DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Grupo Cooperativo Cajamar (GCC, the Group), Cajamar Caja Rural, Sociedad Cooperativa de Credito (Cajamar), and Banco de Crédito Social Cooperativo S.A. (BCC). The Long-Term Issuer Ratings remains at BB (high) and the Short-Term Issuer Ratings at R-3. The trend on all ratings has been revised to Stable from Negative. DBRS Morningstar has also maintained the Group’s Intrinsic Assessment (IA) at BB (high) and the Support Assessment at SA3. Cajamar’s and BCC’s Support Assessment is SA1. See the full list of ratings in the table at the bottom of this press release.
KEY RATING CONSIDERATIONS
The change of the trend to Stable from Negative reflects DBRS Morningstar’s view that the impact of COVID-19 on the Group has been less than originally anticipated, especially with regard to GCC’s asset quality and earnings. Notably, as of end-March 2022 GCC has continued to reduce its problematic assets (down 28% YoY) and profitability levels, albeit weak, are back to pre-COVID levels. DBRS Morningstar expects the Group’s risk profile will continue to improve in coming quarters given expected additional efforts to clean-up its balance sheet. Nevertheless, asset quality risks do remain, following the full removal of Government support measures and following the Russian invasion of Ukraine. DBRS Morningstar does not expect the conflict to have any immediate impact for GCC given the Group does not have material exposures to Russia and Ukraine, however, the indirect macroeconomic implications are likely to negatively affect the operating environment of the Group.
The ratings also reflect the Group’s sound cooperative franchise in Spain, particularly in the agriculture sector in its home markets of Almeria and Valencia, which provides the Group with a stable customer deposit base. The ratings also incorporate the Group’s remaining high levels of non-performing assets (NPAs) due to foreclosed assets. The confirmation also takes into consideration GCC’s still weak profitability as well as the improving but modest capital cushion over its requirements.
An upgrade of the Long-Term Issuer Rating would require further reduction of the Group’s NPAs without negatively affecting capital and consistently restoring pre-pandemic profitability metrics.
A downgrade of the Long-Term Issuer Rating would result from a sustained deterioration in the loan portfolio, a reduction in profitability, or a weakening of the Group’s capital cushions.
BCC‘s and Cajamar’s ratings are equalised with the ratings of GCC. As a result, any positive or negative actions on GCC’s ratings would be mirrored in the ratings of BCC and Cajamar.
Franchise Combined Building Block (BB) Assessment: Moderate
GCC’s IA of BB (high) is underpinned by the Group’s sound franchise position as the largest cooperative bank in Spain, as measured by total assets. The Group enjoys significant market shares for agriculture loans in Spain of around 15% and has meaningful regional market shares in the regions of Almeria (around 45%) and Valencia (around 10%). However, the Group’s national market shares are more modest at around 2.9% for loans at end-March 2022.
Earnings Combined Building Block (BB) Assessment: Weak/Very Weak
DBRS Morningstar views GCC’s profitability as recovering after the economic disruption resulting from COVID-19. The Group recorded in Q1 2022 a net attributable profit of EUR 29.5 million, up from EUR 14 million in Q1 2021. Excluding one-off effects, related to the sovereign portfolio sale, insurance business value increase, and TLTRO III accruals, GCC’s total operating income would have increased 9% YoY. Nevertheless, the Group’s RoE was 3.3% in the period, which is still low compared to domestic peers. This reflects the high cost of risk (170 bps in Q1 2022) given that the Group is still in the process of de-risking the balance sheet by reducing its legacy problematic assets from the financial crisis. DBRS Morningstar considers that profitability will continue to be low in coming quarters due to a still high cost of risk in 2022.
Risk Combined Building Block (BB) Assessment: Moderate/Weak
The recent improvement in GCC’s asset quality is a key consideration for the trend change to Stable, with the Group continuing to reduce its problematic exposures in the past 12 months, despite the COVID-19 pandemic. At end-Q1 2022, NPAs totaled EUR 3 billion, down 28% YoY. The reduction was helped by organic reduction and the sale of a portfolio. As a result, at end-March 2022 the NPL ratio is close to 3.4%, below the average of the Spanish Banking system. However, given its still high exposures to legacy foreclosed assets, the Group’s NPA ratio is still high, at around 8% of total gross loans and foreclosed assets, down from 11.3% a year ago. DBRS Morningstar expects that the Group will continue to reduce its problematic assets in coming quarters, mainly through further organic reduction. As of end-March 2022, all the Group’s loans under moratoria had expired and the performance of the loans under moratoria has been better than expected. Regarding newly originated loans provided under the state guarantee schemes, these amounted to EUR 1.8 billion, representing around 5.1% of the Group’s total gross loans. However, given the guarantees provided by the Kingdom of Spain (which covers up to 80% of the credit losses), DBRS Morningstar does not expect any deterioration of this portfolio to have a major impact on the Group’s asset quality profile.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views GCC’s funding and liquidity position as being underpinned by the solid and stable customer deposit base generated through its cooperative business model. At end-Q1 2022, the loan to deposit ratio was 85% (as calculated by DBRS Morningstar) down from 90% at end-Q1 2021. The Group also has a solid liquidity position supported by a large pool of liquid assets totaling EUR 13.2 billion, or 22% of end-Q1 2022 total assets. GCC reported a Liquidity Coverage Ratio (LCR) of 204% and a Net Stable Funding Ratio (NSFR) of 139% at end-Q1 2022. Funding from the European Central Bank (ECB) stood at around EUR 10.3 billion at end-Q1 2022, accounting for around 17% of total assets.
Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
GCC’s CET1 ratio (phased-in) stood at 13.1% at end-Q1 2022, down from 13.8% at end-Q1 2021, largely resulting from higher Risk Weighted Assets (RWAs) due to strong new lending volumes. In addition, the Group had a negative impact (45 bps) of the application of the prudential regulation, related to the shortfall of loan loss reserves for old NPLs relative to the ECB’s expectations and further deductions for intangible assets. This compares to a minimum SREP Capital Requirement (OCR) for total capital of 13.0% for 2021. As a result, the capital cushion over the requirement was 256 bps, which is lower than the average of Spanish peers. However, capital ratios and cushions over requirements have increased since the COVID-19 outbreak. The cooperative credit institutions within the Group (including Cajamar) are owned by its members who contribute to capital. Capital contributions from its members were substantial during the previous 12 months representing 86 bps of the Group’s CET1 ratio (phased-in). DBRS Morningstar views this positively as the Group’s ability to increase capital through retained profits or capital markets is limited.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397204
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/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, GCC 2021 Presentation, GCC 2021 Press Release, GCC Q1 2022 Report, GCC 2021 Annual Accounts, European Banking Authority (EBA) Risk Dashboard, and Bank of Spain Statistical Bulletin. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/397203
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Pablo Manzano, CFA, Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: 26 November 2020
Last Rating Date: 25 May 2021
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