DBRS Morningstar Confirms CaixaBank’s Issuer Ratings at “A” / R-1 (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of CaixaBank S.A. (CaixaBank or the Bank), including the Long-Term Issuer Rating of “A” and the Short-Term Issuer Rating of R-1 (low). All ratings have a Stable Trend. The Bank’s Intrinsic Assessment (IA) remains at “A” and the Support Assessment at SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of CaixaBank’s ratings reflects its leading banking franchise in Iberia, which has been further strengthened following the completion of the merger with Bankia. DBRS Morningstar considers that in 2021, CaixaBank has completed the integration of Bankia in a satisfactory fashion and in a notably short period of time. The confirmation also considers DBRS Morningstar’s view that the financial disruption on CaixaBank resulting from COVID-19 has been lower than anticipated. However, new risks have materialised following the Russian invasion of Ukraine. DBRS Morningstar does not expect the current conflict to have any immediate impact for CaixaBank given the Bank does not have material exposures to Russia and Ukraine. Nevertheless, the indirect macroeconomic implications are likely to negatively affect the operating environment of CaixaBank.

The confirmation of CaixaBank’s ratings at “A” reflects its still modest profitability, which is being affected by the low interest rate environment. However, DBRS Morningstar sees the merger with Bankia as positive for CaixaBank’s earnings power as it will lead to cost savings synergies. Whilst CaixaBank’s asset quality has remained sound throughout the pandemic, vulnerabilities still exist in some loan portfolios, mainly those linked to state guarantees. Nevertheless, given the guarantees provided by the Kingdom of Spain, we expect this will likely translate into only a modest deterioration of CaixaBank’s asset quality. Furthermore, the Bank’s funding and liquidity profile has strengthened after the merger with Bankia. The rating action also takes into account CaixaBank’s capital position. The Bank plans on implementing a share buy-back programme during 2022 in order to bring current capital ratios closer to capital targets. DBRS Morningstar expects that the Bank will restore its capital ratios closer to pre-pandemic levels, which we considered as sound.

RATING DRIVERS
An upgrade to the long-term ratings of CaixaBank would require an upgrade in the Spanish sovereign rating coupled with an improvement in the Bank’s core profitability and asset quality profile.

A downgrade of CaixaBank’s long-term ratings could arise from a deterioration in Spain’s sovereign rating. A material deterioration in the Bank´s asset quality would also be negative for the rating.

RATING RATIONALE

Franchise Combined Building Block Assessment: Strong/Good

CaixaBank provides universal banking services to individuals, small and medium-sized enterprises and large corporations in Spain and Portugal. In 2021 the Bank completed its merger with Bankia SA, at the time the fifth largest Spanish banking group by total assets. The merger consolidated the market leadership of CaixaBank in Spain with a market share in gross loans of around 24.4% (as rerported by CaixaBank at end-2021). DBRS Morningstar considers that during 2021, CaixaBank has completed the integration of Bankia in a satisfactory fashion and in a notably short period of time, given the significant challenges of what it has been the largest integration in Spanish banking history to date. During this period, CaixaBank´s loan book deleveraged (down 4.9% in 2021 on a like to like basis). However, DBRS Morningstar expects CaixaBank´s loan book evolution to be more positive in 2022. In Portugal, CaixaBank owns the fifth largest bank by total assets, Banco BPI.

Earnings Combined Building Block Assessment: Good/Moderate

Following the consolidation of Bankia and CaixaBank into one entity, in 2021 the issuer reported a net attributable profit of EUR 5.2 billion. The Bank’s 2021 results were affected by accounting impacts related to the merger with Bankia. In particular, the badwill (the difference between Bankia´s equity at fair value and the acquisition price) had a positive impact on CaixaBank´s revenues of EUR 4.3 billion while restructuring costs related to the merger amounted to around EUR 1.9 billion. When stripping out the one-off impacts of the merger, net attributable profit went up to EUR 2.9 billion in 2021, from EUR 1.6 billion on a like-for-like basis in 2020, driven mainly by lower Loan Loss Provisions (LLPs) which are now closer to pre-COVID levels. CaixaBank´s core income (as calculated by DBRS Morningstar; NII and Net Fees) in 2021 decreased by 1.4% YoY on a like-for-like basis, as higher net fees did not offset the reduction in net Interest Income (NII) of 5.8% YoY. NII decreased due to a lower average loan yield coupled with a reduction in the loan book (down by 4.9% YoY on a like-for-like basis). As of end-2021, excluding the one-off impacts of the merger, CaixaBank reported a modest Return of Equity (RoE) of 6.4%. We expect profitability will improve in 2022 despite negative pressure on the NII.

