TEXT-S&P afrms 'BB-/B' rtgs on Portuguese Banco BPI
We have raised BPI's stand-alone credit profile (SACP) by one notch to 'bb-' from 'b+' to reflect the benefit to its financial profile of the Portuguese government's recent capital support. At their current level, the ratings are at the same level as the SACP and do not benefit from any uplift for extraordinary government support. This is because we believe that any uplift for government support should not result in bank ratings that are at the same level as those of the sovereign, which in this case is 'BB'.
The government's subscription to the hybrid issue has allowed BPI to comply with the higher capital requirements. However, in contrast with the EBA and regulatory approach, the hybrid instrument doesn't 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.
Our projected RAC ratio includes, nonetheless, the EUR200 million ordinary share capital increase to be concluded before the end of September 2012. This will be subscribed by existing shareholders and will be entirely used to repay part of the hybrid issuance. Our projections also reflect our view that internal capital generation will likely be constrained by the tough operating environment in Portugal, which is likely to continue weighing on BPI's domestic profitability in 2012 and 2013. The impact of domestic profitability trends on consolidated returns is likely to be somewhat mitigated, in our view, because of a stronger performance at international operations. We anticipate that the bank's deleveraging efforts will benefit BPI's future RAC levels. As a result, our capital and earnings assessment assumes that the RAC ratio will remain between 3% and 5% in the next 18-24 months. We are thus maintaining our assessment of capital and earnings as "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, following the partial transfer of pension obligations to the government at year-end 2011, we believe that the vulnerability of BPI's capital base to changes in its employee pension commitments--which was already lower than peers'--has likely diminished. We have therefore improved our risk position assessment to "adequate" from "moderate." Our assessment continues to incorporate our view that BPI's asset quality is, and will likely remain, better than that of domestic peers, reflecting stronger underwriting and monitoring standards.
BPI's 'bb-' SACP continues to reflect our view of the bank's "adequate" business position, "average" funding, "adequate" liquidity, and our 'bb' anchor for banks operating primarily in Portugal.
We have lowered our issue ratings on the preferred stock and junior subordinated debt issued by BPI by two notches to 'CCC-' from 'CCC+'. This is because we see an increasing likelihood that the EU may restrict the coupon payments of these instruments following the disbursement of state aid to the bank. We have also widened the differential between the SACP and BPI's nondeferrable subordinated debt ratings. The debt is now rated three notches below BPI's SACP from two previously. In addition, we have placed the 'B-' issue ratings on these instruments on CreditWatch with negative implications. This reflects the possibility of a further downgrade because at this point it is still unclear to us whether the EU's coupon payment restrictions will also apply to nondeferrable subordinated debt.
The negative outlook reflects our view that the weak domestic economic environment and difficult operating conditions could put pressure on BPI's creditworthiness.
In particular, we could lower the rating if we saw that the restructuring plan following the state aid weakened the bank's business position, if funding and liquidity conditions for the bank significantly deteriorated, or if the bank's asset quality was no longer better than peers. We could also lower the rating if we changed our view on the economic and industry risks that the Portuguese banking system is facing, leading us to lower our 'bb' anchor for the domestic industry.
We could revise the outlook to stable do so if we see risks in the operating environment abating and leading to a stabilization of BPI's financial position.
Ratings Score Snapshot
Issuer Credit Rating BB-/Negative/B
Business Position Adequate (0)
Capital and Earnings Weak (-1)
Risk Position Adequate (0)
Funding and Liquidity Average and Adequate (0)
GRE Support 0
Group Support 0
Sovereign Support 0
Short-Term Extraordinary Support 0
Additional Factors 0
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology and Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- 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
BPI Capital Finance Ltd.
Preference Stock* CCC- CCC+
Banco BPI S.A.
Banco Portugues de Investimento S.A.
Counterparty Credit Rating BB-/Negative/B
Certificate Of Deposit BB-/B
Banco BPI S.A.
Senior Unsecured BB-
Banco BPI Cayman Ltd.
Commercial Paper* B
Banco BPI S.A.
Subordinated B-/Watch Neg B-
*Guaranteed by Banco BPI S.A.
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