DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Caixa Geral de Depósitos (CGD or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The Bank’s Deposit ratings were confirmed at BBB (high)/R-1 (low), 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 long-term ratings has been changed to Positive from Negative. The IA of CGD is maintained at BBB and the Support Assessment at SA3. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings and the change in the trend to Positive take into account the Bank’s leading market position in Portugal, its solid funding and capital, as well as the resiliency shown during the pandemic. The Positive trend also incorporates our expectation that CGD will consolidate the progress made in terms of balance sheet de-risking, as well as continuing to maintain good cost control. CGD continued to reduce its stock of non-performing loans (NPLs) in 2020 and 2021, while the formation of new NPLs during the pandemic and post-moratoria period has been less pronounced than previously anticipated. In addition, the Bank is making progress with its revenue generation and profitability metrics. However, the growing uncertainty in the bank’s operating environment resulting from high and persistent inflation, and the potential impact from the war in Ukraine, could add pressure to earnings and credit risk in the medium term, in DBRS Morningstar’s view.
The Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). This reflects the legacy issues the bank has faced which still weigh on the grids assessment, and that the IAR has improved with the incorporation of FY 2021 data, mainly as the large losses reported in FY2016 are no longer part of the scorecard results.
A rating upgrade would be likely if the Bank is able to preserve its solid capital position, maintain its current risk profile, as well as demonstrate an adequate track record of recurrent profit.
Given the Positive trend, a rating downgrade is unlikely at this time. However, the trend could be revised to Stable if CGD’s future profitability levels fall. A downgrade of the ratings would also be driven by a significant deterioration of the Bank’s risk profile.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Owned by the Portuguese State, CGD is the largest banking group in Portugal where it is the market leader in several products and services in commercial and retail banking. For several years, the Bank has embarked on a restructuring program agreed with the European Commission (EC) following the State-backed recapitalisation process in 2017. During this period, CGD has successfully reduced its stock of NPLs, streamlined its operating structure by reducing headcount and branches, and downsized its operations outside Portugal. The program with the European Commission was concluded in 2021. As part of the new strategic plan for 2021-2024, CGD aims to consolidate its leadership position, by increasing the focus on the product offering, digitalization and sustainability. At the same time, the Bank is expected to consolidate the progress made in terms of efficiency and risk, as well as to improve its profitability.
Earnings Combined Building Block (BB) Assessment: Moderate
CGD’s profitability has improved somewhat in recent years mainly due to lower impairment charges and good cost control. On the other hand, revenue generation has remained modest, particularly for net interest income. In FY 2021, CGD’s net profit increased by around 19% mainly due to lower credit provisions which were higher in 2020 as a result of the downward revision of the macroeconomic scenario for COVID-19 and preventive measures in anticipation of future asset quality deterioration. Results for 2021 were also positively impacted by some one-offs and significant contributions from trading income. The results for Q1 2022, confirmed a normalisation in credit risk and a pick-up in revenues. Net commissions and fees were up by around 17% YoY in Q1 2022, supported by the growth in commissions on sales of investment funds and insurance as well as fees from transactions and payments. Net interest income was also up 14% YoY on the back of the improving performance in both the international business and Portugal. Overall, RoE was reported at 7.2%, up from 4.2% in Q1 2021.
Risk Combined Building Block (BB) Assessment: Good
CGD’s credit quality has largely remained resilient since the onset of the pandemic, as loan moratoria and other government-support measures have shielded the Bank from asset-quality deterioration, especially in sectors such as tourism & hospitality, food services, transportation, leisure and entertainment which have been the sectors most affected by the pandemic. At end-Q1 2022 the gross NPL stock stood at EUR 2.1 billion, largely stable compared to YE 2021. The gross NPL ratio was reported at 2.8%, stable versus FY 2021, but down compared to the same period in 2021. Coverage levels remain solid. Going forward, DBRS Morningstar expects CGD’s gross NPL ratio to remain below 3%, in line with the Bank’s strategic plan for 2021-2024.
The Bank’s large stock of loans supported by the COVID-19 related moratoria largely expired by September 2021. Most customers have resumed their debt payments without any meaningful impact on the Bank’s asset quality to date. Downside risk for asset quality is contained in our view should the pandemic remain under control, however there might be pressure in the medium to long term given the uncertainty resulting from high and persistent inflationary pressures, and the potential impact of the war in Ukraine.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
The Bank maintains a solid funding and liquidity position, underpinned by its leading franchise position in customer deposits in Portugal, and a solid liquidity position with a stock of ECB eligible assets of around EUR 14 billion. At end-Q1 2022, the net loan to deposit ratio was stable at 63%, while the liquidity and funding ratios (LCR and NSFR) remained at very comfortable levels.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
CGD’s capital position remains solid. In Q1 2022, CGD reported a fully-loaded common equity tier 1 (CET1) ratio of 18.2% and a total capital ratio of 19.7%, providing a solid cushion over the regulatory minimum requirements and against a potential adverse environment. In March 2022, CGD was granted ECB approval for the early redemption of the AT1 instrument, issued in March 2017, under the state-backed recapitalisation plan agreed with the European Commission.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397482
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, CGD Presentation and Press Release Q1 2022 results, CGD 2016-2021 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.
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/397481
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: December 23, 2011
Last Rating Date: May 28, 2021
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