Press Release

DBRS Morningstar Confirms CaixaBank’s Issuer Ratings at “A” / R-1 (low), Stable Trend

Banking Organizations
March 29, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of CaixaBank, S.A. (CaixaBank or the Bank), including the Long-Term Issuer Rating of “A” and the Short-Term Issuer Rating of R-1 (low). All ratings have a Stable Trend. The Bank’s Intrinsic Assessment (IA) remains at “A” and the Support Assessment at SA3. Concurrently, following the recent merger between Bankia and CaixaBank, the outstanding senior, senior non-preferred and subordinated debt of Bankia has been legally assumed by CaixaBank, and as a result the ratings on these instruments have been upgraded in line with the ratings of CaixaBank. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of CaixaBank’s ratings reflect the strength of its banking franchise in Iberia, which has been further strengthened following the merger with Bankia. DBRS Morningstar considers the transaction will be broadly credit positive for CaixaBank. In particular, DBRS Morningstar notes that the merger makes CaixaBank the market leader in Spain, and this should support its profitability in the current difficult environment, especially through the ability to improve costs. Nevertheless, DBRS Morningstar takes into account the potential execution risks stemming from the merger.

In addition, the rating action also considers the ongoing negative implications of the COVID-19 crisis on CaixaBank´s creditworthiness. DBRS Morningstar views that the state guaranteed loans and loan moratoria are limiting past-due situations, and preventing the deterioration of both CaixaBank and Bankia´s loan books. Nevertheless, DBRS Morningstar considers that CaixaBank´s asset quality profile will suffer a manageable deterioration during 2021, in particular, after the expiration of the loan moratoria. The ratings also incorporate the Bank´s sound funding and liquidity position and CaixaBank’s sound capital levels and solid loss absorption capacity given its strong Minimum Requirement for own funds and Eligible Liabilities (MREL) ratio.

RATING DRIVERS
An upgrade to the long-term ratings of CaixaBank would require an upgrade in the Spanish sovereign rating coupled with improvement in the Bank’s core profitability and asset quality profile.

A downgrade of CaixaBank’s long-term ratings could arise from a deterioration in Spain’s sovereign rating. A material impact on the Bank’s capital position or asset quality would also be negative for the rating. Additionally, any significant operational issues as a result of the merger with Bankia would also have negative rating implications.

RATING RATIONALE
CaixaBank provides universal banking services to individuals, small and medium-sized enterprises and large corporations. In Portugal, CaixaBank owns the fifth largest bank by total assets, Banco BPI. In September 2020, the Bank announced its intention to merge with Bankia SA, the fifth largest Spanish banking group by total assets. After receiving all the regulatory and legal approvals the transaction closed on the 26th of March 2021. The merger makes CaixaBank the domestic market leader with a market share in gross loans of around 27% (as calculated by DBRS Morningstar).

DBRS Morningstar considers the transaction will be broadly credit positive for CaixaBank as it will further strengthen its already solid position in Spain. However, we note the large size of the transaction and the execution risks, in particular regarding IT migration, which is projected to be completed by end-2021. We expect CaixaBank to successfully manage the merger given the extensive experience within both entities in integrating other banks, noting that CaixaBank and Bankia have completed around 16 integrations in Spain in the last 10 years. However, the size and scale of this operation is unprecedented and IT migration risks are consequently larger.

CaixaBank´s 2020 results were severely affected by the COVID-19 crisis, and the challenging economic environment in Spain. Spain was the worst performer of the EU-27 countries with GDP declining 11% in 2020, compared to an average reduction of 6.3%. CaixaBank´s net attributable profit was EUR 1.4 billion for FY20, down 19% Year-on-Year (YoY). However, the net profit was down 40% YoY (as calculated by DBRS Morningstar) after adjusting for the extraordinary costs the bank had during 2019. Nevertheless, the Bank registered the lowest drop in domestic profits compared to its Spanish peers. The main driver behind the impact on earnings was higher Loan Loss Provisions (LLPs) that rose to EUR 1.9 billion in 2020 compared to EUR 0.4 billion in 2019. Despite ongoing pressure, CaixaBank demonstrated good revenue resiliency, with net fees and Net Interest Income (NII) only marginally down. DBRS Morningstar sees as positive for CaixaBank´s profitability its merger with Bankia as will support profitability in the current difficult environment, with expected annual cost savings of c. EUR 770 million by end-2023.

