DBRS Confirms ICO’s Long-Term Ratings at A, Stable Trend

DBRS Ratings Limited (DBRS) confirmed Instituto de Crédito Oficial (ICO or the Bank) ratings, including the Long-Term Issuer Rating at “A” and the Short-Term Issuer Rating at R-1 (low). All ratings have Stable Trend. ICO’s Support Assessment remains SA1. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of ICO’s Long-Term Issuer Rating at “A” stable trend follows DBRS’ confirmation of the Kingdom of Spain Long-Term Foreign and Local Currency rating at “A” with Stable trend on September 28, 2018. ICO’s ratings reflect its statutory ownership and the full guarantee of its liabilities by the Kingdom of Spain as stated in its by-laws under the Royal Decree Act 706/1999. As a result, DBRS’ support assessment for ICO is SA1 and ICO’s issuer ratings and trend are equalised with the Long-Term and Short-Term Foreign and Local Currency ratings of the Kingdom of Spain and will move in line with the rating of the Spanish sovereign.

RATING DRIVERS
The Long-Term and the Short-Term ratings move in line with the ratings of the Kingdom of Spain. An upgrade of the Kingdom of Spain would result in a positive rating action for ICO. Similarly, a downgrade of the Kingdom of Spain would result in a negative rating action for ICO.

RATING RATIONALE
As a public specialised lending institution and the state’s financial agency, ICO´s role is to support and develop any economic activity contributing to the growth of the Spanish economy. ICO was founded in 1971 and became a state-owned bank after the reform of the Spanish state banking sector in 1991. In addition to providing funding as an institutional lender, ICO also has a duty to contribute to the mitigation of economic effects from serious economic recessions, natural catastrophes or similar situations, as well as to act as the instrument for executing certain economic policy measures. Therefore, its role is countercyclical in nature: when the economy is weak, ICO’s activities grow substantially as it is needed to provide financing to companies when access to financing is more challenged due to the weakening operating and economic conditions. Conversely, when the economy is growing, ICO tends to have lower business activities.

In carrying out its public service mandate, ICO’s goal is not to maximise profits, however the Bank has never reported a loss in its history. Nevertheless, given its countercyclical nature, profits have shown volatility over time. DBRS views ICO’s earnings power constrained by its weak operating margins, despite being partially off-set by its low-cost base. The Bank’s net income totaled EUR 103 million in 2017, down from EUR 317 million in 2016. In 2017 ICO reported negative net interest income (NII) of EUR 69 million. DBRS expects ICO´s NII to remain negative during 2018, due its tight operating margins combined with the fact that the Bank´s liabilities reprice more slowly than its assets. However, results were positively affected by a net release of loan loss provisions of EUR 156 million in 2017 and EUR 458 million in 2016. DBRS notes that the provision release in 2017 is linked to the Bank’s high level of coverage for non-performing loans (NPL), whereas the provisions released during 2016 were also impacted by the implementation of new provisioning standards by the Bank of Spain in October 2016.

DBRS views ICO’s risk appetite as generally conservative due to the nature of its activities. However, ICO´s credit profile is negatively affected by its high single-name concentration. The Bank’s lending is carried out through two different channels: a) Indirect lending in which the Bank’s operates through credit lines to commercial banks that, in turn, lend the funds to SMEs/entrepreneurs. The indirect lending results in ICO having counterparty credit risk to the participating banks. At end-2017, ICO’s total indirect lending totaled EUR 13.8 billion at end-2017, down 22% Year on Year (YoY). b) Direct lending, which typically consists of providing syndicated loans to large companies or structured finance projects, either public or private, and represents around EUR 12.2 billion at end-2017, down 19% YoY.

The deleveraging of its balance sheet reflects the Bank’s countercyclical nature, and DBRS expects this to stabilise over the coming years. Despite this, ICO granted around EUR 5.4 billion of new loans in 2017, compared with EUR 5.0 billion in 2016. Direct loans are the only driver of the Bank’s NPLs ratio. The Bank’s NPL ratio decreased to 8.5% at end-2017 from 10.8% at end-2016 (as calculated by DBRS), with gross NPLs totaling around EUR 1 billion. The Bank’s coverage ratio for these NPLs remains very strong at 105% at end-2017 (as calculated by DBRS and not including other provisions).

ICO’s funding structure is reliant on wholesale funding and funding from multilateral development banks, mainly the European Investment Bank. The Bank has not experienced any notable difficulties in accessing the markets since its creation and has been able to tap the markets on a regular basis, even during the financial crisis. Refinancing risk is also mitigated by the fact that ICO lends at much shorter maturities than the funding it obtains on the capital markets. DBRS views ICO’s capitalisation as robust. ICO’s Common Equity Tier 1 capital ratio strengthened to 32.7% at end-2017 from 29.3% at end-2016.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is DBRS Criteria: Guarantees and Other Forms of Support (January 2018) and the Global Methodology for Rating Banks and Banking Organisations (July 2018). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve-month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Pablo Manzano – Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: September 16, 2011
Most Recent Rating Update: April 12, 2018

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