DBRS Morningstar Confirms Banco Montepio’s Long-Term Issuer Rating at B; Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Caixa Económica Montepio Geral, S.A. (Banco Montepio, or the Bank), including the Long-Term Issuer Rating of B, and the Short-Term Issuer Rating of R-4. The trend on the Issuer Ratings remains Negative. The Bank’s Intrinsic Assessment (IA) is maintained at B and the Support Assessment at SA3.

The Bank’s B (high) Long-Term Deposits rating is one notch above the IA, reflecting the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. The Bank’s Short-Term Deposits rating is R-4 with a Stable trend. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings takes into account the actions taken by the Bank under the new CEO to strengthen its balance sheet as well as restore its profitability over the medium term. However, the ratings and the Negative trend continue to reflect the Bank’s weak profitability, vulnerable capital buffers and the still large stock of non-performing loans (NPLs). In addition, the impact on the economic environment driven by the COVID-19 pandemic poses further risks for the Bank’s balance sheet and restructuring process.

RATING DRIVERS

Given the Negative trend, an upgrade of the ratings is unlikely, although the trend could change to Stable if the Bank strengthens its capital buffers. An upgrade would also require a significant improvement in profitability and asset quality.

A downgrade would occur if the capital position was to weaken further, or if asset quality were to deteriorate. A weakening of the Bank’s franchise could also contribute to downward rating pressure.

RATING RATIONALE

Banco Montepio is a small Portuguese retail and commercial bank with total assets of around EUR 20 billion at end-Q1 2021 and is majority owned by the Montepio Geral Associação Mutualista (MGAM). The Bank is currently implementing a restructuring plan aiming at strengthening its balance sheet and franchise, as well as restoring profitability in the medium term. Under the new CEO, who was appointed in January 2020, the Bank is accelerating the process of digital transformation and corporate simplification. Over the past year, Banco Montepio has closed 39 branches, corresponding to around 10% of the total network. The Bank is also implementing measures to strengthen its capital buffers, as well as reduce NPLs, and other non-core assets. On June 30th, 2021, the bank announced the sale of its shareholding in Almina Holdings, S.A..

DBRS Morningstar views Banco Montepio’s capital base as remaining under pressure, and notes that the Bank is currently using the temporary capital relief allowed by the ECB and the national authorities in response to the COVID-19 pandemic. At end-Q1 2021, the Bank reported phased-in CET1 and total capital ratios of 11.3% and 13.4% respectively. Positively, in H2 2020 the Bank was able to issue EUR 50 million in Tier 2 bonds, which were placed with the Bank’s main shareholder, as well as reduce RWAs, however these factors only partially offset the negative operating result and the capital deductions related to DTAs and the phase-in of IFRS-9.

In FY 2020 Banco Montepio posted a net loss of EUR 81 million, mainly due to lower core income and trading income, as well as higher impairments in anticipation of future asset quality deterioration due to the COVID-19 pandemic. There was also an increase in operating costs due to restructuring charges linked to the reduction of the Bank’s operational structure. Pressure on profitably will likely remain in 2021 given the challenging operating environment and the restructuring challenges the Bank continues to face. For Q1 2021, Banco Montepio reported a net loss of EUR 16 million.

Banco Montepio’s gross NPE ratio fell to 10.4% at YE 2020 from 12.3% in FY 2019, however this increased slightly to 10.7% in Q1 2021 mainly as a result of the implementation of the EBA new default definition. This level continues to compare unfavourably with domestic and international peers. In our view, the capital challenges the Bank faces, as well as the weak profitability, are key constraints for the Bank’s ability to reduce NPLs.

Further asset quality challenges will likely emerge from the ongoing economic disruption from COVID-19, especially in sectors which have been hit hard, such as tourism and hospitality. In DBRS Morningstar’s view, new NPL inflows will likely pick-up after the end of the moratoria period in September 2021. At Q1 2021, around 24% of Banco Montepio’s gross loan book was under moratoria.

In terms of funding, in Q1 2021 Banco Montepio increased its exposure to the ECB through the TLTRO III funding program, while the stock of deposits remained largely stable YoY. Access to unsecured wholesale market remains more challenging and costly compared to peers. The liquidity portfolio is mainly composed by sovereign bonds and retained notes from covered bonds and RMBS.

ESG CONSIDERATIONS

Corporate Governance is a significant rating factor for the Bank. This is included in the Governance category. Over recent years, the Bank has experienced high management turnover and reputational issues and these are reflected in the franchise and risk building blocks. Banco Montepio was also subject to several administrative proceedings and fines by the supervisory authorities in relation to alleged past failures in controls. Over the past year, however, the bank has made some progress in resolving some of these proceedings.

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 Caixa Económica Montepio Geral, S.A. are as follows: Franchise Strength – Moderate/Weak; Earnings – Weak/Very Weak; Risk Profile – Weak; Funding & Liquidity – Moderate/Weak; Capitalisation – Very Weak.

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 Caixa Económica Montepio Geral, S.A. Press Release Q1 2021 Results, Caixa Económica Montepio Geral, S.A. 2016-2020 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. 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/381136

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

Lead Analyst: Nicola De Caro, Senior Vice President – Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: June 27, 2011
Last Rating Date: June 30, 2020

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