DBRS Morningstar Revises Trend on Abanca to Stable, Confirms BBB Long-Term Issuer Rating

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Abanca Corporación Bancaria S.A. (Abanca or the Bank) including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The trend on all ratings has been revised to Stable, from Negative. DBRS Morningstar has also maintained the Intrinsic Assessment at BBB and the 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 Abanca should successfully cope with the economic disruption caused by the COVID-19 pandemic. As a result of the significant reduction in Non-Performing Assets (NPAs) in recent years, and high coverage ratio, DBRS Morningstar views Abanca as being well placed to face any potential asset quality deterioration driven by the end of the support provided by the moratoria schemes. The change in trend also considers the Bank’s resilient earnings generation, albeit supported by recent business acquisitions, as well DBRS Morningstar’s expectation of a significantly lower cost of risk in 2021, as 2020 profitability was negatively impacted by high loan loss provisions related to the revision of the macroeconomic scenario for COVID-19.

The ratings continue to reflect the Bank’s leading regional franchise in its home market of Galicia, which has been reinforced by the growing presence in Spain and Portugal through a series of acquisitions, and its sound capital position, with ample cushions over regulatory requirements. The ratings also incorporate the stable funding and liquidity profile, supported by its large and resilient customer deposit base and ample liquidity portfolio.

RATING DRIVERS

An upgrade of the Long-Term ratings would occur should the Bank demonstrate a good track record of improving recurrent core profitability whilst maintaining its current its risk profile and ample capital cushions.

The Long-Term ratings would be downgraded if the Bank were to experience a material decline in its capital position, asset quality profile or profitability.

RATING RATIONALE

Abanca’s ratings continue to be underpinned by its well-established regional franchise in Galicia, where the Bank maintains leading market shares for loans and deposits. In addition, DBRS Morningstar notes that Abanca has grown its presence in Spain, through a series of targeted acquisitions including Banco Caixa Geral, S.A.’s and Novo Banco, S.A.’s Spanish businesses as well as Bankoa, making it now the sixth largest Spanish banking group by total assets. In addition, the Bank now has a presence in neighbouring Portugal following the 2018 acquisition of Deutsche Bank’s retail business in the country. Abanca is largely owned by one shareholder, Mr. Escotet Rodríguez, who has the direct controlling stake of 84.75 % of the capital and who is also the current non-executive chairman. DBRS Morningstar views, that as a result, the independence of the Bank’s board is more limited than peers with a wider ownership, albeit the board is composed of 7 independent directors out of 10.

Abanca’s profitability deteriorated in 2020, largely impacted by the high cost of risk stemming from the increased provisioning required due to COVID-19, as well as the impact of the low interest rate environment on revenues. Nonetheless, DBRS Morningstar notes that the Bank’s profitability improved in the years preceding the pandemic, supported by good commercial growth, increased revenue diversification, and cost synergies, partly driven by the recent acquisitions. Abanca reported net attributable income of EUR 137.4 million in Q1 2021, up 8.2% year-on-year (YoY). This was mainly driven by lower provisions, cost reductions and core revenue growth as well as the integration of Bankoa in Q1 2021. DBRS Morningstar expects 2021 profitability to return to levels more similar to those seen pre-COVID-19, in particular due to the expected lower cost of risk. However, as with other Spanish banks, Abanca will continue to face challenges stemming from the low interest rate environment and the expected asset quality deterioration as a result of the COVID-19 crisis.

DBRS Morningstar notes the continued improvement of Abanca’s asset quality in recent years, largely through the reduction of non-performing loans (NPLs). The Bank’s asset quality metrics have now reached levels that compare well to domestic peers. This provides a sound starting point to face the likely increase of NPLs as government and banking support measures are withdrawn. The NPA ratio reduced to 3.5% at end-Q1 2021, compared to 3.7% at end-2020 and 4.7% at end-2019. Total NPLs totalled EUR 844 million at end-March 2021, stable since end-2020 but down from EUR 1.0 billion at end-2019. At end-March 2021 the NPL ratio (as calculated by DBRS Morningstar) was 1.9%. In addition, we consider Abanca has sound coverage ratios for the NPAs (73.7% at end-March 2021, comprising 83.4% for NPLs and 61.9% for foreclosed assets at end-March 2021).

Abanca’s funding and liquidity position is supported by its large and resilient customer deposit base, which has increased as a result of the acquisitions, and it has an ample pool of unused liquid assets. Abanca had a sound net loan-to-deposit ratio (LTD) excluding repos and covered bonds included in deposits, as calculated by DBRS Morningstar, of 95.7% at end-Q1 2021 compared to 91.7% at end-2020. Abanca also has sound liquidity and funding ratios, with the Liquidity Coverage Ratio (LCR) at 259% and the Net Stable Funding Ratio (NSFR) at 129%, at end-March 2021.

Despite the capital consumption resulting from the Bank's recent acquisitions, DBRS Morningstar views Abanca’s capitalisation as sound, supported by its capacity to generate capital through retained earnings and a risk profile that has improved in recent years. In addition, whilst capital ratios were only supported by retained earnings in the past, Abanca has diversified its capital base with the recent issuance of AT1 and Tier 2 instruments. At end-March 2021, Abanca reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 12.8%, slightly down from end-2020. This continued to provide the Bank with a comfortable buffer of around 534 bps over the Overall Capital Requirement (OCR) for CET1 ratio of 7.98% according to the Supervisory Review and Evaluation Process (SREP). In addition, Abanca maintained a 510 bps buffer over the 12.25% minimum Overall Capital Requirement (OCR) for total capital. DBRS Morningstar also considers that Abanca is well positioned to reach its MREL requirement of 14.77% of Total Risk Exposure Amounts (TREA) and of 5.25% of Leverage Risk Exposures (LRE) by January 1st, 2022.

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 Abanca Corporación Bancaria S.A. are as follows: Franchise Strength – Good/Moderate; Earnings – Good/Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good; 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 (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, Abanca 2020 and Q1 2021 Annual Accounts, Abanca 2020 and Q1 2021 Reports, Abanca 2020 and Q1 2021 Press Releases, Abanca 2020 and Q1 2021 Presentations 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/380371.

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

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: December 10, 2014
Last Rating Date: July 8, 2020

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