DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco Comercial Português, S.A. (BCP or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The Bank’s Deposit ratings were confirmed at BBB/R-2 (high), 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. At the same time, the trend on the ratings was revised to Negative from Stable. The BBB (low) IA and the SA3 Support Assessment are unchanged. Today’s rating action follows our full annual review of the Bank’s ratings. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The change of the Trend to Negative on BCP’s ratings reflects our view that the wide and growing scale of economic and market disruption resulting from the coronavirus (COVID-19) pandemic will put pressure on the Bank’s profitability and balance sheet. The expected deterioration of the operating environment will likely affect the Bank’s revenues, asset quality and cost of risk.
In confirming the ratings of BCP, we took into account its stable franchise, sound funding profile and moderate capital buffers, as well as the improving asset quality indicators.
An upgrade of the ratings is unlikely given the change in the Trend to Negative, although the trend could return to Stable if the Bank demonstrates limited asset quality and profitability impact in the current environment, whilst maintaining sound capital buffers.
A downgrade could occur if the bank’s profitability, risk profile, or capital positions deteriorate substantially amidst the COVID-19 operating environment.
BCP is the second largest banking group in Portugal where it maintains solid market shares of around 17-18% in both loans and deposits as of YE 2019. Domestic operations accounted for 68% of total assets at YE 2019. Outside Portugal, the Bank has a significant presence in Poland via its subsidiary Bank Millennium. In Q2 2019, the presence in Poland expanded with the acquisition of Eurobank.
The Bank’s profitability has improved in recent years supported by the improving results in Portugal and a solid contribution from the International operations. Results were underpinned by a significant reduction in loan impairment charges in Portugal, good cost control, and the solid performance in Poland against the backdrop of more benign economic conditions.
Nonetheless, the disruption caused by COVID-19 will put pressure on the Bank’s revenues, cost of risk and profitability. We expect fees from payment systems to suffer from lower transaction volumes, while fees on asset management will likely be impacted by rising risk aversion from customers. At the same time, the low interest rates and intense market competition will continue to weigh on net interest income despite some relief expected from debt moratoriums, TLTRO funds and credit lines related to COVID-19.
DBRS Morningstar expects the challenging operating environment will result in higher provisioning costs. In Q1 2020, BCP reported EUR 79 million in COVID related provisions in anticipation of future asset quality deterioration, EUR 60 million were for Portugal with the remainder for Poland. These provisions accounted for around 25% of the Bank’s total pre-provision income in Q1 2020. The allocation of these costs by business sector and borrower remains unclear at this point in time. We understand that the COVID-19 related provisions are still based on very preliminary estimates and expect further provisions as the Bank’s macro-economic scenarios and credit models are updated. At the same time, the risks faced on the legacy exposure to mortgages denominated in CHF in Poland have increased following the ruling of the ECJ in October 2019. This contributed to higher provisions on FX mortgage loans in Q4 2019 and Q1 2020.
In DBRS Morningstar’s view for BCP, the sectors that are most vulnerable to the pandemic are those that are directly and indirectly linked to the tourism industry, which is a key contributor to the economy of Portugal. At Q1 2020, the exposure to high risk sectors, such as hotels & hospitality, food services and transportation, accounted for around 7% of BCP’s loan book. Despite the expectation of some relief from debt moratorium programs and some government initiatives, including state guaranteed loans, we expect an increase in Stage 2 loans as well as higher NPE inflows in 2020 and 2021, when these measures have expired. In addition, the current environment creates additional risk to reduce existing NPEs via disposals. Against this backdrop, the Bank’s target of a NPE stock of EUR 3 billion in 2021 may prove challenging to achieve. At end-Q1 2020, BCP’s total gross NPEs were EUR 3.9 billion, down from EUR 5.2 billion in the same period of 2019. Albeit reducing, BCP’s NPE ratio of 7.2% remains high by domestic and international comparison.
The Bank maintains a solid funding and liquidity position, underpinned by its growing deposit base and large stock of eligible assets for ECB funding. At end-Q1 2020, the net loan to deposit ratio was 86%, slightly down YoY. While the Bank’s debt repayment schedule for 2020-2021 appears manageable, market conditions on the wholesale debt markets have deteriorated since the beginning of the pandemic, implying higher refinancing costs for future market issuances. The Bank’s capital ratios provide an acceptable cushion over the ECB SREP minimum requirements. At Q1 2019 the Bank reported a fully-loaded CET1 ratio of 12%, 70bps lower compared to Q1 2019, while the total capital ratio stood at 15.4%.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792
The Grid Summary Grades for Banco Comercial Português, S.A. are as follows: Franchise Strength – Good; Earnings – Moderate; Risk Profile – Moderate/Weak; Funding & Liquidity – Good/Moderate; Capitalisation – Moderate.
All figures are in EUR unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (22 January 2020) https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883
The sources of information used for this rating include BCP Presentation and Press Release Q1 2020 results, BCP 2016-2019 Annual Reports, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar 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
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/361723
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Nicola De Caro - Senior Vice President - Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: June 10, 2011
Last Rating Date: June 3, 2019
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