DBRS Ratings GmbH (DBRS Morningstar) has assigned first time public ratings to Kutxabank, S.A (Kutxabank, the Bank or the Group) and Cajasur Banco, S.A (Cajasur). The assigned ratings include Long-Term Issuer Ratings of A (low) and Short-Term Issuer Ratings of R-1 (low). The trend on all Long-Term ratings is Positive whereas the trend on all Short-Term ratings is Stable. Kutxabank’s Intrinsic Assessment (IA) is A (low) and the Support Assessment is SA3. Cajasur’s Support Assessment is SA1. See the full list of ratings in the table at the bottom of this press release.
The A (low) Intrinsic Assessment is underpinned by Kutxabank’s leading banking franchise in the Basque Country. The ratings reflect the Bank’s low credit risk profile, strong asset quality metrics, as well as its robust funding and liquidity position with a stable deposit base and strong capacity to issue covered bonds. DBRS Morningstar sees Kutxabank’s capital ratios as solid and with ample capital cushions over minimum regulatory requirements. The ratings also take into account the Bank’s significant exposure to Spanish equity holdings, which may make the Bank vulnerable to developments in financial markets, as well as taking into account the Bank’s current modest profitability metrics.
The Positive trend reflects the Bank’s sound track record in risk management as well as our expectation that Kutxabank’s profitability will improve in coming quarters on the back of higher net interest income and stable cost of risk. DBRS Morningstar views that the Bank will maintain strong asset quality and capitalization ratios, despite the current operating environment of high inflation and rising interest rates.
The support assessment for Kutxabank is SA3, resulting in no uplift to the Long-Term Issuer Rating for systemic support. Cajasur has an SA1 support assessment to reflect the expectation of predictable support from Kutxabank. It also reflects the joint strategy, established by Kutxabank, and a common treasury and risk management structure.
A rating upgrade would be likely if the Bank is able to demonstrate an improvement in current profitability whilst maintaining its solid capital position and strong asset quality profile.
Given the Positive trend, a rating downgrade is unlikely at this time. However, the trend could be revised to Stable if the Bank´s future profitability levels prove to be below our expectations. The ratings could be downgraded if the Bank’s asset quality metrics or capital ratios deteriorate materially.
Cajasur´s ratings are equalised with the ratings of Kutxabank. As a result, any positive or negative pressure on Kutxabank’s ratings would be mirrored in Cajasur´s ratings.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Kutxabank’s IA of A (low) is underpinned by the Group’s solid franchise. It is the 8th largest banking group in Spain, as measured by total assets at end-June 2022 (EUR 67 billion). The Group enjoys regional market shares above 25% for loans and deposits in the Basque Country and Córdoba. The Bank operates in Córdoba and Andalucía through its banking subsidiary Cajasur, which represents around 20% of the aggregate revenues of the Group at end-June 2022. However, the Group’s national market shares for loans are more modest at around 4% at end-June 2022. Kutxabank´s core markets are mortgage lending as well as its insurance and wealth management division, which reported a strong mutual fund market share of around 6.5% in Spain at June-2022.
Kutxabank’s corporate structure is uncommon in Spain, with the Bank being fully owned by three Basque Foundations. Due to national legislation, the controlling shareholder (BBK Foundation, with a 57% stake) has been required to create a Reserve Fund representing up to 0.75% of the Bank´s RWAs by end-2024, to provide support in the event of Kutxabank facing severe financial difficulties. As of end-September 2022 the Reserve Fund stood at EUR 168 million and it is expected to reach EUR 231 million at end-2024.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Kutxabank’s profitability as improving after the economic disruption resulting from both COVID-19 and the Russian invasion of Ukraine. Kutxabank registered a net profit of EUR 250.5 million in 9M 2022, up 42% YoY. The bank’s return on equity (ROE) stood at 5% at end-September 2022 up from 3.5% at end-September 2021, but still below the 6% registered pre-COVID (end-2019). Profitability is still below pre-COVID levels, affected by still higher loan loss provisions and lower extraordinary revenues compared to pre-COVID results. Nevertheless, at end-September 2022, core revenues (including Net Interest Income and Net Fees) were 10% above pre-COVID levels. DBRS Morningstar expect the Bank´s profitability to materially improve during coming quarters on the back of low Loan Loss Provisions and higher interest rates.
Risk Combined Building Block (BB) Assessment: Strong/Good
Kutxabank has strong asset quality and a sound risk management record and this is a key consideration for the Positive trend. The Bank successfully reduced its Non-Performing Assets (NPA) in recent years and the NPA ratio improved to 3.8% at end-September 2022 from 6.3% at end-2019, while its NPL ratio (both as calculated by DBRS Morningstar) was 1.4%, down from 3.1%, the lowest among Spanish banks. DBRS Morningstar also notes that Stage 3 coverage levels (including total loan loss reserves and capital deductions) remained strong at 117% at end-September 2022. Kutxabank holds legacy Financial Assets (FAs), with a net exposure of around EUR 512 million as of end-June 2022 down 21% YoY. DBRS Morningstar expects that the Bank will continue to reduce these exposures during coming years.
DBRS Morningstar considers Kutxabank’s loan book may be less sensitive to economic shocks than other peers, due to the high proportion of retail mortgages in its loan book. This is reflected in the low proportion of COVID-19 measures (state guaranteed loans and loan moratoria) implemented in their loan book during the pandemic, compared to other Spanish banks. However, the ratings also consider the Bank’s significant exposure to Spanish equity holdings (EUR 1.6 billion at end-June 2022) which might make the Bank vulnerable to developments in financial markets, even though the largest exposures are to blue-chip companies.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers Kutxabank’s liquidity and funding as solid. Kutxabank’s funding and liquidity position is supported by a stable customer deposit base, which is the main funding source (83% of total funding at end-June 2022). Funding through debt securities represented 5% of total funding, mainly through Covered Bond issuances and Senior Non-Preferred debt. The Bank also has a sound liquidity position with ample liquid assets and a very substantial potential capacity to issue covered bonds, given the amount of unencumbered mortgage loans which could be registered on its cover pool. Other liquidity and funding metrics are also solid such as an LCR of 211% (12 month average) and an NSFR of 136% at end-September-2022.
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar sees Kutxabank’s capital ratios as solid with a CET1 (phased-in) ratio of 17.1% at Q3 2022. Capital cushions over minimum regulatory requirements are strong at 540 bps for Total Capital, higher than the average of Spanish banks at end-September 2022. DBRS Morningstar sees this ample capital cushion over capital requirements as offsetting the potential market volatility arising from its equities portfolio. DBRS Morningstar also notes that the Bank had already met their MREL requirements as of June 2022, ahead of time. Lastly, DBRS Morningstar views the Reserve Fund, which totalled EUR 168 million at end-September 2022, as an additional capital cushion to cope with severe financial difficulties.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/408629
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 private credit rating include Morningstar Inc. and Company Documents, Kutxabank 2020 & 2021 Annual Accounts, Kutxabank Investor Presentations 2017-2021, Kutxabank Press Releases 2017-Q3 2023 . DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.
This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.
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/408628
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Pablo Manzano, CFA, Vice President - Global FIG
Credit Rating Committee Chair: Elisabeth Rudman, Managing Director, Global FIG
Initial Credit Rating Date: 20th January 2023
Last Rating Date: Not applicable as there is no last rating date.
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.