July 4, 2014 / 3:46 PM / in 3 years

Fitch Takes Various Rating Actions on 4 Portuguese Banks

(The following statement was released by the rating agency) BARCELONA/LONDON, July 04 (Fitch) Fitch Ratings has upgraded Santander Totta, SGPS, S.A.'s and Banco Santander Totta, S.A.'s (BST) Long-term Issuer Default Ratings (IDRs) to 'BBB' from 'BBB-'. The Outlook on Santander Totta and BST have been revised to Positive from Negative. The support-driven Long-term IDRs of Caixa Geral de Depositos, S.A. (CGD), Banco Comercial Portugues, S.A. (Millennium bcp) and Banco BPI, S.A. were affirmed at 'BB+'. The agency also upgraded the Viability Ratings (VRs) of Millennium bcp to 'bb-' from 'b', Banco BPI to 'bb' from 'bb-' and Santander Totta to 'bb+' from 'bb-'. CGD's VR was affirmed at 'bb-'. Except for Santander Totta and BST, the Outlook on the Portuguese banks is Negative. A full list of rating actions is available at the end of this commentary. The VR upgrades of Banco BPI and Santander Totta primarily reflect Fitch's expectation that the two banks will benefit more than peers from an improved operating environment, following the upward revision of Portugal's GDP growth expectations by Fitch. Both banks have weathered Portugal's sovereign crisis and recession better than peers. The upgrade of Millennium bcp's VR reflects primarily the announced EUR2.25bn fully underwritten rights issue, which will strengthen its core capital position. In addition, the bank is making further progress in its restructuring plan. The upgrade of the Long- and Short-term IDRs of Santander Totta and its wholly owned banking subsidiary, BST, reflects the improved ability of its parent bank, Banco Santander, S.A. (Santander), to provide support to these entities (see 'Correct: Fitch upgrades Santander and BBVA to 'A-'; Stable Outlook (corrected)' published on 6 June 2014 and available at www.fitchratings.com, for more details). The rating action is also driven by the expected benefits of a banking union in the EU, particularly as regards the fungibility of liquidity and capital. The revision of the Outlook for the Long-term IDR reflects that of Portugal's sovereign rating, which was revised to Positive from Negative in April 2014. KEY RATING DRIVERS - IDRS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR The Long-term IDRs and senior debt ratings of CGD, Millennium bcp and Banco BPI are at their Support Rating Floors (SRF; BB+), reflecting Fitch's view that there is a moderate probability that the Portuguese authorities would support the country's largest banks, in case of need. The Negative Outlook reflects Fitch's view that there is a clear ultimate intention to reduce implicit state support for financial institutions in the EU. This is demonstrated by a series of legislative, regulatory and policy initiatives, including the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) (see 'Fitch Revises Outlook on 18 EU Commercial Banks to Negative on Weakening Support' published on March 26, 2014 and available at www.fitchratings.com, for more details). Fitch believes that Santander Totta is a strategically important subsidiary to Santander. The ratings of Santander Totta and BST are equalised because the two are regulated as a consolidated entity in Portugal, the bank is wholly-owned by the holding company and the holding company has no outstanding debt. Despite the common branding, integration, board composition and a wide range of shared risk management and operational policies and procedures, Fitch has notched down twice the subsidiaries' ratings from the parent's Long-term IDR, as opposed to the typical one notch. This is because the still fragile state of Portugal's economy and the very high performance correlations between the Portuguese entities and the domestic economy has led Fitch to believe that Santander's propensity to support these subsidiaries may be tested in the event of extreme stress in Portugal, although this is not Fitch's base case. As a result, the agency has capped the Long-term IDRs of Santander Totta and BST at two notches above the Portuguese sovereign ratings. Santander Totta is a Portuguese holding company, wholly owned by Santander. BST is it main operating subsidiary in Portugal. RATING SENSITIVITIES - IDRS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR The sensitivities of the IDRs of CGD, Millennium bcp and Banco BPI are the same as those for the SRFs. The SRs and SRFs of these three banks are sensitive to a weakening of the assumptions around Portugal's ability and propensity to provide timely support to the banks. Of these, the greatest