Morningstar DBRS Upgrades BCP's Long-Term Issuer Rating to BBB (high), Trend Stable

DBRS Ratings GmbH (DBRS Morningstar) upgraded the credit ratings of Banco Comercial Português, S.A. (BCP, the Bank, or the Group), including the Long-Term Issuer Rating to BBB (high) from BBB and the Short-Term Issuer Rating to R-1 (low) from R-2 (high). The Bank's Deposit ratings were upgraded to A (low)/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 is unchanged. See a full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The upgrade to BCP's credit ratings reflects Morningstar DBRS's assessment that the Bank's asset quality, earnings, and capitalisation have improved. Benefiting from higher interest rates and high exposure to floating rate loans, BCP has strengthened its profitability and its internal capital generation. In addition, the Bank's asset quality has improved despite high interest rates and inflation, and the Group has continued to make progress in reducing non-performing exposures (NPEs). The supportive economic environment in Portugal will likely improve prospects for the Bank's domestic operations and limit asset quality deterioration.

The Stable trend reflects our view that risks to the outlook are balanced. The Bank's provisions will likely remain elevated, reflecting its legal and financial exposures linked to legacy CHF-denominated mortgages in its Polish subsidiary. That said, overall provisioning has declined, and we expect this risk to gradually subside. Moreover, the trend reflects our expectation that the Bank will maintain healthy profitability levels and solid capital buffers.

CREDIT RATING DRIVERS

BCP's ratings would be upgraded if the Bank is able to sustain its profitability and asset quality in its domestic and international operations, notably in Poland, while also maintaining strong capital levels. Conversely, the ratings would be downgraded if there is 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 Assessment: Good/Moderate

With total assets of EUR 100 billion, BCP is the largest private sector 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 35% of the Group's consolidated assets as of June 2024. Operations in Poland (Bank Millennium S.A.) has had a positive diversification effect for the Group, particularly during the previous crises when the performance of its Portuguese operations was burdened with high levels of problem loans. While Bank Millennium's gross profit has benefitted from the higher interest rate environment, its performance remains affected by provisioning costs on CHF mortgage loans and the mortgage holiday for households in Poland.

Earnings Combined Building Block Assessment: Good/Moderate

The Bank's profitability has been supported by solid interest earnings and effective cost management, which has more than offset high impairments linked to CHF mortgages in Poland. In 1H 2024, BCP's net income increased to EUR 485.3 million, up 14.7% from EUR 423.2 million a year earlier, corresponding to a ROE of 15.4%. This performance was in large part driven by strong net interest income in Portugal and across the international operations from the higher interest rates, the Bank's large exposure to variable rate lending, and a more contained rise in deposit costs. Profitability was also supported by the favourable evolution of impairments and provisions, while income was weighed down by a 10.3% inflation-related increase in operating costs in 1H 2024 to EUR 619 million compared to a year earlier, and the recognition in the second quarter of the credit holidays costs in the Polish subsidiary. Despite inflationary pressures, BCP reported a low cost-to-income ratio of 35% in June 2024.

Total impairments and provisions, mainly due to the CHF mortgage portfolio in Poland and including legal risk and goodwill, declined to EUR 451 million in June 2024 from EUR 560 million a year earlier. Elevated provisions on the CHF mortgages in Poland will likely continue to be a drag for the Group's earnings. However, Polish authorities aim to simplify proceedings and accelerate the conclusion of settlements. This suggests the costs associated with the legacy FX mortgage loans should gradually decrease. The cost of risk in the Bank's international operations remains elevated, at 50bsp in Poland, while the cost of risk in Portugal declined to 28 bps in 1H 2024. Thus, at the group level, the steady disposal of nonperforming loans, and the reduction in provisioning for CHF legal risk, reduced the Bank's cost of risk to 34 bps from 50 bps a year earlier.

Risk Combined Building Block Assessment: Good/Moderate

BCP's asset quality has gradually improved in recent years, despite the pressures arising from high inflation and more restrictive monetary policy. At 1H 2024, BCP further reduced its legacy stock of NPEs by 8.2% to 1.97 billion from a year earlier, through a mix of write-offs and sales. The Bank's consolidated gross NPE ratio was 3.4% at June-2024, down from 3.7% a year earlier. In Portugal specifically, the stock of NPE was EUR 1.1 billion in 1H 2024, and the Bank's NPE ratio declined to 2.9% from 3.2%. The increase in the NPE specific coverage ratio, to 81.4% at 2Q 2024, from 73.6% a year earlier further strengthens asset quality. In Poland, the Bank continues to face issues related to the legacy exposure to mortgages denominated in CHF at its subsidiary. This portfolio totalled EUR 1.7 billion as of June 2024, 9.5% of gross loans. While we expect the amount of litigation and provisions to remain material, the cumulative provisions for CHF loans reached EUR 1.75 billion at end-June 2024, accounting for 101% of the CHF mortgage portfolio.

Funding and Liquidity Combined Building Block Assessment: Good

The Group's funding and liquidity position remain adequate. The Bank is largely funded by deposits from retail, SME and corporate clients, which together accounted for 82% of the Group's total funding at June 2024. Customer deposits increased by 9.3% in 1H 2024 relative to a year earlier, because of more term deposits from higher interest rates. The Loan to Deposit (LTD) ratio was 67%. The Group's liquidity position is underpinned by a sizable stock of eligible assets. The Bank had around EUR 28.9 billion of ECB eligible assets in 1H 2024, net of haircuts, corresponding to 48% of the total deposit base in Portugal and 29% of total assets. Liquidity positions remain robust, with the liquidity coverage ratio (LCR) at 244% and the net stable funding ratio (NSFR) at 160%.

Capitalisation Combined Building Block Assessment: Good/Moderate

BCP's capital position has improved in the past few years supported by improved earnings generation. BCP reported a fully loaded CET1 ratio of 16.2% in 1H 2024, up from 14.0% a year earlier, and a total capital ratio of 20.6%, up from 18.3%. The significant increase in the capital ratios was mainly driven by higher internal capital generation, despite the provisioning needs in Poland. These capital ratios are comfortably above the ECB's minimum SREP (Supervisory Review and Evaluation Process) requirements, including the CET1 ratio of 9.41%, and a total capital ratio of 14.00%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/440724.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  

The Product Governance (Social) factor has changed from the prior credit rating disclosure. Product Governance is no longer relevant to BCP's credit ratings. Morningstar DBRS considers that the risks associated to ongoing issues on legacy exposure to mortgages denominated in CHF at its Polish subsidiary, Bank Millennium S.A., have diminished. Cumulative provisioning more than covered the EUR 1.7 billion CHF loan portfolio as of 1H 2024.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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

The sources of information used for this credit rating include Morningstar, Inc. and company documents, 2024 and 2023 quarterly reports and presentations, BCP annual reports (2014-2023), European Banking Authority (EBA) and European Central Bank (ECB) data. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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 credit rating assumptions can be found at: https://dbrs.morningstar.com/research/440723.

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

Lead Analyst: Jason Graffam, Senior Vice President - Global Sovereign & Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 10 June 2011
Last Rating Date: 18 December 2023

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