DBRS Morningstar Upgrades BCP’s Long-Term Issuer Rating to BBB, Trend Stable

DBRS Ratings GmbH (DBRS Morningstar) upgraded the credit ratings of Banco Comercial Português, S.A. (BCP or the Bank), including the Long-Term Issuer Rating to BBB from BBB (low) and the Short-Term Issuer Rating to R-2 (high) from R-2 (middle). The Bank’s Deposit ratings were upgraded to BBB (high)/R-1 (low), one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. The trend on the credit ratings is Stable. At the same time, the SA3 Support Assessment are unchanged. See a full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The rating upgrade reflects BCP’s higher profitability, and the strengthening of its capital buffers while maintaining adequate asset quality. In 9M 2023, the Bank’s profitability has benefitted from rising interest rates given its high exposure to floating rate loans, and this has supported the improvement in the capital ratios. Concurrently, the Bank’s asset quality remained resilient in a more challenging operating environment with higher interest rates. The Stable trend reflects our expectations that the Bank will maintain adequate profitability levels and solid capital buffers. The stable trend also takes into consideration the Bank’s adequate funding structure coupled with solid liquidity buffers.

Nonetheless, the credit ratings continued to reflect the challenges that the Bank is currently facing with its legal and financial risks arising from its legacy exposure to CHF-denominated mortgages in its Polish subsidiary. We expect the provisions for CHF loans to remain elevated in the near-to-medium term given the recent legal developments.

CREDIT RATING DRIVERS

A rating upgrade would require sustained improvements in profitability and asset quality in Portugal combined with an improvement in the contribution from the International activities, notably Poland, while maintaining an adequate capital position.

A downgrade would likely be driven by a significant deterioration in the Bank’s risk profile and/or profitability that could result in lower capital buffers.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate

With total assets of EUR 91 billion, BCP is a leading banking group in Portugal where it maintains solid market shares in both loans and deposits. Outside Portugal, the Bank has a significant presence in Poland, and to lesser extent in Mozambique and Angola. Total international activities accounted for around 32% of the Group’s consolidated assets at end-Q3 2023 Bank Millennium Poland has had a positive diversification effect for the Group, particularly during the previous crisis when the performance of the Portuguese operations was burdened with high levels of problem loans. While Bank Millennium’s gross profit has benefitted from the higher interest rate environment in 2023, its performance has been affected by high provisioning costs on CHF mortgage loans and the mortgage holiday for households in Poland.

Earnings Combined Building Block (BB) Assessment: Good/Moderate

The Bank’s profitability has improved in 9M 2023 mainly due to higher interest earnings amid resilient asset quality and good cost management, which has more than offset high impairments linked to CHF mortgages in Poland. In 9M 2023, BCP’s net profit increased to EUR 650.7 million, from EUR 89.8 million a year earlier. This increase was mainly driven by the positive evolution in net interest income in Portugal and across the international operations, up by around 64% and 17% YoY, respectively. This largely reflects the high interest rate environment amid the Bank’s large exposure to assets at floating rates. The Bank’s results for 9M 2023 also incorporated a one-off effect of EUR 127 million from the sale of 80% of the shares in Millennium Financial Services in Poland. Despite inflationary pressures, BCP reported a low Cost/Income ratio of 32% in 9M 2023, down from 38% a year earlier.

Total impairments and provisions (including legal risk, and goodwill) grew to EUR 814 million in 9M 2023 from EUR 774 million in 9M 2022 mainly due to higher impairments on the CHF mortgage portfolio in Poland, which more than offset lower loan provisions in Portugal. Elevated provisions on the CHF mortgages in Poland will likely persist in the near-term, which might continue to be a drag for the Group’s earnings. However, in our view, the Group will continue to benefit from the high interest rate environment in 2024.

Risk Combined Building Block (BB) Assessment: Good/Moderate

In DBRS Morningstar’s view, the Bank has improved its asset quality with gross NPLs declining gradually, despite the increased pressures arising from high inflation and tight monetary conditions. In 9M 2023 BCP continued to reduce its legacy NPE stock through a mix of write-offs and sales, with the total stock of gross NPEs down 16% YoY to EUR 2.0 billion (of which EUR 1.3 billion were in Portugal). At end-September 2023, the Bank’s consolidated gross NPE ratio was 3.6%, down from 4.1% a year earlier (3.8% at FY 2022). In Portugal the Bank’s NPE ratio was at 3.0% in Q3 2023. The NPE ratio for the International operations slightly decreased to 4.8% from 5.0%.

The NPE specific coverage ratio was 77% at Q3 2023, up from 67% in Q3 2022. Around 85% of the Group’s loan book was collateralised at end-September 2023.

In Poland, the Bank continues to face issues related to the legacy exposure to mortgages denominated in CHF at its subsidiary, Bank Millennium. This portfolio totalled EUR 2.0 billion as of Q3 2023, accounting for 4.6% of total loans. We expect the amount of litigation and provisions to remain elevated in the near to medium-term also in light of the recent European Court of Justice rulings, which created a basis for more favourable terms for CHF borrowers. At end-September 2023, the cumulative provisions for CHF loans reached EUR 1.5 billion, accounting for around 73% of the gross CHF mortgage book.

Funding and Liquidity Combined Building Block (BB) Assessment: Good

The Group funding and liquidity position remain adequate despite the increase in competition from non-banking saving products in the current rising interest rate environment, and the repayment of the ECB TLTRO. Nonetheless, we expect an increase in funding costs, including deposits. The Bank is largely funded by deposits from retail, SME and Corporate clients, which together accounted for around 82% of the Group’s total funding at Q3 2023. Customer deposits slightly decreased (by 0.5%) in 9M 2023 mainly due to the increase in competition from non-banking products, while the Loan to Deposit (LTD) ratio was reported by the Bank at 73%.

The Group’s liquidity position is underpinned by a sizable stock of eligible assets. The Bank had around EUR 24.4 billion of ECB eligible assets at Q3 2023, net of haircuts, corresponding to around 48% of the total deposit base in Portugal. At end-September 2023, the liquidity coverage ratio (LCR) was high, at 244%, while the net stable funding ratio (NSFR) stood at 160%.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

BCP reported a fully-loaded CET1 ratio of 14.9% in Q3 2023, up from 11.4% in Q3 2022, and a total capital ratio of 19.4%, up from 15.1%. The significant increase in the capital ratios was mainly driven by higher internal capital generation. The capital ratios required for the Bank under the ECB Supervisory Review and Evaluation Process (SREP) for 2023 includes a CET1 ratio of 9.41%, and a total capital ratio of 14.00%, including a Pillar 2 requirement of 2.5%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/425438.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
DBRS Morningstar considers the Social factor to be relevant to the credit ratings assigned to BCP. The Bank is currently undergoing litigation in Poland for potential abuses of CHF mortgage loans. As a result, the “Product Governance”, an ESG subfactor, is negatively taken into account under the Risk Profile grid grade.

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 EUR 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 and the 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 credit rating include Morningstar Inc. and Company Documents, BCP Presentation and Press Release Q3 2023 results and BCP Annual Reports. 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 credit 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://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/425439.

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

Lead Analyst: Nicola De Caro, Senior Vice President, Credit Ratings - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Credit Ratings - Global Head of Financial Institutions
Initial Rating Date: August 5, 2014
Last Rating Date: May 23, 2023

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