DBRS Ratings GmbH (DBRS Morningstar) upgraded the Long-Term Issuer Rating of Caixa Geral de Depósitos (CGD or the Bank), to BBB (high) and the Short-Term Issuer Rating to R-1 (low), from BBB/R-2 (high), respectively. The Bank’s Long-Term Deposit ratings were also upgraded to A (low), 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 all ratings is now Stable. The IA of CGD has been upgraded to BBB (high) and the Support Assessment remains at SA3. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The ratings upgrade takes into account the Bank’s progress in improving its profitability, whilst maintaining solid capitalisation and a stable liquidity position. CGD’s net income increased by 45% year-on-year (YOY) in FY 2022, supported by a significant increase in net interest income as a result of rising interest rates, and lower impairments reflecting the significant progress CGD has made in reducing its stock of non-performing loans (NPLs). The formation of new NPLs due to the pandemic COVID-19 and the Russia/Ukraine crisis has been moderate thus far. Nonetheless, asset quality risks remain for the medium term as persistent high inflation and higher interest rates will continue to erode debt affordability.
The Stable trend reflects our view that risks are broadly balanced. The bank is in a stronger position to cope with a more demanding operating environment due to rising interest rates and higher economic uncertainty.
The Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). The Scorecard assessment for Risk is influenced by the significant reduction in legacy NPLs, which leads to a negative Net NPL/Net Loan ratio, that also takes into account provisions for performing loans. The ratings, however, take into account potential downside risks and challenges that may arise from a more demanding operating environment and increased market uncertainty.
A rating upgrade would require the bank to continue to improve profitability levels, whilst maintaining solid capital and asset quality profiles.
CGD’s ratings could be downgraded in the event of a significant deterioration in profitability and liquidity or a material weakening of the Bank’s risk profile.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Owned by the Portuguese State, CGD is the largest banking group in Portugal where it is the market leader in several products and services in commercial and retail banking. For several years, the Bank has embarked on a restructuring program agreed with the European Commission (EC) following the State-backed recapitalisation process in 2017. During this period, CGD has successfully reduced its stock of NPLs, streamlined its operating structure by reducing headcount and branches, and downsized its operations outside Portugal. The program with the European Commission was concluded in 2021. As part of the new strategic plan for 2021-2024, CGD aims to consolidate its leadership position, by increasing the focus on the product offering, digitalization and sustainability. At the same time, the Bank is expected to consolidate the progress made in terms of efficiency and risk, as well as to improve its profitability. In 2023, CGD transferred all pension fund liabilities to Caixa Geral de Aposentações (CGA), in order to reduce the volatility risks associated to that.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
CGD’s profitability has improved in recent years. In FY 2022, the Bank’s net income increased to EUR 843 million, up by 45% YOY driven by a stronger performance from both its domestic and International markets. The improvement was attributable to a strong increase in net interest income (NII) and a reduction in provisioning, despite the increase in expenses due to the costs associated with the transfer of pension funds. NII benefitted from asset repricing as a result of the increase in interest rates, whilst total provisions and impairments declined by EUR 174 million in 2022. The positive momentum for revenue generation continued in Q1 2023, with NII up by 129% YOY mainly as a result of higher interest rates on its portfolio of floating rate loans as well as a higher contribution from the security portfolio. However provisions and cost of risk increased YOY in Q1 2023 in light of a more challenging operating environment. Net Return on Equity (ROE) was reported at 13.1%, in Q1 2023, up from 7.2% the year prior.
Risk Combined Building Block (BB) Assessment: Strong/Good
Domestic loans represented 86% of CGD’s gross loans at end-Q1 2023. CGD has made significant progress in reducing its problem assets. The stock of gross NPLs decreased to around EUR 1.9 billion in Q4 2022 from 10.6 billion at end-2016 (EUR 2.1 billion at YE 2021). This reduction was mainly achieved through a combination of portfolio sales, recoveries and cures, partially benefiting from improved economic conditions in Portugal. The gross NPL ratio was reported at 2.4% at Q4 2022, down from 2.8% at end-2021. In Q1 2023, however, the Bank reported a slight increase in non-performing loans (+0.4% against Q4 2022) as new inflows more than offset cures and recoveries. As a result the gross NPL ratio was reported at 2.5%, up from 2.4% at YE 2022. Loan loss coverage level for NPLs remained solid at 75% in Q1 2023.
Credit quality risks from both the pandemic and market stress resulting from the Russia/Ukraine conflict have been well-managed, and thus far we have not noted significant asset quality deterioration. In the medium term, however, DBRS Morningstar expects some asset quality deterioration arising from higher interest rates and a more challenging economic environment. As the Bank’s loan book gradually reprices to reflect increased rates, some stress is anticipated as debt affordability decreases. Nonetheless, we expect CGD’s gross NPL ratio to remain below 3%, in line with the Bank’s strategic plan for 2021-2024.
The Bank’s asset base also shows a significant exposure to debt securities, of which the majority are held at amortised cost. The increase in interest rates has led to the formation of unrealised losses. We expect this to be largely manageable taking into account the Bank’s solid liquidity and capital positions.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
The Group’s funding and liquidity position remains adequate despite the challenges posed by the current rising interest rate environment, including increased competition from non-banking saving products, and the repayment of the ECB TLTRO. CGD’s funding profile is supported by its large customer deposit base in Portugal, underpinned by its leading retail and corporate banking franchise. Customer deposits, including deposits with retail and corporate clients, are the Group’s main source of funding. In Q1 2023, the stock of deposits declined by around EUR 4 billion (or 5%) compared to YE 2022, without affecting the Bank’s market share. The net loan to deposit ratio was slightly up to 63%. The Bank maintains a solid liquidity position with a stock of ECB eligible assets of around EUR 14 billion and cash and equivalents at Central Banks for EUR 19 billion, as well as comfortable buffers over the minimum requirements for LCR and NSFR, reported at 285% and 176%, respectively in Q1 2023.
Capitalisation Combined Building Block (BB) Assessment: Good
CGD’s capital position remains solid with an ample cushion above regulatory requirements. In Q1 2023, the Bank reported a fully loaded CET1 ratio of 19.5%, up from 18.7% at FY 2022, whilst the total capital ratio increased to 20.9% from 20.2%. Under the Supervisory Review and Evaluation Process (SREP), CGD is required to maintain, in 2023, a minimum Overall Capital requirement (OCR) for CET1 (phased-in) of 9.069% and a minimum OCR total capital (phased-in) of 13.4%. This compares to minimum capital requirements of 9.125% and 13.5% in 2022 for CET1 and total capital, respectively, following a reduction in the Bank’s Pillar 2 requirement to 1.9% from 2.0%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/414447
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)
DBRS Morningstar notes that this Press Release was amended on 9 June 2023 to include the rationale for the IA being positioned outside of the IA Framework Range, as well as correcting the Risk Combined Building Block score.
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 in its consideration of ESG factors
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, CGD Presentation and Press Release 2022 and Q1 2023 results, CGD Annual Reports, Bank of Portugal. 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/414446
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: 23 December 2011
Last Rating Date: 30 May 2022
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