Risk Combined Building Block Assessment: Good/Moderate

Despite the COVID-19 outbreak, CaixaBank’s asset quality profile has remained sound. The financial disruption on CaixaBank resulting from COVID-19 has been lower than anticipated. DBRS Morningstar considers that the state guaranteed loans and loan moratoria limited past-due situations, and prevented the deterioration of traditional asset quality metrics. CaixaBank has extensively used both measures. As of end-2021, most of CaixaBank’s loans under moratoria had expired and the performance of the loans under moratoria has been better than expected. As a result, we see now the State Guaranteed Loans as the main source of risk deterioration during 2022, and they amounted to EUR 21.7 billion or 6.1% of the Bank’s total gross loans at end-2021. We consider that despite an expected deterioration in this book, given the guarantees provided by the Kingdom of Spain (which covers up to 80% of the credit losses), will likely translate into only a modest deterioration of CaixaBank’s asset quality profile.

The Bank´s non-performing loan (NPL) ratio was 3.7% at end-2021 (as calculated by DBRS Morningstar), down from a pro-forma 3.9% at end-2020 and below the overall Spanish domestic banking system (4.2% at end-2021). Total Non-Performing assets (NPA, which includes NPLs and foreclosed assets FAs) ratio was 5.2%, also down YoY (as calculated by DBRS Morningstar). DBRS Morningstar also sees as positive that CaixaBank has recently decreased its exposure to equity stakes, as it reduces CaixaBank´s market risk as well as its earnings and capital volatility. The latest transaction was the sale of its stake in Erste Group Bank AG (EUR 1.2 billion of book value at end-2020) in 2021. The sale had an positive impact on P&L of EUR 54 million and a positive impact on the CET1 ratio of 16 bps.

Funding and Liquidity Combined Building Block Assessment: Strong/Good

CaixaBank’s funding is underpinned by its leading franchise in Spain where the Bank has maintained strong market shares for deposits (around 25.3% at end-2021). The Bank’s funding and liquidity ratios remain strong. DBRS Morningstar notes that the Bank’s customer deposits grew by 11% YoY in 2020 and 8.7% YoY in 2021 (on a like for like basis). At end-2021, the Bank reported a total of EUR 80.4 billion in central bank funding. However, DBRS Morningstar notes that the new ECB funding is used mostly to benefit from its positive impact on profitability due to the low funding costs, and the Bank is well prepared to repay this funding as it has more than EUR 104 billion in cash and balances at central banks.

Capitalisation Combined Building Block Assessment: Good/Moderate

CaixaBank´s capital ratios during the pandemic increased mainly as a result of the ECB recommendation to limit dividends, regulatory measures and lower risk-weighted assets (RWAs), as well as other impacts. Despite this improvement, it is expected that CaixaBank´s capital ratios will go down in coming quarters. In particular, the Bank has an intention, subject to the appropriate regulatory approval, to implement a share buy-back program during the 2022, in order to bring current capital ratios closer to capital targets. CaixaBank´s current CET1 capital ratio target range is 11.0% to 11.5%. DBRS Morningstar considers that the Bank will restore its capital ratios closer to pre-pandemic levels, which we considered to be sound.

The Bank reported a regulatory CET1 ratio of 13.2% and a Total capital ratio of 17.9% at end-2021. At end-2021 CaixaBank’s capital ratios includes 32 bps of additional capital due to the transitional impact of IFRS9. Following the integration, capital requirements have changed, with the Pillar 2 requirement increasing from 1.50% to 1.65%, whilst the domestic systemic risk buffer was set at 0.375% in 2022 and 0.5% in 2023. This new capital requirements implies a capital cushion of around 500 basis points at end-2021. We also view as positive that at end-2021, CaixaBank is compliant with both its MREL requirements for January 2022 and January 2024, which were set in February 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/394550

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.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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

The sources of information used for this rating include Morningstar Inc. and Company Documents, Annual Reports (2015-2021), Quarterly Reports (2015-2021), Presentations (2015-2021), European Banking Authority (EBA), and Bank of Spain. 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/394553

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: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: March 4, 2013
Last Rating Date: March 29, 2021

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