DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Caixa Económica Montepio Geral, S.A. (Banco Montepio, or the Bank), including the Long-Term Issuer Rating of B, and the Short-Term Issuer Rating of R-4, and the Trend on all ratings is now Stable. The Bank’s Intrinsic Assessment (IA) is maintained at B and the Support Assessment at SA3.
The Bank’s B (high) Long-Term Deposits rating is one notch above the IA, reflecting the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. The Bank’s Short-Term Deposits rating is R-4 with a Stable trend. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings and the change of the Trend to Stable from Negative takes into account the progress that Banco Montepio has made in 2021 in strengthening its regulatory capital ratios and de-risking its balance sheet. The Bank continued to reduce its stock of non-performing loans (NPLs) and non-core assets, mainly through the disposal of legacy problem loans. However, the ratings continue to reflect the Bank’s weak profitability, the still large stock of non-performing loans (NPLs) and the modest capital cushions.
An upgrade would require a sustained improvement in profitability and a further reduction in NPLs.
A downgrade would occur in the event of a material deterioration in the Bank’s capital position or its asset quality.
Franchise Combined Building Block (BB) Assessment: Moderate/Weak
Banco Montepio is a small Portuguese retail and commercial bank with total assets of around EUR 19.7 billion at end-2021 and is majority owned by the Montepio Geral Associação Mutualista (MGAM). The Bank is currently implementing a restructuring plan aimed at strengthening its balance sheet, productivity levels and competitive position. In 2021, the management has taken further actions to streamline the Bank’s retail footprint and enhance digitalization.
Earnings Combined Building Block (BB) Assessment: Weak/Very Weak
DBRS Morningstar’s assessment of Banco Montepio’s profitability considers the Bank’s modest revenue diversification, high cost income ratio and high provisioning costs, which lead to weak profitability metrics. However we note that Banco Montepio returned to profit in FY 2021, posting a net income of around EUR 7 million, compared to a net loss of EUR 80.7 million in 2020. The improvement reflected the improving economic environment, lower provisions and impairments, as well as lower operating costs. Nonetheless, the Bank’s profitability levels remain below pre-pandemic levels, mainly as a result of lower revenues .
Risk Combined Building Block (BB) Assessment: Weak/Very Weak
In 2021, Banco Montepio has made significant progress in reducing its stock of legacy non-performing loans. Despite the challenges of the pandemic, the Bank’s gross NPE ratio has reduced to 8.6% at end-2021 (or 8.0% on a pro-forma basis, taking into account the sale of a secured portfolio of NPLs at the end of 2021) from 10.4% at end-2020. Nonetheless, the Bank’s asset quality metrics continue to compare unfavourably with domestic and international peers.
Near terms risks from the pandemic have decreased for the time being, and the Bank’s asset quality has proved to be more resilient than previously anticipated. DBRS Morningstar notes that, so far, the withdrawal of the moratoria by September 2021 has not resulted in a spike of new NPLs. However, there has been an increase in the level of Stage 2 loans. For these loans, credit risk has increased significantly since initial recognition, and the migration to Stage 3 (NPLs) could take same time before it materialises.
Funding and Liquidity Combined Building Block (BB) Assessment: Moderate
Banco Montepio's funding profile is underpinned by its customer deposits, which represent the main source of funding. After a period of stress in 2017,the Bank’s deposit base has stabilised. This has also helped to reduce funding costs. On the wholesale market, the Bank has mainly secured exposures, subordinated debt and repos. Accessing the unsecured market remains more challenging and costly. In 2021, the Bank took the opportunity to increase its exposure to the ECB. Funding and liquidity ratios were comfortable at end-2021 with the NSFR at 125% and the LCR at 264%.
Capitalisation Combined Building Block (BB) Assessment: Weak/Very Weak
In 2021, Banco Montepio restored its capital buffers over the minimum supervisory requirements, even when excluding the capital relief measures introduced during the pandemic. The Bank strengthened its phased-in CET1 and Total capital ratios to 12.7% and 15.1%, respectively, from 11.6% and 13.8% at end-2020. This was mainly due to the reduction in RWAs achieved through the reduction in NPLs, lower exposure to real estate assets, and the sale of other non-core assets.
Despite this, the current capital cushions provide limited flexibility for future balance sheet adjustments. Our view on capital also considers the Bank’s limited ability to generate capital organically as well as the reliance on the main shareholder.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/395041
In the past, the Bank has experienced high management turnover and reputational issues, and was also subject to administrative proceedings and fines by the Portuguese supervisory authorities in relation to alleged past failures in internal controls. DBRS Morningstar views that the bank has made progress in resolving some of these proceedings, and has not faced any new significant issue. As a result, we now consider the “Corporate Governance” risk subfactor as relevant to Banco Montepio’s ratings, rather than significant, and this is reflected in the assessment of the Risk building block.
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.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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
The sources of information used for this rating include Morningstar Inc. and Company Documents, Caixa Económica Montepio Geral, S.A. Press Release Q4 2021 Results, Caixa Económica Montepio Geral, S.A. 2016-2020 Annual Reports . 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/395042
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: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: June 27, 2011
Last Rating Date: July 2, 2021
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