DBRS Morningstar Confirms Bankia at BBB (high)/R-1 (low); Trend Revised to Stable from Positive

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Bankia SA (Bankia or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on the Group’s long-term ratings has been revised to Stable from Positive while the trend on the short-term ratings remains Stable. DBRS Morningstar has also maintained the Bank’s Intrinsic Assessment at BBB (high) and support assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The change of the Trend to Stable reflects our view that the wide and evolving scale of economic and market disruption resulting from the coronavirus (COVID-19) pandemic will have a negative effect on the operating environment for banks in Spain and therefore is likely to impact on Bankia’s revenues, asset quality and cost of risk. The impact will likely emerge in the coming quarters, whilst the implications for the medium to long-term will depend on the evolution of the outbreak. Downward rating pressure would intensify should the crisis be prolonged.

We will continue to monitor the performance of the Bank’s asset quality, as well as all measures to support the franchise and customer base, including the implementation of the debt moratoriums. At the same time, we will continue to incorporate the mitigating impact of the unprecedented support measures announced by the Spanish government, as well as several other international authorities and central banks.

The confirmation of Bankia’s Long-Term ratings at BBB (high) reflects our view that the Bank’s strong progress in reducing its non-performing assets (NPAs) over the past few years has left the Bank with a much cleaner asset quality profile, and the Bank’s relatively low exposure to SMEs could mean the Bank is less vulnerable to deterioration in sectors that are likely to be severely affected such as tourism, and transport. Nevertheless, we would still expect pressure on the Bank’s risk profile to materialise, albeit mitigated by the Spanish government and the European authorities’ support measures.

RATING DRIVERS
Any upgrade is unlikely in the short-term given the recent change of trend. However, an upgrade could occur should the Bank manage to improve recurrent profitability and limit the impact on asset quality from the COVID-19 pandemic.

The ratings could be downgraded if the Bank’s profitability experiences a material decline, potentially as a result of the COVID-19 pandemic. A downgrade could also occur if the progress in asset quality made by the bank so far were to be reversed.

RATING RATIONALE
Bankia’s ratings continue to reflect its well-established franchise as the fourth largest bank by assets in Spain, reinforced through the acquisition of Banco Mare Nostrum in 2018. Nevertheless, Bankia’s profitability is modest, reflecting the focus on mortgage lending and the low interest rate environment, which has negatively impacted net interest income on which the Bank is very reliant. We expect profitability to be further pressured by the effects of the COVID-19 pandemic, most notably weaker lending growth, lower fees and commissions as well as higher loan loss provisions.

The ratings continue to be underpinned by the Bank’s robust capital position, with solid cushions over regulatory requirements. These, combined by flexibility given by the regulator over capital buffers, should help the Bank mitigate the expected rise in risk-weighted assets (RWAs) driven by a deterioration in the loan book. Finally, we continue to view Bankia as benefitting from a solid funding and liquidity profile, backed by high levels of liquid assets and regular access to wholesale markets for funding.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

The Grid Summary Grades for Bankia SA are as follows: Franchise Strength – Strong / Good; Earnings Power – Good / Moderate; Risk Profile – Good / Moderate; Funding & Liquidity – Good; Capitalisation – Good.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, Bankia 2019 Presentation, Bankia 2019 Financial Data, Bankia 2019 Report, Bank of Spain Statistical Bulletin 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 12-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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359661

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director - Global Financial Institutions Group
Initial Rating Date: July 8, 2016
Last Rating Date: July 2, 2019

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Tel. +49 (69) 8088 3500
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