BARCELONA,Spain & LONDON--(BUSINESS WIRE)--Fitch Ratings has affirmed Portugal-based Caixa Economica Montepio Geral's (Montepio) Long-term Issuer Default Rating (IDR) at 'BB', Support Rating (SR) at '3' and Support Rating Floor (SRF) at 'BB'. Fitch has also affirmed Montepio's Viability Rating at 'b+'. The Long-term IDR Outlook is Negative.
A full list of rating actions is provided at the end of this commentary.
KEY RATING DRIVERS - IDRs, SENIOR DEBT, SR AND SRF
Montepio's Long-term IDR and senior debt rating are at the bank's SRF. The affirmation of these ratings indicates Fitch's expectation that there continues to be a moderate likelihood that Portugal (BB+/Positive) would support its important second-tier banks, such as Montepio, if needed, until the mechanism for resolving such banks comes into effect. This expectation reflects both Portugal's moderate ability to support its banks and Montepio's relative domestic importance, given its 7.2% deposit market share at end 1H14 (end 1H13: 6.6%). The bank has not required state aid but, in general terms, Portugal has supported its banks' senior creditors.
The Negative Outlook on Montepio's Long-term IDR reflects the legislative, regulatory and policy initiatives taken by Portugal to allow it to achieve the resolution of its important banks without excessive disruption to financial markets. Fitch believes that once the EU's Bank Recovery and Resolution Directive (BRRD) is implemented in Portugal, on 1 January 2015, and a Single Resolution Mechanism (SRM) becomes functional, there are likely to be negative implications for banks whose Long-term IDRs are at their SRFs, including Montepio. By 2016 BRRD requires creditors to be bailed in before an insolvent bank can be recapitalised with state funds.
RATING SENSITIVITIES - IDRs, SENIOR DEBT, SR AND SRF
Montepio's Long-term IDR, SR and SRF are primarily sensitive to further progress made in implementing BRRD and SRM. Once these are put in place they will become an overriding rating factor, as the likelihood of banks' senior creditors receiving full support from the sovereign, if required, will diminish substantially.
Fitch expects to downgrade Montepio's SR to '5' and to revise its SRF to 'No Floor' during the first half of 2015, depending on the progress in bank resolution legislation. The revision of the bank's SRF will likely result in a downgrade of Montepio's Long-term IDR and senior debt ratings to the level of its VR, currently 'b+'.
The IDR, SR and SRF are also sensitive to any change in the assumptions underpinning Fitch's judgement of Portugal's ability to support banks. A downgrade of Portugal's Long-term IDR would likely lead to a downward revision of the SRF.
KEY RATING DRIVERS - VR
The bank's fragile and volatile profitability as well as the weaknesses present in its legacy loan portfolio are key factors in assessing Montepio's VR.
Fitch believes the profitability of Montepio's core banking business is still weak reflecting modest non-interest income generation, a high proportion of low-margin residential mortgages, historically low interest rates and recent deleveraging. Results for 1H14 continued to be supported by one-off capital gains on the bank's securities portfolio (EUR262m), which Fitch considers a volatile income source but, nevertheless were used to offset a high level of loan impairment charges. Fitch expects the bank's earnings generation ability to be supported by the successful diversification of the loan book into more profitable SMEs loans - which accounted for 88% of total new loans extended in 1H14 - and by a focus on reducing funding costs.
Montepio's credit-at-risk ratio (loans overdue by more than 90 days, under-collateralised restructured loans, and bankruptcy) has worsened, though at a much slower pace than in 2012-2013, to 13.8% of total loans at end-1H14 (end 1H13: 12.1%). Related loan loss reserves improved to 56%, which compares adequately with similarly rated peers.
Montepio is making efforts to reduce its exposure to the real estate sector, by loan diversification and recoveries. However, construction and real estate lending and foreclosed property assets still accounted for a high 15% of the bank's total assets at end-1H14. Fitch expects that any material exposure reduction will take time to materialise but the bank is moving in this direction. In addition, Fitch's expectations of GDP growth for Portugal of 1% in 2014 and 1.4% in 2015 and of slower declines in domestic real estate price should offer greater protection against real estate-related risks than in the recent past.
Montepio reported a Fitch core capital/weighted risks ratio and a phase-in CET1 ratio of at 8.9% and 10.5%, respectively, at end 1H14. While these figures are sufficient to absorb moderate risks, the proportion of impaired credit-at-risk loans which are not covered by impairment reserves, is high. The latter loans accounted for 76% of Montepio's FCC at 1H14 and about 130% of FCC when foreclosed real estate assets are included. Further pressure on capital adequacy is exerted by the bank's large investments in real estate funds.
Liquidity and funding are improving and are generally stable, but still partly rely on central bank funding. The bank successfully increased the share of retail funding both in the form of deposits and bonds in recent years, despite a severe domestic recession. At end-1H14 these accounted for more than 85% of Montepio's non-equity funding.
Reliance on ECB funding is declining and totalled just under EUR2bn at end-1H14, down from EUR3.3bn at end-2013. Although the pace of reduction was stronger than that seen for the whole domestic banking system in the same period, the ECB funding-to-total assets ratio of Montepio is in line with the national average of around 8%..
RATING SENSITIVITIES - VR
Montepio's VR could benefit from a sustained improvement in core profitability, supporting a greater loss absorption capacity and a more marked improvement in asset quality trends.
A downgrade would likely be driven by external factors, such as a particularly sharp deterioration in the domestic economy and of its property market, that result in a material weakening of the bank's asset quality. A downgrade may also result from increasing loan impairment charges penalising earnings and capital.
KEY RATING DRIVERS AND SENSITIVITIES - DATED SUBORDINATED DEBT
The bank's dated subordinated debt is notched down once from its VR, in accordance with Fitch's criteria and reflecting its subordination and a lack of coupon flexibility. The rating of the subordinated debt is therefore primarily sensitive to a change in Montepio's VR.
The rating actions are as follows:
Long-term IDR: affirmed at 'BB'; Outlook Negative
Short-term IDR: affirmed at 'B'
VR: affirmed at 'b+'
SR: affirmed at '3'
SRF: affirmed at 'BB'
Senior unsecured debt long-term rating affirmed at 'BB'
Senior unsecured debt short-term rating affirmed at 'B'
Subordinated debt affirmed at 'B'
Additional information is available on www.fitchratings.com.
Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014, and 'Evaluating Corporate Governance' dated 31 January 2014 are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
Evaluating Corporate Governance
Global Financial Institutions Rating Criteria