DBRS Morningstar Confirms Banco Cooperativo’s Long-Term Issuer Rating at BBB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco Cooperativo Español S.A (BCE or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on all ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is BBB (high), while its Support Assessment remains SA1. A full list of rating actions is included at the end of this press release. The support Assessment is SA1 to reflect that BCE is part of the larger consolidated entity, GrucajRural Inversiones S.L. (the Group). A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflect the Bank’s low risk profile, its stable profitability, which allows it to build up capital through retained earnings. The rating action also considers the Bank´s beneficial relationship with the Asociación Española de Cajas Rurales (AECR) members, who provide a stable deposit base. The ratings also take into account the Bank’s relatively small size and scope, its moderate business diversification and its sizeable risk concentration in Spanish government bonds. However, DBRS Morningstar views the interest rate risk management policies of the Bank as solid, as demonstrated during the current interest rate cycle. Despite the significant increase in interest rates, its fixed income portfolio has unrealised gains.

Nevertheless, risks are looming and DBRS Morningstar expects that AECR’s members will experience asset quality deterioration in coming quarters, similar to other Spanish peers, due to tighter financial conditions and a weaker macroeconomic environment. However, DBRS Morningstar also expects that the Bank´s profitability will remain stable in coming quarters, whilst the AECR´s profitability will still be solid as high interest margins will absorb potential credit losses.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require the strengthening of the AECR’s franchise over the long-term coupled with BCE maintaining sound credit fundamentals and capital ratios.

A downgrade of the Long-Term Issuer Rating would arise from a prolonged deterioration in the earnings or material asset quality weakening of the members of the AECR. Any material increase in the BCE’s risk profile would also be viewed negatively.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Moderate
BCE acts as the central treasurer and liquidity provider for the members of the AECR, the largest cooperative Group in Spain by asset size, which at end-June 2023 had a market share in Spain of around 4% of loans and around 4.4% of deposits. BCE, AECR and the Holding Company “GrucajRural Inversiones S.L." are part of an IPS, whereas the Holding Company, which includes Banco Cooperativo SA and Grupo Seguros RGA, is the entity at the highest level of prudential consolidation. BCE’s assets account for approximately 80% of the consolidated balance sheet at end-2022. The structure of the IPS does not create a consolidated banking group, as the IPS members remain autonomous institutions. The members have created an ex-ante fund to provide support in the event of a member institution facing severe financial difficulties. The size of this fund is around EUR 375 million or 1% of the AECR’s combined Risk Weighted Assets as of end-June 2023.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar considers that the Bank’s core profitability has been resilient and stable in recent years, including through the current interest rate cycle and the COVID-19 crisis. However, DBRS Morningstar notes that BCE has limited revenue diversification, as most of its revenues arise from its fixed income portfolio and its small loan book. BCE aims to achieve positive earnings that provide stable performance and generate capital through retained earnings. In H1 2023, the Group reported an increase in net attributable income to EUR 52 million, up 37% Year-on-Year (YoY). Notably, when assessing the performance of the Bank on a standalone basis (i.e. excluding the insurance arm), the entity posted stable results in recent years on the back of stable net interest margins, despite the current interest rate cycle. This reflects a sound management of its fixed income portfolio.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers BCE to have a generally low risk profile, driven by its low-risk business mix and specialised franchise. At end-2022, the consolidated Group had a material exposure to financial securities (52% of total assets), mainly comprising of Sovereign bonds, as part of its intermediary role for the members of the AECR, and its fixed income portfolio related to its insurance business. At end-June 2023, the Bank´s bond exposures (excluding the insurance portfolio) totaled EUR 6 billion, largely related to Sovereign bonds. Despite the size of its fixed income portfolio, we acknowledge the solid interest rate risk management of the portfolio as demonstrated during the current interest rate cycle, given that lack of unrealised losses in the Bank’s fixed income portfolio. Given its limited exposure to lending, the Bank’s non-performing loans (NPLs) are non-material.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
BCE’s funding and liquidity position is underpinned by a large and stable deposit base from credit institutions, which represents the bulk of the funding resources. A large part of these deposits are from the members of the AECR, who deposit their excess liquidity at BCE in the form of bank deposits. At end-2022, the consolidated Group had a solid liquidity position with strong LCR and NSFR ratios of 197% and 192% respectively. DBRS Morningstar considers BCE’s liquidity position as solid, although, given the nature of the Bank’s business model, diversification of funding sources is limited.

Capitalisation Combined Building Block (BB) Assessment: Good
DBRS Morningstar views BCE as having robust regulatory capital ratios given its low risk profile. Moreover, BCE’s consistent profits have supported the organic build-up of capital in recent years. The Group’s consolidated phased-in Common Equity Tier 1 (CET1) ratio was 44.8% at end-2022. This compares to a minimum Overall Capital Requirement (OCR) for total capital of 11.66% in 2023 according to the Supervisory Review and Evaluation Process (SREP). The Group’s leverage ratio stood at a strong 10% at end-2022. DBRS Morningstar considers that the capital ratios of the individual Bank are also solid, with a CET1 ratio of 34% at end-2022 and a leverage ratio of 6.6%. Lastly, DBRS Morningstar also notes that the Group and the individual Bank meet their MREL requirements as of June 2023. DBRS Morningstar views BCE’s membership within the IPS positively as it provides potential support from the ex-ante fund should BCE face severe financial difficulties.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/422147.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) - https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:

All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this rating include Morningstar Inc. and Company Documents, and BCES Annual Accounts (2015 – 2022). 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/422149.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices
Initial Rating Date: April 16, 2018
Last Rating Date: October 16, 2023

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