December 21, 2017 / 4:05 PM / in a year

Fitch Upgrades Caixa Economica Montepio Geral to 'B+'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, December 21 (Fitch) Fitch Ratings has upgraded Caixa Economica Montepio Geral, caixa economica bancaria, S.A.'s (CEMG) Long-Term Issuer Default Rating (IDR) to 'B+' from 'B' and Viability Rating (VR) to 'b+' from 'b'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. The rating action is part of a periodic portfolio review of Portuguese banks rated by Fitch and follows the upgrade of Portugal's sovereign rating (see "Fitch Upgrades Portugal to BBB; Outlook Stable" dated 15 December 2017 at KEY RATING DRIVERS IDR, VR AND SENIOR DEBT The upgrade reflects the remedial actions taken by CEMG to restore its capital ratios and to accelerate the implementation of its strategic plan. However, the ratings still reflect low capital buffers in light of the bank's poor asset quality metrics, weak operating profitability and stable, albeit price-sensitive, funding. In June 2017, CEMG completed a capital increase of EUR250 million. The bank has also undertaken substantial deleveraging and reduced risk-weighted assets by around 17% since end-September 2015. In addition, the bank was converted into a public liability company in September 2017. This will enable CEMG to benefit from a change in the treatment of some deferred tax assets (DTA), which, in turn, will reduce the regulatory capital deduction due to these assets. The bank calculates that the benefits from changes in DTA treatment have a 131bp impact on its fully loaded common equity Tier 1 (CET1) ratio of 11.4% at end-September 2017 (the latter was 8.2% a year earlier). However, unreserved problem assets (including non-performing loans (NPLs) and foreclosed assets) still represented around 1.9x the fully loaded CET1 at end-June 2017, indicating that the bank's solvency is highly vulnerable to additional asset quality shocks. Asset quality remains weak. CEMG's NPL ratio (as per European Banking Authority's definition and excluding exposures to central banks and credit institutions) stood at a high 19.4% at end-June 2017. Including foreclosed assets and investments in properties the problem asset ratio is higher at 26%, which compares unfavourably with peers'. The stock of problem assets is gradually declining, due to lower NPL inflows and larger recoveries amid an improved economic environment in Portugal. The bank recently securitised a EUR581 million NPL portfolio, reflecting the management team's focus on accelerating problem asset reduction. However, in our view the NPL reserve coverage remains low (about 40% at end-June 2017) and further loan impairment charges are required before asset quality sees further material improvements. CEMG's core profitability is weak and highly variable through the business and interest rate cycles. In 9M17 both net interest income and net fees and commissions increased significantly. This, combined with lower loan impairment charges and restructuring costs, resulted in the bank reporting EUR20 million net income in 9M17. Cost efficiency has improved, due to a sharp decline in operating costs. Improving its profitability will be key to strengthening its internal capital generation. CEMG's funding and liquidity profile is sensitive to changes in creditor sentiment despite having been fairly stable during the last financial crisis. However, its deposit base remains more price-sensitive than peers'. The loans/deposits ratio was acceptable at 128% at end-June 2017. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' for CEMG reflect Fitch's belief that senior creditors of the bank cannot rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of - or ahead of - a bank receiving sovereign support. RATING SENSITIVITIES IDR, VR AND SENIOR DEBT Rating upside is limited in the short-term given a still large, although declining, stock of problem assets and the bank's weak operating profitability. In the longer term, an upgrade would be contingent on the bank improving substantially profitability metrics and asset quality, materially reducing capital encumbrance from problem assets. The ratings could be downgraded if the improving trend of CEMG's asset quality stalls, weakening the bank's low capital buffers or if the bank fails to sustain its recent profitability improvements. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support it. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: CEMG: Long-Term IDR: upgraded to 'B+' from 'B'; Outlook Stable Short-Term IDR: affirmed at 'B' Viability Rating: upgraded to 'b+' from 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt long-term rating upgraded to 'B+'/'RR4' from 'B'/'RR4' Senior unsecured debt short-term rating affirmed at 'B' Contact: Primary Analyst Josu Fabo, CFA Director + 34 93 494 3464 Fitch Ratings Espana, S.A.U. AV. Diagonal, 601, 2nd Floor 08028 Barcelona Secondary Analyst Arnau Autonell Associate Director +44 20 3530 1712 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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