Despite the COVID-19 crisis, CaixaBank’s key asset quality metrics have improved during 2020. The NPA ratio decreased YoY and stood at 4.9% at end-2020, while its NPL ratio (both as calculated by DRBS Morningstar) was 3.4%, down YoY. DBRS Morningstar considers that the state guaranteed loans and loan moratoria are limiting past-due situations. CaixaBank has made use of both measures. State guarantees amounted to EUR 11.5 billion representing 4.7% of the Bank’s total gross loans. As of end-2020, the Bank had granted payment holiday applications amounting to EUR 16.8 billion, or 6.9% of its total gross loans. At end-2020, EUR 14.3 billion of payment holidays breaks are still active. DBRS Morningstar considers that CaixaBank´s asset quality will deteriorate during 2021, in particular after the expiration of its loan moratoria which are mainly concentrated between April and July. In addition, CaixaBank´s asset quality metrics will slightly deteriorate due to Bankia’s slightly higher NPL and NPA ratios. The pro-forma NPA ratio will deteriorate by around 70bps at end-2020. Despite these challenges, we consider that CaixaBank is well positioned to manage the COVID-19 impact on its loan book.

CaixaBank’s funding is underpinned by its leading franchise in Spain where the Bank has maintained strong market shares for deposits. The Bank’s funding and liquidity ratios remain strong. DBRS Morningstar notes that the Bank’s customer deposits grew by EUR 23.7 billion or 11% YoY in 2020. DBRS Morningstar expects Caixabank’s funding and liquidity position to remain very solid after the merger, given the robust funding and liquidity profile of Bankia.

DBRS Morningstar views Caixabank’s capital position as sound, supported by the Bank’s good track record in generating earnings, access to capital markets and solid capital cushions. At end-2020, the Bank’s capital ratios amply exceeded its minimum requirements. Similar to most European banks, CaixaBank´s total capital ratios have improved substantially, up 240 bps YoY, positively impacted by new regulatory capital measures, the recent restriction on dividend payments, organic capital generation and new capital instruments issuances. Moreover, its CET1 (fully-loaded) ratio, excluding the transitional IFRS9 impact, has also increased by around 110 bps YoY. As a result, CaixaBank´s CET1 (fully-loaded) ratio stood at 13.1% at end-2020.

DBRS Morningstar considers that the merger gives CaixaBank greater flexibility to absorb potential credit impairments and to implement restructuring plans. The Bank's pro-forma CET1 ratio at end-2020 would be around 80 bps higher following the merger. However, during 2021 the Bank expects to book some negative one-off capital impacts, due to TRIM revisions (around 60 bps) and Fair Value adjustments of Bankia´s balance sheet and other adjustments (around 55 bps). Lastly, the Bank expects to charge substantial restructuring costs to support its profitability ratios, which according to the Bank will deduct at least 95 bps of capital during 2021. Despite these impacts, DBRS Morningstar consider the Bank´s capital ratios are well positioned to absorb potential impacts from the COVID-19 crisis.

Following the merger between Bankia and CaixaBank, the outstanding senior, senior non-preferred and subordinated debt of Bankia has been assumed by CaixaBank, and as a result the ratings on these instruments have been upgraded in line with the ratings of CaixaBank. The ISINs of these instruments are as follows: Long-Term Senior Debt (ES0213307053 and ES0313307201); Senior Non-Preferred Debt (ES0213307061 and ES0313307219); and Dated Subordinated debt (ES0213056007, ES0213307046 and XS1951220596).

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/373262

The Grid Summary Grades for CaixaBank S.A. are as follows: Franchise Strength – Strong; Earnings –Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

DBRS Morningstar notes that this Press Release was amended on 24 March 2022 to correct the ratings table.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020)- https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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 Annual Reports (2015-2020), Quarterly Reports (2015-2020), Presentations (2015-2020), European Banking Authority (EBA), Bank of Spain 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/376017

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: March 4, 2013
Last Rating Date: March 30, 2020

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