Fitch Downgrades Montepio to 'B'; Affirms Other Portuguese Banks
KEY RATING DRIVERS
IDRS, SENIOR DEBT AND SUPPORT RATING - SANTANDER TOTTA AND BST
The IDRs of Santander Totta and BST reflect a high probability of support from both entities ultimate parent, Banco Santander, S.A. (Santander; A-/Stable), in case of need. Fitch believes that Portugal is a strategically important market for Santander, as demonstrated by Santander Totta's acquisition of the banking assets and liabilities of Banif in December 2015.
Santander Totta's and BST's Long-term IDRs are capped at two notches above that of the Portuguese sovereign (BB+/Stable). This reflects our view that Santander's propensity to support its Portuguese subsidiaries is linked to Portugal's operating environment, since this affects the attractiveness of these entities to the Santander group and their impact on the group's financial profile. The Stable Outlooks on these IDRs mirror that on the sovereign.
VR - SANTANDER TOTTA AND BST
Santander Totta's Viability Rating (VR) is supported by healthy reported capital ratios, which mitigate the risks of operating in a vulnerable economic environment. The rating also reflects better than sector average asset quality indicators and the benefits from being part of the Santander group, both in terms of management expertise and potential contingent funding from the parent that we believe would be made available if required. The acquisition of Banif's assets and liabilities in December 2015 is manageable, in our view, given Santander group's record in managing acquisitions in different geographies.
Santander Totta's fully loaded CET1 ratio was 15% at end-March 2016, including the acquisition of Banif, and its credit-at-risk (CaR) to loans ratio was 5.8% (4.4% at end-2015 without Banif). Fitch expects a continued improvement in profitability metrics thanks to lower deposits rates, sound fee income generation and good cost control. Loan impairment charges (LICs) should be manageable but are sensitive to economic uncertainty. Excluding the impact of the acquisition of Banif, the bank continues to improve its funding and liquidity profile by increasing its deposit base and some modest loan book deleveraging.
Fitch has equalised the Viability Ratings (VRs) of Santander Totta and BST. This reflects common supervision, moderate double leverage and the dominance of BST in the Santander Totta group. BST is wholly owned by Santander Totta.
IDRS, VR AND SENIOR DEBT - CGD
CGD's ratings reflect weak, although improving, core profitability, weak asset quality, and high market risk exposure through investment funds and interest rate sensitivity. The ratings also take into account the bank's leading retail franchise in Portugal, and generally stable funding and liquidity.
The bank has been reporting losses since 2011, and while the trend is positive, both the cost base and LICs will likely remain high in the medium term, and we believe it will be difficult for the management team to meet its strategic objectives. Nevertheless, LICs have declined reflecting some asset quality improvement, and the reported CaR/loans ratio fell to 11.5% at end-2015 from 12.2% at end-2014, with coverage of around 64% at end-2015. Fitch expects CGD to strengthen its capital base in order to maintain a buffer above future capital requirements.
IDRS, VR AND SENIOR DEBT - MILLENNIUM BCP
Millennium bcp's ratings reflect weak asset quality indicators, which despite some improvement, have not progressed enough to trigger a rating change, and continue to undermine bottom line profitability. Positively, the sustainability of core earning generation is improving thanks to lower deposit rates, healthy fee income and declining overheads. The reported CaR/loans ratio improved to 11.5% at end-March 2016 from a peak of 12.4% at end-June 2015, and coverage had increased to about 55% at end-March 2016. Market risk is relatively high due to the bank's exposure to foreclosed assets and a recovery/corporate restructuring fund. The ratings also consider the bank's sound domestic franchise as well as an improved funding and liquidity profile.
IDRS, VR AND SENIOR DEBT - MONTEPIO
The downgrade of Montepio's ratings reflects the bank's inability to date to turn around the very weak profitability of its core banking business and the need for capital support from its parent, MGAM, to offset reported net losses since 2013. In Fitch's view, Montepio has failed to meet its financial objectives, and is highly affected by the challenging operating environment. Asset quality indicators are weak, with the reported CaR/loans ratio deteriorating to 14.3% at end-2015 from 12% at end-2014. Market risk is also high, driven by exposure to foreclosed assets and investment property. Despite the injection made by the parent in March 2016, Montepio's capital base is highly exposed to unreserved CaR loans and real estate assets.
SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) - CGD, MILLENNIUM BCP AND MONTEPIO
CGD's '4' SR and 'B' SRF reflect Fitch's opinion that there remains a limited probability of extraordinary support being provided to CGD by the Portuguese state without the bail-in of senior creditors. This potential support is based on full and willing state ownership and CGD's market leading position in the Portuguese market. 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 SR of '5' and SRF of 'No Floor' for Millennium bcp and Montepio 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 banks become 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.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by CGD and Millennium bcp are notched down from their VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to changes in the VRs.
BST's preference shares are capped at the rating on equivalent securities issued by the ultimate parent, Santander. In Fitch's view, support from the parent mitigates the non-performance risk of the instruments. Therefore, the agency would only notch down the rating of the preference shares twice for loss severity from the subsidiary's IDR if the cap was not applied.
SUBSIDIARY AND AFFILIATED COMPANY
The ratings of Caixa Banco de Investimento (Caixa - BI) are equalised with those of its parent, driven by the full ownership, the integration of Caixa - BI within the parent bank and the offering of core investment banking products. Fitch does not assign a VR to the institution as we do not view it as independent entity.
RATING SENSITIVITIES
IDRS, SENIOR DEBT AND SUPPORT RATING - SANTANDER TOTTA AND BST
The IDRs of Santander Totta and BST are sensitive to a change in the sovereign rating. The IDRs and the SR are also sensitive to a change in Fitch's assumptions around Santander's propensity or ability to support its Portuguese subsidiary. In a higher sovereign rating environment, these would likely be notched down once from the parent's IDR, underpinned by the strategic importance of the subsidiaries, but also supported by common branding, strong synergies and integration with the parent, and a wide range of shared risk management and operational policies and procedures.
VRS - SANTANDER TOTTA AND BST
Santander Totta and BST's VRs would benefit from an improving operating environment. This would benefit asset quality and profitability, and support higher business volumes. Santander Totta's VR is sensitive to an increase in double leverage.
IDRS, AND VRS - CGD, MILLENNIUM BCP, MONTEPIO
Upward VR and IDR potential for CGD, and Millennium bcp would mostly arise from a sustained and material improvement in asset quality, as well as structurally better core profitability. The banks have a significant volume of problem assets, which will likely take time to reduce. Downward rating pressure would primarily come from a further weakening if asset quality or profitability, which would put pressure on capital. CGD's inability to strengthen its capital base could be credit negative, although we do not expect this.
The Stable Outlook on Montepio's ratings reflects Fitch view that the bank's capital base still provides a cushion for the bank as it is actively working to improve its very weak core profitability and to reduce its high real estate exposures. Any set back in this process would put its ratings under pressure. Upside rating potential is currently limited.
SUPPORT RATING AND SUPPORT RATING FLOOR - CGD, MILLENNIUM BCP AND MONTEPIO
An upgrade of the Support Ratings or upward revision of the Support Rating Floors would be contingent on a positive change in the Portuguese sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by CGD, and Millennium bcp are are primarily sensitive to any change in their VRs. BST's preference shares are sensitive to a change in Santander's IDR.
SUBSIDIARY AND AFFILIATED COMPANIES
The ratings of Caixa-BI are sensitive to rating actions on CGD's IDR.
The rating actions are as follows:
CGD:
Long-Term IDR: affirmed at 'BB-', Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B'
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 affirmed at 'B-'
Caixa - BI:
Long-Term IDR: affirmed at 'BB-', Outlook Stable
Short-Term IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Millennium bcp:
Long-Term IDR: affirmed at 'BB-', Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt Long-Term rating affirmed at 'BB-'
Senior unsecured debt Short-Term rating affirmed at 'B'
Lower Tier 2 subordinated debt affirmed at 'B+'
Preference shares affirmed at 'B-'
Santander Totta:
Long-Term IDR affirmed at 'BBB', Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
BST:
Long-Term IDR affirmed at 'BBB', Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Senior unsecured debt affirmed at 'BBB'
Commercial paper affirmed at 'F2'
Preference shares affirmed at 'BB'
Montepio:
Long-Term IDR: downgraded to 'B' from 'B+'; Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating: downgraded to 'b' from 'b+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt Long-Term rating downgraded to 'B'/'RR4' from 'B+'/'RR4'
Senior unsecured debt Short-Term rating affirmed at 'B'
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