DBRS Ratings GmbH (DBRS Morningstar) upgraded the ratings of Caixa Económica Montepio Geral, S.A. (Banco Montepio, or the Bank), including the Long-Term Issuer Rating and Long-Term Senior Debt to B (high) from B, and the Long-Term Deposits to BB (low) from B (high). The Short-Term Issuer Rating remained unchanged at R-4. The Trend on all ratings is Stable. The Bank’s Intrinsic Assessment (IA) was also raised to B (high) and the Support Assessment was maintained at SA3.
The Bank’s BB (low) Long-Term Deposits rating is one notch above the IA, reflecting the legal framework in place in Portugal which has full depositor preference in bank insolvency and resolution proceedings. The Bank’s Short-Term Deposits rating is R-4 with a Stable trend. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The rating upgrade takes into account the progress that Banco Montepio has made in 2022 in de-risking its balance sheet, and in strengthening its profitability and regulatory capital ratios. The Bank continued to reduce its stock of non-performing loans (NPLs) and non-core assets. Currently, the management is taking measures to strengthen the Bank’s operational structure and commercial banking franchise in Portugal. The combination of restructuring measures and a more benign operating environment supported the Bank’s results in 2022. However, profitability levels remain weak relative to peers. Moreover, the ratings continue to reflect the still large stock of non-performing loans (NPLs) and the limited capital flexibility. The Stable Trend reflects the expectations that risks are broadly balanced and that the Bank will cope with the headwinds from increased market volatility as well as the risks to asset quality posed by high inflation and rising interest rates.
An upgrade would require further improvement in profitability and reduction in NPLs.
A downgrade would occur in the event of a material deterioration in the Bank’s capital position or liquidity position.
Franchise Combined Building Block (BB) Assessment: Moderate/Weak
Banco Montepio is a small Portuguese retail and commercial bank with total assets of around EUR 19 billion at end-2022 and is majority owned by the Montepio Geral Associação Mutualista (MGAM). As part of its turnround, the Bank continued to streamline its branch footprint, with the closure of 15 branches in Portugal in 2022, whilst the number of employees for the Group declined to 3,406 at December 2022 from 3,478 at December 2021. In addition, as part of the Bank’s strategic re-focus on its core Portuguese market, Banco Montepio reduced its exposure to the African market with the signing of the sale and purchase agreement of Finibanco Angola, and the liquidation and dissolution of Banco MG Cabo Verde.
We expect the new Board of Directors, appointed in 2022, to keep its strategic focus on strengthening the balance sheet, as well as revamping the Bank’s competitive position.
Earnings Combined Building Block (BB) Assessment: Weak/Very Weak
In our view, the Bank’s profitability metrics and returns remain modest compared to its peers, and they are constrained by modest revenue diversification, a high cost to income ratio and high provisioning costs. Results, however, improved in 2022. Banco Montepio posted a net profit of around EUR 34 million, up from 7 million in 2021, on the back of higher revenues, as well as lower impairments and provisions, and lower operating costs. In 2022, the Bank’s net interest income (NII) grew by 8% to EUR 251.5 million, and was supported by loan growth and repricing, on the back of rising interest rates, as well as higher revenues on the security portfolio, and lower funding costs. Commissions also increased, while provisioning costs and impairment charges fell by 46% YoY in 2022 reflecting an improvement in the Bank’s asset quality profile. The results for 2022 also incorporated the negative extraordinary effect from the signing of the sale and purchase agreement of Finibanco Angola.
Risk Combined Building Block (BB) Assessment: Weak/Very Weak
The Bank’s loan portfolio is manly exposed to mortgages to households and loans to corporates, mainly in the manufacturing sector. Most of these loans are at floating rates, and therefore sensitive to repricing in the current interest rate environment.
