DBRS Morningstar Revises Trend on Caja Rural Granada to Negative; Confirms Issuer Rating at BBB (low)

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Caja Rural de Granada, Sociedad Cooperativa de Crédito (CRG or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The Trend has been revised to Negative from Stable. The Intrinsic Assessment (IA) for the Bank is BBB (low), while its Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The change of the trend to Negative reflects our view that the scale of economic disruption resulting from the coronavirus (COVID-19) pandemic in Spain and its likely impact on CRG has increased. DBRS Morningstar expects the Bank’s risk profile to deteriorate, albeit partially mitigated by the Spanish government and the European authorities’ support measures in the short-term. Notably, CRG faces the COVID-19 economic downturn with a substantial level of legacy Non-Performing Assets (NPAs) from the previous crisis. Downward rating pressure would intensify should the crisis be prolonged. Moreover, the Bank’s relatively high exposure to SMEs mean the Bank is more vulnerable to deterioration in sectors that are likely to be severely affected in this environment. We will continue to monitor the performance of the Bank’s asset quality metrics, as well as all measures to support the franchise and customer base, including the implementation of the debt moratoriums.

The confirmation of CRG’s Long-Term Issuer Rating at BBB (low) takes into account the Bank’s consistent fundamentals, underpinned by a stable funding and liquidity profile, combined with an ample capital cushion. The ratings also reflect the Bank’s membership of the Institution Protection Scheme (IPS) between the members of the Asociación Española de Cajas Rurales (AECR), the largest cooperative group in Spain. DBRS Morningstar also expects the unprecedented support measures announced by the Spanish government, as well as several other regulatory authorities and central banks to continue to help to mitigate the economic impact.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely given the change in trend and the negative economic implications from the global pandemic. The trend on the Long-Term ratings could revert to Stable if the Bank is able to limit the likely deterioration in asset quality whilst maintaining capital ratios near current levels.

A downgrade of the Long-Term Issuer Rating would result from a further weakening of its asset quality profile. A downgrade could also arise from a prolonged material deterioration in the Bank’s capacity to generate earnings.

RATING RATIONALE
The Bank has a solid franchise in its home market of Granada, where it had significant market shares in loans and deposits at end-June 2020. CRG is also a member of the Asociación Espanola de Cajas Rurales (AECR), the largest cooperative group in Spain by total assets. The AECR comprises 29 Cajas Rurales (CRs) operating throughout Spain. In addition, since March 2018, CRG is part of an IPS established between the AECR members, Banco Cooperativo Español (BCE) and the Holding Company “GrucajRural Inversiones S.L.”. DBRS Morningstar considers CRG’s membership of both the AECR and the IPS to be a positive as they provide other significant benefits such as access to a well-developed common technology system, central clearing and liquidity services.

The Bank´s profitability is under pressure. Core revenues were down 1.4% YoY, driven by lower NII (down 6.3% YoY) partly compensated by strong net fees performance (up 10.8% YoY). Further NII pressure is expected during 2021 given the recent evolution of Euribor. CRG maintained the same the level of operating costs during 9M 2020 YoY. The Bank reported a net attributable profit of EUR 34 million in 9M 2020, down 10% YoY negatively affected by lower revenues coming from the sale of Foreclosed Assets (FAS). Moreover, CRG only booked EUR 4 million of loan loss provisions (LLPs) to date reaching a cost of risk of only 14bps, which compares to 40bps in 2019 or 80bps in 2018, despite a more challenging economic environment. As a result, DBRS Morningstar understands that the bulk of new LLPs will be booked during Q4 2020.

DBRS Morningstar expects that, given the unprecedented economic shock, CRG’s asset quality will deteriorate in the coming quarters. CRG faces the COVID-19 economic downturn with a substantial level of legacy Non-Performing Assets (NPAs) from the previous crisis given an NPA ratio of 8.3% at end-Q3 2020 (vs. 9.3% at end-Q3 2019). As of end-September 2020 the Bank’s NPLs had increased 15% year-to-date (YTD) and the NPL ratio stood at 4.4% at end-September 2020. Nevertheless, the Bank continues to reduce its FAS exposures which went down 12% YTD. The Bank´s exposure to land, which DBRS Morningstar considers as the riskiest and least liquid category of FAS, in proportion to its overall stock of FAS is higher than the average of the Spanish System. The Bank has improved its coverage ratios in recent years and it reported a strong NPA coverage ratio of 60% at end-Q3 2020, higher than other Spanish peers .

DBRS Morningstar sees the guarantee loan scheme provided by the Spanish government to SMEs and Corporates as reducing credit risk related to this crisis. CRG has granted EUR 212 million of loans with state guarantees as of end-Q3 2020, which accounts for around 5% of the total loan book or 14% of the loan portfolio to SMEs, which is in line with Spanish peers. In addition, a total of EUR 82 million of applications for loan moratoria had been granted by end-Q3 2020. However, around 28% of the initial moratoria have already expired. As a result, around 1.5% of its total loan book was still under moratoria at end-Q3 2020, which is a lower amount than other Spanish peers.

CRG’s funding and liquidity profile remains sound, supported by its stable deposit base. At end-Q3 2020, the Bank had a robust net loan-to-deposit ratio of 89%, lower than most domestic peers. Funding from the European Central Bank (ECB) stood at around EUR 800 million at end-Q3 2020, accounting for 14% of total funding. CRG’s capitalisation remains robust with a total capital ratio of 19.9% under the phased-in criteria (Pro-forma) at end-Q3 2020. This compares to a minimum SREP Capital Requirement (OCR) for total capital of 11.88% for 2020. As a result, the minimum capital cushion over the requirements was 805 bps, significantly higher the average of Spanish peers. DBRS Morningstar considers CRG’s membership within AECR and the IPS as a positive because it provides potential support from the ex-ante fund totaling EUR 200 million to date should CRG face severe financial difficulties, however, the Bank’s ability to improve capitalisation through organic generation or to access capital markets is limited.

ESG CONSIDERATIONS

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 Caja Rural de Granada, Sociedad Cooperativa de Crédito are as follows: Franchise Strength –Moderate; Earnings – Moderate/Weak; Risk Profile – Moderate/Weak; Funding & Liquidity – Good/Moderate; Capitalisation – Good/Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

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 CR Granada - Annual Reports (2015-2019), European Banking Authority (EBA) Transparency Exercise 2019, 2018 EBA-wide stress test, Confidential Company Documents, Bank of Spain Statistical Bulletin 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/370034

Ratings assigned by DBRS Ratings GmbH, are subject to EU and U.S. regulations only.

Lead Analyst: Pablo Manzano, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman Managing Director, Head of European FIG - Global FIG
Initial Rating Date: December 3, 2013
Last Rating Date: April 15, 2020

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