sensitivity is to progress made in implementing bank resolution legislation, which is likely to result in the downgrade of the three banks' SRs to '5' and the revision of their SRFs to 'No Floor'. This is most likely to occur in late 2014 or 1H15. A downward revision of these banks' SRFs would likely trigger a downgrade of their Long-term IDRs and long-term senior debt ratings to the level of their VRs. Currently, this would mean a one-notch downgrade to 'BB' for Banco BPI and a two-notch downgrade to 'BB-' for CGD and Millennium bcp. The IDRs of Santander Totta and BST are sensitive to an upgrade of the sovereign rating, as reflected by their Positive Outlooks. KEY RATING DRIVERS - VR Fitch believes that earnings and profitability exert a higher influence on the VRs of CGD and Millennium bcp than other VR variables, due to the banks' historically weak performance. The two banks have been reporting losses since 2011, although this year could be a turning point based on reported 1Q14 results. Fitch believes that earnings and profitability, which is better at Banco BPI, also plays a bigger role in its VR. However, Fitch notes that contribution by its Angolan subsidiary is currently sizeable. Santander Totta's profitability, which is mainly domestic, has been supported by a comparatively higher proportion of cheaper funding from central banks as well as by sound fee income generation and strong cost management. In Fitch's opinion, a key driver for improving profitability for all banks is a continued reduction of deposit costs observed in the early months of 2014. Additional factors supporting profitability are repayment of expensive contingent convertible bonds (except for Santander Totta), reducing impairment charges and downsizing of branch network and staff. The pace of asset quality deterioration is expected to slow further in 2014, a trend already noted in 2H13. Given the improved economy, Fitch would expect impaired loans to peak in 2014. Asset quality is considered to have a higher influence on the VRs of CGD and Millennium bcp, which reported high credit at risk (CaR) ratios of 11.5% and 11.7% at end-1Q14, respectively. Banco BPI's and Santander Totta's CaR ratios have been more stable, at 5.2% and 5.3%, respectively. Coverage ratios are adequate. Capital at the largest Portuguese banks is considered as sufficient to absorb moderate shocks. At end-2013, the Fitch core capital (FCC)/weighted risks ratio was just adequate at 8.8% at CGD, a low 5.7% at Millennium bcp, reasonable at 9.3% at Banco BPI and more robust at 14.8% at Santander Totta. Once Millennium bcp's rights issue is finalised, its FCC/weighted risks ratio would still be no more than adequate at 10.9%. Capital has a higher influence on and is supportive of Santander Totta's VR. The sale of CGD's insurance subsidiary will support the bank's capital position. In addition to the capital ratio, Fitch also assesses capital against net CaR loans. Unreserved CaR loans to FCC (including Millenium bcp's rights issue) reached 22% for Banco BPI and Santander Totta, which is considered manageable, but a high 71% for CGD and 79% for Millennium bcp. Fitch eligible capital (FEC)/weighted risk ratios, which include 100% of state-subscribed contingent convertible bonds (cocos) in the case of CGD, Millennium bcp and Banco BPI, are more robust. However, Banco BPI has already repaid these bonds; Millenium bcp has repaid some of these bonds and funds raised by its rights issue will be used to repay a further amount. The VRs of the four banks also consider their improved funding and liquidity profiles. Exposure to volatile wholesale funding sources is declining, although Millennium bcp and Santander Totta have a higher proportion of funding from the ECB's liquidity facility. RATING SENSITIVITIES - VR Business volumes should increase in line with the continued improvement of the operating environment. This should also benefit asset quality, in turn, reducing impairment charges and boosting profitability and internal capital generation. The VRs of CGD and Millennium bcp are unlikely to be upgraded until core profitability and asset quality indicators improve. At Banco BPI, an upgrade of the VR will most likely be driven by enhanced profitability and improved capital adequacy ratios. Santander Totta's VR would benefit from an improved funding profile, with a reduced reliance on central bank borrowing. A downgrade of the banks' VRs is not Fitch's base case. However, this could arise from a marked deterioration of asset quality. If regulatory reviews of asset quality to be conducted in 2014 uncover substantial capital shortfalls, VRs will be under pressure. