DBRS Morningstar Places Liberbank Under Review Positive; LT Issuer Rating at BBB (low)

DBRS Ratings GmbH (DBRS Morningstar) placed 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), Under Review with Positive Implications. The Intrinsic Assessment (IA) for the Bank is BBB (low), while the Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The rating action reflects the impending merger by absorption with Unicaja Banco, S.A. (Unicaja, unrated), which is expected to close in late Q2 2021 or early Q3 2021. The Review will focus on the impact the merger will have on Liberbank's franchise and credit fundamentals. The merger is set to create the 5th largest banking group in Spain with approximately EUR 110 billion in total assets, with a larger geographic footprint across Spain. DBRS Morningstar expects to conclude the review when the transaction closes.

Liberbank's BBB (low) Long-Term Issuer Rating reflects the Bank’s standalone franchise strength in certain regional markets in Spain where it has meaningful market shares for lending and deposits, its sound funding position which is underpinned by the stable customer deposit base, as well as satisfactory capital cushions over minimum regulatory requirements. The economic impact from the coronavirus (COVID-19) pandemic is likely to continue to negatively impact banks in Spain, and as a result DBRS Morningstar expects the Bank’s earnings to remain under pressure, and asset quality metrics to deteriorate in coming quarters as the moratoria and other government support measures are removed.

RATING DRIVERS

If the merger with Unicaja is completed then Liberbank's ratings are likely to be upgraded to reflect the positive impact of becoming part of a larger and stronger banking group.

If the merger does not go ahead as planned, the trend would likely revert back to Negative, reflecting the challenging environment in Spain as a result of the impact of the COVID-19 pandemic. The ratings would be downgraded if the merger does not go ahead and the Bank experiences a significant weakening in its capital position or in asset quality.

RATING RATIONALE

Liberbank S.A. is a Spanish regional bank largely focused on individuals. With total assets of EUR 47 billion at end-March 2021 the Group is the 12th largest banking group in Spain. The Group enjoys regional market shares above 20% for loans and deposits in core areas such as Cáceres, Toledo, Asturias and Cantabria, although the Group’s national market share for loans is more modest at around 2% at end-2020. The planned merger with Unicaja would result in the combined entity having a stronger franchise with larger national market shares.

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 was still weak at the beginning of the pandemic outbreak with the DBRS Morningstar calculated return on average equity (ROAE) being below 4% in both 2018 and 2019. Liberbank registered a net profit of EUR 41 million in FY 2020, a 63% decline YoY. This included a substantial increase in provisions amounting to EUR 162 million, following macroeconomic adjustments in credit models resulting from the COVID-19 pandemic. However, the bank’s core revenues did evidence some resiliency, with net interest income rising 10% YoY in FY 2020 and core net fees also increasing YoY. In Q1 2021, Liberbank reported significantly lower credit provisions but profitability remained weak with a ROAE of 2.8%. DBRS Morningstar expects the potential merger with Unicaja will be positive for profitability especially given the opportunity to significantly reduce the combined entity’s cost base.

DBRS Morningstar considers Liberbank's loan book may be less sensitive to economic shocks than some peers, given that retail mortgages and loans to public administrations account for around 70% of its loan book at end-2020. However, despite this, DBRS Morningstar expects that Liberbank's asset quality will deteriorate when government support measures end. The Bank entered the COVID-19 economic downturn with a substantial level of legacy non-performing assets (NPAs) from the previous crisis. Liberbank's gross non-performing loans (NPLs) totalled EUR 801 million (2.9% as a percentage of total gross loans) at end-March 2021, below the Spanish system average of 4.5% at end-February 2021. However, foreclosed assets are still sizeable, with a net exposure of around EUR 1.2 billion as of end-March 2021. As a result, the Bank´s NPA ratio is still high and above most domestic peers at 7.3% at end-March 2021 (as calculated by DBRS Morningstar). In addition as of end-2020 the Bank had granted EUR 1.8 billion of loans with state guarantees, which represents around 6.5% of the total loan book, and granted payment holidays amounting to around EUR 1 billion at end-2020 or around 3.7% of its total loan book.

DBRS Morningstar considers Liberbank's liquidity and funding as sound. Customer deposits (excluding repos and covered bonds) are the Bank’s largest funding source, representing around 62% of total funding at end-2020, and as of the same date the loan-to deposit ratio was around 101%. Liquidity is strong with the Bank reporting a Liquidity Coverage Ratio of 203% at end-March 2021. In addition the Bank had EUR 7.7 billion of unused liquid assets at end-March 2021 and additional capacity to issue EUR 5.7 billion of covered bonds.

DBRS Morningstar views Liberbank's capital position as satisfactory. The fully-loaded CET1 ratio was 14.4% at end-March and the Total Capital was 16.2%. As of end-March 2021 the Group has a sound cushion over the minimum capital requirements equivalent to 440 bps, and leverage is solid, with a reported fully-loaded leverage ratio of 5.6%. DBRS Morningstar considers that the merger will provide the combined entity with greater flexibility to absorb potential credit impairments and to implement restructuring plans, including some negative one-off capital impacts such as restructuring charges (around EUR 550 million), additional NPA provisions (around EUR 420 million), and Fair Value adjustments of Liberbank's balance sheet and break up costs of strategic agreements (around EUR 240 million).

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Liberbank, S.A. are as follows: Franchise Strength – Good/Moderate; Earnings Power– Moderate/Weak; Risk Profile – Moderate/Weak; 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 (8 June 2020). https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings .

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, Liberbank - Annual Reports (2015-2020), Liberbank - Quarterly Reports (2015-Q1 2021), Liberbank - Presentations (2015-Q1 2021), 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/379436.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

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: 5 June 2020

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