DBRS Morningstar Revises Caixa Geral’s Trend to Negative; Confirms BBB/R-2 (high) Issuer Ratings

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Caixa Geral de Depósitos (CGD or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The Bank’s Deposit ratings were confirmed at BBB (high)/R-1 (low), one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. At the same time, the trend on the ratings was revised to Negative from Stable. The IA of CGD is maintained at BBB and the Support Assessment at SA3. Today’s rating action follows our full annual review of the Bank’s ratings. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The change of the Trend to Negative on CGD’s ratings reflects our view that the wide and growing scale of economic and market disruption resulting from the coronavirus (COVID-19) pandemic will put pressure on the Bank’s profitability and balance sheet. The deterioration of the operating environment in Portugal will likely affect the Bank’s revenues, asset quality and cost of risk. The current environment will also add new challenges and higher execution risk to the Bank’s strategic plan.

The confirmation of the ratings reflects the Bank’s leading market position in Portugal, the solid funding and capital position, as well as progress made in reducing Non-Performing loans (NPLs) and other legacy assets.

RATING DRIVERS

Given the Negative trend, a rating upgrade is unlikely at this time. However, the trend on the ratings could revert to Stable if the Bank were able to demonstrate limited asset quality deterioration and capital erosion in the current environment.

A downgrade would likely be driven by a significant deterioration of the Bank’s capital, risk profile or profitability resulting from the COVID-19 pandemic.

RATING RATIONALE

CGD is the largest banking group in Portugal where it is the market leader in several products and services in commercial and retail banking. Owned by the Portuguese State, the Bank is currently implementing a restructuring plan for the 2017-2020 period, as agreed with the European Commission (EC) following the State-backed recapitalisation in 2017. As part of this plan, the Bank has continued to reduce its stock of non-performing assets, streamline its operating structure by reducing headcount and branches, and downsize its operations outside Portugal. In 2019, CGD completed the disposal of its subsidiaries in Spain and South Africa, while in 2020 the branches in Luxembourg and Spain were closed. However, the market disruption caused by COVID-19 will likely delay the planned disposal of the activities in Brazil and Cape Verde.

The Bank’s profitability has improved in recent years, driven by an improvement in underlying profitability in Portugal on the back of lower impairment charges, good cost control and increases in non-interest income. In our view, some of these trends may now be reversed or halted. We expect the Bank’s fee generation to suffer from lower business volumes and rising risk aversion from customers, while net interest income is likely to remain modest due to low interest rates and intense market competition, despite some expected increase in lending volumes to SMEs and Corporates. Provisioning costs will also increase as a result of the challenging economic environment. In Q1 2020, CGD reported EUR 60 million in COVID-19 related provisions in anticipation of future asset quality deterioration. DBRS Morningstar understands that these provisions are still based on very preliminary estimates and expects further provisions to be raised as CGD is still in the process of reviewing its credit models.

The sectors that are most affected by the pandemic include tourism & hospitality, food services, transportation, textile and automotive. Despite the expectation of some relief from debt moratorium programs and some government initiatives, including state guaranteed loans, DBRS Morningstar expects an increase in Stage 2 loans as well as higher NPL inflows in 2020 and 2021. In addition, the current environment creates additional risk to reduce existing NPLs. However, DBRS Morningstar notes that the Bank has a stronger balance sheet than in the previous crisis. Supported by disposals, lower NPL inflows and write-offs, the gross stock of NPLs decreased to EUR 2.5 billion at end-March 2020, from EUR 10.6 billion in 2016. The gross NPL ratio stood at 4.5% at end-Q1 2020, down from 15.8% at end-2016.

The Bank maintains a solid funding and liquidity position, underpinned by its leading franchise position in customer deposits in Portugal, and a solid liquidity position with a stock of ECB eligible assets of around EUR 18 billion. At end-Q1 2020, the net loan to deposit ratio was 71%, down from 74% at YE 2019, supported by higher deposit funds. On the wholesale debt markets, the Bank issued an inaugural Senior Non-Preferred Bond of EUR 500 million in November 2019 to build up its MREL (Minimum Requirement for Own Funds and Eligible Liabilities) buffers. Market conditions, however, have deteriorated since the beginning of the pandemic, implying higher refinancing costs for future market issuances.

CGD’s capital position has significantly improved with the capital injection received in 2017. DBRS Morningstar also recognises the significant progress in de-risking the balance sheet to date. CGD’s fully-loaded Common Equity Tier 1 (CET1) ratio was slightly down in Q1 2020 at 16.6%, from 16.9% at YE 2019 due to the impact on the valuation reserve from COVID-19, whilst the total capital ratio was 19.2%, providing a solid cushion over the regulatory minimum requirements. This should mitigate some of the impact from the deteriorated operating environment.

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 Caixa Geral de Depósitos are as follows: Franchise Strength – Good; Earnings – Moderate; Risk Profile – Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – Good/Moderate.

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 CGD Presentation and Press Release Q1 2020 results, CGD 2016-2019 Annual 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 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/361726

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

Lead Analyst: Nicola De Caro - Senior Vice President - Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: February 23, 2011
Last Rating Date: June 3, 2019

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