Morningstar DBRS Upgrades Institut Català de Finances's Long-Term Credit Ratings to BBB, Trend Remains Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded Institut Català de Finances's (ICF or the Entity) credit ratings, including the Long-Term Issuer Rating to BBB from BBB (low) and the Short-Term Issuer Rating to R-2 (middle) from R-2 (low). The trend on all credit ratings remains Positive. ICF's Support Assessment remains at SA1. See a full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The upgrade of ICF's Long-Term Issuer Rating to BBB and the Positive trend follows Morningstar DBRS' upgrade of the Autonomous Community of Catalonia (Catalonia)'s Long-Term Issuer Rating to BBB with Positive Trend on 13 December 2024.

ICF has a support assessment of SA1, which implies Morningstar DBRS' expectation of predictable support from its shareholder, 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.

Morningstar DBRS rates Catalonia's Long-Term Issuer Ratings at BBB with a Positive Trend and ICF's credit ratings are positioned at the same level as the sub-sovereign credit rating 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
ICF's credit ratings and trends move in line with Catalonia's credit ratings. An upgrade of Catalonia's credit ratings would lead to an upgrade of ICF's credit ratings.

Similarly, a downgrade of Catalonia's credit ratings would lead to a downgrade of ICF's credit ratings. In addition, a weakening of the guarantee provided by Catalonia could also lead to a downgrade of ICF's credit ratings.

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-2023, 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 small and medium-size enterprises and entrepreneurs. At end-2023, the Entity granted loans in 2023 to a total of 5,805 private companies and 91 public sector entities. In addition, ICF served 1,127 social companies such as non-profit organisations, co-operatives, foundations, and associations.

Earnings Combined Building Block Assessment
Morningstar DBRS views ICF's earnings power as constrained, reflecting a combination of low margins, because of 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 2023, ICF reported net income of EUR 49.5 million, up from EUR 27.4 million in 2022 mainly driven by ICF's high sensitivity to interest rates. Results were driven by very strong growth in revenues and lower loan loss provisions despite operating expense growth. While ICF should continue reporting high revenues in 2024 and 2025, Morningstar DBRS expects them to moderately come down given the gradual decrease in interest rates.

Risk Combined Building Block Assessment
ICF's asset quality continues to be affected by its large, albeit declining, stock of nonperforming loans (NPLs) since ICF's strategy remains to work out loans on a case-by-case basis, rather than pursue the disposal of NPLs. The NPL ratio stood at 7.1% at end-2023 compared with 7.5% at end-2022, still much above the Spanish and European averages. However, only 34% of the loans the Entity classified as NPLs was doubtful at end-2023 compared with 48% at end-2022 as per ICF prudent classification policy. The NPL ratio representing defaults having already materialised was 4.7% at end-2023. Morningstar DBRS notes that the coverage ratio of the Entity was sound at 129.5% at end-2023.

Funding and Liquidity Combined Building Block Assessment
The Entity's main funding sources at end-2023 consisted of funding from public banks at 81%, from private banks (12%), issuances (3%), and the Entity's Pagarés Programme (4%). Morningstar DBRS notes that ICF has not experienced any notable difficulties in tapping the markets. ICF had high-quality liquid assets of EUR 288 million at end-2023 and reported a Liquidity Coverage Ratio (LCR) of 893%, well exceeding the 100% regulatory minimum. In addition, the Net Stable Funding Ratio (NSFR) was also above regulatory requirements at 127% at end-2023.

Capitalisation Combined Building Block Assessment
Morningstar DBRS 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-2023, the Entity reported a CET1 ratio of 37.8% and Total Capital Ratio of 38.5%, down from 38.6% and 39.4%, respectively in 2022. This was mostly driven by an increase in risk-weighted assets. In 2023, this was the first-time ICF distributed dividends to its shareholder, Catalonia, of around EUR 25 million. This dividend will be reinjected in a fund in 2024 to finance the local economy. The capital buffer is significantly higher than regulatory requirements. The Entity's leverage ratio was 37.8% at end-2023.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on Catalonia would have an impact on this credit rating. Consequently, passed-through Social credit considerations affect ICF's credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Catalonia are discussed separately at https://dbrs.morningstar.com/issuers/22723.

There were no Environmental 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 (13 August 2024; https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186

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 these credit ratings include Morningstar Inc. and company documents. Other sources include ICF 2023 Annual Report, ICF 2023 Pillar III Report, ICF 2023 Corporate Governance Annual Report and ICF 2023 Prudential Relevance Report 2023. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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' trends 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/444903.

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

Lead Analyst: Arnaud Journois, Senior Vice President, European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director, Global Financial Institution Ratings
Initial Rating Date: 2 December 2022
Last Rating Date: 20 December 2023

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