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. The trend on the ratings remains Negative. At the same time, the BBB (low) IA and the SA3 Support Assessment are unchanged. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings of BCP takes into account the Bank’s stable franchise, solid funding profile and moderate capital buffers. The Negative trend reflects the risks for the Bank’s asset quality and profitability as a result of the ongoing uncertainty and economic disruption from the COVID-19 pandemic. In Q1 2021, the outstanding loans under moratoria were still sizable at EUR 8 billion, corresponding to 21% of the Bank’s Portuguese lending book. The Negative Trend also incorporates the legal and financial risks that the Bank is facing with its exposure to mortgages denominated in CHF at its subsidiary in Poland, stemming from the potential conversion of the loans into PLN zloty or from the annulment of the contracts if they are deemed abusive.
An upgrade of the ratings is unlikely given the Negative trend, although the trend could return to Stable if the Bank demonstrates limited asset quality impact at the end of moratorium period, and if the capital impact following the resolution of the CHF mortgage problem proves to be manageable.
A downgrade would likely be driven by a significant deterioration of the Bank’s capital buffers or deterioration in the risk profile,
BCP is the second largest banking group in Portugal where it maintains solid market shares in both loans and deposits. Domestic operations accounted for 71% of total assets in Q1 2021. 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 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.
The net results, however, declined in 2020, mainly as a result of the COVID-19 pandemic which has put pressure on revenues and credit impairments, especially in Portugal, and the negative evolution of the legal position for FX mortgages in Poland which led to a sharp increase in provisions for legal risks amid the growing number of lawsuits. BCP’s Return on Equity (RoE) fell to 3% in YE 2020 from 5% in 2019.
In Q1 2021, total impairments and provisions rose by 20% YoY. Loan loss impairments increased to EUR 111 million from EUR 86 million in Q1 2020, reflecting the deterioration of the credit profile of some customers as well as an increase in collective impairments.
Despite the challenging operating environment in 2020, the Bank continued to reduce its stock of Non-Performing Exposures (NPEs) which declined by EUR 0.8 billion YoY to EUR 3.1 billion in Q1 2021, largely due to portfolio sales. For the time being, loan moratoria and other government-support measures have helped to shield the Bank from further asset-quality deterioration. However, with the forthcoming removal of these support measures, we expect NPLs to rise through 2021 and 2022. As of Q1 2021, BCP reported outstanding moratoria for EUR 8 billion, corresponding to 21% of its total lending book in Portugal, of which 26% were classified as Stage 2 loans, and 9% in Stage 3. The grace period for the bulk of these loans is set to expire in September 2021.
Outside Portugal, the Bank continues to face issues related to the legacy exposure to mortgages in CHF of its subsidiary, Bank Millennium, in Poland. The risks have increased following the ruling of the ECJ in October 2019. Since then, the number of lawsuits has grown as have the number of unfavourable court rulings against BCP. Provisions for CHF loans increased sharply to EUR 113 million in Q1 2021 from EUR 12.7 million in Q1 2020. This has led to cumulative provisions of EUR 304.5 million, or 11% of the total CHF mortgage portfolio. The final costs for the Bank which stem from the potential conversion of the loans in PLN zloty or from the annulment of the contract if the FX clauses of the mortgage are deemed abusive, remain uncertain given the ongoing legal development, but they could be significant. A ruling from the Supreme Court of Poland on FX loans is expected by YE 2021.
The Bank maintains a solid funding and liquidity position, underpinned by its stable deposit base and large stock of eligible assets for ECB funding. At end-Q1 2021, the net loan to deposit ratio was 83%, slightly down YoY driven by growth in deposits. On the wholesale market, the Bank increased its exposure to the ECB with the take-up of TLTRO III funds and in February 2021 it returned to the institutional market with the issuance of senior bonds for EUR 500 million in line with its MREL funding plan. The Bank’s capital ratios provide an acceptable cushion over the ECB SREP minimum requirements. At Q1 2021, the Bank reported a fully-loaded CET1 ratio of 12.2%, while the total capital ratio stood at 15.5%.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
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 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 (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings .
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 2021 results, BCP 2016-2020 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. 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/379331
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Nicola De Caro - Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: June 10, 2011
Last Rating Date: May 28, 2020
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