DBRS Morningstar Confirms CGD’s Long-Term Issuer Rating at BBB (high), Trend Revised to Positive

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer Rating of Caixa Geral de Depósitos (CGD or the Bank) at BBB (high) and revised the trend to Positive, and confirmed the Short-Term Issuer Rating at R-1 (low) with Stable trend. In addition, the Bank’s Long-Term Deposit rating was also confirmed at A (low)/Positive Trend, 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 IA of CGD has been confirmed at BBB (high) and the Support Assessment remains at SA3. See a full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of the ratings takes into account the Bank’s solid capital and liquidity position, resilient asset quality as well as higher profitability. The stock of NPLs declined further since our last rating review while capital buffers benefitted from stronger internal capital generation despite dividends payment.

The Positive trend reflects recent positive developments and our expectation that the Bank’s profitability will remain adequate despite potential margin compression in Portugal and some reduction in net interest income compared to the exceptional levels reported in 9M 2023. We also expect CGD to keep its balance sheet strengths despite some increase in asset quality risks stemming from the economic slowdown and higher interest rates. We expect CGD’s gross NPL ratio to remain solid at below 3%, in line with the Bank’s strategic plan for 2021-2024.

The Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). The Scorecard assessment for Risk is influenced by the restructuring measures and significant reduction in legacy NPLs, which has led to a negative Net NPL/Net Loan ratio, that also takes into account provisions for performing loans. In addition, the Scorecard assessment for Earnings was boosted in H1 2023 by some non-recurring items.

CREDIT RATING DRIVERS

A rating upgrade would require the Bank to demonstrate an ability to maintain adequate profitability levels in different interest rate scenarios as well as a resilient asset quality profile.

Negative rating implications are unlikely given the Positive Trend. However, CGD’s Trend could return to Stable should the Bank’s profitability and asset quality deteriorate more than expected. The ratings could be downgraded in the event of a significant deterioration in liquidity or a material weakening of the Bank’s capital position.

CREDIT RATING RATIONALE

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. As of 9M 2023, the Bank reported a market share of around 23% for both customer deposits and mortgage loans. Internationally, the Group is present in France and some Portuguese-affinity markets such as Macau, Angola and Mozambique.
For several years, the Bank has embarked on a restructuring program agreed with the European Commission (EC) following the State-backed recapitalisation in 2017. During this period, CGD has successfully reduced its stock of NPLs, streamlined its operating structure, and downsized its operations outside Portugal.

Earnings Combined Building Block (BB) Assessment: Good/Moderate

CGD’s profitability has improved in recent years driven by its healthier balance sheet and improving economic environment in Portugal. In 9M 2023, the Bank’s net income grew significantly YOY, with net income up 43% against the same period in 2022. The growth was mainly attributable to the strong increase in net interest income (NII) on the back of the higher interest rate environment.
NII more than doubled YoY in 9M 2023, mainly due to the stronger contribution from treasury activities on the back of positive remuneration on the deposits held at the ECB, as well higher interest income from the Bank’s retail and commercial banking operations as loans repriced fasted than liabilities. In our view, the positive trend for NII is unlikely to remain in the coming quarters considering the elimination of the remuneration on the central bank minimum reserves from September, as well as the increase in remuneration of deposits initiated in the second half of 2023.
Concurrently, the Bank reported an increase of EUR 690 million in impairments and provisions mainly due to higher credit costs and cost for the employees’ restructuring program.

Risk Combined Building Block (BB) Assessment: Strong/Good

CGD’s risk exposures are predominantly credit-based, driven by its domestic loan portfolio which largely comprises mortgages to individuals and Corporate & Government loans. The bulk of the loan book is composed of floating rate loans, although, over the recent quarters, the Bank has reported an increase in fixed rate loans.
CGD’s asset quality remained solid in Q3 2023. The stock of gross NPLs decreased further to EUR 1.5 billion from EUR 1.85 billion at end-2022, as cures and recoveries outpaced new NPL inflows. The gross NPL ratio fell to 2.9% (or 2.1% EBA) from 3.4% (or 2.4% EBA) at end-2022, while the Stage 2 (%) loans slightly increased to 8%. Concurrently, the Bank’s NPL coverage ratio was strengthened to around 78% from 75% at YE 2022, while the weighted LTV average was 59%. Going forward, DBRS Morningstar expects CGD’s gross NPL ratio to remain below 3%, in line with the Bank’s strategic plan for 2021-2024. However, downside risks for asset quality have increased due to rising interest rates and the weakening in the economic environment.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good

CGD’s funding profile is supported by its large customer deposit base in Portugal, underpinned by its leading retail and corporate banking franchise. Funding and liquidity positions remain adequate despite the challenges posed by the current interest rate environment, including increased competition from non-banking saving products. Deposits stabilised in Q3 after the shift to government saving certificates in Q1 2023.
The Bank maintains a solid liquidity position with a stock of ECB eligible assets of around EUR 14 billion at end-9M 2023, and cash and equivalents at Central Banks for EUR 19 billion.

Capitalisation Combined Building Block (BB) Assessment: Good

CGD’s capital position remains solid with an ample cushion above regulatory requirements. In 9M 2023, the Bank reported a fully loaded CET1 ratio of 20.1% up from 18.7% at end-2022 mainly due to improved organic capital generation. We expect these buffers to remain solid even after the payment of EUR 461 million in dividends budgeted for 2024.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/425445.

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 (4 July 2023) https://www.dbrsmorningstar.com/research/416784/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 (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings 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 2023 up to Q3 results, CGD 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/425446.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Nicola De Caro, Senior Vice President, Credit Ratings - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Credit Ratings - Global Head of Financial Institutions
Initial Rating Date: 23 December 2011
Last Rating Date: 24 May 2023

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