Morningstar DBRS Upgrades Banco Montepio's Long-Term Issuer Ratings to BB (high), Trend Changed to Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded the credit ratings of Caixa Económica Montepio Geral, caixa económica bancária, S.A. (Banco Montepio, or the Bank), including the Long-Term Issuer Rating and Long-Term Senior Debt to BB (high) from BB, and the Long-Term Deposits to BBB (low) from BB (high). The Bank's Short-Term Debt and its Short-Term Issuer Ratings were also upgraded to R-3, from R-4, and the Bank's Short-Term Deposits rating was upgraded to R-2 (middle). At the same time, Morningstar DBRS changed the trends on all ratings to Positive.

Banco Montepio's Intrinsic Assessment (IA) was also raised to BB (high) and the Support Assessment maintained at SA3. The Bank's BBB (low) Long-Term Deposits rating is one notch above the IA, reflecting the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. See a full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The upgrade of Banco Montepio's credit ratings reflects the sustained improvement in the Bank's risk profile, capitalisation and earnings, that have benefited from stronger interest revenues and lower provisions. The credit rating action also considers the Bank's material reduction in the stock of non-performing assets, and its strengthened capital position through organic capital generation and a reduction of risk-weighted assets (RWAs) driven by asset de-risking.

The Positive trend reflects Morningstar DBRS's view that the Bank is likely to maintain its sound capital and liquidity buffers. Likewise, the trend reflects our expectation that the Bank, is well placed to cope with asset quality risks posed by still high interest rates and to continue to reduce non-performing loans, all of which could result in further positive rating pressure.

Banco Montepio's credit ratings continue to reflect the Bank's good retail franchise in Portugal and improved funding and liquidity position, following further customer deposit base stability and the repayment of Central Bank funding. However, the credit ratings also reflect the bank's small size and modest profitability and its limited flexibility in the past to raise capital. While having improved recently, profitability remains below its domestic and international peers.

The Bank's IA is positioned below the Intrinsic Assessment Range (IAR). We are of the view that Banco Montepio needs a longer track record of maintaining asset quality and profitability improvements before the Bank's credit ratings move into the investment grade level.

CREDIT RATING DRIVERS

Banco Montepio's credit ratings could be upgraded if the Bank is able to sustain improved profitability and continue to improve its risk profile, while maintaining robust capital and liquidity buffers. More consistent access to a variety of market funding would also apply upward pressure on the credit ratings. Negative credit rating implications are unlikely given the Positive trend. However, the trend could return to Stable should its profitability and asset quality deteriorate. The credit ratings could also be downgraded because of material weakening of the Bank's capital.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment: Moderate/Weak

Banco Montepio is a small Portuguese retail and commercial bank with total assets of EUR 18.2 billion in H1 2024 and is majority owned by the Montepio Geral Associação Mutualista. It is the seventh largest bank by assets in Portugal, and as part of a long and successful turnround, the Bank streamlined its branch footprint and reduced its headcount. It has 226 branches in Portugal, and a total market share of around 5% for loans and deposits as of June 2024. The Bank's strategic re-focus on its core Portuguese market included the sale of Finibanco Angola in August 2023. Prior to that, the Bank liquidated Banco MG Cabo Verde, as well as the disposal of its stake in Banco Terra, S.A. in Mozambique. In addition, the Bank's business model, centered on traditional retail and commercial banking with limited diversification, has benefitted from the reduction in legacy problem assets and the higher interest rate environment.

Earnings Combined Building Block Assessment: Moderate

Banco Montepio's profitability has significantly improved in recent years, driven by a series of restructuring initiatives, balance sheet de-risking, and rising interest rates. Net interest income remained strong in 1H 2024, at EUR 194 million, up 2.2% year-over-year. Lower impairments and provisions, and contained operating costs also supported income. The cost of risk declined to 12bps at June 2024, from 42bps at end-2023. Banco Montepio posted net income of EUR 68.7 million in 1H 2024 - representing a return on equity of 8.6% in June 2024 from 1.8% a year earlier. In 2023, the Bank reported a heavy loss in the third quarter related to the disposal of Finibanco Angola, which led to the recognition of a negative impact of EUR 116 million from FX reserve reclassification. The Bank's recurring cost to income ratio of 50.5% in 1H 2024 compares well to its Portuguese peer group.

Risk Combined Building Block Assessment: Good/Moderate

Banco Montepio's risk profile has improved in recent years due to de-risking and significant reduction of non-performing exposures (NPEs). The Bank's active management of NPE and real estate assets has led to better asset quality metrics. Banco Montepio's NPL declined by 38% YOY in 1H 2024 to EUR 330 million due to disposals, and higher cures and recoveries. The reduction was ahead of the Bank's strategic target. NPLs as a share of total loans fell to 2.8% from 3.2% at end-2023. The reduction in real estate assets was also material, declining by 31% YOY to 231 million and representing 1.3 % of net assets, down from 1.8% a year earlier. At the same time, the total NPL coverage by provisions for balance sheet loans increased to 72% in 1H2024 from 60% in 1H 2023, resulting in a net NPE ratio of 0.8% (as reported). We expect Banco Montepio's asset quality to benefit from a benign economic environment in Portugal and the gradual reduction of interest rates, albeit from higher levels.

Funding and Liquidity Combined Building Block Assessment: Good/Moderate

Banco Montepio's funding profile is underpinned by its customer deposits, the bulk of which are with retail customers. There has been a recent shift to term deposits with higher remuneration. Term deposits increased to 61% of the total at June 2024, from 58% at end-2023. In 1H 2024, the loan-to-deposit ratio declined to 81.9% in June 2024, down from 85.7% at end-2023. With an MREL ratio of 25.3% at 1H 2024, the Bank has already met its own funding requirement of 23.5% by January 2025. The Bank returned to the wholesale market with one Tier 2 issuance of EUR 250 million in March 2024 (at a fixed interest rate of 8.5%) and two MREL eligible issuances in senior bonds: EUR 200 million in October 2023 (at a fixed interest rate of 10.0%) and EUR 250 million in May 2024 (at a fixed interest rate of 5.625%). The difference in interest rates indicates greater market confidence in the Bank. Banco Montepio also maintained an adequate liquidity profile with a buffer of EUR 5.6 billion, including unencumbered assets, net of haircuts, and cash and deposits at Central Banks. LCR ratio and NSFR ratio were reported at 219% and 135% respectively in June 2024, both comfortably above minimum requirements.

Capitalisation Combined Building Block Assessment: Moderate
Banco Montepio continues to strengthen its capital buffers. The Bank's CET1 increased to 16.1% in June 2024, from 14.4% a year earlier. Fully implemented total capital increased 2.3 percentage points over the same year to reach 19.4%. This represents 540 bps of excess capital over minimum requirements. The improvement was mainly due to strong organic capital generation and a reduction in RWAs on the back of the Bank's strategy of reducing non-strategic assets, real estate exposures and NPL disposals.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/441933.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  

A Governance factor has changed from the prior credit rating disclosure. Previously, the Bank experienced high management turnover and reputational issues, and was subject to administrative proceedings and fines by the Portuguese supervisory authorities in relation to alleged past failures in internal controls. Morningstar DBRS now considers the Bank has moved past these proceedings and has not faced any new significant issues.

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. Banco Montepio 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/441932.

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: Elisabeth Rudman, Managing Director - Global Financial Institution Ratings
Initial Rating Date: June 27, 2011
Last Rating Date: December 13, 2023

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