DBRS Morningstar Revises Trend on Liberbank to Negative; BBB (low) LT Issuer Rating Confirmed

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Liberbank, S.A. (Liberbank or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The Trend has been revised to Negative from Stable. The Intrinsic Assessment (IA) for the Bank is BBB (low), while its Support Assessment remains 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 Negative reflects our view that the scale of economic disruption resulting from the coronavirus (COVID-19) pandemic is now greater than our expectation when Liberbank was previously reviewed. DBRS Morningstar expects pressure on the Bank’s risk profile, albeit partially mitigated by the Spanish government and the European authorities’ support measures in the short-term. Notably, Liberbank will face the COVID-19 economic downturn with a substantial level of legacy Non-Performing Assets (NPAs) from the previous crisis.

The confirmation of the ratings also reflects that Liberbank continues to benefit from a robust franchise in certain regional markets in Spain. Capital ratio cushions over regulatory requirements are currently satisfactory. The Bank is expected to have positive capital one-offs in coming quarters which will give it some flexibility to absorb some of the potential impact of the COVID-19 crisis. The ratings also consider Liberbank’s sound funding position, underpinned by the Bank’s stable customer deposit base.

RATING DRIVERS

Given the Negative Trend, an upgrade or positive rating pressure is unlikely in the short-term. The trend on the Long-Term ratings could revert to Stable if the Bank is able to limit the likely deterioration in asset quality while maintaining satisfactory capital levels. An upgrade would require the Bank to have a longer track record of consistently improving its profitability and risk profile.

The ratings could be downgraded if the Bank experiences a significant weakening in profitability, or capital position as a result of the stressed economic environment. A downgrade could also occur if asset quality experiences a material deterioration.
 

RATING RATIONALE

Liberbank is a Spanish regional bank largely focused on individuals. The Bank is the 12th largest banking group in Spain, as measured by total assets at end-March 2020 (EUR 43 billion). Liberbank enjoys regional market shares above 20% for loans and deposits in core areas such as Asturias, Cantabria Cáceres and Toledo. However, the Bank’s national market shares for loans are more modest at around 2% at end-2019. The pandemic has now led to a significant macro-economic deterioration in the regions where Liberbank operates.

DBRS Morningstar views the wide and growing scale of economic and market disruption resulting from COVID-19 as posing significant challenges for the Bank and expect it to put pressure on Liberbank’s profitability. In recent years, Liberbank's core revenues have been improving as net interest income and fees benefitted from new lending volumes and business activity. Nevertheless, the Bank’s profitability is still low. The Bank posted a Return on Average Equity (ROAE, as calculated by DBRS Morningstar) of 3.7% in 2019 and 2.5% in Q1 2020. Liberbank registered a net profit of EUR 19 million in Q1 2020, a 10% decline YoY. This included provisions related to COVID-19, amounting to EUR 16 million, following a readjustment of expected credit losses (ECL). In addition, the Bank also included EUR 7 million of provisions related to foreclosed assets. For 2020, the Bank expects a Cost of Risk (CoR) of around 50bps, up from 27 bps in 2019.

DBRS Morningstar considers Liberbank’s loan book may be less sensitive to economic shocks than other peers. This is reflected in Liberbank’s high exposure to retail mortgages and loans to public administrations which account for around 79% of its loan book at end-2019. Moreover, the Bank´s risk metrics on its mortgage book are solid. As of end-April, 2% of the Bank’s mortgage book has received moratoria applications. In addition, DBRS Morningstar sees as positive the guarantee loan scheme provided by the Spanish government to SMEs and Corporates, reducing credit risk related to this crisis. Liberbank was allocated EUR 719 million of guarantees in the first two out of five tranches of the scheme, which compares with an SME loan book in Spain of around EUR 4 billion at end-March 2020.

Nevertheless, DBRS Morningstar expects that, given the unprecedented economic shock, Liberbank’s asset quality will deteriorate in coming quarters. Moreover, Liberbank will face the COVID-19 economic downturn with a substantial level of legacy NPAs from the previous crisis. Liberbank's gross NPLs amounts to EUR 812 million (3.2% as percentage of total gross loans) at end-March 2020, below the Spanish system average of 4.8% at end-March 2020. However, foreclosed assets are still sizable, with a net exposure of around EUR 1.4 billion as of end-2019 (including investment properties exposures). As a result, the Bank´s NPA ratio is still high and above most domestic peers at 8.0 % at end-March 2020 (or 11.3% including investment properties exposures) and makes the Bank particularly vulnerable to real estate price changes. Although Liberbank has demonstrated its ability to reduce its stock of NPAs, which peaked at 30% in 2015, DBRS Morningstar sees the current economic environment as very challenging. DBRS Morningstar sees the evolution of the Bank´s NPA ratio as key for the rating, amid this challenging environment.

DBRS Morningstar considers Liberbank’s liquidity and funding as well placed to face this challenging environment. The Bank had EUR 5.8 billion of HQLA at end-March 2020 and additional capacity to issue EUR 5.1 billion of covered bonds. Its refinancing risk is manageable with wholesale funding maturities totaling around EUR 5 billion at end-March 2020, of which only EUR 400 million is maturing in 2020. The Bank has a sound funding profile with a Liquidity Coverage Ratio of 248% at end-March 2020 and it has a total capacity of EUR 4.5 billion for ECB funding in the new TLTRO-III scheme. As of end-March 2020, total ECB funding stood at EUR 5.7 billion, as in Q1 2020 the Bank switched part of its interbank funding to the ECB bridge lending facilities.

DBRS Morningstar considers that Liberbank´s capital ratios (fully-loaded CET1 ratio of 13.0%, and a fully-loaded Total Capital ratio of 14.5% at Q1 2020), could be negatively affected by the COVID-19 crisis. However, the Bank is expected to book positively offsetting items in coming quarters which will help absorb some of the potential impact, although the total size of some of these items is uncertain.

These include, the completion of corporate transactions which will add an additional 37bps to the Total Capital ratio during Q2 2020. In addition, in coming quarters Liberbank expects to complete the work to migrate its mortgage book to IRB models with a potentially significant impact on its CET1 ratio. As of end-March 2020 the capital cushion over their regulatory requirements stood at 275 bps and its CET1 (phased-in) ratio was 14.2%.

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 Liberbank, S.A. are as follows: Franchise Strength – Good/Moderate; Earnings Power– Moderate/Weak; Risk Profile – Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – 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 Liberbank - Annual Reports (2015-2019), Liberbank - Quarterly Reports (2015-1Q 2020), Liberbank - Presentations (2015-1Q 2020), European Banking Authority (EBA) Transparency Exercise 2019, 2018 EBA-wide stress test, 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/362088

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

Lead Analyst: Pablo Manzano, Vice President – Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: 11 March 2014
Last Rating Date: 15 April 2020

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