DBRS Ratings GmbH (DBRS Morningstar) upgraded the ratings of Abanca Corporación Bancaria S.A. (Abanca or the Bank), including the Long-Term Issuer Rating to BBB (high) and the Short-Term Issuer Rating to R-1 (low). The trend on all ratings is Stable. The Intrinsic Assessment (IA) is now BBB (high), while its Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
The upgrade of Abanca’s ratings reflects the Bank’s leading regional franchise in its home market of Galicia, reinforced in recent years through several targeted acquisitions which have expanded the Bank’s footprint in both Spain and Portugal. We view these acquisitions as having diversified Abanca’s revenue mix while creating potential cost synergies which should improve profitability over the medium term.
The upgrade also considers Abanca’s good track record in integrating previous acquisitions, which has enabled the Bank to quickly leverage its new businesses. In our view, this has translated into continued core revenue improvement, through both higher fees and commissions and net interest income (NII). Although cost efficiency remains weaker than its domestic peer group, synergies have materialised on the cost side and we expect the cost-to-income ratio to improve over the medium term.
In addition, the rating action incorporates the continued progress made in asset quality, with asset quality metrics now comparing very favourably to domestic peers and in line with European peers.
Ratings are also underpinned by the Bank’s sound funding and liquidity position. Capital levels are solid, and reinforced through regular access to wholesale markets, although we note that the acquisitions have put some pressure on capital levels. In addition, the ratings continue to incorporate the fact that Abanca is largely owned by one shareholder who is also the current non-executive chairman and therefore we consider that the independence of the board is more limited than peers.
An upgrade of the Long-Term ratings would occur should the Bank materially improve its profitability metrics whilst maintaining its current risk profile and capital cushions.
The Long-Term ratings would be downgraded if the Bank were to experience a material decline in its capital position, asset quality or profitability. Any major integration issues from acquisitions would also lead to a downgrade.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Abanca’s ratings continue to be underpinned by its well-established regional franchise in Galicia, where the Bank maintains leading market shares for loans and deposits. In addition, DBRS Morningstar notes that Abanca has grown its presence in Spain, through a series of targeted acquisitions including Banco Caixa Geral, S.A.’s and Novo Banco, S.A.’s Spanish businesses as well as Bankoa, making it now the seventh largest Spanish banking group by total assets. In addition, the Bank now has a presence in neighbouring Portugal following the 2018 acquisition of Deutsche Bank’s retail business in the country. Abanca is largely owned by one shareholder, Mr. Escotet Rodríguez, who has a controlling stake of 84.75 % of the capital and who is also the current non-executive chairman. As a result, DBRS Morningstar views the independence of the Bank’s board as potentially more limited than peers with a wider or public ownership, albeit the majority of the board is composed of independent directors.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
In 2021, Abanca reported net attributable income of EUR 323.3 million, up twofold year-on-year (YoY) from EUR 160.1 million. Results in 2021 incorporated EUR 205.9 million of negative goodwill related to several acquisitions, including NB Espana. Excluding this effect, results were supported by higher core revenues, contained operating expenses and lower provisions compared to 2020 which incorporated elevated COVID-19 related provisions. In Q1 2022, the Group reported net attributable income of EUR 81.2 million, down from EUR 135.3 million in Q1 2021 which incorporated the positive impact of negative goodwill from the Bankoa acquisition. Excluding this, profits were up 13.2% YoY, mostly driven by lower operating expenses and continued improvement in core revenues. Cost of risk continued to normalise to very sound levels, standing at 17 bps compared to 26 bps in Q1 2021.
Risk Combined Building Block (BB) Assessment: Strong/Good
Abanca’s asset quality has improved substantially in recent years, primarily through the reduction of non-performing loans (NPLs). DBRS Morningstar views Abanca asset quality metrics as having reached levels that compare well to domestic peers and in line with the European average. However, the unprecedented measures put in place by the domestic and European authorities have delayed the formation of NPLs following the COVID-19 pandemic. Therefore, we believe uncertainty remains regarding the full effect of the COVID-19 pandemic on asset quality. In addition, the macroeconomic outlook has been made less clear by Russia’s invasion of Ukraine, although Abanca has almost no direct exposure to Russia and Ukraine. The NPA ratio reduced to 3.4% at end-March 2022, stable from end-2021. Total NPLs stood at EUR 1.0 billion at end-March 2022, stable from end-2021, but up from EUR 0.8 billion as a result of the Bank’s latest acquisitions. As a result, Abanca’s NPL ratio (as calculated by DBRS Morningstar) was 2.1% at end-March 2022. DBRS Morningstar considers Abanca’s coverage levels for NPAs at 76.4% at end-March 2022 (84.5% for NPLs and 63.0% for FAs at end-March 2022) as adequate.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
Abanca’s funding and liquidity position is supported by its large and resilient customer deposit base, which has increased as a result of acquisitions, and an ample pool of unused liquid assets. Abanca had a sound net loan-to-deposit ratio (excluding repos and covered bonds included in deposits, as calculated by DBRS Morningstar) of 92.8% at end-Q1 2022 compared to 92.2% at end-2021. Abanca also has sound liquidity and funding ratios, with the Liquidity Coverage Ratio (LCR) at 253% and the Net Stable Funding Ratio (NSFR) at 132%, at end-March 2022.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
Despite the capital consumption resulting from the Bank's recent acquisitions, DBRS Morningstar views Abanca’s capitalisation as sound, supported by its capacity to generate capital through retained earnings and a risk profile that has improved in recent years. In addition, whilst capital ratios were only supported by retained earnings in the past, Abanca has diversified its capital base with the recent issuance of AT1 and Tier 2 instruments. At end-March 2022, Abanca reported a Common Equity Tier 1 (CET 1) ratio of 12.8%, slightly down from end-2021. This continued to provide the Bank with comfortable buffers of around 460 bps over the Overall Capital Requirement (OCR) for CET1 ratio of 8.125% according to the Supervisory Review and Evaluation Process (SREP). In addition, Abanca maintained a 415 bps buffer over the 12.5% minimum Overall Capital Requirement (OCR) for total capital according to the SREP, which includes the AT1 and Tier 2 buckets. With an MREL ratio of 18.2% at end-March 2022, Abanca also complies with its MREL requirement of 17.27% of Total Risk Exposure Amounts (TREA) proforma taking into account the reclassification due to change in business models carried out in April 2022 in certain debt positions.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398618.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
DBRS Morningstar views the Corporate / Transaction Governance subfactor under the Governance ESG factor as relevant since it considers the Bank’s board independence to be more limited than peers with a wider ownership, albeit Abanca’s Board of Directors (BoD) currently consists of 11 members, of which 8 are independent. As a result, these risks are incorporated in the Bank’s Franchise and Capital grid grades.
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 (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, Abanca 2021 & Q1 2022 Press Releases, Abanca 2021 & Q1 2022 Presentations, Abanca 2021 & Q1 2022 Accounts and Abanca 2021 Sustainability Report. 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/398617.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: December 10, 2014
Last Rating Date: June 22, 2021
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