During 2022, Banco Montepio continued to reduce its stock of problem loans and non-core assets, mainly by means of disposals. Moreover, total cures and recoveries for the period outpaced the new defaults. In 2022, the Bank’s stock of gross NPEs fell by around 34% YoY and the gross NPE ratio declined to 5.3% in 2022 from 8% at YE 2021. Nonetheless, the Bank’s asset quality metrics continue to compare unfavourably with the European average. During and after the pandemic, the Bank’s asset quality has proved to be more resilient than previously anticipated. The vast majority of the loans that had a moratoria resumed payment and the share of Stage 2 loans (where credit risk has increased significantly since initial recognition) has decreased compared to the level registered in 2020, although remains high. For the medium term, we expect some asset quality deterioration from the current environment with high inflation and higher interest rates potentially putting pressure on borrowers.
The Bank maintains a large exposure to Sovereign bonds. This security portfolio increased to roughly EUR 4.4 billion in 2022, corresponding to approximately 23% of the total assets. Most of this portfolio is classified at amortised cost. However, the increase in interest rates has led to the formation of unrealised losses on this portfolio, although we expect this to be manageable given the Bank’s adequate liquidity profile and access to central bank funding.
Funding and Liquidity Combined Building Block (BB) Assessment: Moderate
Banco Montepio's funding profile is underpinned by its customer deposits, which represent the main source of funding. The bulk of deposits are with retail customers, and are evenly split between sight and terms deposits. After a period of stress in 2017, the Bank’s deposit base has stabilised. This has also helped to reduce funding costs. In FY 2022, customer deposits increased YoY to around EUR 13.1 billion mainly due to higher stock of corporate customers. At the same time, the Loan to Deposit (LtD) ratio declined marginally, to 89% from 91.5% in FY 2021. On the wholesale market, the Bank has mainly secured exposures, subordinated debt and repos. Accessing the unsecured market remains more challenging and costly. In our view, the increase in interest rates and recent increase in market volatility will likely contribute to higher funding costs in the near term.
The Bank maintains an adequate liquidity profile with a buffer of around EUR 3.9 billion, including unencumbered assets, net of haircuts, and cash and deposits at Central banks. LCR ratio and NSFR ratio were reported 249.6% and 125% respectively at YE 2022.
Capitalisation Combined Building Block (BB) Assessment: Weak/Very Weak
The Bank’s regulatory capital ratios were restored in 2021, following a period of stress in 2020. In 2022, the Bank’s phased-in CET1 stood at 13.7% (13.2% fully loaded), up from 12.7% (11.8%) at end-2021. Total capital ratio was reported at 16.2%, up from 15.1% in 2021, which compares with a total regulatory requirement of 14.01%. The improvement was mainly due to the reduction in RWAs, on the back of the Bank’s strategy of reducing non-strategic assets, real estate exposures and NPL disposals, as well as net income for the period and securitisation. Despite this, the capital position remains vulnerable given the limited ability to generate capital organically as well as the reliance on the main shareholder.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/412103
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
In the past, the Bank has experienced high management turnover and reputational issues, and was also subject to administrative proceedings and fines by the Portuguese supervisory authorities in relation to alleged past failures in internal controls. DBRS Morningstar views that the bank has made progress in resolving some of these proceedings, and has not faced any new significant issue. As a result, we consider the “Corporate Governance” risk subfactor as relevant to Banco Montepio’s ratings, and this is reflected in the assessment of the Risk building block
There were no Environmental or Social 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 https://www.dbrsmorningstar.com/research/398692 (23 June 2022). 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/ (17 May 2022) in its consideration of ESG factors
The sources of information used for this rating include Morningstar Inc. and Company Documents, 2016-2021 Montepio Annual Reports, 2016-2022 Montepio Quarterly Reports, 2016-2022 Montepio Quarterly Presentations. 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/412104
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: Elisabeth Rudman, Managing Director, Global Head of Financial Institutions
Initial Rating Date: June 27, 2011
Last Rating Date: April 8, 2022
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