Morningstar DBRS Upgrades CGD's Long-Term Issuer Rating to A (low), Trend Remains Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded the Long-Term Issuer Rating of Caixa Geral de Depósitos (CGD or the Bank) to A (low) and maintained the Positive trend. Morningstar DBRS also confirmed the Short-Term Issuer Rating at R-1 (low) with Stable trend. In addition, the Bank's Long-Term Deposit rating was upgraded to A, with a Positive Trend, one notch above the IA to reflect the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. CGD's Intrinsic Assessment (IA) was also upgraded to A (low) and the Support Assessment remains at SA3. See a full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The upgrade of CGD's Long-Term credit ratings reflects the Bank's significant improvement in earnings and reduction in non-performing loans (NPLs) since our last review. Resilient economic prospects in Portugal and higher interest rates improved CGD's capacity to generate healthy profits and reduce the stock of impaired loans. CGD's improved NPL ratios, which outperform domestic and international peers, best illustrate its effective restructuring and the de-risking of its balance sheet. Furthermore, the upgrade reflects the Bank's strong capitalisation. Capital buffers have benefitted from stronger internal capital generation and remain considerably above minimum requirements.

The Positive trend reflects our expectation that the Bank will continue to benefit from favourable features of the Portuguese operating environment. Though interest rates in this economic cycle appear to have peaked, we expect CGD's earnings profile to remain strong and for the bank's gross NPL ratio to remain low.

CGD's credit ratings reflect its leading banking franchise in Portugal and its robust capital position. Likewise, the ratings are underpinned by strong deposit funding and healthy liquidity. The ratings also reflect the limited size of the Portuguese market.

The Bank's IA is positioned below the Intrinsic Assessment Range (IAR). While we consider CGD's restructuring complete, the benefits to the Bank from the significant reduction in legacy NPLs and the rising interest rates have been rapid. A more sustained track-record of strong profitability and asset quality would be positive for the Bank's credit profile.

CREDIT RATING DRIVERS

The credit ratings could be upgraded if the bank is able to sustain healthy profitability and asset quality. Negative credit rating implications are unlikely given the Positive trend. However, CGD's trend could return to Stable should the Bank's profitability and asset quality significantly deteriorate. The credit ratings could be downgraded in the event of a material weakening of the Bank's asset quality or capital position.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment: Good

CGD is the largest banking group in Portugal where it is the market leader in several products and services in commercial and retail banking. The Bank has a leading domestic franchise with 18% of the market share for loans and 23% for deposits. Exposure to countries with economic links and historical ties to Portugal, including Mozambique and Angola, provide the Bank with a small amount of geographical diversification. It also has a limited presence in France and Macau. CGD is entirely owned by the Portuguese State and has successfully completed the restructuring agreed with the European Commission (EC) following the State-backed recapitalisation in 2017. In the intervening years, CGD has reduced its legacy stock of impaired assets, streamlined its operating structure, and downsized its operations outside Portugal. Healthy results allowed the Bank to pay out a total of EUR 825 million in dividends in the year to June 2024. The Bank has recovered the public recapitalisation carried out in 2017 and repaid the private debt component.

Earnings Combined Building Block Assessment: Good

CGD's profitability has improved in recent years, primarily driven by its healthier balance sheet and the improved operating environment in Portugal, including higher interest rates. In 1H 2024, the Bank's net income grew 46.3% against the same period in 2023 to reach EUR 889 billion. The return on equity increased to 18.7% in 1H 2024, from 13.5% a year earlier. Net income over the first half of this year already eclipsed net income generated for the full year 2022 (EUR 843 million) and is on pace to overperform full year 2023 (EUR 1,291 million). The strong performance was primarily due to higher interest rates and the increase in net interest income (NII), a reduction in loan loss provisions, and sound cost control. CGD reported in 1H 2024 a release of loan loss provisions and impairments due to the better-than-expected evolution of the domestic economy and of credit quality. This resulted in a cost of risk of -40 bps in 1H 2024, from 29 bps at end-2023. The cost-to-income ratio improved to 29.3% in the first half of the year, down markedly from the 51.1% at end-2022, due to higher interest rates and operating revenue.

Risk Combined Building Block Assessment: Strong/Good

CGD has a moderate risk profile that has significantly improved in recent years. Though the bulk of CGD's loan portfolio is composed of floating rate loans, sound underwriting standards and solid macroeconomic fundamentals in Portugal have limited the deterioration in asset quality typically associated with the rapid rise in interest rates. NPLs totalled EUR 1.2 billion in 1H 2024, down from EUR 1.9 billion reported at end-2022. The Bank reported that as of 1H 2024, its NPL ratio declined to 1.7%, which compares well with domestic and international peers. The NPL coverage ratio was 163.9% at 1H 2024, placing the NPL ratio net of impairments at 0.4%. Moreover, the Bank has continued to reduce real estate assets. The stock of real estate assets was EUR 216 million in 1H 2024, down from EUR 248 million at end-2023. In our view, Portugal's strong labour markets and healthy private sector finances should contain any deterioration in asset quality in the face of structurally higher interest rates and macroeconomic uncertainty.

Funding and Liquidity Combined Building Block Assessment: Strong/Good

CGD's funding profile is supported by its leading retail deposit franchise in Portugal, with 23.0% market share. Customer deposits increased by 6.0% in 1H 20224 compared to a year earlier. The net loan to deposit ratio was 61.8% in 1H 2024 from 62.8% at end-2023. The Bank's debt portfolio and deposits at the central bank underpin its strong liquidity position. CGD reported High Quality Liquid Assets (HQLA) of EUR 40.7 billion in 1H 2024, of which EUR 22.4 billion is cash deposited at the ECB and EUR 18.3 billion of securities eligible as collateral for ECB funding. This liquidity buffer represents around 56% of total domestic deposits. The LCR stood at 329% and the NSFR was 190% in 1H 2024, both liquidity coverage ratios are well above the regulatory requirement of 100%. CGD has demonstrated access to wholesale funding market, though principally to satisfy minimum requirements for own funds and eligible liabilities (MREL). That said, the Bank does not regularly access wholesale capital markets.

Capitalisation Combined Building Block Assessment: Strong/Good

CGD's capital ratios - CET1 at 20.4% and Total capital at 20.6% in 1H 2024 - have benefitted from improved retained earnings and compare favourably to the Portuguese and European averages. Both ratios are significantly above SREP minimum requirements of 8.82% and 13.15%. These solid capital levels have been met after the EUR 525 million in dividend payment related to 2023 and an additional EUR 300 million has been paid thus far in 2024. With the latest payout, CGD has paid in dividends to its shareholder the Portuguese government EUR 2.5 billion since 2018, which equals the public cash raised in 2017. EUR 5.2 billion of capital generated since 2017 exceeds the total EUR 3.9 billion of public investment in CGD's recapitalisation plan.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/442275.

ENVIRONMENTAL, SOCIAL, AND 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 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, H1 2024 and H12023 reports and presentations, CGD 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/442276.

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: December 23, 2011
Last Rating Date: December 18, 2023

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