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 all ratings has been revised to Stable from 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 reflects the Bank’s stable franchise in Portugal, the solid funding profile and the modest capital cushion over the supervisory requirements. The change of the trend to Stable from Negative reflects DBRS Morningstar’s view that the impact from COVID-19 has been less pronounced than initially anticipated. Asset quality deterioration has been contained, while core revenues have begun to normalise in both the domestic and international businesses. Despite that, the growing uncertainty resulting from high and persistent inflationary pressures, and the potential impact from the war in Ukraine pose risks to earnings and credit risk in the medium term.
The ratings also take into account the legal and financial risks facing the Bank due to its exposure to mortgages denominated in CHF at its subsidiary in Poland. We understand that there is still uncertainty on the evolution of this issue and its ultimate impact on profitability and capital. Provisions for these risks have increased sharply in 2021 and they are expected to remain elevated in the near term.
A rating upgrade is unlikely given the ongoing uncertainty related to the CHF mortgage portfolio in Poland. An upgrade would require further reduction in non-performing exposures (NPEs), strengthening of the capital cushions, as well as improvement in profitability.
A downgrade would likely be driven by a significant deterioration of the Bank’s capital buffers or deterioration in the risk profile. Negative rating pressure would be likely if the risks and financial impact related to the CHF mortgage loans prove to be worse than expected.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
BCP is the second largest banking group in Portugal where it maintains solid market shares in both loans and deposits. Domestic operations accounted for 72% of total assets as of end-Q1 2022. Outside Portugal, the Bank has a significant presence in Poland via its subsidiary Bank Millennium, and this was further expanded with the acquisition of Eurobank in Q2 2019. Poland has had a positive diversification effect for the Group, particularly during the previous crisis when the performance of the Portuguese operations was affected by the build-up of problem loans. The situation in Poland, however, has become more challenging in relation to its legacy exposure to mortgages denominated in CHF.
Earnings Combined Building Block (BB) Assessment: Moderate/Weak
The Bank’s profits weakened in 2021, impacted by the increased need to raise provisions related to the CHF mortgage portfolio in Poland. Group net income was EUR 138 million in FY 2021, down from EUR 183 million in 2020. The return on equity fell to 2.4%, down from around 3.1% in 2020 and 5.1% in 2019.
BCP’s subsidiary in Poland reported EUR 457 million in charges related to the CHF mortgage portfolio, up from EUR 152 million in 2020, and included costs for conversion into the local currency or early repayment, compensation charges and legal costs. These charges are expected to remain high in the near term. Positively the performance of the operations in Portugal improved with net income up around 29% YoY in 2021, exceeding pre-pandemic levels, driven by higher revenues as well as lower credit costs compared to 2020.
Risk Combined Building Block (BB) Assessment: Moderate/Weak
The Bank has continued to reduce its stock of NPEs, with the total gross NPE stock decreasing to EUR 2.7 billion at Q1 2022, down by 14% YoY. At Q1 2022, the Bank’s gross NPE ratio was reported at 4.6%, down from 5.5% at Q1 2021 (4.7% at FY 2021). Asset quality risks stemming from the pandemic have decreased for the time being, and DBRS Morningstar notes that, so far, the withdrawal of the moratoria has not resulted in a spike of new NPLs. The Bank previously had EUR 8 billion of loans under moratoria (at Q1 2021), representing around 21% of the gross loan book. DBRS Morningstar notes that this portfolio has seen an increase in the proportion of Stage 2 loans (where credit risk has increased significantly since initial recognition).
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 have increased sharply and the Bank now has taken cumulative provisions of EUR 741 million, or 30% of the total CHF mortgage portfolio. The final outcome and costs for the Bank remain still uncertain.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
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 2022, the net loan to deposit ratio was 79%, slightly down YoY driven by growth in deposits. The Bank’s Liquidity Coverage Ratio (LCR) stood at a very solid 283% at end-Q1 2022. During the second half of 2021, BCP returned to the institutional market with the issuance of two EUR 500 million senior bonds and a EUR 300 million subordinated bond, in line with its MREL funding plan.
Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
The Bank’s capital ratios provide a modest cushion over the ECB SREP minimum requirements. At Q1 2022, the Bank reported a fully-loaded CET1 ratio of 11.5%, down from 12.2% a year ago, affected by the revaluation of the fair value reserves and the non-controlling interest of international subsidiaries.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397488
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
DBRS Morningstar considers the Product Governance ESG subfactor, under the Social factor, relevant to BCP’s ratings. This reflects the ongoing legal issues related to the CHF mortgage portfolio in Poland. This factor is considered under the Risk Profile grid grade. The Business Ethics subfactor is no longer considered as relevant.
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
and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (4 April 2022) https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
The sources of information used for this rating include Morningstar Inc. and Company Documents, BCP Presentation and Press Release Q1 2022 results, BCP 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/397487
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 10, 2011
Last Rating Date: May 28, 2021
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.