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 the ratings has been revised to Positive from Stable, except for the Short Term Critical Obligations rating which remains Stable. 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 and the change of the trend to Positive reflect the progress that BCP has made in improving its profitability, reducing non-performing assets and strengthening its capital buffers. In 2H 2022 and Q1 2023, the Bank’s profitability has benefitted from higher revenues mainly due to the repricing of its floating loan portfolio on the back of rising interests rates. Results also confirmed the improvements in asset quality in Portugal and good efficiency levels. At Q1 2023, the Bank’s gross NPE ratio was 3.8%, down from 4.6% at Q1 2022, and stable against YE 2022. The ratings and the Positive trend also consider the strengthening of the capital ratios which were supported by improving internal capital generation, as well as by the reduction in RWAs due to the exclusion from market risk of certain structural exchange rate positions following regulatory approval.
Nonetheless, the ratings continued to reflect the challenges that the Bank is facing with its legal and financial risks arising from its legacy exposure to CHF-denominated mortgages at its Polish subsidiary. DBRS Morningstar understands that there is still uncertainty on this issue and its ultimate impact on profitability and capital. As a result, we expect these provisions for CHF loans to remain elevated in the near term. In addition, in our view, persistent inflationary pressure and further increases in interest rates will likely pose risks to asset quality and balance sheet in the medium term.
A rating upgrade would require further reduction in non-performing exposures (NPEs) and sustained improvements in profitability, while maintaining an adequate capital position.
A downgrade would likely be driven by a significant deterioration in the Bank’s risk profile and liquidity position. 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. Outside Portugal, the Bank has a significant presence in Poland. Total international activities represented around 30% of the Group’s consolidated assets at end-Q1 2023, including Mozambique, Angola and Macao. 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 problem loans. The situation in Poland, however, has become more challenging in relation to its legacy exposure to CHF-denominated mortgages.
Earnings Combined Building Block (BB) Assessment: Moderate/Weak
The Bank’s profitability has improved as a result of higher revenues mainly due to the repricing of its floating loan portfolio in the context of rising interest rates. Results also reflected the improvement in asset quality in Portugal and good efficiency levels. For YE 2022, BCP’s net profit was reported to EUR 207.5 million, up from EUR 138.1 million at YE 2021. For Q1 2023, net income increased to EUR 215 million from EUR 112.9 million in Q1 2022 supported by the positive evolution in NII in Portugal and across international operations; rising by around 60% and 28% YoY, respectively. The Bank’s results for Q1 2023 also incorporated a one-off increase of EUR 127 million from the sale of 80% of the shares in Millennium Financial Services in Poland.
On the other hand, total impairments and provisions grew to EUR 318 million in Q1 2023 from EUR 254 million in the same quarter in 2022 mainly due to impairments for legal risks on the CHF mortgage portfolio in Poland.
Risk Combined Building Block (BB) Assessment: Moderate
BCP continued to reduce its legacy NPE stock through a mix of write-offs and sales, with the total stock of gross NPEs decreasing to EUR 2.2 billion (of which EUR 1.3 billion are in Portugal), down 19% YoY while remaining relatively stable compared to YE 2022. The Bank also continued to scale back its stock of foreclosed assets, mostly comprised of real estate properties in Portugal, as well corporate restructuring funds.
At Q1 2023, the Bank’s gross NPE ratio was 3.8%, down from 4.6% at Q1 2022 (3.8% at FY 2022). This level, however, continues to remain higher than the European average. Asset quality risks stemming from the pandemic have decreased for the time being, and the withdrawal of the moratoria has not resulted in a spike of new NPLs. In the medium term, however, DBRS Morningstar expects some asset quality deterioration stemming from higher interest rates and a more challenging economic environment. In our view, these factors will likely affect debt affordability.
Outside Portugal, the Bank continues to face issues related to the legacy exposure to mortgages in CHF of its Polish subsidiary, Bank Millennium. 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. Cumulative provisions for CHF loans increased to EUR 1.2 billion in Q1 2023, accounting for 55.8% of the gross book. The final outcome and costs for the Bank remain still uncertain but elevated reserves are expected to continue.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
The Group’s funding and liquidity position remain adequate despite the challenges posed by the current rising interest rate environment. The Bank is largely funded by deposits from retail, SME and Corporate clients, which together accounted for around 81% of the Group’s total customer funding at Q1 2023. Despite the increase in competition from non-banking products, customer deposits continued to increase in Q1 2023 while the Loan to Deposit (LTD) ratio fell to 74%. The Group’s liquidity position is underpinned by a sizable stock of eligible assets. The Bank had around EUR 25 billion of ECB eligible assets at Q1 2023, net of haircuts, corresponding to around 49 % of the total deposit base in Portugal. At Q1 2023, the liquidity coverage ratio (LCR) was reported at 201%, down from 283% in Q1 2022 mainly due to the repayment of TLTRO funds, while the net stable funding ratio (NSFR) stood at 154%.
Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
The Bank’s capital position has improved YoY in Q1 2023. BCP reported a fully-loaded CET1 ratio of 13.6% in Q1 2013, up from 11.5% in Q1 2022, and a total capital ratio of 18.0%, from 15.5%, mainly as a result of improving internal capital generation and lower RWAs for market risk following the regulatory approval to implement article 352 (2) of the Capital Requirements Regulation (CRR).
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/414413
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.
There were no Environmental/ 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 (17 May 2022) 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 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.
The following methodologies have also been applied
• DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023) https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies
The sources of information used for this rating include Morningstar Inc. and Company Documents, BCP Presentation and Press Release Q1 2023 results and BCP 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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/414412
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: William Schwartz - Senior Vice President - Credit Practices Group
Initial Rating Date: 10 June 2011
Last Rating Date: 30 May 2022
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