DBRS Morningstar Confirms Institut Català de Finances’s Long-Term Issuer Rating at BBB (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the credit ratings of Institut Català de Finances (ICF or the Entity), a public regional development bank entirely owned by the Autonomous Community of Catalonia (Catalonia). The credit ratings include a BBB (low) Long-Term Issuer Rating and an R-2 (low) Short-Term Issuer Rating. The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS

ICF has a support assessment of SA1, which implies the expectation of predictable support from its shareholder, the Autonomous Community of Catalonia, which provides an explicit, irrevocable, unconditional, and direct guarantee of ICF. ICF plays a critical role in Catalonia because it is tightly integrated with the regional government’s public mission of promoting regional development, channeling public credit and fostering the economic and social development of the Region.

DBRS Morningstar rates the Autonomous Community of Catalonia’s Long-Term Issuer Ratings at BBB (low) with a Stable Trend and ICF’s ratings are positioned at the same level as the sub-sovereign credit rating of the Autonomous Community of Catalonia in line with the guarantee. The credit ratings incorporate the expectation of a very strong likelihood of support, as any difficulties at ICF would fall within the responsibility of the Regional government and also have a direct reputational impact on Catalonia.

CREDIT RATING DRIVERS

The credit ratings move in line with the ratings of the Autonomous Community of Catalonia. An upgrade of the Autonomous Community of Catalonia would result in an upgrade for ICF.

Similarly, a downgrade of the Autonomous Community of Catalonia would result in a negative credit rating action for ICF.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment

ICF is a Spanish regional public development bank, based in Catalonia. The Entity’s aim is to provide an alternative to traditional bank funding and provide complementary funding to Catalan companies. At end-2022, the entity had total assets of EUR 2.6 billion. The Entity’s main activities are to finance investments and provide guarantees to facilitate access to credit for SMEs and entrepreneurs. At end-2022, the entity served a total of 4,367 private companies and 101 public sector entities.

Earnings Combined Building Block Assessment
DBRS Morningstar views ICF´s earnings power as constrained, reflecting a combination of low margins, due to its non-profit maximising business model, and the high levels of loan loss provisions stemming from the entity’s prudent provisioning policy. These are partly mitigated by the relatively low cost base. In 2022, ICF reported net income of EUR 27.4 million, down from a high base in 2021 at EUR 35.4 million due to higher activity related to COVID-19. Results were driven by higher provisions and operating expense growth despite higher revenues. We expect revenues to be sustained going forward given the high sensitivity of ICF’s net interest income to interest rates hikes. Although NII should be peaking in Q3 and Q4 2023, revenues should be up from 2022.

Risk Combined Building Block Assessment
ICF’s asset quality continues to be affected by its large, albeit declining, stock of NPLs since ICF's strategy remains to work out loans on a case-by-case basis, rather than pursue the disposal of NPLs. The non-performing loans (NPL) ratio stood at 7.5% at end-2022 compared to 8.2% at end-2021, weaker than Spanish peers and European standards. However, only 48% of the loans the Entity classified as NPLs was doubtful at end-2022 as per ICF prudent classification policy. The NPL ratio representing defaults having already materialised was 3.9% at end-2022. DBRS Morningstar notes that the NPL coverage ratio of the Entity was sound at 139.2% at end-2022.

Funding and Liquidity Combined Building Block Assessment
The Entity’s main funding sources at end-2022 consisted of funding from public banks such as the European Investment Bank (EIB) and Instituto de Credito Oficial (ICO) at 79%, from private banks (12%), issuances (3%) and the Entity’s Pagares (Promissory Notes) Programme (6%). DBRS Morningstar notes that ICF has not experienced any notable difficulties in tapping the markets. ICF had high-quality liquid assets of EUR 310 million at end-2022 and reported a Liquidity Coverage Ratio (LCR) of 378%, well exceeding the 100% regulatory minimum. In addition, the NSFR ratio was also above regulatory requirements at 128% at end-2022.

Capitalisation Combined Building Block Assessment
DBRS Morningstar views ICF’s capitalisation as satisfactory, despite a relatively low nominal capital base, and the regulatory capital ratios are high given the low risk-weighting of its loan book. At end-2022, the Entity reported a CET1 ratio of 38.6% and Total Capital Ratio of 39.4%, down from 41.7% and 42.5% respectively in 2021. This was mostly driven by an increase in risk-weighted assets (RWAs). The capital buffer is well above regulatory requirements. The Entity’s leverage ratio was 37.1% at end-2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
The Passed-through Social credit considerations have a relevant effect on the credit ratings, as the social factors affecting Catalonia’s credit ratings are passed-through to ICF.

There were no Environmental 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 following methodologies have also been applied
• DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023) -
https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support

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, ICF 2022 Annual Report, ICF 2022 Pillar III Report, ICF 2022 Corporate Governance Annual Report and ICF 2022 Prudential Relevance Report 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/424778/.

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

Lead Analyst: : Arnaud Journois, Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices
Initial Rating Date: December 2, 2022
Last Rating Date: December 2, 2022

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