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by CGD, Millennium bcp and by Banco BPI are all notched down from the banks' respective VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Preference shares have been upgraded to reflect lower risk of non-performance associated with these instruments. This is because events triggering conversion are looking less likely as restructuring programmes are progressing well. Preference shares ratings are primarily sensitive to changes in the VRs of CGD, Millennium bcp and Banco BPI. Santander Totta's preference shares are capped at the level assigned to equivalent securities issued by the parent. Fitch believes that support from the parent can neutralise the non-performance risk of the instruments. Therefore, the agency would only notch down twice for loss severity from the subsidiary's IDR. KEY RATING DRIVERS AND SENSITIVITIES - SUSBIDIARY AND AFFILIATED COMPANY The ratings of Caixa Banco de Investimento (Caixa - BI) and Banco Portugues de Investimento (BPI) are equalised with those of their respective 100% parents (CGD and Banco BPI, respectively). Under Portugal's corporate law, CGD and Banco BPI are liable for the obligations of their wholly owned subsidiaries. The equalisation is driven by their integration within their parent banks and the benefits derived from parent support. Fitch does not assign VRs to the two institutions as the agency does not view them as independent entities. The ratings of Caixa-BI and BPI remain sensitive to rating action on CGD's and Banco BPI's IDRs. CGD North America Finance LLC is a financing vehicle of CGD whose commercial paper debt ratings are aligned with CGD's because of the guarantee in place and whose ratings are sensitive to the same factors that might drive a change in CGD's IDR. The rating actions are as follows: CGD: Long-term IDR affirmed at 'BB+'; Negative Outlook Short-term IDR affirmed at 'B' Viability Rating affirmed at 'bb-' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB+' Senior unsecured debt long-term rating affirmed at 'BB+' Senior unsecured debt short-term rating affirmed at 'B' Senior unsecured certificate of deposit long-term rating affirmed at 'BB+' Senior unsecured certificate of deposit short-term rating affirmed at 'B' Commercial paper programme affirmed at 'B' Lower Tier 2 subordinated debt affirmed at 'B+' Preference shares upgraded to 'B-' from 'CCC' Caixa -Banco de Investimento: Long-term IDR affirmed at 'BB+'; Negative Outlook Short-term IDR affirmed at 'B' Support Rating affirmed at '3' CGD North America Finance LLC Commercial paper affirmed at 'B' Millennium bcp: Long-term IDR affirmed at 'BB+'; Negative Outlook Short-term IDR affirmed at 'B' Viability Rating upgraded to 'bb-' from 'b' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB+' Senior unsecured debt long-term rating affirmed at 'BB+' Senior unsecured debt short-term rating affirmed at 'B' Lower Tier 2 subordinated debt upgraded to 'B+' from 'B-' Commercial paper programme affirmed at 'B' Preference shares upgraded to 'B-' from 'CC' Banco BPI: Long-term IDR affirmed at 'BB+'; Negative Outlook Short-term IDR affirmed at 'B' Viability Rating upgraded to 'bb' from 'bb-' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB+' Senior unsecured debt affirmed at 'BB+' Senior unsecured debt short-term rating affirmed at 'B' Lower Tier 2 subordinated debt upgraded to 'BB-' from 'B+' Commercial paper programme affirmed at 'B' Preference shares upgraded to 'B' from 'CCC' Banco Portugues de Investimento: Long-term IDR affirmed at 'BB+'; Negative Outlook Short-term IDR affirmed at 'B' Support Rating affirmed at '3' Santander Totta: Long-term IDR upgraded to 'BBB' from 'BBB-'; Outlook Revised to Positive from Negative Short-term IDR upgraded to 'F2' from 'F3' Viability Rating upgraded to 'bb+' from 'bb-' Support Rating affirmed at '2' BST: Long-term IDR upgraded to 'BBB' from 'BBB-'; Outlook Revised to Positive from Negative Short-term IDR upgraded to 'F2' from 'F3' Viability Rating upgraded to 'bb+' from 'bb-' Support Rating affirmed at '2' Senior unsecured debt upgraded to 'BBB' from 'BBB-' Commercial paper upgraded to 'F2' from 'F3' Preference shares upgraded to 'BB' from 'BB-' Contact: Primary Analyst Roger Turro Director +34 93 323 8406 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Secondary Analyst Belen Vazquez Associate Director +44 20 3530 1504 Committee Chairperson Janine Dow Senior Director +44 20 3530 1464 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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