to increase the size of this fund to around EUR 300 million or 1% of the AECR combined Risk Weighted Assets (RWAs) by 2024. As of end-September the total available amount in the ex-ante fund is EUR 175 million. In 2019 the fund used EUR 25 million to recapitalise one small Caja Rural (CRs) due to its weak capital position. DBRS Morningstar considers CRG’s membership of both the AECR and the IPS to be a positive as they provide other significant benefits such as access to a well-developed common technology system, central clearing and liquidity services.

DBRS Morningstar considers that the Bank´s core profitability has been gradually improving in recent quarters, although positive dynamics have slowed recently. Nevertheless, in 9M19 core revenues increased by 3.4% year-on-year (YoY) compared to 8.6% year-on-year (YoY) in 9M18. The improvement is mainly driven by loan growth and larger business volumes. DBRS Morningstar expects this trend to continue, given the growth in new lending volumes. However, the Bank’s revenues will be negatively affected by the decrease in short-term interest rates, as the majority of its loan book is linked to Euribor. The Bank reached a ROAE of 8% at end-September 2019 (as calculated by DBRS Morningstar), although a large part of the Bank´s profitability in this period was driven by the sale of FAS, which is within a non-core division. Excluding this division, the underlying ROAE was 6.8% in 9M19.

The Bank’s ratio of NPAs, albeit reducing, is still higher than other domestic peers. The Bank reported at end-September 2019 an NPL ratio of 4.4%, in line with other peers in Spain. However, the NPA ratio, which includes NPLs and FAS, stood at 9.3%, a level above other peers in Spain. Moreover, the Bank´s exposure to land (which DBRS Morningstar considers as the riskiest and least liquid category of FAS) in proportion to its overall stock of FAS is higher than the average of the Spanish System. During 2019, DBRS Morningstar saw a slowdown in the recent reduction of NPLs, which were down 2% in the first nine months of 2019 compared to 11% within the Spanish Banking System. Positively, the Bank has improved its coverage ratios in recent years and at end-September 2019 it reported a strong NPA coverage ratio of 56%. As a result, and despite the notable improvement in recent years, DBRS Morningstar considers that further improvement is still needed before any positive rating action. Moreover, the Bank could face a more challenging environment in the coming years given that economic and property market conditions could deteriorate as the economic cycle matures.

CRG’s funding and liquidity profile remains sound, supported by its stable deposit base. At end-September 2019, the Bank had a robust net loan-to-deposit ratio of 86%, lower than most European and domestic peers. Funding from the European Central Bank (ECB) stood at EUR 384 million at end-September 2019, accounting for 7% of total funding, related to the TLTRO-II.

CRG’s capitalisation remains robust with a total capital ratio of 18.45% under the phased-in criteria at end-September 2019. This compares to a minimum SREP Capital Requirement (OCR) for total capital of 11.88% for 2019. As a result, the minimum capital cushion over the requirements was at 657 bps, significantly higher the average of Spanish peers. DBRS Morningstar considers CRG’s membership within AECR and the IPS as a positive because it provides potential support from the ex-ante fund should CRG face severe financial difficulties, however, the Bank’s ability to improve capitalisation through organic generation or to access capital markets is limited.

The Grid Summary Grades for Caja Rural de Granada, Sociedad Cooperativa de Crédito are as follows: Franchise Strength – Good/Moderate; Earnings – Moderate; Risk Profile – Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – Good/Moderate.

Notes:
All figures are in Euros 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 reports and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar 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: December 3, 2013
Most Recent Rating Update: November 16, 2018

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