TEXT-S&P affirms Portuguese Millennium bcp 'B+/B' rtgs; otlk neg
Our stand-alone credit profile (SACP) on Millennium bcp remains unchanged. This is because the marginally positive impact we see from the government's subscription to the bank's hybrid issue is offset by weaker profitability prospects, in our view. The ratings continue to stand one notch above the SACP because we factor in government support.
The government's subscription to the hybrid issue has allowed Millennium bcp to comply with the higher capital requirements. However, in contrast with the EBA and regulatory approach, the hybrid instrument does not qualify for equity credit under our criteria. This is because of the instrument's short residual life--with repayment expected within five years--and the annual step-ups that provide an incentive to redeem the instrument even sooner. We have therefore assigned "minimal equity content" to the hybrid instrument as our criteria define the term and have excluded it from our risk-adjusted capital (RAC) calculation.
Additionally, our expectations of lower domestic revenues and higher provisions related to Millennium bcp's Greek subsidiary in 2012 have led us to lower our RAC projections for the bank. We now think that the RAC ratio before diversification for Millennium bcp will likely stand below 3% within the next 18-24 months. We believe that the RAC ratio will likely decline from 3.1% at year-end 2011 as we anticipate the bank will continue to report losses in 2012 and 2013. This is because we expect its domestic profitability to remain negative, owing to constrained revenues and high impairment charges given our weak economic forecast for Portugal. We have therefore lowered our assessment of Millennium bcp's capital and earnings to "very weak" from "weak."
That said, we think that the recent hybrid issue helps mitigate the potential impact of sizable unrealized losses related to the bank's sovereign exposures. Additionally, we believe that the previous vulnerability of Millennium bcp's capital base to changes in its pension commitments to its employees has likely diminished following the partial transfer of the bank's pension obligations to the government at end-2011. We have therefore changed our assessment of Millennium bcp's risk position to "adequate" from "moderate." Our "adequate" assessment continues to incorporate our view of the bank's weaker-than-system-average asset quality.
We think that the bank is gradually aligning its funding profile with the average for Portugal's banking system. We expect its loan-to-deposits ratio to continue to decline and to reach the Bank of Portugal's 120% requirement before year-end 2014. We have therefore improved our assessment of Millennium bcp's funding to "average" from "below-average." Our liquidity assessment, however, remains "moderate" because of the bank's significant dependence on funding from the European Central Bank (unsolicited AAA/Stable/A-1+). Therefore, the overall impact of the funding and liquidity assessment on the SACP remains unchanged.
Millennium bcp's 'b' SACP continues to reflect our view of the bank's "adequate" business position and our 'bb' anchor for banks operating primarily in Portugal.
According to our criteria, our long-term rating on Millennium bcp is one notch above its SACP in contrast with other rated Portuguese banks. This reflects the bank's current SACP and our view of its "high" systemic importance in Portugal as well as our assessment of the Portuguese government (Republic of Portugal; BB/Negative/B) as "supportive" toward its banking sector. As a result, we believe there is a "moderately high" likelihood that the Portuguese government would provide extraordinary support to Millennium bcp in case of need.
We have widened the differential between the SACP and our issue ratings on the bank's nondeferrable subordinated debt to three notches (from two notches) and between the SACP and the ratings on the bank's preferred stock to four notches (from three notches). This is because we see an increasing likelihood that the EU may restrict coupon payments on these instruments for those banks that have received state aid. Taking into consideration what we see as a meaningful possibility of nonpayment of coupons in the 'CCC' rating category, there is an inherent negative CreditWatch associated with the ratings (see "How Standard & Poor's Uses Its 'CCC' Rating," published Dec. 12, 2008).
The negative outlook on Millennium bcp's long-term rating mirrors that on the sovereign. It also reflects a potential weakening of Millennium bcp's SACP.
If we were to lower the sovereign ratings on Portugal by one notch, we would take the same action on our ratings on the bank because we would remove the one notch of uplift we currently factor in for government support.
We could also lower the ratings on Millennium bcp if we revised down our assessment of its SACP. This could happen if we think that the upcoming restructuring plan following the state aid weakens our assessment of the bank's business position; if asset quality performs significantly worse than we expect; if Millennium bcp increases the support it provides to its Greek subsidiary; or if funding and liquidity conditions for the bank deteriorate meaningfully.
A downgrade could also arise if our view of economic risk or industry risk in Portugal were to worsen significantly, leading us to lower the 'bb' anchor for banks operating in Portugal.
We could revise the outlook on Millennium bcp to stable if we took a similar action on Portugal and the bank's financial profile stabilized.
Ratings Score Snapshot
Issuer Credit Rating B+/Negative/B
Business Position Adequate (0)
Capital and Earnings Very Weak (-2)
Risk Position Adequate (0)
Funding and Liquidity Average and Moderate (-1)
GRE Support 0
Group Support 0
Sovereign Support +1
Additional Factors 0
Related Criteria And Research
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- Portuguese Bank Millennium bcp Ratings Lowered To 'B+/B' After Sovereign Downgrade; Outlook Negative, Feb. 15, 2012
-- BICRA On Portugal Revised To Group '7' From Group '5' Following Sovereign Downgrade, Feb. 14, 2012
-- Portugal's Ratings Lowered To 'BB/B'; Recovery Rating Of 4 Assigned; Outlook Negative, Jan. 13, 2012
BCP Finance Bank Ltd.
Subordinated* CCC CCC+
BCP Finance Co.
Preference Stock* CCC- CCC
Banco Comercial Portugues S.A.
Counterparty Credit Rating B+/Negative/B
Certificate Of Deposit B+/B
Senior Unsecured B+
Commercial Paper B
BCP Finance Bank Ltd.
Senior Unsecured* B+
Commercial Paper* B
*Guarantor: Banco Comercial Portugues S.A.
N.B. This list does not include all ratings affected.
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