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 remain at BB (high) and the Short-Term Issuer Ratings at R-3. The trend on all ratings has been revised to Positive from Stable. 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 Assessments are 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 Positive from Stable reflects the Group’s increased capital position and progress in reducing Non-Performing Assets (NPAs) in recent years. DBRS Morningstar expects the Group to improve key asset quality metrics in coming quarters, despite the current challenging economic environment. The ratings also take into account that profitability levels, albeit weak, are back to pre-COVID levels, and are expected to continue to strengthen on the back of higher interest rates. 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 take into account that despite reporting an improved capital cushion, its capitalisation is lower than the average of its Spanish peers, and that the Group still has significant levels of foreclosed asset exposures.
The IA of BB (high) for Grupo Cooperativo Cajamar is now positioned below the three-notch Intrinsic Assessment Range (IAR) generated by the Methodology. Despite the progress made by the Group, NPA levels are still significant and require further reduction.
An upgrade of the Long-Term Issuer Rating would require further reduction of the Group’s NPAs without negatively affecting capital and profitability metrics.
The trend would return to Stable if Cajamar is unable to improve its key asset quality ratios. A downgrade of the Long-Term Issuer Rating would result if the Group registers 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-September 2022.
Earnings Combined Building Block (BB) Assessment: Moderate/ Weak
DBRS Morningstar views GCC’s profitability as recovering after the economic disruption resulting from COVID-19. In 9M 2022 the Group recorded a net attributable profit of EUR 79 million, up from EUR 62 million in 9M 2021. Excluding TLTRO III financing operations income, GCC’s net interest income (NII) rose 7% Year-on-Year (YoY). Nevertheless, the Group’s Return on Equity (RoE) was still 3% in 9M 2022, which is still low compared to peers. This reflects the high Cost of Risk of 94 bps in 9M 2022 (including foreclosed asset provisions) given that the Group is still in the process of de-risking the balance sheet by reducing its legacy NPAs. DBRS Morningstar considers that profitability will continue to be affected by a high cost of risk in coming quarters. However, GCC is well positioned to further benefit from higher market interest rates given that most of its loan portfolio is at variable rates (c. 80%).
Risk Combined Building Block (BB) Assessment: Moderate
The recent improvement in GCC’s asset quality is a key consideration for the trend change to Positive. The Group continued to reduce its problematic exposures in the past 12 months. At end-Q3 2022, NPAs totalled EUR 2.8 billion, down 26% YoY. As a result, at end-September 2022 the NPL ratio is close to 3.0% (as calculated by DBRS Morningstar), below the average of the Spanish Banking system. However, given its legacy foreclosed asset exposures, the Group’s NPA ratio is still high, at around 7.3% (as calculated by DBRS Morningstar). DBRS Morningstar expects that the Group will continue to reduce its problematic assets in coming quarters, mainly through organic reduction.
Other risks include portfolios affected by extraordinary measures during the COVID-19 outbreak. As of end-September 2022, all the Group’s loans under moratoria had expired and their performance has been better than expected. Existing loans provided under the state guarantee schemes amounted to EUR 1.5 billion, representing around 4.2% of the Group’s total gross loans at end-September 2022. However, given the guarantees from the Kingdom of Spain (which covers up to 80% of the credit losses), DBRS Morningstar does not expect any deterioration in this portfolio to have a major impact on the Group’s asset quality profile. Another source of risk is the Bank´s fixed income portfolio, which represented 22% of total assets at end-June 2022. Most of the fixed income portfolio is held in the amortised cost book (88% at end-June 2022), reducing capital sensitivity to credit spread changes. Nevertheless, for the fixed income portfolio, we still take into account the potential risks from unrealised losses on the back of the recent spike in interest rates.
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-Q3 2022, the reported loan to deposit ratio was 85%. The Group also has a solid liquidity position supported by an adequate pool of liquid assets totalling EUR 12 billion, or 19% of end-Q3 2022 total assets. GCC reported a Liquidity Coverage Ratio (LCR) of 160.9% and a Net Stable Funding Ratio (NSFR) of 139% at end-Q3 2022. Funding from the European Central Bank (ECB) was around EUR 10.4 billion at end-Q3 2022, accounting for around 16.4% of total assets.
Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
GCC’s CET1 ratio (phased-in) stood at 13.1% at end-Q3 2022, down from 13.3% at end-Q3 2021, largely resulting from higher Risk Weighted Assets (RWAs) and further capital deductions. The Group’s total capital ratio (phased-in) stood at 15.52%. This compares to a minimum SREP Capital Requirement (OCR) for total capital of 13.0% for 2023. As a result, the capital cushion over the requirement was 252 bps, which is lower than the average of Spanish peers. However, capital ratios and cushions over requirements have increased since recent years. The cooperative credit institutions within the Group (including Cajamar) are owned by its members who contribute to capital. 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/407568
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors 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 .(17 May 2022)
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) https://www.dbrsmorningstar.com/research/398692 In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, GCC 2021 Presentation, GCC 2021 Press Release, GCC Q2 and Q3 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/407567
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: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 26 November 2020
Last Rating Date: 23 May 2022
DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500
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.